Free Translation of the 2007 Annual Report - Hebrew Wording Binding

EL AL AIRLINES LTD.

2007 ANNUAL REPORT

MESSAGE FROM THE CEO AND THE CHAIRMAN OF THE BOARD

CHAPTER A - OVERVIEW OF THE ENTITY'S BUSINESS

CHAPTER B - DIRECTORS' REPORT

CHAPTER C - 2007 FINANCIAL STATEMENTS Greetings,

The financial results of for the year 2007, showing the highest level of revenues since the Company was established, are proof above all of El Al’s financial strength and its ability to deal with an ever intensifying competitive reality. In 2007, El Al achieved the targets it had set itself, including increasing revenues, reducing costs, and ensuring correct management of the Company’s inputs, all with the overall aim of continuing to operate as a profitable and financially robust company, one that puts its emphasis on attentive, high quality service for the benefit of its customers, staff and shareholders, while continuing with its investment plan. The Company continues to work towards greater efficiency, by cutting back on inefficient and unprofitable routes, expanding its activities in the , and increasing flight frequencies to popular destinations, such as New York and Los Angeles. In 2007, the Company recorded a record income of 1.9 billion dollars, representing an increase of about 16% compared with the same period in the previous year. During 2007, El Al put the emphasis on efficient utilization of its fleet of aircraft, as shown by the very high load factor in the company aircrafts - 85%. All this was achieved in spite of growing competition, which is characterized by an increase in the number of seats offered by foreign companies and by competition in the freight business. Notwithstanding the numerous challenges and the exogenous influences that the Company faces, including record prices for jet fuel and changes in exchange rates, which together led to an increase of $112 million in costs, the Company’s ability to manage its revenues brought about an impressive growth in turnover, representing an all-time record high since the Company was established in 1948. Consequently, El Al is able to show an operating profit of $71.4 million, one of the highest it has ever achieved, compared with an operating loss in the previous year. This significant improvement in results is also reflected in the bottom line, with a net profit of some $31.7 million, compared with a loss of $33.9 million the previous year. The Company’s financial strength is reflected in a strong cash flow from current activity, amounting to $231.2 million, an impressive growth of 136% compared with 2006. As part of our strategic plan, this year we invested a total of $248.6 million in rejuvenating and renewing our fleet of aircraft and in fixed assets. El Al continues to invest considerable resources and effort with the aim of maintaining its leading position in the industry. The Company is continuing implementation of its "El Al 2010" strategic plan, which involves a whole range of actions aimed at implementing a policy of growth, including: introduction during the summer of two new Boeing 777 aircrafts - named "" and "", which it purchased from the Boeing company. In addition, in early summer 2008, the Company expects to add two new 737-800 aircraft to its fleet, and three more at the beginning of 2009; this is in addition to the 747-400 Boeing plane that until now has been in the service of Singapore Airlines, and is expected to start operating in October 2008. All these aircraft are fitted with new seats and the latest entertainment systems. In March 2008, the Company signed an agreement with Boeing to purchase four 777-200 type aircraft at a cost of about $540 million, to be delivered in 2012. During 2007, the trends in competition and the introduction of the "Open Skies" policy found expression, among other things, in considerable growth in the capacity and frequency of foreign airlines, and the decision of the Government of Israel, in January 2008, to take away from El Al the exclusive status of Israeli designated carrier to international destinations, which was granted in 2003, while at the same time increasing the State’s participation in the security costs of Israeli airlines to 80% (instead of the previous 50%). In December 2007, the Company signed a code share agreement with American Airlines, which gives the Company’s passengers the option to book connecting flights to more than 20 central destinations of American Airlines all over the US. The transition from the Carmel system to the Amadeus system, which is currently being completed, is expected to bring about significant improvements in the Company’s marketing methods and sales channels, to develop new options for managing inventory and to allow travel agents to work with just one booking system. It will also provide technological benefits thanks to its innovative system, such as a user-friendly interface, worldwide deployment, automation and adaptation of processes to Company policy, "Customer value" oriented automatic handling at all points of the customer’s interface with the Company, significant expansion of self service facilities, etc. The Company is also working to implement a solution for resource management (Back Office) systems using ERP technology. At this time the systems are being designed in preparation for the project, which is due to begin in 2008 and continue for two years. El Al is determined to continue promoting its vision – to be the leader of the aviation market in Israel and to be the first and preferred choice for all air traffic to and from Israel. The focus on meeting the needs of business travelers has consistently yielded growth in El Al’s share of the premium market. We want to thank all our customers for choosing El Al in spite of all the options available to them, and to thank all Company employees for their dedication and hard work this year.

Prof. Israel (Izzy) Borovich Haim Romano Chairman of the Board of Directors CEO

Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

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2007 ANNUAL REPORT

CHAPTER A OVERVIEW OF THE ENTITY'S BUSINESS

Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

TABLE OF CONTENTS

Chapter 1: General 3

Chapter 2: Description of the general development of the Corporation’s business 4 1. The Corporation’s activities and a description of the development of its business 4 1.1 General 4 1.2 Holdings of the Company 5 1.3 Year and form of incorporation 6 1.4 Changes in the Corporation’s business 6 2. Operating areas 7 3. Investments in the Corporation’s capital 8 3.1 General 8 3.2 Options 8 3.3 Shares held by Company employees 9 3.4 Changes in holdings of interested parties 10 3.5 Table summarizing data on interested party holdings 12 4. Distribution of dividends 13 5. Financial data on the Corporation’s operating areas 14 5.1 Nature of consolidation adjustments 17 5.2 Explanation of developments occurring in operating fields 17 6. General environment and effect of external factors with regard to the Company 18 6.1 Traffic in the international aviation Industry 18 6.2 Traffic in the Israeli aviation Industry 19 6.3 Fluctuations in jet fuel prices 19 6.4 Currency rate fluctuations 20 6.5 Interest rate fluctuations 20

Chapter 3: Description of the Corporation’s business by operating fields 21 7. The field of Passenger aircraft 21 7.1 General information on the operating field 21 7.2 Services in the operating field 37 7.3 Analysis of revenues and profitability from services 43 7.4 New services 44 7.5 Customers 45 7.6 Marketing and distribution 45

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7.7 Reservations backlog 48 7.8 Competition 49 7.9 Seasonality 50 7.10 Productive capacity 51 7.11Aircraft Fleet 52 8. Cargo aircraft field 56 8.1 General information on the operating field 56 8.2 Services in the operating field 61 8.3 Analysis of revenues and profitability from services 63 8.4 New services 64 8.5 Customers, marketing and distribution 64 8.6 Reservations backlog 64 8.7 Competition 64 8.8 Seasonality 68 8.9 Productive capacity 68 8.10Aircraft Fleet 69 8.11 Raw materials and suppliers 70 9. Details on the two operating areas 70 9.1 Fixed assets and installations 70 9.2 Insurance 73 9.3 Intangible assets 74 9.4 Human resources 74 9.5 Raw materials and suppliers 91 9.6 Working capital 92 9.7 Investments 94 9.8 Financing 97 9.9 Taxation 100 9.10 Environmental matters 101 9.11 Restrictions and regulation of the Corporation’s business 106 9.12 Material agreements 136 9.13 Cooperation agreements 136 9.14 Legal proceedings 137 9.15 Goals and business strategy 141 9.16 Forecasted developments in the coming year 144 9.17 Financial data on geographical segments 145 9.18 Discussion of risk factors 145

a-2 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

CHAPTER 1: GENERAL

El Al Israel Airlines Ltd. is pleased to present the description of the Corporation’s business for the fiscal year ended December 31, 2007, which surveys the Corporation in general and the development of its business, as they occurred during the year 2007. The report was prepared in accordance with the Securities Regulations (Periodic and Immediate Reports)- 1970. The financial data included in the report is in U.S. dollars, unless stated otherwise. The financial data relating to monetary claims are in Israeli shekels (“NIS”) as of the date that the claim was filed, unless stated otherwise. The percentages of ownership are presented in numbers rounded out to the nearest whole percent, unless stated otherwise. Data appearing in this report are correct as of the report date, unless stated otherwise. Data appearing in this report as correct as of a date close to the approval of the report, have been updated to March 17, 2008, unless stated otherwise. The importance of the data included in this Periodic Report, including the description of material transactions, has been assessed from the Company’s point of view, while in some cases, additional descriptive information is given in order to provide a comprehensive picture of the matter being described. This chapter, which deals with a description of the Group, its development, businesses and operating areas, also includes Forward-Looking Information, as defined in the Securities Law, 1968. Forward-Looking Information is information that is uncertain as to the future, based principally on existing Company information at the reporting date and includes estimates, assumptions or intentions of the Company, as of the report date, as well as estimates and forecasts of third parties, which might not be realized or only partially realized. Therefore, actual results, in full or in part, could be significantly different, positively or negatively, from the results estimated, derived or implied from this information. In certain cases, sections containing Forward-Looking Information can be identified by the use of certain words, such as: "estimates", "perceive", "expects", "forecast", etc., but it is possible that this information will also appear with other expressions.

Interpretation For convenience purposes, in this Periodic Report, the following capitalized terms will hereinafter have the meaning below: Directors’ report - The report of the Board of directors on the state of affairs of the Corporation’s business for the year ended December 31, 2007. Dollar - U.S. dollar. Stock exchange - The Tel-Aviv Stock Exchange. Financial Statements - The consolidated financial statements of the Company for the year ended December 31, 2007, unless stated otherwise. The State - The State of Israel. The Group - The Company and its subsidiaries. The Authority - The Securities Authority. The Corporation or the Company or El Al - El Al Israel Airlines Ltd. The Prospectus - The prospectus published by the Company on May 30, 2003, as amended on June 3, 2003 and June 4, 2003.

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Fifth Freedom - Transport of passengers or cargo between two foreign countries by a carrier from a third country. For example, El Al transports cargo between Amsterdam and New York. Sixth Freedom - Transport of passengers or cargo between two foreign countries with a stopover in the country of the air carrier. For example, a flight of a European airline from Israel to the U.S. via an airport in the country of that airline in . Companies Law - The Companies Law-1999. Government Corporations Law - The Government Corporations Law-1975. Securities Law- The Securities Law-1968. IATA- The International Air Transport Association. Report Date - December 31, 2007. K’nafaim - K’nafaim- Holdings Ltd. Date close to approval of Report - March 17, 2008, unless stated otherwise. Sun D’Or - Sun D'Or International Airlines Ltd. Income Tax Ordinance - Income Tax Ordinance (New Version)-1961. NIS - New Israeli shekel. Reporting Year - The year 2007. ASK - Available Seat Kilometer - number of seats offered for sale multiplied by the distance flown. ATK - Available Ton Kilometer - the available capacity for transport of passengers (translated into tonnage) and cargo multiplied by the distance flown. RPK - Revenue Passenger Kilometer - number of paying passengers multiplied by the distance flown. RTK - Revenue Ton Kilometer - the weight in tonnage of paying passengers and cargo multiplied by the distance flown.

CHAPTER 2: DESCRIPTION OF THE GENERAL DEVELOPMENT OF THE CORPORATION’S BUSINESS

1. The Corporation’s activities and a description of the development of its business

1.1 General The Group is engaged primarily in the air transport of passengers and cargo (including baggage and mail) between Israel and foreign countries, by means of passenger aircraft and cargo aircraft. The passenger aircraft of the Company carry out scheduled flights as well as charter flights. The Company serves as the designated air carrier of the State of Israel on most international routes that operate to and from Israel. See Section 10.1.7 and 2.7.11.9 below for more on this subject and on the term “Designated Carrier”, and on the Government's decision regarding "Open Skies". The Group is engaged in auxiliary activities to its air transport activity, such as sale of duty-free products, production and supply of food primarily to its aircraft, and in the leasing of aircraft, providing security services, regular maintenance and overhaul services to aircraft of other airlines at Ben-Gurion Airport (“BGA”) and management of travel agencies abroad. The business environment in which the Company operates is the sector of international civil aviation and tourism to and from Israel, which are characterized by seasonal fluctuations and a high level of competition, which becomes more severe during periods of excess capacity.

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In the area of passenger transport, the Company competes with 2 Israeli airlines ( and Israir), approximately 42 foreign scheduled airlines and approximately 40 international charter companies operating regular flights. The airlines compete in various areas, principally: fares, frequency and flight times, operational punctuality, equipment type, airplane configuration, passenger service, etc. The competition is with the airlines that maintain scheduled flights between different destinations, charter flights between those destinations and/or Sixth Freedom Flights (irregular flights via stopover destinations in the mother country of those companies). The Company competes with about seven airlines in the cargo transport area, which operate cargo planes in flights to and from BGA, including C.A.L. Cargo Airlines Ltd. Additionally, the Group competes with most of the scheduled airlines that operate passenger airplanes and transport cargo in their belly. See Sections 7.8 and 8.7 for more on competition.

1.2 Holdings of the Company In the report year, there were no changes in the Company's holding structure. The following is a chart of the structure of the Company’s holdings in investees active as of a date close to the approval of the report (the percentages listed in the chart express the Company’s holdings in the investee companies):

Sun D'or 100%

Tamam 100%

Katit 100%

Superstar Holidays Britain 100%

Bornstein Caterers USA 100%

ACI 50%

Airtour 50%

Sabre 49%

Kavei Chufsha 20% a-5 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

1.3 Year and form of incorporation El Al Israel Airlines Ltd was incorporated as a limited liability company on November 15, 1948 under the name of El-Al Israel Airlines Ltd. and, on May 16, 1951, changed its name to its present name.

1.4 Changes in the Corporation’s business Until June 6, 2004, the Company was a “Government Corporation” in the process of “privatization” (as these terms are defined in the Government Corporations Law). See Section 9.11.below, “restrictions and regulation of the corporation’s business”, for additional details. In the context of the procedures for privatization of the Company, on May 30, 2003, the Company and the State published a prospectus, by means of which shares of the Company and options exercisable into shares of the Company were issued and sold. Within the framework of the prospectus, the State also offered shares and options to purchase shares from two series – call options (Series A) and call options (Series B). On the prospectus issue date, the State had held approximately 97.25% of the Company’s issued share capital. Immediately after issuance of the securities pursuant to the prospectus, the State's holdings in the Company dropped to 85% of the Company's issued share capital (undiluted). On June 6, 2004, after having purchased shares of the Company and due to the exercise of options by the public, the holdings of the State decreased to less than 50%. Therefore, the Company was converted from a “Government Corporation” to a “Mixed Company”, as the meaning of this term is defined in the Government Corporations Law. Following the exercise of further options on December 23, 2004, the holdings of K’nafaim rose to approximately 40% of the issued share capital of the Company and the State’s holdings decreased to approximately 31% of the issued share capital of the Company. On January 6, 2005, the majority of the members of the Board of Directors was replaced when the meeting of the Company’s shareholders, convened at the request of K’nafaim, decided to appoint new board members. At the same time, the State announced the end of the term of all directors who were not public directors, who had been serving as of that date on the Company’s Board of Directors. On December 28, 2006, the tenure of the two previous public directors terminated as Company directors. On February 28, 2007, the meeting of the Company’s shareholders approved the appointment of two public directors to the Company's Board of Directors. Close to the date of approval of the report, there are 9 members serving on the Company's Board of Directors (including two public directors). Since K’nafaim holds Company shares at a rate exceeding that held by the State, the special provisions that are detailed in Section 108 of the Company’s Articles of Association ceased to apply. See Section 9.11.2(k) below for additional details. By June 5, 2007, all of the call options (Series B) and most of the options (Series 1) were exercised, as detailed in Section 3.2 below. As a result of the exercise of the call options (Series B), the State ceased being an interested party in the Company as from June 5, 2007. The State still holds shares of the Company (which according to the last report the Company has, is at a rate of 1.1% of share capital), and therefore, the Company still has the status of "mixed company". Likewise, the State holds a Special State Share (for information on the Special State Share and its related rights, see Section 9.11.9 below). As a result of the exercise of options (Series 1), the issued and paid- capital of the Company changed – see Section 3.2 below for details.

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2. Operating areas

The Group’s headquarters functions on an integrated basis in the operating areas listed below, including financial management, procurement, human resources, legal counsel, information infrastructures, security, maintenance, engineering, marketing and advertising and also in ground operations and construction.

The Group has two operating areas that are reported as business fields (secondary) in the Company’s consolidated financial statements (See also Note 24.B. to the financial statements).

(A) Air Transport in passenger aircraft In this field, the Group transports passengers as well as cargo (including mail and baggage) in the belly of the passenger transport aircraft, and also provides auxiliary services, such as sale of duty free products and leasing passenger aircraft. Revenues from this operating field represented approximately 88% of total Group revenues for the year 2007.

(B) Air Transport in cargo aircraft In this area, the Group transport cargo in cargo transport aircraft and also provides auxiliary services, such as leasing cargo aircraft. The revenues from this operating field represented approximately 11% of total Group revenues for the year 2007.

Other than the operating areas detailed above, the Group has additional activities which are not included in these fields, which are not material to the Group’s operations1 and with total revenues representing about 1% of total Group revenues for the year 2007.

Breakdown of revenues by operating areas - for the year 2007:

other 1% cargo aircraft 11%

Passenger aircraft 88%

1 The production and supply of meals for flight passengers, providing security services (see Section 9.11.12 below for details), regular maintenance services and overhaul services to aircraft of other companies at BGA and management of travel agencies abroad.

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3. Investments in the Corporation’s capital

3.1. General

In 2006 and 2007, no investments were made in the Corporation’s capital, except for the exercise of options (Series 1) which were issued in the context of the prospectus, into ordinary shares of the Company, which caused an increase in the Company's shareholders' equity of 296 thousand dollars ($296,000) and 31,820 thousand dollars ($31,820,000) (respectively).

It should be noted that in 2006 and in 2007, the shareholders’ equity of the Company increased by 775 thousand dollars ($775,000) and 25,289 thousand dollars ($25,289,000) (respectively), within the capital reserve arising from transactions with a former controlling party (the State), as a result of deposits by the State in the severance fund of Company employees. See Section 9.4.8. for details regarding the State's obligation to cover the deficit in the severance pay fund of Company employees.

3.2 Options The call options (Series A) issued by the State were each exercisable for one ordinary share of the Company, commencing soon after they were issued and until June 6, 2004, at an exercise price of NIS 1.30 per option plus linkage to the Consumer Price Index of April 2003. Through June 6, 2004, all of the call options (Series A) had been exercised, totaling 138,400,000 call options. As a result of the exercise of the call options (Series A), on June 6, 2004, the ownership of the State was reduced to approximately 49.5% of the issued capital of the Company (undiluted). The call options (Series B) issued by the State were exercisable, commencing December 12, 2004 and until June 5, 2007 (inclusive) for one ordinary share of the Company each. The exercise price of the call options (Series B) was NIS 1.32 per option (plus linkage to the Consumer Price Index of April 2003) for one ordinary share of the Company. Through June 5, 2007, all of the call options (Series B) had been exercised, totaling 157,600,000 options. As a result of the exercise of the call options (Series B), on June 5, 2007, the ownership of the State was reduced to approximately 1.1% of the issued share capital of the Company (undiluted). The options (Series 1) issued by the Company were exercisable from December 12, 2004 through June 5, 2007 (inclusive), into one ordinary share of the Company at an exercise price of NIS 1.34 (plus linkage to the Consumer Price Index of April 2003) per one ordinary share of the Company. Through June 5, 2007, 99,998,588 options (Series 1) had been exercised out of 100,000,000 options. The balance of the options (Series 1) not exercised by June 5, 2007 (1,412 options) expired and are null and void. On February 26, 2006, the Board of Directors of the Company resolved to adopt a 2006 option plan for employees and executives of the Company (hereafter: "the 2006 Options Program"). On that date, the Board of Directors ratified that the quantity of options which would serve as a pool for allotment under the plan would stand at 17,092,129 options, exercisable into 17,092,129 ordinary shares of the Company with par value of NIS 1 each, subject to adjustments. The Board of Directors is permitted, from time to time, to add to this

a-8 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding quantity of options. At the same time, the Company's Board of Directors approved a grant of 17,092,129 options to approximately 50 offerees, of which approximately 10 were senior executives of the Company and approximately 40 other executives of the Company. The grant of options to the Company's executives was also ratified by the Audit Committee of the Company on February 26, 2006. The grant of options was conditional upon the approval of the General Meeting of the Company for the increase in the Company's registered capital. Such approval was obtained on March 23, 2006 and that day, the allotment was executed. On May 23, 2006, the Company's Board of Directors resolved on the addition of 3,000,000 options to the pool of options for issuance pursuant to the 2006 Options Program. In addition, the Board of Directors appointed the Human Resources and Appointments Committee of the Company's Board of Directors as the Administrator of the 2006 Options Program and authorized the Committee to grant options to executives of the Company in accordance with the guidelines stipulated by the Board of Directors. In addition, the Board of Directors approved the publication of an outline, which was published on May 29, 2006. Following that, on December 27, 2006, the Human Resources and Appointments Committee of the Board of Directors of the Company decided to grant 3,072,536 options to nine Company executives (of whom two are officers), which were actually granted on December 31, 2006. On November 20, 2007, the Company's Board of Directors resolved to publish an outline (which was published on November 21, 2007) for the granting of options, which returned to the pool of options that can be allotted pursuant to the terms of the 2006 Options Program, from the original quantity as detailed in the outline from February 26, 2006 and as amended on March 15, 2006 and/or from the additional quantity detailed in the outline from May 29, 2006, totaling 3,382,843 options (hereafter: "2007 Options Program"). Likewise, the Board of Directors allotted 2,195,852 options to 6 offerees (on of whom is an officer), provided that the requisite approvals are obtained. The said allotment was executed on December 26, 2007. As of December 31, 2007, the total options granted under the 2006 and Options Programs (as described above), stands at 18,905,138, after deducting the options returned to the pool for any reason which complied with the program. See Section 9.4.5 c. below for further details. During 2007, the Company recorded the value of a benefit against a capital reserve with respect to this options program of 1,882 thousand dollars, according to a calculation of the value of the benefit made by using an economic model.

3.3 Shares held by Company employees Pursuant to the prospectus, the State granted “Eligible Employees” (as defined in the prospectus) the right to purchase 34,685,642 shares of the Company that had been owned by the State (hereinafter: “the Employees’ Shares”). The Employees’ Shares were offered to the Eligible Employees at a price of NIS 0.91 per share. The Employees' Shares that were purchased by the Eligible Employees are held by a trustee and were blocked until December 31, 2004. The Eligible Employees purchased approximately 0.5% of the issued share capital of the Company in the framework of the tender offer (approximately 0.4% fully diluted). The State has also committed to sell to an employees' association, or to employees as individuals, the remaining Employees’ Shares not purchased by Eligible Employees (“remaining State shares”), at the lower of two prices: 30% of the average closing price of the Company’s shares on the stock exchange during the 90 trading days preceding the exercise date, or NIS 1.30 per share. On February 23, 2005, the employees’ association (Holdings in Trust for El-Al Employees Ltd.) acquired all of the remaining State shares (32,527,216 ordinary shares), for a price of NIS 0.39 per share. As of the date close to the report approval

a-9 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding date, the employees' association holds 31,881,816 ordinary shares, representing 6.43% of the Company's issued share capital (6.20% on a fully-diluted basis), following the exercises from August 2007 through January 2008. Sundry restrictions apply to the sale of the shares that 2 are held by the employees’ association .

3.4 Changes in holdings of Interested Parties As of December 31, 2007, K’nafaim owns approximately 39.339% of the issued capital of the Company, on an undiluted basis, and approximately 37.91% of the Company’s issued capital on a fully-diluted basis. As of March 17, 2008, the holdings of K’nafaim in the Company stand at approximately 39.33% of the issued capital of the Company (undiluted).

The assumptions for the calculation of the percentages of ownership of capital and voting rights on a fully-diluted basis (above and hereafter: “full-dilution”) are: exercise of all the executives' options under the 2006 and 2007 Options Programs (see Section 3.2 for details on the 2006 and 2007 Options Plans).

Presented below are details of transactions with respect to interested party holdings that were executed during the reporting period:

• On May 6, 2007, the Company was informed that on May 3, 2007, K'nafaim had sold, in an off-exchange transaction, 37,500 thousand options (Series 1) of the Company, at a price of NIS 0.7 per option. Additionally, through June 5, 2007, K'nafaim had exercised all of the options (Series 1) and call options (Series B) it had held to that date. As a result of these transactions, as of December 31, 2007, K'nafaim held 39.33% of the Company's issued share capital on an undiluted basis and 37.91% of the Company's issued share capital on a fully-diluted basis. As of March 17, 2008, no change occurred in K'nafaim's holdings in the Company's shares.

• On June 4, 2007, the Company was informed that Y. Hillel & Co. Ltd. (a company wholly-owned by Mr. Pinchas Ginsburg), together with individuals from the Ginsburg Family (hereinafter together: "the Ginsburg Group") became interested parties in the

2 The following restrictions apply to the shares held by the employees’ Company (in addition to the provisions of law on tax issues): (A) No transaction or proceeding will be made in the shares and no power of attorney or transfer document will be conferred for a period of 24 months from the date that each purchase was completed; (B) At the end of the aforementioned blockage period, the remaining shares will not be marketable and/or realizable, pledged and/or used as collateral in any manner, except by the employees’ association in the context of the bylaws of the employees’ association and/or after their release to the employee, as specified in the bylaws of the employees’ association. (C) In accordance with the bylaws of the employees’ association, the employees of the Company and the subsidiaries have the right to sell the Company shares held for them by the association at the end of the blockage period, should any of the following occur: (1) with their retirement from work and the termination of the employee-employer relationship between them by their employer, in accordance with the bylaws of the employees’ Company; (2) under other circumstances that are itemized in the bylaws of the employees’ Company, such as a sale between Company employees, or upon the occurrence of exceptional personal circumstances; (3) in each year, beginning from the end of five years, the beginning of which is after the period of blockage within the framework of the prospectus has terminated, up to 20% of the shares held for him by the employees’ Company, in a manner so that by the end of the tenth year, he may sell all of his shares.

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Company by virtue of their holdings, following the exercise of options. As of December 31, 2007, the Ginsburg Group held 7.69% of the Company's issued capital on an undiluted basis and 7.41% of the Company's issued capital on a fully-diluted basis. As of March 17, 2008, no change had occurred in the Ginsburg Group's holdings in the Company's shares.

• On June 12, 2007, the Company was informed that Mrs. Tamar Moses Borovich (Deputy Chairman of the Company) had become an interested party in the Company by virtue of her direct holdings in the Company, following the purchase of shares on the stock exchange. As of December 31, 2007, Mrs. Tamar Borovich held 0.05% of the Company's share capital on an undiluted basis and 0.05% of the Company's share capital on a fully- diluted basis. As of March 17, 2008, no change occurred in Mrs. Tamar Borovich's holdings in the Company.

• On June 5, 2007, the State of Israel ceased being an interested party in the Company as a result of the exercise of all the call options (Series B), as described above. The State still holds shares in the Company (which according to the last report the Company has, is 1.1% of the issued and paid-up share capital). In addition, the State owns a Special State Share, which was established under the Company’s bylaws and provides the State with special rights. Among other things, the Special State Share stipulates that transactions in the Company’s shares in certain rates will not procure any right vis-à-vis the Company, which is derived from owning and/or acquiring Company shares, without the advance written approval of the holder of the Special State Share (the State, through the ministers determined by the government). Section 8.1.7 of the Company’s articles prescribes a detailed arrangement on the manner of presenting the request to obtain the authorization to hold Company shares, in a case in which such authorization is required, as mentioned above. See Section 9.11.9 below for details regarding the Special State Share.

• On February 25, 2008, the Company was informed that the Holdings in Trust for El-Al Employees Ltd. ("Employees Trust") sold 645,400 shares on the stock exchange, between the months of August 2007 and January 2008. As of December 31, 2007, the Employees Trust held 6.56% of the Company's issued share capital, on an undiluted basis, and 6.32% on a fully-diluted basis. As of March 17, 2008, the Employees Trust holds 6.43% of the Company's share capital

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3.5 Table summarizing data on interested party holdings The following is a table that summarizes a number of facts regarding the Company’s securities and the holdings of the principal interested parties3:

March 17, December 31, December 31, 2008 2007 2006 Holdings of interested parties Ownership rate of the State in issued capital Special Special State (undiluted)** State Share Share 20.97% Ownership rate of K'nafaim in issued capital (undiluted) 39.33% 39.33% 39.49% Ownership rate of employees' trust holdings in issued 6.43% 6.56% 8.12% capital (undiluted) Ownership rate of 7.69% 7.69% Ginsburg Group (undiluted) Ownership rate of 0.05% 0.05% Mrs. Tamar Borovich (undiluted) Company capital Registered share capital in NIS (excluding a 550,000,000 550,000,000 550,000,000 Special State Share) Issued share capital in NIS (excluding a 495,719,135 495,719,135 400,788,334 Special State Share) Convertible securities Options (Series 1) (in - - units) 94,932,213 Purchase options - - (Series B) (in units) 78,422,298 Executive options under 2006 options program4 18,489,176 18,905,138 20,092,129

** The State of Israel ceased being an Interested Party in the Company, commencing June 2007. To the best of the Company's knowledge, it holds 1.1% of the issued capital of the Company as of the publication date of the report. See Note 3.4 above for additional information.

3See Section 9.11.9 below regarding the up to date provisions of the Special State Share. 4After deducting options that expired that were returned to the pool of options for allotment according to the terms of the program.

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Breakdown of the holdings of the Company’s shares as of 31.12.2007:

Employees Pinchas Trust Ginsburg Knafaim 7.7% 39.3% 6.6%

State of Israel Others 1.1% 45.3%

Breakdown of the holdings of the Company’s shares as of 17.3.2008:

Pinchas Employees Ginsburg Knafaim Trust 7.7% 39.3% 6.4%

State of Israel Others 1.1% 45.5%

4. Distributions of dividends The Company did not distribute dividends during the years 2003 through 2006. On March 28, 2005, K’nafaim, the controlling owner of the Company, sent a letter to stating that “considering the present obligo status of El Al with Bank Leumi, and considering the fact that the Board of Directors of El Al is likely from time to time to formulate policies for distribution of profits of the Company, we state that as long as the balance of the existing principal obligo of El Al to Bank Leumi will not be less than 50 million dollars, we will not support a resolution to distribute earnings at a rate which exceeds 60% of the balance of retained earnings of El Al available for distribution as they will exist from time to time, other than after consultation with the Bank regarding the percentage in excess of 60% as aforementioned”. Concurrent with this letter, El Al received a letter from Bank Leumi on March 28, 2005, according to which the bank will not consider the conversion of K’nafaim into the controlling shareholder of El Al as an event which entitles the bank to immediate payment of El Al's debt

a-13 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding to the bank, conditional upon the terms as detailed in the letter of the bank to the Company, all as detailed in Section 9.8.2.c. below. On December 28, 2005, the Company's Board of Directors resolved to adopt a dividend distribution policy, beginning with the 2006 fiscal year and thereafter, whereby the Company will strive to distribute dividends of between 20% to 40% of net after-tax earnings in the prior year that were derived from the Company's ordinary operations, excluding one-time earnings not from current operations and capital gains, this on the basis of the consolidated financial statements. Implementation of this policy is subject to all law provisions, and, to the assessment of the Company's Board of Directors concerning the ability of the Company to comply with its existing and anticipated obligations from time to time, and to consideration of the Company's existing liquidity, operations and business plans or those anticipated for the future. Adoption of this policy does not detract in any way from the authority of the Company's Board of Directors to decide, at any time, to change and/or amend and/or revoke the dividends policy which was stipulated in this decision and/or to approve additional distributions within the permitted limitations by law and/or to decide on the reduction of the rate of dividends to actually be distributed, or to refrain from a distribution due to the liquidity, operations, business and condition of the Company, which may change periodically. On October 7, 2007, the Company's Board of Directors resolved to distribute a dividend of NIS 0.075 per share, for a total of NIS 37,178,926, 5.98% of the issued and paid-up capital. The dividend was actually distributed on October 29, 2007. On November 20, 2007, the Company's Board of Directors resolved to update the dividend policy that had been resolved by the Board of Directors on December 28, 2005. Within the scope of the new dividend policy, the Company will periodically distribute dividends, at the discretion of the Board of Directors and subject to the Company's needs. On December 30, 2007, the Company's Board of Directors resolved to distribute a dividend totaling NIS 11,571,100 thousand (representing NIS 0.0233418 per share), 19.4% of the issued and paid-up share capital. The dividend was actually distributed on January 21, 2008.

5. Financial data on the Corporation’s operating areas Details of the Company's operating fields in the financial statements are given based on the fleets of aircraft - air transport by means of passenger aircraft and air transport by means of cargo aircraft. Cargo Transport in the belly of passenger aircraft represents part of the operations of passenger aircraft. This activity is auxiliary and a derivative of the operations of transporting passengers in the passenger aircraft and is dependent upon these operations. Thus, for example, the destinations of freight transport in the belly of passenger aircraft are determined by the flight destinations of the passengers in the passenger aircraft. Additionally, the current operations of the Company’s activities as carried out by Company management, including the decision as to the feasibility of the operation of a route and the actual departure of a flight, are carried out based on this operating field. The convertible aircraft have been attributed to this operating field based on their actual utilization during the entire operating period.

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The 2006 year*:

Thousands of Passenger Cargo Other and Total dollars aircraft aircraft consolidation adjustments Passenger revenues 1,547,505 - - 1,547,505 Cargo and mail 106,217 216,338 - 322,555 revenues Other revenues 38,692 994 22,704 62,390 Total revenues 1,692,414 217,332 22,704 1,932,450 Costs (1,585,122) (258,246) (17,708) (1,861,076) Operating income 107,292 (40,914) 4,996 71,374 (loss) Fixed assets at end 1,196,726 42,467 47,228 1,286,421 of year

The 2006 year*:

Thousands of Passenger Cargo Other and Total dollars aircraft aircraft consolidation adjustments Passenger revenues 1,277,746 - - 1,277,746 Cargo and mail 232,910 - 331,606 98,696 revenues Other revenues 34,426 965 20,703 56,094 Total revenues 1,410,868 233,875 20,703 1,665,446 Costs ()1,415,238) ()243,311 (15,368 (1,673,916) Operating income (4,370) (9,436) 5,335 (8,470) (loss) Fixed assets at end 1,070,258 57,100 49,170 1,176,528 of year

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The 2005 year*:

Thousands of Passenger Cargo Other and Total dollars aircraft aircraft consolidation adjustments Passenger revenues 1,259,773 - - 1,259,773 Cargo and mail 98,815 210,305 - 309,120 revenues Other revenues 33,254 839 16,483 50,576 Total revenues 1,391,842 211,144 16,483 1,619,469 Costs (1,296,341) (222,162) (14,416) (1,532,919) Operating income * 95,501 (11,018) 2,067 86,550 (loss) Fixed assets at end 1,075,676 66,708 45,597 1,187,981 of year

* It should be noted that in the years 2006 and 2005, as described above, the Company's revenues and its breakdown between the passenger aircraft operating field and the cargo aircraft operating field was evaluated according to a more precise measurement model than in the past. The results of this evaluation indicated an increase in the pro rata share of revenues from cargo in the belly of passenger aircraft, compared with the data calculated from the start. According to the Company's estimates, this influence on revenues is estimated at 8.7 million dollars for year 2006 and 6.2 million dollars for year 2005. Accordingly, revenues from the passenger aircraft field increased and correspondingly, revenues from the aircraft cargo field decreased by the same amount. The new calculation was implemented as the Company's practice commencing from these financial statements. It should be clarified that this change has no effect on the operating results in the financial statements for these years, and that this change has no effect whatsoever on the financial data for the operating fields as they were presented by the Company, but only on the classification of the revenues between the operating fields and the resultant earnings. Likewise, the cost, operating income and fixed asset items as of the end of the year were restated because of the first-time application of Accounting Standard 27 – Fixed Assets. See Note 2.z to the financial statements for additional details. It should be stated that one must look at the profitability of the cargo transport field in a broader context that is derived as well from the cargo transport operations in the belly of the passenger aircraft, since the cargo transport field carries out commercial and marketing activities complementary to the activities of the cargo transport activities in the passenger aircraft. The costs that are not directly attributed to one of the fields are allocated according to economic models currently in the Company’s possession. It is possible that in the future, these costs will be allocated based on other economic models which will then be in use by the Company.

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5.1 Nature of consolidation adjustments The adjustments to consolidate the revenues and costs result from additional activities that are not attributable to the principal operating fields, primarily maintenance services to other airlines. The consolidation adjustments of the fixed assets relate to the fixed assets that are not attributed to the Company’s aircraft.

5.2 Explanation of developments occurring in the operating fields See the clarifications in Section 3.3 of the Directors’ Report regarding the explanation of developments in the Company’s operating results during the reporting year as compared to previous periods.

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6. General environment and effect of external factors with regard to the Company

6.1 Traffic in the international aviation industry The international aviation industry is affected by the economic and security situation and from unusual events, such as the outbreak of epidemics and natural disasters in the world, in general, and in specific areas, in particular. According to IATA estimates, international passenger traffic grew by 7.4%, higher growth than in 2006 (5.9%), and even higher than the growth rate forecast for 2007, of only 5.8%. The weighted load factor in international passenger flights reached a record 77% in 2007, compared with 76% in 2006 and 75.1% in 2005. This growth trend could change in 2008, in view of the expected slump in demand (growth of only 5% is forecast), compared with expected growth in capacity (5.2%). Regional breakdown: The middle eastern airlines stood out especially, posting considerable growth of 18.1% in passenger traffic, continuing the 4-year growth trend. The increase in passenger traffic in this region is due to the strengthening economies in the region, rising oil prices and the increased capacity and opening of new routes. South America - Airlines posted growth of 8.4% in passenger traffic, originating in the effect of the reorganization in the region. This growth constitutes sharp recovery, compared with a decrease of 2.4% in 2006. – Airlines posted growth of 8%, reflecting the overall growth and liberalization of the markets in part of the continent. Asia – Growth of 7.3% was posted in passenger traffic, similar to the industry's global average. The growth points to the strengthening economics in India and China and air travel becoming more accessible to new and large markets. Europe – Growth in passenger traffic of 6% was posted in 2007 (compared with 5.3% in 2006). This growth reflects stable economic growth and expansion in long routes to Asia and the . – Growth of 5.5% was posted in 2007, representing a continuation of the growth posted in 2006 (5.7%).

According to IATA forecasts, from 2007 through 2011, average annual growth of 5.1% is expected in international passenger traffic. The forecast of international passenger traffic indicates a downturn, against the backdrop of the expected international economic slowdown and in view of the uncertainty with respect to long range forecasts.

According to IATA data, during the year 2007, world shipments by cargo aircraft (including in the belly of passenger aircraft) grew by approximately 4.3% as compared with the year 2006. This growth rate is lower than the growth posted in 2006 (4.6%) and the average annual growth rate projected by the IATA forecast from 2007 through 2011, of 4.8%. IATA estimates that substantial growth in cargo transport on routes related to the Far East, especially China and India, and significant growth in the cargo field is also expected in the Middle East, since airlines in this region enjoy a purchasing power advantage due to of the high price of oil, which enables them to add capacity on existing routes and open new routes.

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Although the projected growth rate is slightly lower than the historical average growth rate of 6%, it still represents stable and strong growth every year. It should be emphasized that the forecasts, assessments and estimates of IATA regarding the volume and results of operations of the global aviation industry (transport of passengers) and regarding the volume of global activity in the cargo field, is Forward-Looking Information as defined in the Securities Law – 1968. Therefore, the actual change in volume and results of global operations in the aviation industry (passenger transport) and in the transport of cargo, could be significantly different than the forecasts, as a result of several factors, including an economic slump, rising fuel prices, changes in the global economic, security and political situation, regulatory changes and the outbreak of epidemics and natural disasters.

6.2 Traffic in the Israeli aviation industry According to data from the Central Bureau of Statistics, during 2007, a record number of outbound Israeli passengers were posted, with outbound Israeli passengers via air totaling 3.4 million, an increase of 9% over 2006. Likewise, in 2007, 1.8 million inbound tourists via air were posted (in BGA and ), with an overall increase of 14% in the number of tourists compared with 2006. The increase in inbound traffic by air is due to the sharp rise (16%) in inbound traffic at BGA in 2007, resulting from the comparison with data for the months of July-December, which were particularly low in 2006 due to the Second War. According to Israel Airports Authority data, passenger traffic in BGA in 2007 increased by 15% compared with 2006. Overall, scheduled traffic in BGA grew by 11% and charter traffic increased by 28% compared with 2006. Most of the growth in charter traffic was due to the substantial expansion of foreign charter flights, mainly on the routes to , due to the fact that the Israeli airlines halted their activity on this route because of the high security costs During 2007, an increase of approximately 6%5 was posted in cargo traffic to and from Israel in comparison to the year 2006. See Section 8.1.3 for details.

6.3 Fluctuations in jet fuel prices Jet fuel is a significant component of the Company’s expenses. The prices of jet fuel are characterized by extensive and severe fluctuations. During 2007, the trend of sharp increases in jet fuel prices continued, reaching their peak in December 2007. Subsequently, the price increase was checked and a significant decrease began which continued until the end of the year 2007, so that in total for 2007, jet fuel market prices rose by an average of approximately 9% as compared to 2006 prices. See Sections 9.5.1 and 9.18.2 below for details. See Section 7 to the Board of Directors' Report for additional details on the financial effect of jet fuel prices, including hedging activity. The trend of rising jet fuel prices also continued in the first quarter of 2008.

5 The data is based on the Company's estimate, after deducting Sixth Freedom activities of El Al through BGA, and adding mail operations of the Company.

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6.4 Currency rate fluctuations The Group’s results are affected by a number of currencies. Fluctuations in the exchange rate of the dollar vis-à-vis other currencies are likely to cause an improvement or erosion of the Group’s profitability. As of December 31, 2007, there was a decrease of approximately 9%, as compared with December 31, 2006 in the exchange rate of the U.S. dollar against the shekel. As of December 31, 2007, there was a decrease of approximately 10.4%, as compared with December 31, 2006 in the exchange rate of the U.S. dollar against the Euro. The weakening of the dollar vs. various currencies in the year 2007 negatively affected the Group’s profitability. See Section 9.18.6 below for details. The trend of a weakening dollar also continued in the first quarter of 2008.

6.5 Interest rate fluctuations The Company took loans in a significant amount at variable interest rates that is based upon LIBOR interest, in order to finance the acquisition of aircraft. A change in the LIBOR interest rate could materially affect the Company’s financing expenses. In 2007, the average LIBOR 3-month interest rate increased by approximately 2%, compared with its average rate during 2005. During 2005, there was an increase of about 46% relative to 2004. See Section 9.18.9 for details.

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CHAPTER 3: DESCRIPTION OF THE CORPORATION’S BUSINESS BY OPERATING AREAS

The following is a description of the business of the Group for each of the operating fields separately, with the exception of matters which apply to the overall operations of the Group, which are described collectively in the framework of Section 9 below.

7. The field of Passenger aircraft 7.1 General information on the operating field The principal activity of the Group in this area is the transport of passengers on scheduled and charter flights. In addition, the Company carries cargo in the belly of the passenger aircraft, an activity that is auxiliary to the activity of transport of passengers. Additional auxiliary services are associated with the service in this area, including sale of duty free products to passengers. Accordingly, in the context of describing this operating area, the Company has focused on a description of transport of passengers. Certain matters that relate to the transport of cargo in the belly of passenger aircraft are similar to the service of carrying cargo in cargo aircraft, which are described in Section 8. The following is a description of trends, events and developments in the macroeconomic environment of the Group, which have or are expected to have a material effect on operating results or on the developments in the operating area, in the following areas:

7.1.1 The structure of the operating area and changes taking place As mentioned, the Company's main operating area is air transport in passenger aircraft in scheduled flights to and from Israel. By using passenger aircraft, the Company carries both passengers and cargo in the belly of the passenger aircraft. The flight rights under which the State permits a “Designated Carrier” to carry passengers on international routes are stipulated in international agreements. Each nation determines an air carrier as a “Designated Carrier” on its behalf to operate the flights and utilize the flight rights. The Company serves as the designated air carrier of the State of Israel for most international routes that operate from and to Israel. See Section 7.1.10 for details on the Company's status as a "Designated Carrier" and State decisions on this issue, including the State's decision from January 2008.

7.1.2 Legislative restrictions, regulations and particular considerations applicable to the field The operating area of carrying passengers and cargo in passenger aircraft is distinguished by international and local regulatory restrictions in various areas. Among other things, authorization is required for operating a flight from one country to another country. In accordance with international agreements, each nation is permitted to grant authorization for the operation of scheduled flights (appointment as a “Designated Carrier”) to one company or to a limited number of airlines, as stipulated in the agreement. The number of Designated Carriers that have been appointed between two destinations is likely to have a material effect on competition between those destinations. The frequency of the flights and the volume of traffic are also conditional on obtaining consents from the aviation authorities in both countries. Additionally, each flight needs a takeoff or landing slot at the airports to or from which it operates. A commercial and operational license is required in order to operate

a-21 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding flights. In the context of these licenses, the State sets various restrictions on the holder of the license. In the framework of international treaties and agreements and local legislation, arrangements have been determined that are connected to implementation of the operating area, which include rules concerning the responsibility of the air carrier for damages caused during the course of international air transport and the responsibility of the air carrier for delays and flight cancellations. Additionally, the Group is committed to operate according to special instructions regarding flight security, which impose additional costs on the Group. Also, the Group is obligated to maintain a minimal fleet of aircraft, in accordance with the Special State Share (also see Section 9.11.9 for details). In addition to scheduled flights, the Company is also engaged in carrying out charter flights by leasing aircraft capacity to organizers of charter flights at prices agreed on in advance and the sale of blocks of seats to agents. Over recent years, the Ministries of Transport and Tourism have instituted a relatively liberal policy, which has permitted many airlines to carry out charter flights to and from Israel. See Section 9.11 below for details. Additionally, foreign airlines have begun operating to and from Israel, on a "low-cost" basis. See Section 7.1.4 below for details.

7.1.3 Changes in the volume of activity and profitability of the area (A) International developments According to IATA estimates, international passenger traffic grew at a rate of approximately 7.4% in 2007, higher than the growth rate for the year 2006 (5.9%), and even higher than the average annual growth rate determined according to IATA's annual forecast for the years 2007 through 2011, of 5.1%. Concurrent with rising passenger traffic, there was an increase in 2007 in the capacity of passenger flights (the number of seats offered by the airlines), albeit at a rate slightly lower (6.2%) than the rise in traffic. As a result, IATA estimates that the load factor in 2007 was approximately 77% in comparison with about 76% in 2006 and 75.1% in 2005.

In IATA's assessment, the high passenger traffic is the main reason why the industry posted earnings of $5.6 million in 2007. However, the growth rate in cargo transport has slowed somewhat, posting growth of 4.3% in 2007, compared with growth of 4.6% in 2006. This growth rate is also lower than the growth in international trade, which stood at 7.5%, which could point to the competition in the aviation industry against transport alternatives, such as sea and land transport.

See Section 6.1 above for additional details on the forecasts and estimates of IATA for the industry's operating results.

The following table presents the operations of the international airlines (scheduled flights) during the last four years as well as its revenues and profitability during that period.

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International operations of the aviation industry and its profitability from the passenger aircraft area6 (scheduled flights) of airlines that are members of IATA

Operating Operating income Year Output revenues 7 (loss) ($ billions) ($ billions) RPK8 (in Annual RTK9 (in Annual Before After millions) change in millions) change interest interest RPK (%) in RTK expenses expenses (%) 200710 7.4 2006 2,230,135 6 275,949 5 232.8 6.1 4.1 2005 2,063,015 8 255,470 6 210.7 5.1 3.1 2004 1,932,272 16 242,118 16 190.8 4.4 2.5

In the estimation of IATA11, the industry's total earnings in 2007 reached $5.6 billion, which earnings expected to fall to $5 billion in 2008.

IATA12 anticipates a decline anticipated in the growth rate of international passenger traffic during the year 2008, in view of the high fuel prices and the economic uncertainty in the American market.

The forecasts, estimates and assumptions of IATA regarding the volume of world activities and operating results in the aviation area as above represent Forward-Looking Information, as defined in the Securities Law, 1968 (“the Securities Law”). Accordingly, the actual change in the volume and results of global activity in the aviation industry may be materially different from that forecast as aforementioned, as the result of a large number of factors, including a change in global economic, security and geopolitical conditions, regulatory changes and from the outbreak of epidemics and the actions of other natural forces.

(B) Developments in the Israeli market International passenger traffic to/from BGA during the year 2007 totaled approximately 10.1 million passengers and represents an increase of about 15% compared to 2006. This increase is due mainly to the considerable increase in outgoing (9.2%) and to the growth in tourists traveling to Israel (14.2%). In BGA alone, there was growth of 16% in incoming tourist traffic. 2007 was a record year in passenger traffic in BGA, and the number of passengers surpassed the number for year 2000, which was the previous record (9.3 million passengers in 2000).

6 The source of the data regarding 2004-2006: IATA publications (World Air Transport Statistics) (WATS; 51st edition-2007).

7 Including revenues from cargo aircraft.

8 Revenue Ton Kilometer - the weight in tons of passengers and paid cargo multiplied by the distance flown.

9 Revenue Passenger Kilometer - the number of paid pass passengers multiplied by the distance flown.

10 Data, estimates, approximations and forecasts of IATA relating to the year 2007 are preliminary. Final data regarding 2007 is expected to be issued by IATA during in June 2008 in the framework of World Air Traffic Statistics. 11 As of the report date, these data have not yet been published by IATA.

12 IATA forecast taken from IATA publications from: IATA Web Site: Carrier Tracker 12/06. This estimate refers to the aviation industry as a whole, including flights and charter flights of the scheduled companies.

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13 Passenger traffic from and to Israel (from/to BGA)

Year Passenger traffic at BGA (Thousands of Yearly change-increase (decrease) (in %) legs) 2007 10,081 15 2006 8,795 4 2005 8,480 12 2004 7,590 13 2003 6,730 (1)

The table and the graph below reflect the trends of incoming tourist traffic to Israel and the departing residents in recent years14:

Year Incoming tourism Departing residents (Thousands of Rate of change (Thousands of Rate of change passengers) (in %) passengers) (in %) 2007 1,790 14.2 3,433 9.2 2006 1,565 (5.3) 3,145 4.4 2005 1,653 23.5 3,013 5.0 2004 1,339 37.8 2,868 6.7 2003 972 24.8 2,689 (4.9) * The data in the table is in thousands of passengers.

During the year 2007, 1.8 million tourists entered Israel by air. The Second Lebanon War took place during July-August 2006 (peak months of demand for flights), significantly reducing inbound tourism to Israel, and its impact on inbound tourist traffic was also expressed in the first half of 2007. In the first half of 2007, the number of tourists entering Israel via air was 8% lower than the number of tourists entering Israel in the first half of 2006. However, in the second half of 2007, following a period of calm and stability security wise, there was considerable recovery in inbound passenger traffic, and the number of tourists (via air) entering Israel grew by 44% compared with the same period in 2006. Overall, inbound tourist entries rose by 14% in 2007 compared with 2006. In the Company’s opinion, incoming tourism traffic to Israel is affected by the international trends in passenger traffic, but primarily from geopolitical processes in Israel or in the region, which affected the feeling of personal safety of tourists visiting our region. In 2007, the trend of rising outgoing tourism continued. In total, 3.4 million departures of Israelis by air were recorded (9% growth), which represents a record number of Israelis going abroad. In the Company’s estimation, the traffic of Israelis was affected principally by the economic situation in Israel.

13 Source: Civil Aviation Administration (including non-paying passengers). In addition to the traffic to BGA, tourists in regular and charter flights arrive in Israel through the Eilat airport in minimal amounts as compared to the traffic at BGA. The term “leg” means a flight section from destination to destination.

14 Data of the Central Bureau of Statistics.

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In the estimation of IATA15, in the year 2007, there will be growth of approximately 5.5% in passenger traffic flying to and from Israel compared to the year 2006. The forecasts and estimates of IATA regarding the volume of passenger traffic to and from Israel as above represent Forward-Looking Information, as defined in the Securities Law, 1968 (“the Securities Law”). This information is supported, inter alia, by the Company’s assessments in light of the trends of change in tourism during recent years and expected developments, and in view of the economic, security and geopolitical situation in Israel during the year 2007. Accordingly, the actual change in the anticipated volume of the number of incoming tourists to Israel and the outgoing tourism from Israel may be materially different from that forecast as aforementioned, if the Company's assessments are not realized, and because of a large number of factors, including a change in economic, security and geopolitical conditions in Israel.

7.1.4. Developments in the markets of the operating area or changes in the characteristics of its customers In recent years, competition has intensified considerably in the passenger aircraft transport field between tens of international scheduled and charter airlines. The airlines compete in various areas, principally: fares, frequency and flight times, on-time performance, equipment type, airplane configuration, passenger service. Fare competition is reflected primarily by offering reduced rates to passengers. The competition is present both with relation to direct scheduled flights between various destinations and with charter flights to the same destinations. Also, in this context, there has been an increase in the activities of the foreign airlines in Israel in the framework of sixth freedom (indirect flights by means of a stopover in the home country of the airlines). Additionally, during recent years, the aviation world has been penetrated by airlines known as “low cost”16, which maintain low costs expenses and generally offer very competitive prices. In 2006, "Hapagfly", a low-cost airline (owned by the German tourism and aviation company TUI), began scheduled flights on the -Israel route. This trend of the entry of low-cost companies to the Israeli market is gaining momentum with implementation of the "Open Sky" policy led by the Ministries of Transport and Tourism (see Section 7.1.8 below for details).

At the end of 2007, other low-cost airlines began operating on the route to and from Israel: • Thomsonfly, an airline owned by TUI commenced scheduled flights on the Manchester- Israel route and from Luton Airport (west London) to Israel. • New Axis airline from , which until now has operated charter flights on the Marseilles- route, has begun operating scheduled flights on this route. Several other low cost airlines have announced their intention to operate flights in formats as below: • The French airline "Corsair", also owned by the German corporation TUI, announced that beginning in April 2008, it would begin to operate two weekly scheduled flights on the

15 Forecast of IATA out of IATA publications from: IATA Passenger Forecast 2007-2011 published by IATA, October 2007.

16"Low cost" companies are relatively new airlines with a structure of low expenses deriving mainly from direct marketing through the Internet and not through distribution systems and travel agents. Use of secondary airports, minimal service profile during the flight and operations on short range flights, with no code share agreements with other companies and high utilization of aircraft.

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Paris-Tel Aviv route, after it was appointed an additional Designated Carrier on this route. • The Belgian airline "Jet Air", also a subsidiary of the tourism and aviation company TUI, announced that as from the spring, it would begin to operate two scheduled weekly flights between Liege and Tel Aviv, following the signing of an aviation agreement between Belgium and Israel that allows other airlines to operate scheduled flights between the two countries. The growth in the number of foreign airlines operating out of BGA, in the number of scheduled flights and in the seat capacity of the foreign airlines, caused considerable intensification in the competition on some of the routes and to a decrease in the Company's market share out of total passenger traffic at BGA. See Section 7.1.10 below for further details.

7.1.5 Technological changes that could materially affect the operating field • From the standpoint of marketing and distribution, 2007 saw continuation of the trend towards global growth in the use of e-ticketing, in direct marketing of airline tickets by means of the Internet and in carrying out independent check-in and seating. These trends are intended to reduce the distribution and marketing costs of the airlines. The Company is continuously conforming its operations to these trends by developing means to enable its customers self-service, as in the instance of purchasing tickets and taking care of check-in and seating by means of the Internet, independent check-in and seating by means of terminal locations, etc. • In August 2007, the Company entered into an agreement with the Amadeus Company to supply the Company with a reservation system to replace the current "Carmel" system. (See Section 7.6.2 below for further details on the "Carmel" system and replacing it). The Company intends to transition to the new Amadeus system in the second quarter of 2008. To this end, the Company is prepared to replace the system and to customize the systems that interface with this system. The switch from "Carmel" to "Amadeus" is a complex process, impacting all of the Company's passenger flight sales processes, involving sales, retail, service entities, as well a travel agents, the Company's branches and stations in Israel and overseas. With the change to the Amadeus system, there is a risk that the data related to some of the reservations transferred from the Carmel system to the Amadeus system will not be transferred completely. This risk is an economic and service risk, although the Company assesses that this risk does not have a high level of probability. The information on the change to the Amadeus system and the risks involved in it constitute Forward-Looking Information, as defined in the Securities Law, 1968. The actual change from the Carmel system to the Amadeus system and its impact on the Company's operations could be materially different from that forecast, due to reasons including technological, commercial and service-related reasons. • During the second quarter of 2006, the Company issued a tender to receive proposals for the implementation of a solution for management of back office systems by means of ERP technology. In December 2007, the Company entered into an agreement with IBM as chief integrator of application of the technology of SAP and RAMCO (maintenance and engineering). The project's cost is estimated at $15 million. Currently, the Company is characterizing and organizing the project, which is expected to begin during 2008 and continue for two years.

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The information on the possible application of the ERP system, including the dates for carrying out the project and its scope, constitute Forward-Looking Information, as defined in the Securities Law, 1968. The actual application of this project, its dates, scope and impact on the Company's operations could be materially different from that forecast, due to reasons including technological, commercial and service-related reasons, and because of the Company's ability to integrate the system and the resources that will be allocated for this. • In November 2007, a memorandum of understanding was signed with Systems AG (LHS) to carry out the "Flight Plan" project in El Al and ASP services (remote application). The system enables the calculation of the optimal flight route for the Company's planes, according to a range of circumstances and limitations, including fuel consumption, climatic effects, transit fees, as well as planning arrival and departure routes from every airport, depending on weather conditions upon arrival, utilizing the information aggregated in the system. The system enables the creation of a more cost-saving, safe and effective route for the Company's aircraft. The signing of a final agreement and commencement of operation of the system is expected to occur during 2008. The information on the possible implementation of the "Flight Plan" system, and the Company's assessments of the advantages embodied in this system, are Forward-Looking Information, as defined in the Securities Law, 1968. The actual application of this project and its impact on the Company's operations could be materially different from that forecast, due to reasons including the absence of a binding contract, commencement of operation of the system on dates other than those forecast, and due to technological, commercial and service-related reasons. • The Company is working toward considerable expansion of its e-commerce abilities, including translation of its website into additional languages, providing clearing and sales abilities overseas, etc. • In recent years, the aviation market has geared up to deal with terror events by expanding the use of advanced technological and other means, on land and in the air. Within the scope of these preparations, the Company is working in accordance with the instructions of the General Security Service, inter alia, for evaluating and installing protective measures.

7.1.6 Critical success factors in the operating field and changes that have occurred in them A number of factors can be pointed to in the operations of the passenger and cargo transport area via passenger aircraft, which affect the competitive position in the field: the economic and security situation in Israel, which influences passenger traffic to and from Israel; the branding of the Company in the eyes of the customers, including matters of safety and quality of service; the ability to offer flights to popular destinations at competitive prices and development of a network of routes - independently and in cooperation with other airlines; preservation of flight rights; the ability to offer flights at the frequency and the capacity demanded; a distribution system; risk management by implementing appropriate risk hedging policies.

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7.1.7 Changes in the supplier network and the raw materials for the operating field The primary raw material that serves airlines is jet fuel and it represents one of the major expense components of an airline. See Section 9.5.1 below for details relating to fuel.

7.1.8 Main entry and exit barriers of the operating field and changes therein One of the most significant entry barriers in the area of the international scheduled flights is obtaining the authorization to carry out scheduled flights from one country to other countries. In accordance with international agreements, each country is permitted to grant the authorization (appointment as “Designated Carrier”) to carry out flights from that country to other countries to only one company or to a limited number of airlines, as stipulated by agreement. The more liberal the aviation agreement between countries, the lower are the entry barriers. According to a Government resolution in May 2003, preference was given to the status of El Al as Designated Carrier for destinations for which the Company was the Designated Carrier as of that date, subject to meeting certain conditions (see Section 9.11.7.2 regarding the Government's resolution from May 2003). Nevertheless, we must state that, in January 2006, Israir Aviation and Tourism Ltd. ("Israir") was granted the status of an additional Israeli Designated Carrier for the Tel-Aviv-New York route, even though the quantitative conditions stipulated in the May 2003 Government resolution had not been complied with. (See Section 9.11.7.2 below for details). On April 16, 2007, the public commission for examining the "Open Skies" issue, headed by Director-General of the Ministry of Transport, Gidon Sitterman, submitted its recommendations to the Minister of Transport. The commission recommended an aviation policy that will serve as a springboard for economic growth and increase tourism to and from Israel, while adapting to the global economic environment, and while emphasizing opposite the European Union, the goal of which is to sign liberal agreements that remove limitations relating to capacity, destinations, frequency and number of Designated carriers. Therefore, the committee recommended immediately opening negotiations with representatives of the European Union countries, in order to institute a policy of "Open Skies" with these countries, gradually within 3 years (See Section 7.1.10(b) regarding the committee's recommendations). In accordance with these recommendations, in November 2007, discussions began between Israel and the European Union, the objective of which is to eliminate the need for separate agreements with each European country, and the execution of one general agreement with the Union's executive, in order to create aviation liberalization that will increase competition and freedom of movement between the airlines. In February 2008, Israel and the European Union Commission signed a preliminary memorandum of understanding, toward the signing of a uniform global aviation agreement between European countries and Israel. On January 27, 2008, the Israeli Government adopted Resolution No. 3024 regarding an increase in the Government's participation in the security expenses of the Israeli airlines, while amending the Government Resolution from 2003 regarding El Al's status as a "Designated Carrier" (see Section 9.11.7.2 for details on the Government's resolution). Following this Government resolution, Israeli airlines have begun to strive to receive appointment as a Designated Carrier to different destinations instead of the charter flights they have operated to date. In the wake of the Government resolution, in March 2008, the Civil Aviation Authority approached, Arkia, Israir and Sun D'Or, with a request to present the Authority with additional routes on which these companies are interested in operating

a-28 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding scheduled passenger flights during the summer of 2008. The airlines were asked to provide their operational ability for their flights to those destinations, such as the number of weekly flights they can operate, based on their aircraft fleet and manpower. In addition to obtaining authorization from the mother country of the airline, consent is generally required from the countries to which the airlines wishes to fly with relation to the number of flights and to the capacity of the flight. Also, each flight is required to have a slot with regard to takeoffs or landings at the airports to or from which it operates. See Section 8.1.8 and Section 9.11.7 below for details. The most important additional entry barrier is the initial relatively large investment that is necessary in order to establish and operate an airline, including acquisition or leasing of aircraft. Under the international aviation agreements, obtaining the appointment as Designated Carrier is conditional upon the substantial ownership and effective control of the air carrier being in the hands of the state or citizens of the country that has specified that it be the Designated Carrier. This requirement represents an entry barrier for obtaining the appointment as Designated Carrier by companies whose major ownership and control is held by foreign citizens. However, it should be noted that in order to work toward implementing the recommendations of the public commission's examination of the "Open Skies" issue, including the recommendation to immediately encourage the entry of low-cost airlines, it was decided to allow the operation of Thomsonfly on the routes between Israel and the UK, which was signed in September 2007, that each party will be able to appoint a carrier whose principle place of business is located in the territory of the appointing party. A similar process is underway between Israel and France, in order to enable Corsair (also owned by the German company TUI), to operate scheduled flights between Tel Aviv and Paris. Moreover, within the framework of the second round of aviation talks between Israel and the European Union, which were held in February 2008, an assessment was made of granting of approval to European airlines to fly to Israel from any country in the Union, even if it is not the parent country of the airline, with the only limitation being the number of flights from the third country will not exceed the total permitted flights from that country under the aviation agreement it has with Israel. Thus, the limitation of ownership and control as a condition for obtaining the status of Designated Carrier will essentially be removed. With relation to the operation of passenger aircraft in international charter flights, each Israeli carrier must obtain a license to operate charter flights to and from Israel, which is subject to various demands, mainly: economic stability and ownership or leasing of at least two aircraft. Additionally, each Israeli carrier and foreign carrier must obtain authorizations for charter flights from the Civil Aviation Authority. At present, there is a more liberal policy of granting authorizations in the area of charter flights, both with relation to Israeli charter airlines as well as with relation to foreign charter companies. Therefore, in the Company’s estimation, there are no material entry barriers in the field of charter flights.

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7.1.9 Substitutes for services of the operating field and changes that have occurred therein The alternatives for transport in passenger aircraft are transport by other means (ocean and land vehicles and cargo aircraft for cargo in the belly of passenger aircraft). In addition, the Group has competitors that offer alternative transport in passenger aircraft in scheduled flights, charter flights, low cost flights and Sixth Freedom Flights (indirect flights with stopovers in the home country of the airlines). There were no substantial changes during 2007 in the substitutes for transport by means of passenger aircraft. In the Company's estimation, the major considerations in preferring a flight over sea and/or land transport are: purpose of travel, traveler's timetable, the distance and the nature of the route.

7.1.10 Structure of competition in the operating field and changes that have occurred therein

A) General • There is severe competition in the passenger aircraft transport field between tens of international scheduled and charter airlines. The airlines compete in various areas, principally: fares, frequency and flight times, on-time performance, equipment type, airplane configuration, passenger service, bonuses to frequent travelers, commissions and special incentives to travel agents and supply of computerized reservation and distribution systems to travel agents. Fare competition is reflected mainly in the offering of cheaper fares to passengers or special rates to cargo shippers. The competition is not only with the Designated Carrier of the country that is located on the other end of the route and with charter airlines that operate on the same route, but also with other airlines, including those not operating flights to Israel (offline airlines), this as the result of the traveler's diverse alternatives for arranging his own flight schedule, in which a number of airlines participate, and the strengthening of code sharing agreements between airlines (Star, Sky Team, One World) • Additionally, most of the scheduled airlines operating flights to and from Israel also carry passengers on Sixth Freedom Flights (indirect flights with a stopover in their mother country). Because the flight from the home airport (Europe) to the is carried out without any connection to the flight from Israel to Europe, the situation sometimes permits the foreign company to lower the total price for the flight from Israel to the United States (through Europe) without reducing the price for which the airline ticket from Europe to the United States is sold. As a matter of fact, sometimes the foreign airlines offer the airline ticket from Israel to the final destination (the United States, for example) at a price lower than the price which they offer for the flight from the stopover destination (Europe, for example) to the final destination. On the other hand, El Al does not presently benefit from similar possibilities to transport passengers between different countries via Israel, primarily because of the current geopolitical situation. A significant portion of the aviation agreements between Israel and other nations state that the offered capacity must be based on the volume of the traffic between Israel and the other nation with which the agreement was signed. Accordingly, the policy of the Ministry of Transport has been to restrict the flight capacity in the context of Sixth Freedom Flights of the foreign companies.

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• In the last two years, the Ministry of Transport has begun implementing a policy of growing liberalization in the aviation industry, in order to encourage and increase tourist traffic to Israel, by increasing competition between the airlines. To this end, the Ministry of Transport appointed a public commission that will evaluate the "Open Skies" policy. The Commission, headed by the Director-General of the Minister of Transport, submitted its recommendation to Minister of Transport Shaul Mofaz in April 2007 (see subsection (b) below for additional details). • As implementation of the liberalization in aviation policy, the Civil Aviation Authority approved requests by many companies to increase the frequency or capacity, while these were not committed in existing bilateral aviation agreements. Many airlines operating scheduled flights to Israel increased their supply of seats, by adding frequency and by operating larger planes. Among the companies that increased the frequency and/or capacity are: , , Austrian Airlines, , Malev, Tarom, Trans Euro, Royal Jordanian and Brussels Airlines. • Likewise, during 2007, aviation discussions were held with the civil aviation authorities of several European countries (Britain, France, Slovakia, and Belgium). In all these agreements, the liberalization policy in the air transport field were expressed, when it was agreed on numerous Designated Carriers, enabling an increase in the number of airlines that can operate scheduled flights on the routes to and from Israel (also see Section 9.11.7.2 for details on the agreements). In the wake of these agreements, the following companies began operating on routes to Israel: • In November 2007, Thomsonfly (a subsidiary of the German aviation company TUI) began operating three weekly flights from Manchester and three weekly flights from Luton Airport, in western London, operating six scheduled weekly flights on routes to Israel. • The French company New Axis was appointed another Designated Carrier on the Israel- Marseilles route, and as from December 2007, began to operate one weekly flight on this route. According to reports by New Axis, this company plans to increase its weekly frequency on this route as from the spring of 2008. • An airline from Kazakhstan (Sayaketh) began operating a scheduled weekly flight on the route between Tel Aviv and Almaty (Kazakhstan). • In December 2007, the Russian airline KD Avia began to operate three scheduled weekly flights between Kaliningrad in Russia and Tel Aviv. • British Midland Airlines (BMI) of the UK, which received the status of second Designated Carrier on the London to Israel route, began to operate a daily flight on this route in March 2008. • The French aviation company Corsair, also owned by TUI, which received the status of second Designated Carrier on the Paris to Tel Aviv route, announced its intention to operate two scheduled weekly flights on this route, beginning in April 2008. • Likewise, the Belgian company Jet Air (owned by TUI), plans to operate three scheduled weekly flights on the Tel Aviv – Liege route, beginning from the spring of 2008.

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B) "Open Skies" policy (1) General: Due to the institution of the "Open Skies" policy, there was a 10% increase in the flight capacity of scheduled foreign airlines to and from Israel in 2007 (growth through added frequency and/or use of larger planes on the route), compared with 2006 and 31% in the last two years (2007 compared with 2005). Most of the growth in the activity of foreign airlines is evident in the routes to the former Soviet Union, where the capacity of foreign scheduled airlines has increased by 21% compared with 2006, in the regional network routes – mainly Turkey – Turkish Airlines increased average capacity of 17%, and on routes to eastern and central Europe, in which the capacity of foreign scheduled airlines grew by 12%. The increase in the number of foreign airlines operating in BGA, in the number of scheduled flights and the seating capacity of the foreign airlines caused an intensification of the competition in some of the routes and to a decline in the Company's market share out of total passenger traffic in BGA. In the Company's estimation, this trend of intensifying competition will grow stronger in 2008, against the backdrop of the intention of additional airlines to further increase their offer of airline seats. Among these companies are "Delta", which began, as noted, to operate daily flights on the New York – Tel Aviv route, in addition to its flights on the Atlanta and BGA route; Turkish Airlines , which announced that it intends to increase the frequency of its weekly flights on the Turkey and Israel routes from 18 to 25 weekly flights; and Trans-Euro, which plans, as from April 2008, to significantly increase its capacity on the routes from Russia to Israel, inter alia, by flying larger planes (747 and 767 planes to replace the smaller 737 planes now flying), as well as by adding frequency – 21 weekly flights in 2008 compared with 14 flights in 2007, following the new aviation agreement signed between Israel and Russia and elimination of the need for visas to Israel, which is expected to cause a sizable increase in traffic from this region. Likewise, Lufthansa filed a request to operate a scheduled flight route from Munich to Tel Aviv, in addition to the route between Frankfurt and Tel Aviv, thereby requesting to increase the number of its weekly flights on routes between Germany and Israel from 14 to 21 weekly flights. Due to the aforesaid, it should be noted that in February 2008, the aviation discussion that were conducted between Israel and Germany were halted, in which Lufthansa's aforementioned request was heard, due to Germany's refusal to commit that Israel will receive takeoff and landing slots in the Frankfurt at the times requested by the Israeli airlines. The Company's assessment regarding the intensified competition in 2008 and their possible effects on the Company is Forward-Looking Information as defined in the Securities Law, 1968. The extent of the actual intensification of competition and the effect on the Company could differ from that forecasted, for reasons including the changes of the economic, security and geo-political changes and their effect on trends in the aviation industry. See Section 7.1.4 for additional details. See Section 9.11.2 for the regulatory changes that could change the competitive structure in the operating field.

(2) Public commission for examining the "Open Skies" issue On April 16, 2007, the report highlights and recommendations of the public commission for evaluating the "Open Skies" issue headed by the Director-General of the Ministry of

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Transport were published, which were submitted to the Deputy Prime Minister, Minister of Transport and Road Safety, Major-General (retired) Shaul Mofaz. According to the committee's report, the State of Israel is striving to adopt an aviation policy that serves as a springboard for economic growth and increasing tourism to and from Israel, based on the importance of a national aviation industry that will take part in equal and fair competition, based on the global environmental conditions and transforming the State of Israel, from an aviation standpoint, to a more attractive destination that its competitors, in terms of price and in terms of capacity of the airlines over time. The report further states that the opening of the skies will bring with it the entry of new operators, a decrease in fares and an increase in the State of Israel's exposure as a competitive destination and consequently, an increase in the number of tourist arriving via air. At the same time, the policy will also apply to Israeli passengers who will benefit from falling prices and the more diverse range of services and destinations. Most of the committee's recommendations are opening the skies to airlines in a gradual and controlled plan, by changing aviation agreements, thereby enabling the entry of new schedules airlines to existing and new destinations; encouraging the entry of low cost airlines to Israel; full coverage of security expenses of the Israeli airlines by the State of Israel; revocation of the Government's decision from 2003 regarding its aviation policy on scheduled routes; increasing the tourism marketing budget for the Ministry of Tourism; granting a "safety net" to the airlines in flights from new destinations; determining differential aviation fee in BGA; entry into immediate negotiations with the European Union in order to determine policy and new aviation agreements; development of reasonable infrastructure for the operations of low cost airlines. The commission further recommended immediately opening negotiations with representatives of the European Union in order to institute an Open Sky policy with these countries within three years, on a gradual basis. Based on these recommendations, in November 2007, discussions were begun between Israel and the European Union (see Section 7.1.8 for details). As provided in previous sections, the Ministry of Transport has begun implementing the report's recommendations through the institution of liberal policy of granting approvals to new foreign airlines to begin operating routes to and from Israel, as well as granting approvals to increase capacity and frequency among existing companies.

(3) Government resolution No. 3024 from January 2008 On January 27, 2008, the Government passed Resolution No. 3024 in the following wording: "a. (1) To determine the rate of the State's participation in the burden of security expenses of Israeli airlines at the level of 80% of total direct expenses of their operation of existing and future international routes, oriented towards enabling these companies to contend, to the degree possible, in fair and equal competition, opposite foreign airlines and in view of the great importance in the liberalization of the civil aviation field, while recognizing the need for the existing of strong Israeli aviation. (2) To revoke Government Resolution No. 2325 from 30.7.2002.

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b. To determine that the rate of participation mentioned in Par. a. above is a continuation to the resolution of the relevant institutions in "El Al" Israel Airlines Ltd. ("El Al"), which recognizes, to the Company's favor, the importance of raising the percentage of the State's participation in the burden of security expenses of Israeli airlines, and accordingly, to change the Government's aviation policy on the scheduled routes, as provided in Section c. below. c. To amend Government Resolution No. 353(KM/14) dated 5.6.2003 regarding the aviation policy of the State of Israel on scheduled routes as below: (1) Instead of Section 1(b) of the Resolution will come: (b) "The Minister of Transport and Road Safety, within the scope of his jurisdiction regarding aviation policy, as authorized by all laws, will consider whether to grant rights to an additional Designated Carrier on scheduled air routes, and will consider whether to revoke El Al's status as a Designated Carrier on a specific route".

(2) Sections 2-3 of the resolution will be revoked.

d. To impose on the Minister of Transport and Road Safety to form an inter-ministerial team with the participation of representatives of the Ministries of Transport and Road Safety, Treasury and the General Security Service, to assess ways to implement the security instructions for Israeli civil aviation.

Date for implementing the Resolution – as provided in the Resolution".

Implementation of the recommendations of the public committee on the "Open Skies" issue, including the Government's resolution from January 2008, could have a material effect on the Group's operations and its financial results, with respect to the increased State participation in the Company's security expenses (see Section 9.11.12 below for details) and with respect to the intensifying competition as a result of the appointment of Israeli airlines as additional Designated Carriers. Implementation of the public committee's recommendations on the "Open Skies" issue and the implementation of the Government's resolutions and all of its elements, as well as its possible effect on the Company's operations and financial results, is Forward-Looking Information as defined in the securities Law, 1968. The manner and extent of the implementation of the public committee's recommendations for assessing the "Open Skies" issue, as well as the manner in which the Government's resolution is actually realized, the receipt of funding for security expenses at the updated percentage and the appointment of additional Israeli airlines as Designated Carriers to carry out scheduled flights and to operate flights by additional Israeli airlines could actually be carried out in a different manner than assessed, for reasons including regulatory limits, economic limits due to the need to purchase equipment for the operation of additional air routes, contractual restrictions involving a change in bilateral agreements or other aviation agreements, as well as changes in the security, economic and geopolitical situation and their effect on competition.

a-34 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding c) "Open Skies" agreement (Europe – U.S.) On April 30, 2007, representatives of the European Union and of the U.S. signed an "Open Skies" agreement, which was published on May 25, 2007. This agreement is based on the willingness of the parties and to encourage an international aviation system based on competition between airlines in the European Union countries and in the U.S., with minimal government involvement, and to enable the expansion of international opportunities, inter alia, through the development of broad communication systems for the convenience of passengers and those sending air cargo, through which the airlines in the said companies can offer to transport passengers and/or cargo at a range of prices and services in the "open market". The implementation date of the agreement is March 30, 2008. The choice of the agreement's implementation date is based on the willingness of the parties to impose the agreement concurrent with the opening of Terminal 5 in Heathrow Airport in London. Likewise, the agreement stipulated that if , by 2010, the demand of European Union companies from the American Government, to allow larger European investment in American airlines (which is limited to just 25%), is not met, every state in the European Union will have the right to suspend the agreement. As of the date of this report, it is still not possible to assess whether this agreement will have material implications for the Israeli aviation market. d) Charter companies In accordance with the policies of the Ministry of Transport and the charter regulations, since the mid-90, the charter airlines enjoy wide freedom from restrictions with regard to routes, fares and frequencies. The competition from the charter airlines is immense and aggressive, in particular as to routes between Israel and Europe to destinations that have intensive Israeli traffic to vacations and recreation in Europe. For several years, the Civil Aviation Authority has given approval to charter airlines even to transport cargo in passenger aircraft that they operate, as the result of which there has only been a minimal increase in the supply of capacity. However, in 2006, due to the decline in demand from incoming tourism due to the War in Lebanon, the foreign charter airlines reduced their activities on the routes to and from Israel. During 2006, the foreign charter airlines reduced their capacity by 6% and the share of the charter airlines fell to approximately 21% of international passenger traffic at BGA. However, in 2007, a year in which there was regional calm and stability on the security front, foreign charter companies increased their activity on routes to Israel. Foreign charter companies increased their average capacity on routes to Israel by 48% and the number of passengers on them rose by a considerable 51%. The main increase in the activities of foreign charter companies was posted on the routes to Turkey. As a reminder, beginning from March 2007, the Israeli airlines halted their activity on routes to vacation destinations in Turkey, due to the high security expenses they were bearing, and accordingly, the foreign charter companies increased their activity on the Turkey routes by 95%. If the routes to Turkey are neutralized, there was only a 14% increase in the activities of foreign charter companies on routes to Israel. Recently, the Israeli airlines, including Sun D'Or announced their intention to reassess operating flight routes to Turkey. Therefore, it is possible that in 2008, the Israeli airlines, including the Group, will resume their activity to this destination.

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After several years in which there was a trend of decline in the share of the charter airlines in total passenger traffic at BGA there was an increase in charter activity and in the share of the charter companies (Israeli and foreign) out of total passenger traffic at BGA (to/from BGA)17 reached 23% in 2007, similar to the level posted in 2004, as in the table below:

Year Share of charter airlines out of total passenger traffic at BGA 2007 23% 2006 21% 2005 22% 2004 23% 2003 25%

E) Low cost companies In addition, in recent years, airlines known as low cost have penetrated the world of aviation. These airlines maintain low costs and generally offer very competitive prices, while providing a low level of service and using alternate, less desirable airports. These airlines have succeeded in growing enormously in the United States, in Canada and in Europe. A stirring in this field has also been felt recently in Asia. The entry of the low cost airlines into certain markets forces the airlines competing in these markets, which do not have a low cost structure like the low cost airlines, to become more efficient in order to reduce costs. Until now, the low cost airlines have operated on short flights, and have not operated on flights to and from Israel. Nevertheless, in February 2006, Germany appointed the "HaphagFly" company, a subsidiary of the aviation and tourism giant, TUI, which also operates low cost flights, as a Designated Carrier for routes between Munich and Düsseldorf and between Tel-Aviv. Likewise, the British company "Thomsonfly" of the TUI Group, began to operate scheduled flights on the Luton (west London) to Tel Aviv route and the Manchester – Tel Aviv route in November 2007. See Section 7.1.10 for details on the intentions of additional low cost companies to operate scheduled flights to Israel. Within the scope of the second round of aviation discussions held between Israel and the European Union, held in February 2008, evaluated permitting European airlines to fly to Israel from all European Union countries, even if it is not the parent company of the relevant airline, with the only limit being that the number of flights from the third European country will not exceed the number of flights allowed from that country under the aviation agreement it has with Israel. Thus will be resolved the issue of ownership and control with respect to all the EEU countries (the appointment of airlines such as Thomsonfly and Jetair, which are owned by the German tourism and aviation corporation, TUI, as a "Designated Carrier" on behalf of England and Belgium, is made possible due to the change in the bilateral agreements with these countries).

17 Source: Civil Aviation Authority

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7.2 Services in the field of operation A. General The main services provided by the Company in this operating field are air transport of passengers and cargo to various destinations by using passenger aircraft. As of the date close to the approval of the report, the Group operates flights in passenger aircraft to approximately 37 destinations, in about 26 countries in Europe, North America, the Far East and Central Asia and other destinations. Additionally, during the winter season, the Group operates flights from a number of locations in Europe to Eilat. During 2007, the Company halted flights to Larnaca and , because of lack of economic feasibility and also halted its operations on the route to Chicago. Towards the end of the 2006 year, the Company gave notice of its decision in principle, to cancel the operation of the flights between Tel Aviv and Cairo, due lack of economic feasibility in operating the route caused by the high security costs borne by the Company, and as part of the Company's actions to reduce expenses. The cancellation of the flights was planned for the month of December 2006, but the Company responded to the request of the Ministry of Transport to continue to operate the route, in light of the announcement of the Managing Director of the Ministry of Transport that the continued operation of the route would take place along with an increase in the State's participation in the security expenses for operating the route to 75% of security costs (as opposed to participation of 50% of security costs on remaining routes. As of a date close to the approval of the report, the mechanism for State participation as aforesaid, has not actually been agreed upon. Also, the Company ceased operating flights on the Larnaca and Istanbul routes beginning from March 2007 due as well to lack of economic feasibility, and even took a decision to cease the flights to Chicago after April 2007. In 2007, the Company operated approximately 205 weekly flights on the average in each direction. In addition to the flights it operates, the Company markets flights in the framework of interline agreements with other airlines, which make it possible for passengers on scheduled flights, subject to certain restrictions, to use airline tickets issued by another airline, for flights of the other airlines. The company whose flights are used by the passenger submits the bill for payment to the company that issued the flight ticket. The accounting between the airlines is done on a monthly basis, generally through IATA's clearinghouse. The scheduled airlines also operate flights in the context of “code share”. The use of the code share permits the air carrier to market flights of another air carrier as if they were its own flights, so that the passenger orders the flight through one carrier, despite the fact that, in actuality, he flies with another carrier. The code share provides the participating carriers with the possibility of increasing the frequency of the flights offered to its customers, accessibility to additional destinations and also marketing advantages, including amplifying the attractiveness of joining the Group’s frequent flyer club. The Company has also operated in this area in recent years. As of the date of the report, the Group has active code share agreements with 10 other airlines. Most of the agreements permit operation of flights by the two companies. In its scheduled flights, the Group operates four service sections that are distinct one from the other in the type of seat, the space between the seats, the food and beverage menu, the manner of serving, the assortment of convenience and leisure products and the number of flight attendants in relation to the number of passengers. The sections are: first class,

a-37 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding improved business section - platinum, business section and tourist section. The charter flights operate a service profile suitable for charter operations. Not all sections operate in all flights. All scheduled flights contain a system of programs of audio, films, screened magazine and printed magazine and services are provided for the sale of duty free products and catalog sales of electrical products which may be purchased during the flight (without duty exemption) and be delivered to the customer’s home. The Company signed a cooperation agreement during November 2006 with the HOT Company for the upgrading of in-flight entertainment content (video, printed magazines and audio). In March 2008, the Company entered into a collaboration agreement with Keshet Broadcasting Company Ltd. and Channel 2 News Company to broadcast the entertainment programs of "Keshet" and the daily news edition on its flights. At the end of July and in August 2007, the Company received a delivery of two new passenger Boeing 777 model aircraft, which it purchased from Boeing. The new aircraft contain bed-seats in the non-coach sections as well as a new entertainment system and a new design. Further to the arrival of the new aircraft, the Company continues to upgrade and renew its long-range aircraft fleet, including the replacement of the business class and first class of four other Boeing 777 aircraft operated by the Company, as well as renewing the interior of the cabin in all service sections to the design of the new planes. Also planned is the replacement of the first class and business class seats in the Boeing 747-400 fleet and upgrading the interior of all sections of the plane in order to refresh the appearance of the plane's interior (seat covers, carpets, etc.). The renewal of the interiors of the 737, 757 and 767 fleets is expected to take place during 2008.

In December 2008, the Company signed a "code share" agreement with "American Airlines", which will enable El Al passengers to fly through one of El Al's four direct destinations in North America to more than 20 key destinations of American Airlines throughout the U.S. and Canada. Moreover, the agreement will enable El Al passengers to fly between North America and Israel, in both directions, while traveling through or staying in one of El Al's key destinations in Europe, with the transatlantic flight between North America and Europe carried out by American Airlines. Similar arrangements will be made available to American Airlines passengers. The agreement is expected to take effect during 2008. , after approval by the relevant authorities of both countries, thereby increasing the number of El Al's code share agreements to 1118. In January 2008, the agreement was ratified by the Ministry of Transport in Israel. See Section 9.11.2(i) in the chapter on the changes in legislation could have a material effect on the Company's ability to enter into "code share" agreements in the chapter on Restrictions and Regulation of Corporation's Businesses – Restrictive Business Practices.

In addition to regular flights, the Company is engaged through Sun D’Or, in carrying out charter flights by leasing capacity in aircraft to organizers of charter flights at prices agreed upon in advance, and the sale of blocks of seats to agents. The charter flights are generally undertaken to recreation destinations.

18 On October 27, 2007, the Company's code share agreement with Delta Airlines, with respect to the Tel Aviv – New York and Tel Aviv – Atlanta routes, as well as several interior U.S. routes, ended.

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The Group’s flights are supported by a system of ground services that administers the processes of boarding passengers and their baggage, their alighting at the destination airport and unloading their baggage, and cargo handling. The ground services exist at BGA and at each of the destinations at which the Group’s aircraft land. At the same time, the Company operates an array of ground security in each of the airports abroad at which the aircraft of Israeli airlines land and a system of air security, which operates during the flights of passengers of Israeli airlines. (The ground security system at BGA is operated by the Airports Authority).

B. Data regarding the destination groups of the Group The following are data regarding the Group's market share separated into groups of key destinations, relative to all passenger traffic to or from BGA, broken down into these destination groups: To/from Number of passengers broken down to Company estimates BGA destinations of direct flights19 (in thousands of market share of of legs) the Company (in %)20 Change 2007 2006 2005 2007 2006 2005 (in %) in 2007 North 5.6% 1,506 1,426 1,299 45.5 47 49 America Europe 13.1% 6,205 5,486 5,346 42 43 44 Far East and 15.6% 375 324 277 62 60 60 21 Central Asia Other 32.1% 1,721 1,303 1,318 9 19 23 Total 14.8% 9,807 8,538 8,239 37.5 41.1 42.8

19This data has been broken down by the passenger’s final flight destination (including the final destination in sixth freedom flights). The Company’s estimate concerning the passenger’s final destination is based upon data from global distribution systems. The Company is unable to assess the level of precision of the data obtained from the distribution systems. This data does not include non paying passengers. It should be noted that the Civil Aviation Authority publishes data which includes non paying passengers and is broken down by the airline companies which carried out the flights (and not by the destinations), so that in cases of a flight of sixth freedom of a European company between Israel and the United States via an airport in Europe - the flight will be attributed to the mother country of the European airline. According to the Company's processing of the Civil Aviation Authority data (deduction of non paying passengers according to the Company’s estimate and a breakdown of the flights to the mother countries of the airlines, while ignoring sixth freedom flights), the market shares of the Company were: in the North America route: 54.1% in 2006 vs. 55.7% in 2006; in the European routes: 34.4% in 2007 vs. 36.2% in 2006; in the Far East and Central Asia routes 96.4% in 2007 vs. 95.1% in 2006; in other destinations: 6.2% in 2007 vs. 14.4% in 2006.

20 Data of the Civil Aviation Authority relate to the airlines that carry out the flights and not to the destinations of the flights. Therefore, this data represents a Group estimate based on analysis of the Civil Aviation Authority data, after deducting non paying passengers. This data has been broken down by the direct flight destination and does not make a distinction as to the true destination of the passenger when the subject is sixth freedom flights of foreign companies (flights from Israel to a foreign country with a stopover).

21 The Group is unable to assess the level of precision of its estimate of the market share which includes sixth freedom flights in the Far East and Central Asia market, Africa and regional destinations (such as Turkey, and ), this in view of the lack of precision of the information in the Company’s possession regarding the number of passengers of other airlines in this market.

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C. The routes to North America (to the United States and Canada) During the height of the 2007 summer season, the Company operated approximately 38 weekly flights to North America and during the 2007 winter season, it operated about 26 weekly flights (mostly to New York). Commencing from the end of March 2006, the Company began also to operate two weekly direct non-stop flights to Miami, and starting from July 2006, the Company also operates direct flights 3 times a week on the Tel Aviv-Los Angeles route. At the end of March 2007, the Company added a third flight to Miami. Due to lack of economic feasibility, the Company halted its flights to Chicago in April 2007. There is severe competition between the airlines that operate on the route between Israel and North America (Continental, Delta and Air Canada), which was intensified due to the heightened activity of the European airlines which take traffic to the United States and Canada via their home airport (Sixth Freedom). Additionally, in May 2006, Israir began operating scheduled flights on the New York route. Overall, in 2007, there was a 10% increase in the activities of foreign airlines on the transatlantic routes and the capacity of the foreign airlines on these routes grew by about 6% compared with 2006. On the other hand, the Company did not significantly increase its capacity on these routes, and the Company's passenger traffic increased by 3% on these routes. In March 2008, the Company announced it was increasing the frequency of its flights to New York (22 weekly flights) and to Los Angeles (5 weekly flights). The Company expects that competition on these routes will intensify in 2008, due to reasons including the following: • Commencement of activity of Delta on the Tel Aviv – New York route as of March 2008, in addition to its activity on the Atlanta – Tel Aviv route. Thus, Delta expects to increase the frequency of flights it operates on routes between the U.S. and Israel from 7 to 14 weekly flights. • Israir is expected to increase the number of its seats on the New York route, and as of April 2008 is expected to operate its flights on the New York route on A330 planes, which contain 286 seats, replacing the Boeing 767 aircraft that operated until now on this route, which contained only 255 seats. • "Israir" and "Arkia" could submit requests for appointment as Designated Carrier for additional destinations in the U.S. (such as Miami and Los Angeles), following the Government's decision of January 27, 2008 (see Section 7.1.10 for details).

Each of the airlines (Israeli and American) on this route has full freedom of action regarding flight fares, frequency, type of aircraft, configuration of aircraft, etc. The Group, as Designated Carrier to the United States, has the rights to transport passengers, cargo and mail to/ from New York and other points in the United States, in part, solely in the context of “code share”. Recently, the Israeli and U.S. aviation authorities began talks toward formulating a broad aviation agreement between the countries ("Open Skies").

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D. The routes to Europe The Company has scheduled flights to 30 destinations in Europe, with the key ones being London, Paris, Frankfurt, Rome, Milan, Madrid and Zurich. In general, the Company competes on the routes between Israel and Europe with the national Designated Carrier of the destination country, and also with other scheduled airlines that take sixth freedom traffic to other countries via their home airport, and with foreign and Israeli charter airlines that operate charter flights to various destinations in Europe. In this connection, it should be pointed out that the European scheduled airlines that fly to Israel have an advantage over the Company, since they have the ability to offer continuing flights to destinations to which the Company does not fly. The Group, as Designated Carrier, has the rights to transport passengers, cargo and mail to/from various destinations in Europe, in part, solely in the context of “code share”. In 2007, competition intensified further, with the implementation of a liberalization policy in the industry, the signing of new aviation agreements and the resultant appointment of additional Designated Carriers (See Section 7.1.10 above for details). In addition to the new airlines, there was considerable growth in the capacity of existing companies on the Israel – Europe routes. Most of the growth in capacity was on the routes to the Confederation of Independent States (former Soviet Union), where the scheduled airlines increased the capacity they offer by 21% and the number of their passengers increased by 30%. Trans Euro increased its seats offered by 13; Russian Airlines (formerly Pulkovo) increased the seats it offers by 17% on routes between Israel and St. Petersburg; Georgian Airlines increased its capacity by 43%. On routes to Central and Eastern Europe, there was a 12% in the capacity for foreign scheduled airlines. The main growth in capacity was posted by the Romanian company Tarom (29%) and the Hungarian company Malev (16%). On routes to Western Europe, the capacity of foreign companies grew by 6.5%. Considerable increases in capacity were posted by airlines: Brussels Airline (22%), Air France (18%), British Airways (9%) and Austrian (7%). Likewise, in view of the Government's decision from January 2008, Israir and Arkia began to prepare for appointment as Designated Carrier to various destinations, instead of the charter flights they have operated to date. Within this activity and to the best of the Company's knowledge, both companies applied to be appointed additional Designated Carriers on a series of routes, including: Paris, London, Moscow, Munich, Barcelona and Rome. In February 2008, the Ministry of Transport approved Arkia's request to be appointed an additional scheduled carrier on the route to Paris. Therefore, Arkia announced that as of May 2008, it will operate daily scheduled flights to Paris, and it is possible that some of the flights will be operated in a "low cost" format. In March 2008, the Civil Aviation Authority approached Arkia, Israir and Sun D'Or, following the Government's decision, with a request to present it with the additional routes that these companies are interested in operating scheduled passenger flights during the 2008 summer season. Aviation agreements signed in 2007 and those expected to be signed in the near future and the Government's decision regarding a change in the "Open Skies" policy, together with the continued growth in demand, will lead to the operation of scheduled flights to and from Israel by other airlines, and to an increase in the capacity and frequency among the existing airlines.

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Therefore, in 2008, a further increase is expected in the competition for traffic on these routes. The Company's estimation regarding the increased capacity and frequency among the other airlines and the intensifying competition are Forward-Looking Information as defined in the Securities Law, 1968. This information relies, inter alia, on the Company's estimations in view of the volume of the Group's current activity and the degree of competition in the markets may not be realized – in full or part – or be realized in a significantly different manner. The actual situation could be different than that forecast, for reasons including the degree to which the market is opened to additional competition, regulatory changes, how the Company deals with the competition and the risk factors described in Section 9.18, as well as economic, security and geopolitical changes.

E. The routes to the Far East and Central Asia On the routes to the Far East and Central Asia - India (Bombay), Thailand (Bangkok), China (Beijing) and Hong Kong – the Company presently has an advantage because it is the only scheduled company that operates scheduled direct flights from Israel to these destinations. Other than the Company, scheduled airlines that operate in Israel operate flights to these destinations in the context of Sixth Freedom traffic. In March 2007, the Company added a third weekly flight on the route to Beijing, and as from October 2007, operates four weekly flights on the Hong Kong route. In total, the Company operates 18 weekly flights to the Far East: to Hong Kong (5 flights), Bangkok (6 flights), Bombay (4 flights) and Beijing (3 flights). At the Company's request, in August 2007, the Minister of Transport appointed the Company the Designated Carrier on the route to Japan. The Company is evaluating the possibility of using this right, including by obtaining landing slots in different airports. In October 2007, a tourism agreement was signed between Israel and China, whereby Israel received "approved destination" status. The importance of the agreement lies in the fact that the marketing and sale of tourist group packages in China is approved only for destinations recognized as approved destinations, and the signing of the agreement could make possible a breakthrough in expanding incoming tourism from China to Israel. In total, growth of 20% was posted in 2007 in the supply of seats on these routes, compared with growth of 15% in passenger traffic on these routes, compared with 2006. Based on the global trend, growth is expected in passenger and cargo traffic on the routes to the Far East. Accordingly, the Group is working to increase its presence in these markets by increasing the capacity and frequency of flights on existing routes, as well as evaluating the feasibility of new routes, as provided above. The data on expectations for increased passenger and cargo traffic on routes to the Far East is Forward-Looking Information as defined in the Securities Law, 1968. This information relies, inter alia, on the Company's estimations, in view of the present volumes of activity of the aviation industry on the said routes, may not be realized, in full or part, or may be realized in a materially different way. Therefore, the actual change in passenger and cargo traffic on the routes to the Far East and the Company's preparations for this could be materially different than those forecasted, as a result of a large number of factors, including the outbreak of epidemics, changes in customer preferences, the extent to which the market is opened to additional competition and the extent of the Company's dealing with the competition. See Section 7.8 below for additional information.

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F. Other routes

The other routes that the Company operated during 2007 were Turkey, Greece, Cyprus, South Africa and Egypt. See Note 24A to the financial statements for details. Toward the end of 2006, the Company reported its decision in principle, to halt the operation of the route between Tel Aviv and Cairo, due lack of economic feasibility in operating the route caused by the high security costs borne by the Company. The halt in the flights was planned for December 2006, but the Company acceded to the Ministry of Transport's request to continue flying this route due to the announcement of the Director-General of the Ministry of Transport that operation of the route would continue along with an increase in the State's participation in the route's security expenses to 75% of security costs (as opposed to participation of 50% of security costs on remaining routes). Also, the Company stopped operating flights on the Larnaca and Istanbul routes beginning from March 2007, due to a lack of economic feasibility. See Section 7.1.10 for additional information. It should also be noted that Arkia and Israir also halted their activity to the vacation destinations in Turkey, due to the high security expenses on these routes. Therefore, Turkish Airlines has considerably increased its activity on these routes (17%), and at the same time, the Turkish charter operators significantly increased their activity on these routes. As mentioned above, the route to Johannesburg is included in the framework of the Commissioner of Business Restrictions' declaration of the Company as the holder of a monopoly on four routes. See Sections 9.11.2(i) and 9.18.15 below for further details. In addition, from time to time, the Company operates one-time charter flights or short series of charter flights to various destinations. Due to the continuation of the trend of intense competition in the industry, and the Group's policy for optimization of its routes network, there was a decline in the Group's market share on these routes in 2007, standing at only 10%. See Section 7.8 for information on competition.

7.3 Analysis of revenues and profitability from services The following are data concerning the breakdown of the Company’s revenues (consolidated) deriving from similar service groups in the passenger aircraft transport field: (1) Flights from Israel to North America and back; (2) Flights from Israel to Europe and back; (3) Flights from Israel to the Far East and Central Asia and back; (4) Flights from Israel to other destinations and back. Similar service Revenues in thousands of dollars % of total Group revenues group 2007 *2006 *2005 2007 *2006 *2005 North America 606,036 516,981 521,656 31.4% 31.0% 32.2% Europe 772,292 642,216 652,969 40.0% 38.6% 40.3% Far East & 257,561 201,937 168,636 13.3% 12.1% 10.4% Central Asia Other 42,061 36,735 34,820 2.2% 2.2% 2.2% destinations No geographic 14,464 12,999 13,761 0.7% 0.8% 0.8% attribution Total 1,692,414 1,410,868 1,391,842 87.6% 84.7% 85.6% * The data for 2006 and 2005 were restated due to a change in the breakdown of the Company's revenues between the passenger field and the cargo field. See Par. 5 above for details.

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The following is the amount of gross profit and the gross margin for the years 2007, 2006 and 2005 deriving from the passenger aircraft transport field (excluding field-wide expenses and unclassified revenues):

2007 *2006 *2005 Amount of gross profit (in 398,187 240,063 354,211 thousands of dollars) Gross margin (in %) 24% 17% 25%

* The data for 2006 and 2005 were restated due to a change in the breakdown of the Company's revenues between the passenger field and the cargo field. See Par. 5 above for details.

7.4 New services

• In 2007, the Company, together with Home Check of the "Shachar" Group, launched a new pre-flight check-in service from home or office, in which the Company's customers, within a limited geographic dispersal, were offered to purchase these services. • In 2007, the Company also launched the "Express Check-in" service, enabling a passenger to input his personal information in the Internet, with the information synchronized with the airport systems. This development provides the passenger with an especially short line in the airport, and enables him to hand in luggage without undergoing additional examination. A passenger having no checked-in luggage will not even have to pass through the pre-flight terminal. It also enables the passenger to choose a preferred seat and to print a boarding pass for the flight on the Internet, efficiently and quickly. • In October 2007, the Group applied to the Civil Aviation Authority to be appointed a Designated Carrier on internal national flights. The Company is assessing the possibilities of operating these routes. • From time to time, the Group assesses the possibility of increasing the frequency to existing destinations and the possibility of operating flights to new destinations, meeting market demand, inter alia, through other "code share" agreements with other airlines. In 2007, the Group increased the frequency of flights to several destinations. • In December 2007, the Company signed a "code share" agreement with American Airlines, whereby each party will be able to sell seats on the flights of the other party. The agreement is in effect for two years, and later, will automatically be renewed for additional periods of one year each, unless one of the parties serves notice of termination. The agreement will apply to flights on the Tel Aviv – New York, Tel Aviv – Los Angeles and Tel Aviv – Miami routes, in both directions, and on routes from Tel Aviv through Europe to a large number of destinations in the U.S., in both directions, as well as on continuation flights from El Al destinations in the U.S. to other destinations within the U.S. The agreement is intended, inter alia, to expand the routes network offered by the Company, thereby enabling it to offer service that is suitable for a broader range of customers, and to increase the number of passengers on the Company's routes. The agreement will take effect only after its approval by the relevant authorities in Israel and the U.S. On January 20, 2008, the Israeli Ministry of Transport approved this agreement. As of the report date, approval had not been received from the U.S. Department of Transportation.

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The Company's assessment regarding expected expansion of the routes network and the increase in the number of passenger legs offered for sale by the Company as a result of the agreement are Forward-Looking Information as defined in the Securities Law, 1968, based on the Company's assessments and forecasts as of the date of this report. These assessments may not be realized, in full or in part, or actually be realized in a materially different manner, with the main factors that could influence this being the lack of approval by the authorities, intensifying competition and a change in the economic, security and geopolitical situation. See Section 9.11.2(i) below regarding changes in legislation that could materially affect the Company's ability to enter into such agreements. In February 2008, the Company signed an agreement with DFASS Distribution LLC, to manage and operate the sale of duty-free products on the Group's flights. DFASS specializes in the sale of duty-free items with large purchasing power. The agreement is for a 5-year period, during which the Group will purchase all of the duty-free products from DFASS, except for Israeli products. DFASS will also provide a ground and air computer system, including terminals, in order to expand and streamline duty-free sales, to provide an array of possibilities for campaigns and to enable optimal inventory management. The Company's assessment regarding the expansion and streamlining of sales of duty-free products as a result of the agreement is Forward-Looking Information as defined in the Securities Law, 1968, is based on the Company's assessments and forecasts as of the date of this report. These assessments may not be realized, in full or in part or actually be realized in a materially different manner, with the main factors that could influence this being the mode of operation of the party with which the Company has undertaken, as well as a change in the economic, security and geopolitical situation.

7.5 Customers The Group renders its services to passengers who are both members of households and of the business sector. The majority of the airline tickets of the Group are sold by means of travel agents and marketers of tourism packages, and directly by the Company to institutions and individuals. See Section 7.6 for additional details. The Group does not have a customer in the passenger aircraft field from which the revenues account for 10% or more of total Group revenues. See Section 8.5 below for details relating to customers of cargo transport services.

7.6 Marketing and distribution 7.6.1 Travel agents and marketers of tourism packages The great majority of the marketing of airline tickets to passengers is carried out by means of travel agents and marketers of tourism packages. Also, airline tickets are sold by the sales offices of the Group and by direct sale by telephone and the Internet. The Group has 5 sales offices in Israel and approximately 30 sales offices abroad. In addition, the Group sells airline tickets by means of approximately 16 general sales agents (GSA) abroad. Airtour Israel Ltd. (hereinafter- “Airtour”), which is a jointly-owned company of the Group and travel agents, is an important marketing channel for the Group in the Israeli market, as a distribution arm to all agents in Israel with respect to sales campaigns, packages and special fares. During 2007, approximately 45% of total sales of airline tickets in Israel were executed through Airtour.

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In the passenger aircraft transport field, the Group does not have an agent through which sales volume amounts to 10% or more of total Group revenues. The Group estimates that it is not dependent on any single agent in the passenger aircraft transport field. The Group provides support to travel agents and package marketers, inter alia, through the Group’s sales offices. The Company grants commissions and special incentives to travel agents, primarily based on the sales volume of airline tickets. In principle, the consideration to Israeli agents is divided in two: a fixed component and a variable commission component, as an incentive. There are various methods in use globally regarding this matter, conforming to market needs. During 2003 and 2004, the Company changed the commission structure for agents in Israel, so that the fixed component would be lower and the variable component would increase based on production. In recent years, a trend has developed in the aviation world of a transition to a “net fare” system (fares without commissions) which replaces, in part, the system of sales incentives. The Company sells tickets at a net price in accordance with market conditions in Israel and globally. The foreign scheduled airlines operating in Israel have instituted a similar policy to that of the Company, although recently, Lufthansa and Swissair, which operate in Israel, announced that as from September 2008, they intend to eliminate the agents' commission and more to the "net price" method practiced in other foreign markets. In March 2008, British Airways also announced its intention to gradually eliminate agents' commissions, beginning in October 2008 through January 2009, conforming to the practice in other countries with respect to agents' commissions. The Israel Travel Agencies Association recently announced its opposition to the announcements of the airlines. Most of the airlines, including El Al, presently permit agents to deduct the base commission at source, at the time of payment for the tickets sold. The commissions to agents abroad vary from country to country, according to market conditions. See Section 8.5 below for details with respect to commissions in the area of cargo transport.

7.6.2 Computerized reservations system

To date, reservations for flights have been made by means of the “Carmel” computerized booking system that also serves both as a cost and as a ticketing system. All of the Company's sales offices in Israel and abroad, most travel agents in Israel, general agents of the Company and a number of large agents abroad are connected on-line to the Carmel system. The Carmel system displays the up to date flight schedule of the Company and of foreign airlines, and enables the users to book reservations and ticket on those companies’ flights. The Group also has agreements with certain international distribution systems that allow sale and direct access to the Carmel system by the users of such systems in order to book reservations for Company flights. The Carmel system is distributed to travel agents in Israel by Sabre Israel Travel Technologies Ltd. jointly owned by the worldwide Sabre (51%) and the Group (49%). See Section 9.7 for additional details regarding Sabre. As of 2006, various alternatives for replacing the “Carmel” System were examined and in August 2007, the Company signed an agreement with "Amadeus" for a comprehensive technology system for reservations and inventory management, as well as an in-airport service system (DCS). The cost of the project is estimated at 8 million dollars. The Company is preparing to replace the system and customize the interfacing systems for the

a-46 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding transition to the new system in the second quarter of 2008, including the transition of systems for the administration of flight schedules, flight inventory, passenger seating and flight check- in. The transition between the Carmel system and the Amadeus system will be carried out after completion of the training and integration processes in Israel and internationally, in an array of interfaces that also include those between El Al and travel agencies, in order to reduce, to the extent possible, the risks involved in such a process (see Section 7.1.5 above for additional details). The airport service system is expected to be operated during 2009. The Company assesses that the change to the Amadeus system will significantly improve the marketing means and sales channels, will open new possibilities for inventory management, will enable travel agents to work with a single reservation system (instead of the duplication now existing between the international system and the "Carmel" system), and is expected to generate technological advantages as a result of the system's innovations, such as convenient interface for the user, global dispersal, automation of processes and their conforming to the Company's policies, automatic handling providing "customer value" all along the interface points of the customer with the Company, significant expansion of self-service services, etc. In recent months, the Group offered travel agents the possibility of booking reservations and ticketing through the GDS distribution systems operating in Israel – Worldspan, Sabre and Amadeus, in addition to booking reservations directly through the Carmel system. With the transition to Amadeus, these channels are expected to be the Group's main distribution channels. It should be noted that the Company broadened the distribution possibilities mentioned above in a Full Content agreement with Amadeus, whereby the Company will give Amadeus access to most of the existing data in the Company's reservations system (including existing inventory and fares). The Company's estimation regarding the possible results of the transition to the Amadeus system is Forward-Looking Information as defined in the Securities Law, 1968, based on the Company's assessments and forecasts as of the date of this report. These assessments may not be realized, in full or in part, or may actually be realized in a materially different manner, with the main influencing factors being technological factors, the Company's ability to complete integration of the new system and its actual implementation, and changes in the volume of the Company's activity, deriving, inter alia, from the competition and a change in the economic, security and geopolitical situation.

7.6.3 Marketing to passengers The Group takes action in order to advertise its services to passengers in the Israeli market and in other large markets. The Group also initiates marketing events, sponsorships and joint efforts. In 2007, there has been continuation of the trend of global growth in e-ticketing, direct marketing of flight tickets through the Internet, and passenger's self check-in and seat selection. These trends are intended to reduce airlines' marketing and distribution costs. The Company continues to conform its operations to these trends, by developing means that enable self-service for customers, such as ticket purchasing, check-in and seat selection by Internet, check-in and seat selection through counters in the terminal, etc. The Group sells directly to passengers through the Group's reservations department and website. The Group also operates a business desk to promote sales to business entities, mainly in Israel.

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In order to increase the attractiveness of the Group's flights for passengers interested not only in transport services to and from Israel, but also in tourism services, the Group markets a variety of ground services for tourists (hotels, tours, car rental) to individual passengers, directly and through agents. For this purpose, the Group markets packages through Airtour. See Section 9.7.2 (f) below for details. This activity is marketed abroad through the Superstar Holdings (England) company at the Company’s branches abroad by independent direct marketing or through travel agents. See Section 9.7.19(d) for details. The Group also holds shares in the marketers of packages operating in Israel: Kavei Chufsha Ltd. (See Section 9.7.2(g) below for details). See Section 8.5 below for details on marketing and distribution of freight transport in the bellies of passenger aircraft.

7.6.4 Frequent flyer program As part of the marketing efforts, and in order to fortify the loyalty of the passengers to the Group, the Group offers special benefits to passengers who are members of the “frequent flyer” club, which is based upon a recorded database. The passengers receive credit in points for their flights on all of the Group’s routes. These points enable the passengers to acquire airline tickets at a discount or at no cost, excluding airport fees and fuel increments, and also to upgrade a ticket to a more preferred section and permit entry into the Company’s lounges throughout the world. The Company accrues amounts for the redemption of points in the aforementioned frequent flyers club. (See also Notes 2.(l) and 13. to the financial statements.) In recent years, the Group has entered into agreements that allow the redemption of the points in other airlines and/or conversion of points/stars from credit cards and other businesses to the frequent flyers club. The frequent flyers club has hundreds of thousands of members and is composed of a number of ranks, according to the level of members' activity: “regular frequent flyer", “silver”, “gold” and “platinum”. Concurrent with commercial changes made in recent years in the club's terms, including changes in “upgrade” policies, restriction of the use of bonus tickets for popular flights, and requirements for cash supplements (including for fuel increment) for bonus tickets, technological improvements were made, including upgrading the information system by allowing club members to execute transactions in their accounts through the website, improving the system for routing calls at the service center, improving the format of the customer account statement, etc. Traffic of frequent flyer club members during the year 2007 accounted for about 32% of total passenger traffic for the Company. A program for cultivating and retaining gold and platinum customers was continued in 2007. The Company is making efforts to broaden the circle of customers to be retained and to cultivate prestigious customers.

7.7 Reservations backlog In general, a customer is permitted to cancel the reservation, without payment, until the date that the ticket is issued to the customer (“ticketing”). The customer may cancel certain tickets even after ticketing, at times without payment of cancellation fees and at times with payment of a cancellation fee. There are also tickets that the customer may not cancel at all after “ticketing”. Generally, the higher the ticket price, the greater the willingness to allow

a-48 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding cancellation of the ticket without cancellation fee or with a small cancellation fee. See Section 9.11.2(f) regarding possible legislative changes in the area of consumer protection. The Company has no financial data as to the volume of forecasted revenues from non- cancelable tickets. A portion of these tickets may also be redeemed by the customer over an extended period that does not exceed two years (“open ticket”). The Company has “prepaid income” which is derived from advance payments received for flights that have not yet flown. See Note 13 to the financial statements for details of the prepaid income that the Company recorded as of the reporting date.

7.8 Competition 7.8.1 General A. The passenger aircraft transport field is characterized by strong competition between the airlines providing transport services between the same or alternative destinations.

B. The Company is the Designated Carrier of the State of Israel to most of the destinations from which regular flights are operated to and from (BGA). The Group operates flights to most of the destinations serviced from BGA. In January 2008, the Government adopted Resolution 3024, which essentially increased the State's participation in the security expenses of Israeli airlines, and amended Government Resolution 323 from May 19, 2003, in which the Company was appointed the Israeli Designated Carrier on most of the air routes to and from Israel. See Section 7.1.10 for additional details.

C. The Group estimates that, as of a date close to report approval, the Group competes for flights to and from Israel with approximately 100 airlines, of which about 44 airlines operate scheduled flights to approximately 50 destinations in about 35 countries and more than 60 airlines operate charter flights (of which 40 operated throughout the year and the rest operated individual flights), including Israeli charter companies: Arkia and Israir (which operate charter flights and scheduled flights to certain destinations). The Company estimates that during 2007, the Group's share of all traffic to and from BGA stands at approximately 37.5%. The competition for cargo transport in the belly of passenger aircraft, which is included in this field, is against airlines that transport cargo in cargo aircraft and in the belly of passenger aircraft. See Section 8.7.1 for additional details.

D. See Section 7.1.10 above for details on the competitive structure of this operating field.

7.8.2 The Group’s market share in the service categories See Section 7.2(b) above regarding the Company’s share in the service categories.

7.8.3 Significant competitors in the passenger aircraft transport field To the best of the Group's knowledge, the Group's major competitors in the passenger aircraft transport field, from the standpoint of market share, are: Continental (U.S.), Lufthansa (Germany), British Airways (UK), (), Air France – KLM (France and Holland) and Swiss (). See Section 7.1.10 above for details on the significant intensification of competition that occurred in the field in 2007.

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7.8.4 Major methods for coping with competition The Group acts in a number of venues in order to raise profitability, while conserving and increasing its market share and increasing the load factor, as follows:

A. Conforming the schedule, as much as possible, to the seasonality of traffic and to international events.

B. Increasing the frequency of flights to popular destinations and increasing the number of flight destinations by also cooperating with other airlines.

C. Striving to constantly improve the service to passengers, including improving seat comfort, food quality and variety, and flight entertainment, etc. with focus on business class.

D. Providing benefits to passengers who are frequent flyers club members and to businesses that are members of the Group’s business desk.

E. Operating through all of the relevant marketing channels.

F. Approaching the traveling public by means of advertising campaigns in Israel and abroad.

The positive factors that affect, or are likely to affect the Group’s competitive position include the following: a broad and varied flight structure; a distribution system dispersed widely throughout Israel; the existence of an attractive frequent flyers club; formidable brand in the local market; high safety and security level; schedule stability and on-time performance; conforming services to market needs and code share agreements with other airlines.

The negative factors that affect, or are likely to affect, the Group's competitive position include the following: a geopolitical situation that significantly reduces the Group's opportunities to carry out Sixth Freedom Flights (indirect flights via BGA) as opposed to the expansion of Sixth Freedom Flights by foreign airlines; the possibility of appointing additional competitors as Designated Carriers in Israel to destinations to which the Group flies or to nearby destinations, especially in view of the Government's January 2008 decision; the entry of low cost companies; excess capacity of competitors; the Group's reliance on distribution by means of agents as opposed to the growing trend of direct marketing via the Internet; the Company's not flying on the Sabbath or Jewish holidays and possible worsening of the economic, security and political situation in Israel.

7.9 Seasonality The Group's operations are seasonal and are concentrated in peak periods. High traffic of Israeli residents abroad occurs principally in the summer seasons and at holiday times, and the greatest traffic of tourists to Israel is principally in the summer season or approaching the Jewish or Christian holidays or vacation time in the home countries. The Group's peak operations are in the third quarter, when passenger volume in the years 2007, 2006 and 2005 was approximately 29%, 27% and 32%, respectively, of total annual passenger traffic.

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The following are data on the breakdown of the Group’s quarterly revenues from passenger aircraft22:

The quarter (in thousands of dollars) Year January-March April-June July- October- September December 2007 333,002 398,616 508,349 452,447 % of operating sector 19.7% 23.6% 30.0% 26.7% 2006 308,187 370,123 391,085 341,473 % of operating sector 21.8% 26.2% 27.7% 24.2% 2005 261,339 363,357 440,952 326,195 % of operating sector 18.8% 26.1% 31.7% 23.4%

7.10 Productive capacity The accepted indices of output in the world of aviation as regards passenger aircraft are load 23 24 factor and ASK . At the peak of demand (the month of August), the productive capacity of the Group approximates full potential output. In August 2007, the ASK was approximately 2,111 million RPK and the load factor for the month of August 2007 was approximately 90%. The following is a graph that describes the average monthly ASK and the load factor for the quarters of the year 2007. It should be noted that the annual load factor for the leading scheduled airlines in the international aviation industry that is considered the most efficient load factor does not generally exceed 80%.

22 The period of the Jewish holidays, according to the Gregorian calendar, varies from year to year; this may have an effect on comparing quarterly operations between one year and another. 23 Passenger Load Factor-computed as RPK (number of paying passengers multiplied by distance flown) as a percentage of ASK (number of seats offered for sale multiplied by distance flown).

24 Available Seat Kilometer - number of seats offered for sale multiplied by distance.

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ASK Monthly- average in millions L.F. 95% ) 2,000

90% 86.6% 87.0% 1,500 83.0% 85% 82.4% 1,598 1,897

80% 1,507 1,699 1,000

75% 500 70%

65% 0 Q1 - 2007 Q2 - 2007 Q3 - 2007 Q4 - 2007

As was mentioned, in accordance with a government resolution in 1982, the Company ceased to operate scheduled flights on the Sabbath and Jewish holidays, and, accordingly, does not fully utilize its productive capacity. With the conversion of the Company to a “Mixed Company” on June 6, 2004, this prohibition was removed. Pursuant to an agreement reached in January 2007 between representatives of the Rabbinic Committee for Sabbath Observance and Company representatives, the parties agreed that the Company would continue to maintain the status quo which had existed up to then, according to which the Company does not carry out passenger flights of EL Al on the Sabbath and on Jewish holidays, pursuant to a 1982 government resolution. In light of the situation that arises from time to time when flights are carried out on the Sabbath, it was agreed that, prior to such flights, the Company would communicate with the Chief Rabbi, Shlomo Amar, to clarify the position of Jewish doctrine. Additionally, the parties formulated understandings concerning the refund of cancellation fees for portions of Kosher meals, in the event that, as the result of the breach of this understanding, the ultra-orthodox customers would be forced to cancel their flights. See Section 9.18.23 below for further details.

7.11 Aircraft fleet 7.11.1 As of a date near the approval of the report, the Company makes use of approximately 32 passenger aircraft25. The fleet of passenger aircraft of the Group was all manufactured by the Boeing Company.

25 The Company also has one convertible aircraft (which can be converted to passenger transport or to cargo transport). Another convertible aircraft was sold during 2006. In recent years, the convertible aircraft are operated as cargo aircraft during the winter season (6-9 months) and as passenger aircraft during the summer season. The Company ceased the use of convertible aircraft as passenger aircraft on scheduled flights beginning from the end of the 2005 summer season. See Section 8.10 below for details.

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A. The following table itemizes the fleet of passenger aircraft owned by the Group, as of December 31, 2007:

Aircraft type Total Average age Average no. of seats (in years) 747-400 4 12.2 408 757-200 5 16.8 193 737-700 2 8.3 104 737-800 3 8.8 142 767-200 2 24.5 199 767-200ER 4 20.7 192 777-200ER 626 4.6 280 Total 26 12.9 233.7

In addition to the above table:

(1) Among the six Boeing 777-200 planes included in the table, the Company took in two new 777 planes during July and August 2007. The first plane received by the Company was named "Sderot" in honor of the city, and the second plane received by the Company was named "Kiryat Shemona". These planes are equipped with innovative passenger seats, with the seats installed in the non-coach sections reclining fully or almost fully. Additionally, these planes are equipped with passenger entertainments systems that are among the world's most advanced. These planes are used by the Company on flight to long-distance destinations. The cost of these planes was 250 million dollars. Self- financing resources were 15% and the remainder was financed by loans, after a guarantee was received from the U.S. Export-Import Encouragement Agency. See Section 9.8.4 below for further details regarding the financing of the aircraft. (2) As part of the Company's business strategy of gradually refreshing its aircraft fleet, in August 2007, the Company's board of directors approved the conversion of the Company's 757-200 fleet with Boeing 737-800 aircraft, based on the availability and specific employment terms. Accordingly, on December 4, 2007, the Company's board of directors ratified the purchase of four new Boeing 737-800 aircraft from a Spanish airline. On February 18, 2008, a letter of intent was signed, whereby at this stage, three new 737- 800 model planes will be purchased, which are expected to be placed in service by the Company during 2009. The estimated total investment for the purchase of the three planes, including the investments needed by the Company to place them in service, are subject to the scale of additions and installations that will be made in the planes to conform them to the Company's needs, is estimated at 145 million dollars. The independent financing is expected to stand at 15% of the price of the planes, with the balance financed by loans. (3) On January 10, 2008, an agreement was signed to purchase a Boeing 747-400 aircraft, pursuant to which the plane will be delivered to the Company not later than December

26 One aircraft was leased by the Group for 12 years, while the Company has an option to purchase the aircraft at the end of the period for the price of one dollar.

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2008. The plane, which was manufactured in 1994, is expected to contain 395 seats and will be integrated in the Company's flight schedule for long-range flights. The payment for the purchase of the plane and the investments needed to place it in service, and the cost of the additions and installations that will be made in the plane to conform it to the Company's needs, is approximately 50 million dollars. The payment will be made upon receipt of the plane. The independent financing means are expected to total 10 million dollars, with the balance to be financed by loans, pursuant to a long-term credit agreement with a foreign bank. (4) On January 27, 2008, the Company filed a claim with Tel Aviv District Court against Legend International LLC ("Legend") and Babcock & Brown Aircraft ("Babcock") for issuance of a declaratory order stating that between the Company and Legend, through Babcock, a binding agreement was signed, whereby Legend committed to sell to the Company a Boeing 747-400 aircraft for 50 million dollars. In February 2008, a compromise agreement was signed between the Company and between Legend and Babcock, whereby the Company waived its demand for enforcement and fulfillment of the purchase agreement for the plane, in consideration for receipt of a financial sum that is immaterial relative to the Company's operating results. (5) In March 2008, the Company signed an agreement with the aircraft manufacturer Boeing, for the purchase of four wide-body model 777-200 long-range aircraft. These planes, which will be equipped with "Rolls Royce" engines, are expected to join the Company's passenger fleets for intermediate and long-range flights, and will have a configuration of 279 seats. Delivery of the planes is expected in January 2012, April 2012, November 2012 and January 2013. The total purchase cost of the four planes, including spare parts and installations necessary for them to conform to the Company's needs, is 540 million dollars. Pursuant to the agreement with Boeing, the payments for each plane will be made only two years before the plane is delivered to the Company. Therefore, at this stage, the Company has not made a final decision as to how the transaction will be financed, and the Company is evaluating various possibilities. Under the terms of the agreement, the Company was granted an option to convert the purchase of the new 777-300ER planes (which will be equipped with General Electric engines), with a configuration of 348 seats. The Company will decide whether to exercise the option by December 31, 2008. Exercise of the option requires modification of terms of the agreement, although the delivery dates of the planes will remain unchanged. Additionally, the agreement contains an additional option that was granted to the Company to purchase two additional planes of this model, which will be delivered to the Company in the years 2014 and 2015, pursuant to the terms stipulated in the agreement. The agreement is subject to the ratification of the Company's board of directors, which according to the agreement, must be done by not later than May 1, 2008. The Company is assessing its existing aircraft fleet and the modifications needed in view of the said purchase agreement, additional agreement to purchase aircraft (as reported by the Company), and in accordance with the Company's business strategy, "El Al 2010" (see Section 9.15 below).

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B. The following table details the fleet of aircraft leased by the Company, as of December 31, 2007: Aircraft type Total Average Date to be returned Average age to lesser no. of seats 737-800 3 6.7 October 2009 142 October 2010 January 2011 767-300 3 15.0 May 2011 228 November 2011 April 2013 Total 8 10.9 185

In addition to the aforesaid in the table, and in accordance with a resolution of the board of directors regarding the replacement of the Boeing 757-200 fleet with the aforementioned 737-800 aircraft, provided below are additional updates regarding the aircraft fleet: (1) Two model 757-200 aircraft, whose lease period expired in March and October 2007, were returned to their owners. (2) In June 2007, the Company signed a letter of intent to lease two model 737-800 aircraft, one from August 2008 and the other from October 2008, for an 8-year lease period, with an option to purchase the plane, which is expected to be delivered in October 2008, as from their date of receipt by the Company (and not from the end of the lease period). The planes are new, from the production line, and in the Company's service will contain 142 seats each. (3) In November 2007, an agreement was signed with Boeing, whereby Boeing will provide supply and overhaul services for four Boeing 777 planes. The agreement will be put into effect in 2009. (4) In March 2008, the dry lease agreement of a model 737-800 plane from GECAS or its subsidiary was extended, for an additional period of 72 months. (5) In March 2008, the lease agreement for a model 767-300 aircraft from GECAS or its subsidiary was extended for an additional period of 61 months. C. Following the discontinuation of operations of a company related to Boeing, with which the Company had previously undertaken for operating an Internet system on some of the Company's planes, the Company stopped providing this service. In January 2007, an agreement was signed between the Company and Boeing, whereby the Company received damages from Boeing for its investments in the Internet system and additional damage it sustained because of halting the operation of the system. In the wake of these damages, the Company recorded income of 4.4 million dollars in the reporting year. Likewise, as the Company reported in July 2007, within the scope of the clarification it signed with Boeing with respect to the overall accounting between the parties, an agreement was included, whereby 6.5 million dollars of the cash flows received from Boeing, constitutes damages for loss of income sustained by the Company as a result of the discontinuation of two joint projects, including the broadband Internet project. See Note 21(F) (3) to the financial statements for additional details.

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D. In the framework of the overall policy of the Company to improve the flying experience and passenger service, actions were also taken during the year 2007 in order to improve the product and the maintenance level of the elements inside and outside the passenger cabin to which the passenger is exposed: 1) Steps have been and are being taken to improve the quality and maintenance level of the items to which the passenger is exposed during the flight. 2) An agreement was signed with the Keshet and Channel 2 New Company to provide in- flight entertainment services (see Section 7.2 for additional details). (3) In April 2007, the Company signed an agreement to purchase seat-beds (that can recline to a flat or almost flat position) for the high-status sections of 747-400 and 777 model aircraft. Two model 777 aircraft purchased from Boeing were delivered to the Company, in which the new seats are already installed. In total, bed-seats were purchased pursuant to this agreement for ten aircraft. (4) During 2007, the Company inaugurated a new business lounge in the airports in Paris and New York. Within this framework, the Company entered into a collaboration agreement with Bank Leumi to brand the Company's lounges, and to brand items in the non-coach sections of the plane, such as earphones and blankets.

8. Cargo aircraft field 8.1 General information on the operating field The following is a description of trends, events and developments in the Group's macroeconomic environment, which have, or are likely to have, a material effect on operating results or on the developments in the entire Group or in the cargo aircraft-operating field, regarding the following matters:

8.1.1 Structure of the operating fields and changes that have occurred There are four types of competitors in the cargo air transport market: airlines that carry cargo solely in cargo aircraft; airlines that carry cargo solely in the belly of passenger aircraft; companies, like El Al, that carry cargo both in cargo aircraft and in the belly of passenger aircraft; courier airlines which, in addition to cargo connected with courier services, also carry other cargo in their aircraft. In recent years, the trend of carrying cargo in the belly of passenger aircraft has increased. This trend is reflected, inter alia, in the transition to passenger aircraft with greater cargo carrying capacity. Continuation of this trend could transfer cargo transport operations from the cargo aircraft field to the passenger transport field. The data regarding the possibility of transferring cargo operations from the cargo aircraft field to the passenger transport field represents Forward-Looking Information, as defined in the Securities Law, 1968 (“the Securities Law”). This information is supported, inter alia, by current market trends and by the Company’s assessments on anticipated market trends. Therefore, these trends may be materially different from the forecast as aforementioned, as the result of many factors, including a change in profitability of the passenger aircraft field and the reduction of its activity and the imposition of security restrictions on flying cargo in passenger aircraft that might impair this trend.

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8.1.2 Legislative restrictions, regulations and special obligations that apply to the operating field The regulatory restrictions on cargo transport in cargo aircraft are similar to those that apply to passenger transport in passenger aircraft. See Section 7.1.2 above for details. Regulatory arrangements have also been set for the cargo field relating to a number of operational aspects, such as: permissible flight capacity, responsibility of the air carrier for damages, flight safety standards, security and noise. See Sections 9.10.3 and 9.11 below for details. Nevertheless, the policies of the global aviation authorities in granting permits for cargo aircraft have tended to be more lenient than in the passenger aircraft field. The situation especially affects the huge opportunity to carry out flights of cargo aircraft on fifth freedom and on sixth freedom. During 2004, the Civil Aviation Authority approved the carriage of cargo in the belly of passenger aircraft in charter flights. This Ministry of Transport decision led to a marginal increase in capacity offered. The total cargo quantity transported in passenger charter flights 27 during 2007 totaled only about 700 tons, approximately 0.2 % of total cargo flown .

8.1.3 Changes in the volume of activity and profitability of the field

(A) Volume of global cargo transported According to IATA data, there has been a growth in the cargo transport field over the past 20 years (an annual average of approximately 6%). During 2006, due mainly to rising fuel prices, which have a direct impact on transport prices, there was a slowdown in global air transport of cargo (including in the belly of passenger aircraft) to only 4.6%. In IATA's estimation, during 2007, global air cargo transport (including in the belly of passenger aircraft) increased by approximately 4.3%. According to IATA’s estimates, average annual growth until year 2011 of approximately 4.8% is anticipated in global cargo air transport (including in the belly of passenger aircraft), with the expectation of significant growth in 28 cargo transported from the East and within the Far East, especially in China and India . According to IATA estimates, growth in the cargo field is also expected in the Middle East, since airlines in this region benefit from the purchasing power advantage they have from the high price of fuel, which enables them to add capacity on existing routes and to open new routes. Although the expected growth rate is slightly lower than the historical average growth rate of 6%, it represents stable growth each year.

27 Source: Civil Aviation Authority. 28 IATA’s forecast through the year 2011 relates to the growth in percentage of the tonnage of cargo flown, regardless of the distance flown (RTK).

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The table below depicts the developments in the volume of activity in cargo air transport from 2003 though 2007, based on data of IATA29:

Year Output RTK30 Annual change in RTK (in millions) (%) 2007 No data No data 2006 122,100 3 2005 118,480 3 2004 115,140 11 2003 103,729 2

IATA estimates31 that growth of approximately 5.0% is anticipated in the global volume of cargo air transport compared with 2007.

The data regarding the IATA estimates of the volume of worldwide cargo Transport in cargo aircraft as above represents Forward-Looking Information, as defined in the Securities Law, 1968 (“the Securities Law”). This information is supported in full by IATA estimates. Therefore, the actual change in the volume of global air transport in cargo aircraft may be materially different from the forecast as aforementioned, as the result of many factors, including a change in fuel prices and a change in the global security and political situation.

B) Volume of cargo air transport carried in aircraft from and to Israel The following are data on cargo traffic to and from BGA over the past five years (The data includes cargo carried in cargo aircraft and in the belly of passenger aircraft)32:

Cargo traffic at BGA (thousands of tons) for the year ended December 31 2007 Change 2006 Change 2005 Change 2004 Change 2003 from from from from 2005 2005 2004 2003 Export 199 9% 183 3% 176 (9%) 194 9% 177 Import 139 3% 135 6% 127 (2%) 130 11% 117 Total 338 6% 318 4% 303 (6%) 323 10% 294

An increase of approximately 6%33 in cargo traffic at BGA was posted in 2007 as compared with 2006. Among the factors causing the increase in traffic, which occurred despite rising jet fuel prices and transport rates, are the significant growth in the volume of Israel's international trade and the cumulative increase in the supply of capacity for cargo by airlines The cargo capacity of foreign airlines includes cargo capacity on passenger flights and capacity on cargo flights of six companies: Fedex (U.S.), MNG and Turkish Airlines

29 2007 data has not been published.

30 Revenue Ton Kilometer - the weight in tons of paid cargo in cargo aircraft multiplied by the distance flown..

31 IATA forecast from IATA publications out of Freight Forecast 2006-2010 published October 2006 by IATA. 32 Source: Civil Aviation Administration and Company estimate.

33 Without deducting the Company's sixth freedom activity by means of BGA, the rate of decrease in 2006 was about 4%.

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(Turkey), EAT (Belgium), Royal Jordanian (Jordan) and Korean Air (Korea). Likewise, unscheduled cargo flights were flown through foreign companies, on an ad hoc basis. The significant growth in the total number of cargo and passenger flights operated by foreign airlines, led to growth in the cumulative capacity they offer in the cargo field and to 11% growth in the cumulative quantity of cargo they have flown. Approximately 67% of the total cargo traffic at BGA was flown in 4,532 cargo flights (an average of 44 weekly flights from BGA). The primary foreign airports that served the airlines operating cargo flights to and from Israel are: Amsterdam, Liege, Luxembourg, and New York (for El Al cargo flights), Liege and New York (for flights of the C.A.L. Company), Brussels, and Milan (for EAT flights), Frankfurt, Athens, New York and Memphis (for Fedex flights) and Istanbul (for MNG and Turkish flights), Amman (for Royal Jordanian flights) and Seoul (Korean flights)34. This data does not include cargo that the Group flew via BGA in the context of sixth freedom 35 (flight from one foreign country to another via BGA) in volume of 7 thousand tons, 5 thousand tons, 6 thousand tons and 10 thousand tons in the years 2007, 2006, 2005 and 2004, respectively. The decrease that began in the years 2003 to 2006 in the volume of cargo flown by means of sixth freedom has resulted, inter alia, from the growth in the volume of cargo flown by means of fifth freedom. IATA estimates that, in the year 2008, there will be an increase of approximately 4.8% compared with 2007 in cargo traffic to and from Israel. The data regarding the anticipated change in cargo traffic to and from Israel represents Forward-Looking Information, as defined in the Securities Law, 1968. This information is supported by IATA estimates. Therefore, the actual change in the cargo traffic to and from Israel may be materially different from the forecast as aforementioned, as the result of many factors, including a change in the economic, security and geopolitical situation in Israel, and from the outbreak of epidemics and other acts of natural forces, as well as regulatory changes.

8.1.4 Developments in the operating field’s markets, or changes in its customers’ characteristics The Israeli market in the operating field of cargo transport by cargo aircraft is characterized by high seasonal fluctuations, due to the relatively high importance of agricultural exports (carried out primarily in the winter months), out of total exports. See Section 8.5 below for information on the Company's customers. IATA estimates that the market in which the fastest growth is anticipated in 2008 is global transport from and within the Far East, particularly in China and India36. The IATA forecasts and estimates regarding the growth in the cargo transport field, as above, represent Forward-Looking Information, as defined in the Securities Law, 1968. Therefore, the actual change in the volume of activity may be materially different from that forecast, as the result of many factors, including a change in the economic, security and political situation in the world, and from the outbreak of epidemics and other acts of natural forces.

34 Source: Civil Aviation Authority. 35 The data includes cargo that was carried in cargo aircraft and also cargo carried in the belly of passenger aircraft. 36 The IATA forecast through the year 2011 relates to the growth in air cargo weight in tons, without considering the distance flown (RTK).

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8.1.5 Technological changes that could materially affect the operating field In 2007, there were no technological changes that could materially affect the cargo aircraft field. It should be stated that the Company is acting to expand and develop advanced computer solutions for the cargo field, for e-commerce and self-service capabilities, in order to improve service and reduce Company costs. Additionally, during 2006, the Company commenced operation of a new system for management of the operating field, which includes an Electronic Data Interchange with the agents. During 2007, the Company expanded its EDI interchange capabilities with the agents. Due to the aggravation of the threats to the aviation industry in recent years, the aviation market has prepared itself to confront terror events by expanding the use of advanced technological and other means, on the ground and in the air. Among the actions taken as part of these preparations, the Company is evaluating and installing protective devices, as mentioned above. During recent years, a trend has become evident in the global market, of airlines considering the conversion of passenger aircraft to cargo aircraft mostly for economic reasons. The Group is also examining the possibilities of conversion of the 747-400 aircraft from passenger aircraft to cargo aircraft.

8.1.6 Critical success factors and changes that have occurred in the operating field A number of factors can be pointed to in the operations of the cargo transport sector via passenger aircraft that affect the field's competitive position: the ability to offer the transport of cargo to popular destinations at competitive prices; development of a network of routes on an independent basis, including the possibility of carrying out Fifth Freedom Flights (flights from one foreign country to another foreign country without a stopover in the home airport of the Group) and Sixth Freedom Flights (flights from one foreign country to another foreign country with a stopover in Israel), both as operations supporting transport to and from Israel; also cooperation with other airlines; offering transport at the frequency and quality demanded while meeting time schedules; risk management and risk hedging.

8.1.7 Changes in the supplier network and the raw materials for the operating field The primary raw material used by airlines is jet fuel and it represents one of the major expense components of an airline. See Section 9.5.1 below for additional details relating to fuel.

8.1.8 Main entry and exit barriers of the operating field and changes that have occurred in them The regulatory entry barriers (the need for appointment as Designated Carrier and the permits as to frequency, capacity, etc.) for regular flights in cargo aircraft are similar in essence to the regulatory entry barriers for scheduled flights in passenger aircraft. See Section 7.1.8 above and Section 9.11 below for details. The Company assesses that there some countries have a more liberal policy of granting permits to the cargo flight field. Therefore, in the Company’s assessment, this entry barrier is less significant for some countries in the cargo field. Another important entry barrier in the industry is the initial, relatively large investment that is necessary in order to establish and operate an airline, including acquisition of aircraft and other substantial current investments, including the leasing of aircraft.

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Under international aviation agreements, obtaining appointment as a Designated Carrier is conditional upon substantial ownership and effective control of the air carrier being held by the government or citizens of the country that has specified that it be a Designated Carrier. This requirement represents an entry barrier for obtaining the appointment as Designated Carrier by foreigners. See Section 7.1.8 above for details on a change in this condition under the terms of aviation agreements of the State of Israel.

8.1.9 Substitutes for services of the operating field and changes that have occurred in them The principal substitutes for air transport in cargo aircraft are transport in the belly of passenger aircraft, ocean transport or a combination of ocean transport to the nearest destination port and from there, shipment by land vehicle. The Company estimates that the major considerations in selecting air transport over ocean and/or land transport are: the nature of the product, the requisite shipping conditions, the necessary time frame and the transport costs. In 2007, no material changes occurred in the substitutes for transport by cargo aircraft.

8.1.10 Competitive structure of the operating field and changes that have occurred in it There has been a structural change in the industry in the Israeli market in recent years, due to increased sources available to customers with the entry of new airlines with cargo aircraft, inter alia, by means of fifth freedom and sixth freedom, upgrade of the passenger aircraft of the foreign airlines to broad-body planes capable of carrying more cargo in the belly and also by the entry of an additional Israeli cargo carrier- C.A.L. Cargo Airlines Ltd. (above and below: “CAL”). See Section 8.7 below for further details.

8.2 Services in the operating field In this operating field, the Group offers cargo transport services in cargo aircraft from Israel to destinations to and from Israel; cargo transported from one foreign country to another foreign country (fifth freedom), for example from Luxembourg to Shanghai; or cargo transported in the context of sixth freedom (indirect flights via stopovers in the home country of the airlines), for example from Asia to Europe or the U.S. with a stopover in Israel. The Group differentiates between three main groups of destinations: (1) North America; (2) Europe; (3) the Far East and Central Asia. During the reporting year, the services offered by the Group in this operating field were cargo transport services to three destinations in Europe, four destinations in the Far East and Central Asia and one destination in North America. Moreover, the Company offers cargo services to many additional destinations by means of the Group’s passenger aircraft or by means of cooperative arrangements with other airlines and also by means of land transport from the airport.

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The following is a breakdown of the volume of cargo traffic in the Group’s cargo aircraft, by principal destination category, in the years 2004 to 2007:

Cargo traffic in Group's aircraft, by regions (tons) for the year ended December 31 2007 2006 2005 2004 To and from Israel and Europe 55,129 63,727 61,802 74,164

To and from Israel and the U.S. 15,170 14,445 14,468 21,454 To and from Israel and the Far East and Central Asia 13,292 14,997 14,768 15,546 Total 83,591 93,169 91,038 111,164

These data do not include cargo which the Group flew, other than via BGA in the context of fifth freedom and cargo which the Group carried by air, via BGA, in the context of sixth freedom). The Group flew cargo by fifth freedom in volume of 21 thousand tons, 23 thousand tons, 20 thousand tons and 17 thousand tons in the years 2007, 2006, 2005 and 2004, respectively. The Group flew cargo by sixth freedom in a volume of 5 thousand tons, 3 thousand tons, 4 thousand tons and 8 thousand tons in the years 2007, 2006, 2005 and 2004, respectively. The principal markets for cargo transport services are importers, industrial enterprises and the agricultural sector. For purposes of distributing cargo from its cargo centers, the Company, by means of subcontractors, operates a truck transport system. Beginning from January 2007, the Group no longer independently operates the cargo terminal in London, but hires cargo terminal services from local handling contractors, similar to the other cargo centers. On August 25, 2005, the Company signed an agreement with Agrexco Agricultural Exports Ltd. (hereafter: "Agrexco"), for air transport of agricultural export cargo, for the purpose of expanding activities between the companies. The agreement was for one year, commencing from December 2005, with an option for its extension for three additional periods of one year each, so that the agreement will terminate, at the latest, during November 2009. Under the agreement, the Company will place capacity in its aircraft to Europe at the disposal of Agrexco during the winter season at a weekly volume of 1,500 tons, and during the summer season, daily volume to enable shipment of all Agrexco cargo to Europe, at prices stipulated in the agreement. Concurrently, Agrexco became committed to fly 70% of the total quantity of cargo that Agrexco will fly to Europe during the winter and summer seasons, by means of El-Al. In addition, supplementary formulas were established for accountings connected with the volume of import cargo from Europe against growth in export volume. Pursuant to understandings between the Company and Agrexco, the agreement was extended for an additional year commencing on November 30, 2006. Additionally, in those understandings with Agrexco, it was agreed that the volume of capacity to be placed at the disposal of Agrexco in the Company's aircraft to Europe would decrease. The agreement was extended for another year in November 2007.

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Despite the continuing trend of sharp competition in the industry, the Group expects to retain its market share in 2008. The data concerning the forecast of a change in the market share of the Company represent Forward-Looking Information, as defined in the Securities Law, 1968. This data is supported, inter alia, by the Company's assessments due to the Group's current volume of activity and the extent of competition in the market. Therefore, the actual change in the volume due to many factors, including the number of cargo aircraft available to the Group, the extent that the market is opened to additional competition, the manner in which the Company deals with competition, and the risk factors described in Section 9.18 below. See Section 8.7 below for details on competition.

8.3 Analysis of service revenues and profitability A. The following are data concerning the breakdown of the Company’s revenues into key destination categories (consolidated) in the field of transport by means of cargo aircraft37:

Destination Revenues in thousands of dollars38 % of total Group revenues group 2007 2006 2005 2007 2006 2005 North 67,076 62,794 45,386 3.5% 3.8% 2.8% America Europe 50,028 56,942 53,437 2.6% 3.4% 3.3% Far East & 99,235 113,300 111,458 5.1% 6.8% 6.9% Central Asia No 994 839 863 0.1% 0.1% 0.1% geographic attribution Total 217,332 233,875 211,144 11.2% 14.0% 13.0%

In the year 2007, there was a 7% decrease in the Group’s revenues from the operating field compared with 2006, while the rate of increase in cargo traffic in BGA during 2007 was approximately 7% as against 2006.

B. The following is the gross profit amount and the gross margin for the years 2007, 2006 and 2005 from the cargo aircraft transport field39:

2007 2006 2005

Gross profit amount (in (16,854) 17,821 10,622 thousands of dollars) Gross margin (in %) (8%) 8% 5%

Regarding the restatement of the breakdown of the Company's revenues between passenger and cargo fields, see Par. 5 above.

37 The revenues include revenues from flights in the framework of fifth and sixth freedoms; the analysis to destinations was made on the basis of the final destination. 38 Restated due to change in the breakdown of Company's revenues between passenger and cargo operating segments. 39Restated due to change in the breakdown of Company's revenues between passenger and cargo operating segments and to the first-time application of Standard 27 – Fixed Assets.

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8.4 New services From time to time, the Group studies the prospects of operating flights to new destinations and increasing the frequency of the flights to existing destinations, according to market demands. In August 2007, the Minister of Transport appointed the Company the Designated Carrier on the route to Japan, also for cargo transport. As of the reporting date, the Company has not yet begun to operate direct flights to this destination. In September 2006, the Company opened a cargo service center, in the framework of the Company's unified telephone service center. See Section 8.1.5 above for details.

8.5 Customers, marketing and distribution Most of the Group's sales in the cargo aircraft transport field are effected through cargo agents (approximately 90% for the year 2007). The remaining sales are made directly to customers. Commencing from the beginning of 2006, the Group instituted a new sales commissions program for Israeli cargo agents. The program is based on a unified hierarchy of sales commissions to all agents for compensation based on cargo quantity, average shipping price and type of route for which the sale is made. In the transport through cargo planes field, the Company does not have any customer from which the Group’s revenues amount to 10% or more of total Group revenues. In the Company’s estimation, it has dependence on one customer, an agent that engages in shipment consolidation, to which the sales represent a material component of the operating field. In addition, the Israeli company for cargo consolidation (ACI), 50% of the shares of which are held by El Al (without the right of receiving dividends), is engaged in consolidation of air cargo at BGA and its transfer abroad, mainly by El Al. ACI, like other airlines which operate in this field, consolidates the cargo of individual dispatchers into one shipment and, as a dispatcher, transfers it to El Al for shipment. In this way, the handling by many dispatchers and cargo recipients is avoided, leading to cheaper air transport costs of consolidated shipments.

8.6 Reservations backlog In general, air transport of cargo in cargo aircraft is carried out in proximity to executing the service reservation. Therefore, the Group did not have a significant volume of reservations backlog during 2007.

8.7 Competition

8.7.1 Competitive conditions in the operating field

A. The cargo aircraft transport field is characterized by strong competition between the airlines that supply transport services between the same destinations or alternative destinations. The airlines compete in different areas, mainly: transport rates, schedule of flights and frequency of flights.

B. In recent years, the Civil Aviation Authority has tended to approve requests of foreign scheduled airlines to increase the frequency of their flights to Israel.

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Due to the institution of the "Open Skies" policy, there was a 10% increase in 2007 in the capacity of foreign scheduled airlines to and from Israel (growth through increased frequency and/or use of larger aircraft on the route) compared with 2006. Most of the growth in the operations of foreign airlines is evident in the routes to the former Soviet Union countries, in which the capacity of the scheduled foreign airlines increased by 21% over 2006; on routes in the regional network – mainly Turkey – where Turkish Airlines increased its offered capacity by 17%; and on routes to the East and Central Europe, in which the capacity of the foreign scheduled airlines increased by 12%. The increase in the number of foreign airlines operating in BGA, in the number of scheduled flights and the number of seats of foreign companies has intensified competition. C. The Company assesses that this trend of intensifying competition will grow stronger in 2008, due to the intention of several airlines to further increase their supply of seats. Among these companies are Lufthansa, which submitted a request to operate a scheduled route from Munich to BGA, in addition to the Frankfurt-BGA route; Delta, which in March 2008 began to operate daily flights on the New York-BGA route, in addition to its flights on the Atlanta-BGA route; Turkish Airlines, which announced its plans to increase the frequency of its weekly flights on the Turkey-Israel routes, and Transeuro, which plans, beginning in April 2008, to significantly increase its capacity on routes from Russia to Israel by changing to larger planes (Boeing 747 and 767 planes to replace the smaller 737 planes now being flown), as well as by increasing frequency. The significant increase in the flight capacity of the foreign scheduled airlines with respect to the passenger aircraft field, also led to a significant increase in the capacity of cargo flown in the bellies of the passenger aircraft of the scheduled foreign airlines, to and from Israel. Therefore, there has been a substantial intensification of the competition in the industry also with respect to the operation of cargo planes. D. In aviation talks between Israel and Jordan held in November 2005, the Civil Aviation Authority authorized Royal Jordanian to execute cargo flights without the limitations which had been imposed in the past (cargo shipment was allowed from Israel by sixth freedom). In the additional round of talks between Israel and Jordan held in December 2006, it was decided to increase the cargo flight quota of Royal Jordanian from two to three weekly flights. The Group assesses that the freight transport operations by Royal Jordanian have caused a decrease in the volume of cargo that the Group transported to Europe and the Far East. In August 2007, the Minister of Transport appointed the Company the Designated Carrier on the route to Japan, in order to operate cargo flights. The Company is considering whether to utilize these rights. E. Additionally, in aviation talks held between Israel and Belgium in December 2007, it was agreed to add two destinations to and from Belgium on which Israeli airlines will be able to transport cargo within context of the fifth freedom. The two new points are a destination in Japan (to be determined in the future) and Jenju in China. F. Until 1999, the Company was the sole Designated Carrier of the State of Israel to most of the destinations to which it operates regular flights of cargo aircraft to and from BGA. In recent years, other foreign airlines that operate cargo aircraft have entered the operating field in Israel. Commencing with 1999, CAL was given a full commercial operating license and, over time, it was appointed as Designated Carrier to a number of destinations. CAL operates two 747-200 cargo aircraft that it owns, and leases additional

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aircraft as needed. As of the date of the report, CAL operates flights to various destinations in the United States and Europe. The granting of a full commercial operating license to CAL had caused contraction of the Group's cargo operations. Previously, CAL had requested appointment as Designated Carrier to additional destinations to which El Al is the sole Designated Carrier, and as to which, under current aviation agreements, no more than one Designated Carrier may be appointed. In January 2007, CAL requested an appointment as Designated Carrier for cargo on the Tel Aviv-Moscow route, a route on which El Al is the sole Designated Carrier. It should be noted that in aviation talks held between Israel and Russia, it was agreed that for the Tel Aviv-Moscow route, each country would be able to appoint an additional Designated Carrier for passengers and/or cargo, as a temporary arrangement for a period of up to two years. It was also agreed to increase the weekly frequency given to those operating the route. In the charter sector, it was agreed that each party may appoint up to two carriers, and to increase the weekly frequency. Moreover, the flight schedule– scheduled and charter – was expanded for the Tel Aviv-St. Petersburg route. To the best of the Company's knowledge, KAL has requested to be appointed Israel's second Designated Carrier for operation of cargo flights. If all or some of these requests will be approved, it could have a negative effect on the volume of the Company's activity on these routes. The information concerning the possible implications in the event that the CAL requests are approved, should they be approved, and in the event of the appointment of other Israeli airlines as Designated Carriers to destinations, represents Forward-Looking Information, as defined in the Securities Law, 1968. The information is fully supported by the Company’s assessments as of the date of this report. Therefore, the actual implications may be materially different from that forecasted, due to a large number of factors, including a change in the volume of operations in the field, the ability of CAL or another Israeli aviation company to fly to the destinations for which it receives (should it receive) the appointment as the Designated Carrier and the extent of competition with other competitors. The Group competes for cargo transport in cargo aircraft to and from Israel with approximately seven airlines, which operate cargo aircraft in flights to and from BGA. In Beginning from December 2006, a Korean airline started flying scheduled cargo flights (once weekly) to Eastern Asia. In addition, the Civil Aviation Authority approved the application of the Korean airline to fly two weekly flights to Seoul, whereas at this stage, the approval was given for the period between March 2007 and October 2007. It should be noted that to the best of the Company's knowledge, that the Korean airline to the Civil Aviation Authority has requested to extend the permit to fly weekly flights to Seoul also in the winter of 2007/2008. This activity could have impact on the volume of cargo flown by the Group to the Far East, if, inter alia, this company receives a permit to operate flights at a higher frequency. The information concerning the possible implications of the activity of the Korean airline on the volume of cargo transport by the Company to the Far East represents Forward-Looking Information, as defined in the Securities Law, 1968. The information is fully supported by the Company’s assessments as of the date of this report. Therefore, the actual implications may be materially different from that forecasted, due to a large number of factors, including a change in the volume of operations in the field, the ability of the Korean aviation company to fly to these destinations and the extent of competition with other competitors.

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G. The Group competes with most of the scheduled airlines that operate passenger aircraft and carry cargo in their bellies40. According to statistics of the Civil Aviation Authority, approximately 33% of the air transport of cargo to and from Israel during 2007 was carried out in the belly of passenger aircraft (primarily wide-body aircraft) in scheduled flights, while the remaining cargo (approximately 67%) was flown to and from Israel in cargo aircraft. In the Group’s estimation, the Group's share cargo transport during the years 2007, 2006 and 2005 stood at approximately 38.1%, 43.1% and 44.7%, respectively, out of the total air transport of cargo to and from Israel (including cargo transported in the belly of passenger aircraft, not including sixth freedom and including postal operations).

H. It is the Group's intention to act to expand the use of fifth freedom to additional destinations, subject to obtaining the proper authorizations. The information concerning the intention to act to expand the use of the fifth freedom to additional destinations represents Forward-Looking Information, as defined in the Securities Law, 1968. The information is fully supported by the Company’s intentions and assessments as of the date of this report. Therefore, the actual implications may be materially different from the forecast as aforementioned, due to many factors, including obtaining relevant authorizations from the regulatory entities and the ability of the Company to make use of fifth freedom as aforesaid.

8.7.2 Major competitors in transport through cargo aircraft To the best of the Group's knowledge, its most significant competitor in transport through cargo aircraft, from the standpoint of market share, is the CAL company.

8.7.3 Key methods for coping with competition The Group acts in a number of venues in order to raise its profitability, while retaining and increasing its market share and also increasing the volume of the cargo its transports as follows:

A. Conforming the schedule, as much as possible, to the seasonality of traffic and maintaining the schedule's stability.

B. Increasing the frequency of flights to popular destinations and increasing the number of flight destinations by cooperating with other companies.

C. Proposing competitive prices.

D. Adding to the frequency of the Company’s cargo flights between two foreign countries (for example between Luxembourg and Shanghai). The positive factors that affect, or are likely to affect, the Group’s competitive position include: strong brand name in the local market; high standard of service, high safety level; schedule stability and on-time performance.

40 In recent years, there has been intensification of a trend of transporting cargo in the belly of cargo aircraft. This trend is expressed, inter alia, in the transition to passenger aircraft with larger cargo carrying capacity.

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The negative factors which affect, or are likely to affect, the competitive position of the Group include: the possibility of appointing in Israel additional competitors as Designated Carrier or to additional destinations; regulatory changes that restrict the possibility to enter into agreements with other airlines or prevent the utilization of flight rights; the entry of new, foreign competitors; increase in the flight capacity of foreign airlines(including fifth and sixth freedoms);worsening of the economic, security and political situation in Israel.

The information concerning factors that might affect the competitive position of the Group represents Forward-Looking Information, as defined in the Securities Law, 1968. The information is fully supported by the Company’s assessments. The factors that may affect the Group's competitive status and their actual consequences may be materially different from the forecast, due to many factors, including a change in the global economic, security and political situation, regulatory changes, the degree that the market is opened to added competition, and the extent that the Company can cope with competition and risk factors as described in Section 9.18 below

8.8 Seasonality The operating field is characterized by high seasonal fluctuations due to the relatively strong influence of agricultural exports out of total exports by means of cargo aircraft. The following are data on the breakdown of the Group’s quarterly revenues from cargo aircraft: The quarter (in thousands of dollars) Year January-March April-June July-September October- December 2007 50,468 49,833 52,294 64,737 % of operating sector 23.2% 22.9% 24.1% 29.8% 2006* 60,353 53,777 51,125 68,620 % of operating sector 25.8% 23.0% 21.9% 29.3% 2005* 54,697 55,089 40,009 61,348 % of operating sector 25.9% 26.1% 18.9% 29.1%

* Regarding the restatement of the breakdown of the Company's revenues between the passenger field and the cargo field, see Par. 5 above.

8.9 Productive capacity 41 The accepted indices of output for cargo air transport in cargo aircraft are the load factor and ATK42. At the peak of demand (in 2007 - November), the Group's productive capacity Group approximates its full potential output. In November 2007, the Group's ATK was

41 Load Factor - computed as RTK (weight in paid tons multiplied by distance flown) as a percentage of ATK (available cargo capacity multiplied by distance flown).

42 Available Ton Kilometer - available cargo capacity multiplied by distance flown.

a-68 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding approximately 88,830 ATK (including the convertible aircraft-see Section 8.10 below for details); and the load factor stood at approximately 69.4% It should be emphasized that load factor indicator is computed solely based on cargo weight and does not consider cargo volume.

The following is a graph that describes the average monthly load factor and ATK for the quarters of the year 2007:

ATK in millions - monthly average ATK in millions - monthly average L.F. 80% 100 84 75% 75 80 72 73

70% 60

68.5% 65% 66.9% 40 65.7% 65.1% 60% 20

55% 0 Q1 - 2007 Q2 - 2007 Q3 - 2007 Q4 - 2007

8.10 Aircraft Fleet

A. As of a date close to the approval of report, the Company makes use of three cargo aircraft and also one convertible 747-200C aircraft (which can be converted to cargo or to passenger). The Group's cargo fleet was all manufactured by the Boeing Company.

B. The following table itemizes the fleet of cargo aircraft owned by the Group, as of December 31, 2007:

Aircraft type Total Average age Maximum carrying (in years) capacity 747-200F 2 27.4 127 tons 747-200SF 1 26.9 110 tons 747-200C43 1 29.7 109 tons Total 4 27.8 -

It should be stated that due to negotiations held for the sale of the convertible 747-200C aircraft, the Company, in January 2007, approval was received from the holder of the Special State Share for such sale, and reduction of the number of the Company's cargo aircraft to three, with the consent subject to completion of transfer of ownership of the aircraft by June 30, 2007. The negotiations held for the sale of this aircraft ended

43 Aircraft which can be converted between cargo aircraft to passenger aircraft. Commencing with the 2005 summer season, the activation of the convertible aircraft, then owned by the Company, as passenger aircraft in scheduled flights was terminated. During the year 2006, the Company sold one of the two aircraft.

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unsuccessfully, in view of the announcement by the potential buyer that it retracted its intention to purchase the plane, due to legislative changes in the destination country, as a result of which the aircraft's purchase was not possible.

C. In addition, the Company leases cargo aircraft in “wet leases” (aircraft leased with its crew) as needed.

D. During the coming years, the Company may be required to replace all or part of the 747- 200 fleet of aircraft, for a number of reasons: considerations of economic feasibility in operating the fleet due to the advanced age of the aircraft and the problem of complying with the maximum permissible engine noise restrictions in various airports worldwide (See Section 9.10.3 below for details of noise restrictions).

E. In recent years, a trend is evident in the global market, of airlines considering the conversion of passenger aircraft to cargo aircraft, mostly for economic reasons. The Group is also examining the possibilities of converting the 747-400 aircraft from passenger aircraft to cargo aircraft (the conversion of 747-400 aircraft owned by the Company to cargo configuration or the purchase and conversion of 747-400 aircraft).

8.11 Raw materials and suppliers The principal raw material of the Company is fuel. See Section 9.5.1 for further details. In the cargo aircraft field, the Group, in its various stations throughout the world, engages suppliers which deal in unloading and loading the aircraft, in cargo storage in warehouses and in land transport of the cargo from the customer to the airport and vice versa. The proportion of expenses related to commitments with these suppliers during 2007 stood at approximately 12% of the operating sector’s expenses. In the year 2007, the Group was not dependent on any single supplier.

9. Details on the two operating fields

9.1 Fixed assets and installations

9.1.1 Real estate A. The Group owns space of approximately 1,560 m2 in El Al House in Tel-Aviv, which serves as the offices of the Company's Israeli branch. In 2006, some of the offices of the Israeli branch were moved to the BGA in order to save costs. The Group also owns offices in (Madrid) and Argentina (Buenos Aires) with total space of approximately 269 m2.

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B. The following is a list of the major real estate properties leased by the Company in Israel:

Parties to the agreement Consideration Contract period & extension option The El Al area at License agreement See subsection The contract is BGA with between the Airports (e) below effective until approximately 290 Authority (licensor) and December 31, thousand m2. El Al (licensee) 2010. There is also an extension option for an additional 25-year period. Warehouse in BGA License agreement between Annual usage Agreement of 4,380 m2. the Airports Authority fees of 480 effective until (licensor) and El Al thousand December 31, (licensee) dollars 2009 Areas at BGA See subsection (f) below See subsection See subsection (f) Terminal 3 (f) below below Areas at BGA for Agreements between El Al, Annual usage Maman building the Company’s Maman Cargo and Handling fees of 141 until December cargo flight Terminals Ltd. and thousand 31, 2008. operations, Bonded Ltd. dollars Ashdod building including space in until December the Maman 31, 2008. building and space in a building in Ashdod (the former Agrexco building) - total space of 287 m2

C. The Group leases space in various places in Israel for use as offices, shops and warehouses with total space of approximately 1,135 m2 for which the Group pays annual rental fees of approximately 200 thousand dollars.

D. The Group rents various real estate properties all over the world, in the key destinations to which it flies, used to maintain its current operations, mainly offices in cities and stations in airports. The total expenses for rent abroad during the year 2007 totaled approximately 5,910 thousand dollars. The principal properties are in New York (approximately 3,400 m2 for annual rental fees of approximately 1,170 thousand dollars), in London (approximately 2,860 m2 for annual rent fees of approximately 1,300 thousand dollars) and in France (approximately 1,350 m2 for annual rental fees of approximately 641 thousand dollars). In March 2007, the Company signed an agreement with the British Airports Authority, whereby it vacated a property it had used in Heathrow Airport in London, and accordingly received early vacation fees from the British Airports Authority. As a result of this agreement, the Company posted net revenues (after-tax) of 3.4 million dollars (see Note 21(g) to the financial statements).

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E. Land usage rights at BGA

The Ben- Gurion Airport (BGA) serves as the Group's mother airport and central operational base. The Group’s headquarters, hangars, aircraft parking areas, workshops, warehouses and other offices and installations are located at BGA. Most of the offices, hangars and other buildings used at BGA were constructed on land for which the Group has long-term usage rights.

Under the auspices of this agreement from June 1992 with the Airports Authority (AA), as amended in February 1995, the Company has the usage right (permit) to 290 hectares of land at BGA through December 31, 2010. This period may be extended for an additional 25-year period under the terms of the contract or under other terms as will be agreed upon with the AA. It appears that exercise of the option will be subject to the payment of Purchase Tax.

According to the aforementioned agreement, AA permits the Company to use the property and the access roads to it and also allows the Company to operate on the property and/or use it for services of an aviation company. The agreement gives the AA the right to demand that the Company vacate space and/or a building that it will need for the operations, safety, development or security of the airport.

In 2005, the Company paid licensing fees of 960 thousand dollars for the aforementioned usage rights, and for 2006 and thereafter, the licensing fees will rise by 7.4% per annum until the end of the contract period, but not to exceed 4 million dollars per annum. In accordance with an October 19, 2004 amendment to the agreement, in addition to the payment for the land, the Company will pay annual usage fees to the AA for certain fully depreciated buildings and installations. The annual payment will be at a rate which will rise gradually (in accordance with and contingent upon the quantity and type of buildings which become fully depreciated each year), starting with 900 thousand dollars in 2006 and reaching approximately 4,000 thousand dollars in 2025.

F. Terminal 3 ("BGA 2000")

Within the framework of the “BGA 2000” project, the AA constructed a new passenger terminal at BGA (Terminal 3), aircraft parking spaces and support areas in order to operate the services needed for on-site operations. Terminal 3 operations began in November 2004. The AA shut down Terminal 1 (the terminal that had been in use until Terminal 3 was opened) for international operations. Most of the Company’s installations were situated adjacent to Terminal 1: offices, aircraft parking spaces, hangars, warehouses and various workshops, an area of approximately 75,000 m2. Due to the transfer of the activity to Terminal 3, the Group relocated part of its operations to Terminal 3 and new adjacent areas. The relocation has caused a material change in the operating pattern of the Group and to the dispersion of its operations over a broad expanse. The transition to the new terminal increased the Company's current operational costs, due to reasons resulting from the new agreements with the AA, including transporting aircraft, shifting and transporting employees, by approximately 6 million dollars per annum. The agreement to provide a permit for operating a passengers’ lounge

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(approximately 1,400 m2) was signed on December 11, 2006, even though the Company had been operating the lounge since November 2004. The agreement will be in effect for 6 years commencing from November 2, 2004 at total consideration of up to 1,750 thousand dollars per year, including an extension option for another 3 years. Agreements for a permit for the other areas were also signed, and they cover a period of 10 years commencing from November 2, 2004 at a rental of 1,770 thousand dollars per year44.

In the context of the operations of Terminal 3, the Group is considering whether to set up an aircraft maintenance center in stages, adjacent to Terminal 3. In April 2000, the Company signed an agreement in principle with the AA to lease approximately 20 hectares in order to set up a maintenance center, a hangar and supporting facilities close to Terminal 3. The AA board of directors ratified the transaction but it is subject to the signing of a detailed agreement between the parties and the ratification by the Company's board of directors.

9.1.2 Accessories, spare parts and spare engines

The Company keeps accessories, spare parts and spare engines in its warehouses, having total book value of approximately 103 million dollars as of December 31, 2007. In recent years, the Company has begun to purchase external logistic support services from designated suppliers abroad as a complement to the spare parts purchased by the Company. See Note 9 to the financial statements for additional details of fixed assets.

9.2 Insurance The Company’s insurance coverage is mainly related to two aspects: insurance of the different types of Company property and legal liability insurance for property and bodily injury. El Al's airline liability insurance is limited to a ceiling of 1,500 million dollars for each occurrence. After the attacks in the United States in November 2001, the policy provides an answer to bodily injury of passengers that result from terrorist activities and war within those borders, while third party damages are insured by the same policy to the extent of 150 million dollars. Therefore, the Company purchased additional insurance coverage of 850 million dollars, over and above the first layer of insurance, so that the total insurance protection against third party damages arising from terrorist activities and war stands at 1,000 million dollars. In the Company’s estimation, this coverage is adequate to provide the proper insurance protection for its operations. The hull all-risk insurance of the aircraft owned by or in the service of the Company, or as regards loss or damage to aircraft for which the Company has agreed to be responsible for insurance, is based on “agreed value” of each aircraft and includes deductible levels that are acceptable in the aviation industry. The insurance of the aircraft hulls against dangers of war and similar risks covers, inter alia, acts of war, terror actions, civil war, strikes, riots, malicious damages, hijacks and confiscation.

44 Including payments for telecommunications.

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It should be noted that, at the request of K'nafaim, the Company entered into an agreement with it, according to which joint application was made to the Company's insurers. As of the report date, two riders for insurance to cover acts related to K'nafaim were added to the Company's insurance policies: • The "contingent stratum" rider for 11 aircraft owned by the K'nafaim Group that are leased to various airlines. The insurance is designated to insure the rights of the K'nafaim Company in the event that the lessors or their insurers breach their insurance obligations. • The rider for third party liability related to maintenance activities provided by "K'nafaim Maintenance" (an entity in the K'nafaim Group) to aircraft of the air force. The incremental premium for these three riders amounts to approximately $ 65,000 per year, and, according to the agreement between the Company and K'nafaim, K'nafaim bears this entire incremental premium, and also pays the Company an additional 15% of the incremental premium. Additionally, K'nafaim committed to be responsible for additional premiums that the Company may be demanded to pay, should such demand be made, in the case of an event related to one of the aforementioned riders. The Company is also covered by various insurance, which Company assesses is sufficient to provide insurance coverage adequate for the primary risks to which the Company and its employees are exposed. These refer to policies to insure employers’ liability, insurance of buildings against fire, earthquakes and the like, personal accident insurance for company employees, etc. The policies are renewed annually. Group directors and executives are insured by director and officers' liability insurance in the framework of the insurance coverage of K'nafaim, in accordance with an agreement with K'nafaim. (See Section 9.12 below for details). The overall cost to the Company for insurance premiums during the year 2007 was approximately 9 million dollars.

9.3 Intangible assets The Group owns the trademark: “El Al”, which is the protected trademark of the Group. A registered trademark is valid in Israel for limited periods fixed by law, and may be renewed at the end of every period. In the Group’s assessment, the economic life of the “El Al” trademark covers a multi-year period, being part of the Company’s name, and due to the many years that this symbol has been used and its dominant market position. See Section 9.11 below and Note 10C to the financial statements for details as to licenses and flight rights given to the Group. See Note 10B to the financial statements for details regarding the usage rights of the Company to security equipment.

9.4 Human resources 9.4.1 Organizational structure The prescribing of the Company's general policies and supervision over the activities of the CEO is within the authority of the Company’s board of directors. The day-to-day management of the Company’s affairs has been assigned to the CEO of the Company, who is assisted for the purpose of fulfilling his duties by the management team, serving as the Company head office, and composed of the VP Finance, the VP Maintenance and Engineering, the VP Commerce and Aviation Relations, the VP Human Resources and

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Administration, the VP Service, VP Operations, the VP IT and Organization, the General Counsel, and Corporate Secretary and the Company Internal Auditor. During 200t and until the approval of this report, the following changes in the Company's head office took place: (a) In April 2007, the position of Head of Commercial Planning and Marketing Controls Department was eliminated. (b) In May 2007, a Security Officer was appointed for the Company, reporting directly to the CEO and coordinated with the VP Human Resources and Administration. (c) In August 2007, it was decided to convert the Cargo Department to a vice-presidency, and a VP Cargo was appointed. In September 2007, a Cargo Division was formed, reporting to the VP Cargo. (d) In August 2007, the CEO Chief of Staff was added to the Company's Senior Management forum. (e) In September, The Planning and Development, Maintenance and Engineering Sub- Division were converted to a Division, reporting to the VP Maintenance and Engineering. (f) In October 2007, the Aircraft Overhaul and Logistics Division was split into two departments: Aircraft Overhaul Division and Workshops and Logistics Division, both reporting to the VP Maintenance and Engineering. Below is a flowchart depicting the Group's organizational structure:

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The following is a diagram that describes the organizational structure of the Company:

Board of Directors Board of Directors ChairmanChairman Board Board of of Directors Directors

President & CEO President & CEO

Company Internal General Counsel Company Internal Chief of staff General Counsel Auditor Chief of staff &Corporate Secretary Auditor &Corporate Secretary

V.P Maintenance V.P Customers V.P IT & V.PV.P Commerce Commerce V.P Maintenance V.P Customers V.P Finance V.P IT & V.P Operations V.PV.P HR HR & & Admin. Admin. & Engineering Service V.P Finance Organization V.P Operations && Industry Industry Affairs Affairs & Engineering Service Organization

Sales & Revenue Ground Operations Information Systems OperationsOperations Control Control HumanHuman Resources Resources Sales & Revenue A/CA/C Maintenance Maintenance Ground Operations AccountsAccounts Div. Div. Information Systems SecuritySecurity Div.* Div.* Div. Div. Div.Div. Div.Div. ManagementManagement Div. Div. Div.Div. Div. Div.

Safety & Quality Schedule & IsraelIsrael Station Station BudgetBudget & & Control Control Projects, Organization Safety & Quality FlightFlight Operations Operations Administration Div. Schedule & A/CA/C Overhaul Overhaul & & Projects, Organization Div.* Administration Div. Distribution Sys. Div. Div.Div. Div.Div. & Methods Div. Div.* Div.Div. Distribution Sys. Div. LogisticsLogistics Div. Div. & Methods Div.

Employee Training ITIT Infrastructure Infrastructure & & Employee Training InflightInflight Services Services CompanyCompany Treasurer Treasurer Cargo Div. PaxPax Marketing Marketing Div. Div. EngineeringEngineering Div. Div. Communications Div Cargo Div. && Development Development Div. Div. Div. Communications Div. Div.

Customers Service IsraelIsrael Branch Branch Quality Control Div. Customers Service Quality Control Div. Div. Div. ChiefChief Executive Executive EastEast Europe, Europe, Asia, Asia, AfricaAfrica &International &International Affairs Div. Affairs Div. ChiefChief Executive Executive WestWest Europe Europe & & South South America America

ChiefChief Executive Executive for for CentralCentral & & North North America America

ChiefChief Executive Executive for for NorthNorth Europe Europe

* Security division & Safety& Quality division are subordinated to the CEO and coordinated by V.P Operations

Security Division Head and Safety and Quality Division Head report to the CEO and coordinate with the VP Operations. Company Security Officer reports to the CEO and coordinates with VP Human Resources and Administration.

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9.4.2 Employees in service As of December 31, 2007, the Company employed 3,521 permanent employees, of which 373 employees (including 24 Israelis posted abroad) were in the Company’s branches abroad. In addition, the Company employed an annual average of 2,409 temporary employees during 2007, of which 116 were abroad45. The extreme seasonality in the industry necessitates that manpower be modulated, with a variable number of employees, conforming to demand. Personnel employed by the State also work as part of the Group’s security system, and the Company pays one-half of their salaries (in accordance with the splitting of security costs between the Company and the State - see Section 9.11.12 below for details). The following is the breakdown of the Company's permanent employees in Israel and abroad as of December 31, 2007 and December 31, 2006, according to their fields of employment:

Position December 31, December 31, 2007 2006 Executive employees 44 42 Marketing, sales and cargo 455 457 Pilots and flight engineers 527 524 Flight attendants 320 297 Ground operations, security, control 518 561 operations and service Maintenance, overhaul, engineering and 1,078 1,065 audit Auxiliary services 579 615 Total permanent employees46 3,521 3,561

9.4.3 Significant dependence on a particular employee The Company is not dependent on any one particular employee.

9.4.4 Investment in instruction and training The Company’s training center has been designated as an “authorizing institute” under the Flight Regulations (Testing Institute, Authorizing Institute and Self Maintenance), 1979. The center trains workers and holds training courses for most of the professions needed by the Group: pilots, flight engineers, aircraft technicians, flight attendants, traffic officers, ground stewards, reservations and ticketing personnel, marketing and sales managers, lower level management, etc. In addition, the Company holds courses and study programs for travel agents and cargo agents in Israel and abroad. Other than its activities in the training center, the Company assists its employees in acquiring technological schooling and higher education. The Company also sends employees to study programs and professional and management courses abroad and in Israel as well as studies for an academic degree.

45 The breakdown of temporary employees by fields of employment was: flight attendants (977), ground operations (684), maintenance and engineering (263), marketing and sales (78), overseas (116), remainder in other functions (291). 46 Includes generation A and generation B permanent employees (next generation).

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In 2007, the Company invested approximately 9 million dollars in employee instruction and 47 training .

9.4.5 Employee compensation plans A. See Section 3.3 above for details of the rights of the employees and of the Company to purchase shares from the State.

B. Local employees who are employed abroad by the Group and who, as of the date that the prospectus was published (May 2003) had completed at least six months of employment, were entitled to a bonus from the Government in place of the shares that were granted to Group personnel who were employed in Israel. In December 2005, the State transferred the amount of approximately NIS 2.4 million in order to pay this bonus, and the Company transferred the payment to the eligible employees, after deducting relevant taxes owed by every local employee abroad.

C. On February 26, 2006, the Company's board of directors resolved to adopt the 2006 Option Plan for Company employees and executives (in this section: the Plan). On that date, the board of directors confirmed that the number of options which would serve as a pool for allotment under the Plan would stand at 17,092,129 options, exercisable for 17,092,129 ordinary shares of the Company with par value of NIS 1 each, subject to adjustments. Likewise, the Company's board of directors approved an allotment of 17,092,129 non-marketable options to approximately 50 offerees, including approximately 10 senior executives of the Company and approximately 40 other Company executives. The allotment of the options to the Company's executives was also ratified by the Company's Audit Committee on February 26, 2006. The allotment of the options was described in an outline published by the Company on February 27, 2006, and which was amended on March 15, 2006.

The allotment of the options was conditional upon the approval of the General Meeting of the Company for the increase in the Company's registered capital. Such approval was obtained on March 23, 2006 and the allotment was executed on the same day. The options were allotted to a trustee in conformity with the capital gains alternative under Section 102 of the Income Tax Ordinance. These options were not listed for trading on the stock exchange, although the underlying shares were listed for trading on the stock exchange. The options were allotted on the capital gains track with a trustee, under Section 102 of the Income Tax Ordinance. The options will vest and become exercisable in equal parts over a 4-year period, beginning from January 1, 2007 (one quarter of the options will vest each year,), conditional upon the offeree being employed by the Company, or rendering services to the Company, on the vesting date. The Program also permits the acceleration of vesting under certain circumstances unless they had expired earlier according to the provisions of

47 These costs include the direct training budget, payments for simulator practice, including related expenses, and also the salaries of employees during their training period.

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this Program. All options granted but not exercised, will expire and be cancelled at the end of 3 years from the date each option became vested. The theoretical exercise price of one option into one share will be NIS 2.9733 (85% of the average price for the 30 trading days that preceded the allotment date). The exercise price is the theoretical price not paid by the employee. In the event that the option is exercised, the employee will be eligible for shares in a number equivalent to the difference between the price of the exercise share (the closing price on the Tel-Aviv Stock Exchange of one ordinary share of the Company at the end of the trading day on which the Company received the instruction to exercise) and the theoretical exercise price, multiplied by the number of options for which a notice of exercise was given and divided by the price of the exercise shares.

Upon exercise, the Company will convert the amount of par value of the underlying shares allotted from "capital reserve" to "share capital" in its financial statements, in accordance with Section 304 of the Companies Law-1999. If this will not be possible, the Plan Administrator will prescribe instructions to allot the underlying shares to the offerees for no consideration, in a manner that the benefit to the offerees will not be reduced.

The theoretical exercise price is subject to customary adjustments in the event of dividend distributions and changes in composition of the Company's capital. See Note 19(I) (1) to the financial statements regarding the accounting implications of this Plan.

On May 23, 2006, the Company's board of directors decided on the addition of 3,000,000 options to the pool of options for issuance pursuant to the 2006 Options Plan. Additionally, the board of directors appointed the Human Resources and Appointments Committee of the Company's board of directors as Administrator of the 2006 Options Plan and authorized the Committee to allot options to executives of the Company in accordance with the guidelines stipulated by the board of directors. In addition, the board of directors approved publication of an outline that was published on May 29, 2006. Following that, on December 27, 2006, the Human Resources and Appointments Committee of the Company's board of directors decided to allot 3,027,536 options to nine Company executives. The Company allotted the options on December 31, 2006. The theoretical exercise price of each option among those allotted on that date for one share stood at NIS 1.8894 (85% of the average closing price on the Tel-Aviv Stock Exchange of one ordinary share during the 30 trading days prior to the allotment date). See Note 19(I) (2) to the financial statements.

On November 20, 2007, the Company's board of directors approved publication of an outline (that was published on November 21, 2007), for the purpose of the allotment of options that had been returned to the pool of options that may be allotted under the terms of the 2006 Options Plan, out of the original quantity, as provided in the outline dated February 27, 2006, and as amended on March 15, 2006 and/or the additional quantity as provided in the outline dated May 29, 2006, for a total of 3,382,843 options. Likewise, the board of directors approved the allotment of 2,195,852 options to 6 offerees (including one officer), subject to the receipt of the requisite approvals. The Company's board of directors approved the appointment of the Human Resources and Appointments

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Committee of the Company's board of directors to continue to serve as the administrator of the 2006 and 2007 Options Plans, and to allot options to the Company's executives according to the standards prescribed by the board of directors. On December 26, 2007, the options were allotted. The theoretical exercise price of one option, among those allotted on this date, for one share, stands at NIS 2.007 (85% of the average closing price on the Tel-Aviv Stock Exchange of one ordinary share during the 30 trading days prior to the allotment date). See Note 19(I) (4) to the financial statements for the accounting implications of the options.

As of December 31, 2007, the total options issued under the 2006 and 2007 Options Plan after deducting the options returned to the pool for any reason, stands at 18,905,138. As of March 17, 2008, the total options issued under the 2006 and 2007 Options Plan after deducting the options returned to the pool for any reason, stands at 18,848,176.

D. On May 20, 2004, the Company signed an agreement in principle (special collective labor agreement) with the Histadrut and the employees’ representatives, among other things, in the matter of reducing the stay in North America and operation of an air crew base in Toronto, and compensation to employees for efficiency measures. The compensation under the agreement will be paid according to a hierarchy that is conditional upon earnings that were achieved in 200. In July 2006, a new agreement was signed between the parties as listed in Section 9.4.7(H) below.

E. Following a Board of Directors' resolution in March 2008, an employees' bonus was distributed as compensation to Company employees and executives for the 2007 business results at an overall cost of approximately 6.1 million dollars, the expense for which was included in the 2007 financial statements. See Note 17(D) (1) to the financial statements for details.

9.4.6 The applicability of the Budget Fundamentals Law Because the Company was previously a Government Corporation and is presently a Mixed Company, a number of provisions of the Budget Fundamentals Law, 1985 apply to the Company. In accordance with the provisions of Section 29 of the Budget Fundamentals Law, the Company is not permitted to agree to changes in wages, retirement terms or pensions, or to other financial benefits related to work, nor to institute such changes or benefits, except in accordance with what was agreed or instituted with respect to all State employees or with the consent of the Minister of Finance. The Company’s request for exemption from Section 29 of the Budget Fundamentals Law was approved by the Minister of Finance, and was approved by the ’s Finance Committee on March 17, 2005.

9.4.7 Special collective agreements In addition to labor legislation and extension orders, the employment terms of Company personnel employed in Israel, with the exception of the executives and other personnel employed under personal agreements, are organized in special collective agreements which are signed from time to time between the Company and the New General Workers Histadrut (above and below-“the Histadrut”) and also by procedures that are occasionally issued by management. The following is a concise description of the main collective agreements, which apply to the Company and its employees.

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A. Special collective agreement for permanent Company employees (“Generation A agreement” or “the collective agreement”) The special collective agreement applies to all of the Company’s permanent employees in Israel, including air crews. The agreement does not apply to executives (officers and others), who have personal employment agreements, nor to temporary employees who have their own special collective agreement. The agreement regulates all of the employment terms of the permanent employees, and stipulates, inter alia, work procedures, basic rights and obligations, productivity incentives48, appointments and stationing abroad, internal tenders, insurance, pension arrangements, dismissal procedures, dealing with disciplinary violations, rights to free and discounted airline tickets and an apparatus for resolving disagreements. The agreement forbids strikes and sanctions, unless the strike has been declared by the Histadrut in compliance with the Law for Settling Labor Disputes, 1957, and subject to the Histadrut constitution, including a secret vote by all employees. According to the agreement, all permanent employees of the Company are ranked based on an enterprise wage ranking, which has no connection to national rankings. There are a number of rankings: ground employee ranking; “veteran” air crew personnel ranking; a separate ranking at lower wages for “new” air crew personnel; “veteran” air steward crew personnel ranking and a separate ranking at lower wages for “new” steward crew personnel. The agreement has been amended from time to time and, on May 20, 2004, the effective date of the agreement was extended through December 31, 2005, and through September 2006, concurrent with negotiations regarding the terms of this agreement. The agreement continued to be applicable in light of the fact that a new agreement was not signed/or the existing agreement cancelled. On September 5, 2006, the Company and the New General Workers Histadrut - the Division for Professional Unions and the employees' representatives signed a special collective agreement which extends the effectiveness of the special collective agreement for the permanent Company employees ("Generation A Agreement") until December 31, 2007. On October 5, 2006, ratification of the agreement by the Company's board of directors was received. Concurrently, the employees' representatives decided, in view of the Company's economic condition as reflected in its financial statements, to enter into negotiations with the Company for finding joint and agreed solutions to improving the Company's efficiency, and during October 2006, actual negotiations were begun. Among the principal subjects being discussed in this framework: employee layoffs (temporary and permanent workers), trimming wages and related expenses, by means including by increasing the rate of employee participation in the services provided to them, unification of functions according to Company needs, and various changes in the operations of ground workers and air crews that will contribute to operational flexibility and reduction of expenses. It should be emphasized that, as of the date close to approval of this report, there is no well-founded assessment and/or assurance regarding understandings that will be reached at the end of the negotiations with respect to every one of the subjects detailed above and/or other matters that might arise during the negotiations. In the context of the negotiations on the efficiency program, two special collective agreements were signed on December 7, 2006 in order to extend the effectiveness of availability of

48 See Note 13(B) to the financial statements.

a-81 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding employees who were to enter the "permanent employee" track on December 31, 2006. The period of availability was extended for these employees through December 31, 2007. Since despite the time that has elapsed, efficiency measures have not been agreed with employees' representatives and the Histadrut, a resolution was adopted at a meeting of the Company's board of directors held on April 18, 2007, whereby the Company's board of directors backs and supports the Company's management on its decisions and actions until such date regarding the negotiations with the employees' representatives on the matter of the efficiency measures. Furthermore, it authorizes the Company's management to take all measures necessary, including a decision on cancellation of the collective agreement, so that the collective agreement will be terminated not later than December 31, 2007 or any earlier date, at the discretion of management. Moreover, the Company's board of directors authorized the Company's management to institute efficiency measures at its discretion. A notice of cancellation of the collective agreement was not served. On June 28, 2007, notice was received in the Company's offices on behalf of the New General Workers Histadrut - the Division for Professional Unions ("the Histadrut"), under the Law for Settling Labor Disputes, 1957, whereby the Histadrut was given the right to declare a strike as from July 18, 2007. According to the wording of the notice, the dispute is due to the intention of the Company's management to examine the possibility of negatively effecting the terms of the existing collective agreement, and even cancel it, due to reasons including the resolution of the Company's board of directors from April 18, 2007, as described previously. The Company's management rejected the claims of the Histadrut and even clarified to the Histadrut that it does not intend, at this stage, to cancel the collective agreement and that there is no cause for the declaration of a dispute. The Company's management called on the Histadrut and employees' representatives to cancel the notice and return to negotiations, in order to continue proper labor relations. Until the date of this report, no actions whatsoever were taken by the Histadrut. In view of the aforesaid, the collective agreement's effective period ended on 31.12.2007. Section 6(E) of Chapter A of the collective agreement stipulates that "during a period of negotiations, although not more than six (6) months from its termination date, the agreement will remain in effect and at the end of the said 6 months, will be deemed a collective agreement for an unspecific period and the provisions of Section 14 of the Collective Agreements Law, 1957, will apply to it". Presently, negotiations are underway on the changes requested by the parties to insert in the labor agreement. As long as the negotiations do not lead to a binding collective agreement, the aforesaid in Section 6(E) will apply – i.e. after June 2008, the collective agreement will become a collective agreement for an unspecified period, when according to Section 14 of the Law, each party is permitted to cancel it, upon serving advance notice of 2 months.

B. Special collective agreement for the employment of temporary personnel (“the temporaries agreement”) The employment terms of the temporary employees have been arranged in a special collective agreement that, on May 20, 2004 was extended to December 31, 2008. The agreement stipulates the maximum length of employment of temporary employees, in accordance with the type of work and the department in which the worker is employed. The agreement regulates all of the employment terms of temporary employees, including wages, bonuses, provisions for comprehensive pensions, insurance, sick leave, rights to airline tickets, etc.

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C. Special collective agreement for the next “permanent” generation The agreement was signed on May 20, 2004 with regard to the administrative, commercial and operational professions, including supervisory and management, flight attendant and academic positions in administrative professions. This agreement regulates the employment terms of the personnel, which are different than those applying to the generation A employees, with a saving in future costs and achievement of managerial flexibility, including the dismissal of employees due to lack of professional or operational suitability. This agreement is effective until December 31, 2008.

D. Special collective agreement (ground crew- “intermediate permanent generation”). The agreement was signed on May 20, 2004. It relates to employees who began working prior to January 1, 1999 and is intended to apply different terms to them than those stipulated in the agreement for generation A and than those stipulated for the next generation.

E. Special collective agreement (air steward crew personnel -“intermediate permanent generation”) The agreement was signed on May 20, 2004. It relates to flight attendants who began employment prior to September 1, 1996 and flight attendants who commenced employment between January 1, 1996 and December 31, 1997, and is intended to apply different terms to them than those stipulated in the agreement for generation A and for those stipulated for the next generation.

F. Special collective agreement (security) The agreement was signed on May 20, 2004. It obligates the Company to act to create a balance among all personnel whose employment is organized by special collective agreements (generation A, interim generation, next generation), in order to avoid the preference of one field over another and also regards giving future wage increments to different fields. The agreement stipulates, inter alia, that the number of permanent employees in certain professions may not be less on various dates than those stipulated in the agreement.

G. Special collective agreements for ground crews and air steward crews (shortening stay over) In July 2006, a number of special collective agreements were signed between the Company and the New General Workers Histadrut - the Division for Professional Unions and the employees' representatives, relating to ground crews and air steward crews for improving the Company's operational flexibility by removing existing restrictions on flying direct flights without any intermediate stopover and shortening the stay of the crews in North America.

9.4.8 Pension arrangements

Pension agreement Beginning from September 1992, the social rights of part of the Company’s employees are regulated within the context of a pension agreement. Pursuant to this agreement, an employee joining the comprehensive pension must insure a portion of his salary in the pension plan and the balance can be directed to managers' insurance or to the provident fund of the Company's employees. After the agreement was signed, new employees must be insured by the comprehensive pension.

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The agreement stipulates that the Company's payments to the pension fund and an approved fund (managers' insurance or provident fund) for an employee joining the pension plan, will come in lieu of its severance pay obligation to that employee, pursuant to Section 14 of the Severance Pay Law, 1963, for that part of the salary and for that period as to which the payments were made. Up to the date of becoming a member, the employee is entitled to receive severance pay based on his last salary. During 2005, amendments were made to the Income Tax Regulations (Rules for Approving and Managing Provident Funds), 1963, which change the rules for deposits and withdrawals of monies in pension insurance plans, inter alia, with regard to the reduction of the maximum amount which may be insured in capital insurance. In June 2005, the Company, the Histadrut-the Federation of Trade Unions and the Employees' Association of El Al Employees signed a special collective agreement that enables the adjustment of the provisions to the new rules, at the employees' option.

Managers’ insurance agreement The agreement between the Company and the Phoenix Israeli Insurance Company Ltd., which became effective on December 1, 1990, was extended until the end of the effective period of the managers’ insurance policies that were issued under its auspices to employees. According to the stipulations of the pension agreement, directing part of the pension salary to managers’ insurance is conditional upon joining comprehensive pension. Managers’ insurance may be considered solely a savings plan or a savings plan with specified insurance (insurance against work disability and/or life insurance). The provisions for insurance are at the rate of 18 1/3% of the insured salary, of which 8 1/3% is for severance pay and 5% for provident fund on the employer’s account and 5% for provident fund on the employee’s account.

The severance pay deficit and how it was covered Until the pension agreement was signed, the Company personnel employed in Israel, who were covered by the collective agreement, had no pension insurance. According to the provisions of the collective agreement, since January 1983, the Company makes deposits (for employees who did not join the pension) of 8 1/3% of the current wages of the employees in a provident fund for severance pay in Israeli banks. The deposits are in the Company’s name. Since the Company did not deposit monies for severance pay in a severance pay provident fund until January 1983, and since January 1983, severance pay was paid to retired employees from the money accrued in the provident funds for severance pay, a substantial shortfall was created in the provident fund for severance pay, as listed in the table below. (See Note 15(B) (3) (b) to the financial statements on this matter). In addition, the Company’s accounts include a liability for a grant for unutilized sick days. The grant is paid according to the provisions of the collective agreement at the time of retirement from the Company due to disability or age, or subsequent to a period of service, on the condition that the employee is entitled to severance pay. The liability is in conformity with the eligibility accumulated by the employees, as listed in the following table, and subject to the maximum ceiling for redemption of sick leave, as detailed in Note 15(B)(4) to the financial statements. In addition, a liability for cumulative vacation days through 1982 is recorded in the accounts,

a-84 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding which, under the agreement with the employees, will be paid at the time that the eligible employees resign.

The following is detail of the Group’s liabilities in connection with the termination of the employee-employer relationship, net (consolidated data):

December 31, December 31, December 31, 2007 2006 2005 Thousands of Thousands of Thousands of dollars dollars dollars Liabilities for severance pay to employees 140,243 133,743 125,264 Less-deposits in severance pay funds (153,358) (86,752) (80,243) Liability for grant due unutilized sick days and long-term provision for vacation and benefits to retirees 46,977 42,036 31,570 Provision for voluntary retirement, net 38,985 37,981 45,855 Less-current installment (1,821) (837) (1,920) Total 70,936 126,171 120,526

In June 2003, an agreement was signed between the State, the Company and the employees’ association, according to which the State and the Company agreed to act to cover the deficit between the provisions for severance pay recorded in the Company’s accounts (“the provision”) and the monies actually deposited into the severance pay provident fund (“the fund”) and which is connected to the eligibility of employees who had been employed by the Company at the date that the Official Receiver began to manage in 1982 and who continued to be employed in June 2003 ("eligible employees"). On the date of the agreement, the deficit stood at NIS 516,240,000 and it is index linked and bears annual interest of 5.05%, starting June 1, 2003. Under this agreement, the State and the Company transferred the immediate proceeds which they received from the sale of securities, pursuant to the prospectus published in May 2003 (“the initial offering”), after deducting expenses, to the severance pay fund for the eligible employees (the balance of the severance pay funds includes the above proceeds). The State and the Company also committed under the agreement to transfer to the severance pay fund of the eligible employees, any amount that was raised from the conversion of convertible securities that were issued in the initial offering or from the sale of securities in other offerings which would be executed through the date of the end of the last exercise date (June 5, 2007) of securities issued by the Company in the initial offering. From January 1 2007 through December 31, 2007, deposits were made to the severance pay funds of eligible employees (in thousands of dollars): State deposits totaling NIS 104,624,444, Company deposits of NIS 100,862,605 and in total deposits were made to the severance pay fund of eligible employees of NIS 205,487,049. After making the above State and Company deposits, the deficit in the fund for eligible employees, as defined in the agreement between the Company, the State and employees' representatives signed on the even of the Company's privatization, was covered.

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After making the deposits and fully covering the deficit in the severance pay fund, as required by the agreement, the Company deposits NIS 28.6 million, representing the balance of the offering proceeds, in a separate account (included in short-term deposits as of December 31, 2007 – see Note 3 to the financial statements). The Company is assessing whether there are limitations on its ability to use the said balance, pursuant to the aforementioned agreement between it and the State and the employees' representatives, and in this context, it has approached the State.

The following is data on deposits made by the State and the Company into the severance pay fund of the eligible employees during the years 2003, 2004, 2005, 2006 and 2007 (in thousands of dollars):

Year State deposits Company Total deposits 2007 25,289 24,376 49,665 2006 775 296 1,071 2005 25,791 535 26,326 2004 38,396 712 39,108 2003 11,296 4,909 16,205 Total 101,547 30,828 132,375

9.4.9 Legislative amendments relating to retirement age and retirement arrangements Within the framework of legislative amendments in effect from the beginning of 2004 and applying to the entire country (and not to the Group alone), it was determined as follows:

A. The age at which an employee (both male and female) can be forced to retire due to reasons of age is 67. The male employee is entitled to receive a pension at the age of 67 and the female employee is entitled to retire from work at 62 and to receive a pension (subject to the conditions stipulated by law).

B. Employees (male or female) retiring after the age of 60 but before reaching the age of 67 for a male employee or 62 for a female employee would be entitled to receive a reduced pension.

C. In addition, the pension contribution rates to the veteran deficit pension funds for both employee and employer were gradually increased for 2004-2006.

Employees taking early retirement before January 1, 2004 The legislative amendments did not deal with the question of the eligibility of employees who took early retirement program before January 1, 2004 (during the period when the retirement age for a male employee was 65 and for a female employee-60) for pension from the pension fund between the prior retirement age and the new retirement age. Pursuant to an agreement signed between the Government and the Economic Organizations’ Liaison Bureau on January 5, 2005, it was agreed that the Government would finance the additional cost associated with the raising of the retirement age for employees as aforementioned, in the entire economy.

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Pilots who have reached the age of 65 Under regulatory restrictions, an employee may not serve as a pilot on a commercial flight after he has reached the age of 65. Due to the problematic nature of raising the retirement age to 67 for this group, the Company requested that the Director-General of the Ministry of Finance authorize that pilots’ retirement age remain at 65 years, but this request was not approved. The Company is attempting to employ pilots who have reached the age of 65 in ground positions. See Section 9.14.4 below as to details of a legal proceeding on the matter of the salaries of these pilots. It should be noted that, in the context of the aforementioned agreement regarding early retirement prior to January 1, 2004, the Ministry of Finance provided a budget of NIS 600 million to assist in resolving the real financial difficulties caused by raising the retirement age, and a committee of the Economic Organizations’ Liaison Bureau was established in order to discuss the use of this budget. The Company approached the Ministry of Transport with a request to assess the possibility of employing the pilots in training and testing positions, although a response has not yet been received from the Ministry of Transport. See Section 12.14.9 below for details on lawsuit filed against the Company regarding the employment of pilots in training and testing positions after age 65.

Updated legislation related to pension In January 2008, a general collective agreement and an expansion order took effect, which organize the insurance obligation in comprehensive insurance for the entire economy. The Company has a group of veteran employees who in the past elected the severance pay track, and do not have pension insurance. The expansion order stipulates the obligation to insure every employee who has no benefiting pension arrangement, as defined in the order, and therefore applies to the aforementioned employees.

Updated legislation on outsourced manpower According to the Law for Employment of Outsourced Employees, 1996, which provided that outsourced employees will be deemed employees of the actual employer, if employment with the employer continues for more than 9 months. The law was amended, whereby the 9 months will began as from commencing January 1, 2008.

9.4.10 Eligibility for flight tickets According to IATA regulations, Company employees are entitled, for themselves and for their families, including retired employees, to receive service-vacation flight tickets (free or at a discount), the great majority of which are on an empty seat basis. This right is anchored in the labor agreements (and in the personal employment agreements of the senior executives), in the personal retirement agreements, in the Company procedures and in the professional instructions of the human resources division. The quota of free or discounted flight tickets is limited by the provisions of the labor agreement, of personal agreements or retirement agreements and by Company procedures. The Company included a provision in the financial statements as of December 31, 2007 for the anticipated cost to the Company from the utilization of flight tickets by employees after retiring from the Company. See Note 17(A) (8) to the financial statements regarding the income tax assessment for employee flight tickets.

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9.4.11 Employees’ voluntary early retirement plans Within the framework of its efficiency and cost-cutting measures, the Company created voluntary early retirement plans. During the years 2007, 2006, 2005, 2004 and 2003, 52 employees (of which 28 will retire in the first quarter of 2008), 95 employees, 53 employees 55 employees and 79 employees, respectively, retired in the context of the retirement plans. During the period between January 2003 and the date of the report, approximately 334 employees have retired in early retirement plans. See Note 15(B) (12) (d) to the financial statements for additional details.

In order to carry out the retirement plans, agreements were entered into between the employees and the Company, between the employees and financial institutions, and between the Company and financial institutions. In the framework of these agreements, the financial institutions serve as the payor, making the pension payments to the retirees. As security for the Company’s obligations to the retirees, the State provided a guarantee, according to which, inter alia, the Company will make periodic deposits (mostly, for one year in advance) to the financial institutions or will pledge a deposit in a commercial bank in an identical amount to the total amounts which the Company must pay as pension to the retirees for the coming year, and the Company’s payments to the retirees will be made from these monies. From time to time, the financial institutions estimate the anticipated costs of the retirement plan, and the Company updates its estimates to the extent necessary, according to actual costs and the experience gained on the subject. In this context, after receiving the State guarantees as collateral for the Company’s obligations to the retirees, and in light of the anticipated long- term interest rate in the international and Israeli markets, in 2004, the Company changed the estimated interest rate for discounting the liability for early retirement of the employees from 2% to 3.8% (the yield on risk-free government debentures). As of December 31, 2007, to secure the voluntary retirement plan for employees, the Company furnished guarantees to third parties totaling 6,943 thousand dollars. See Note 17(C) to the financial statements.

9.4.12 Local employees in Company branches abroad Most of the Company personnel overseas, other than Israeli employees posted overseas, are employed under collective labor agreements between the Company and the local union in that country, or under agreements with the employees’ association, or under agreements between the employers' organization (foreign airlines) and the umbrella organization of airline employees, or under other agreements. The employment terms of Company employees in the remaining countries are not covered by any collective agreement, but are established by the Company, in accordance with accepted practice in the aviation industry or in the national airlines in those countries. In some branches, the employees are engaged by personal contracts or through a contractor. Some of the branches are committed to pay severance pay in accordance with law or agreement; some of the branches have a pension insurance obligation or a right to pension by agreement. The Company makes regular payments for pension insurance and includes a full provision in its accounts for the liability for severance pay. On February 23, 2007, an understanding was reached with the professional union in the United States for renewal of the collective labor agreement for Company employees in the U.S., this through December 31, 2008, and on March 19, 2007, the consent of the employees' representation in the U.S. to such agreement was obtained.

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9.4.13 Israeli employees posted abroad The Company employs abroad, inter alia, permanent workers, Israeli residents dispatched to fill managerial positions abroad (“posted’). As part of the efficiency measures instituted by the Company, the number of posted employees out of the permanent workers abroad (373) was reduced from 34 as of December 31, 2006 to 24 as of December 31, 2007. Similar to State emissaries abroad, the salaries of those posted during their service abroad (hereinafter “salary abroad”) are also different from Israeli salaries, considering the standard of living and taxation abroad, and also the fact that the salary is subject to income tax and social taxation, both abroad and in Israel. The salary abroad, including participation in car maintenance, is paid to the posted employee based on “net salary” (the tax, including social taxation and the grossing-up abroad, are paid by the Company). If the salary abroad or special payments in excess of the tax-exempt ceiling are subject to tax in Israel, the Company assumes the Israeli tax. In addition to the salary abroad, the Company also bears the rental cost of those posted as well as tuition expenses for their children These payments (up to a certain ceiling) are tax-exempt in Israel, but are liable for tax according to the laws of the different countries. The Israeli salary of the posted employee (salary according to rank and position, had he been employed in Israel) serves as the determining salary by the Company for the purpose of making provisions for severance pay, for pensions (or managers’ insurance) and to an advanced education fund, as is stipulated in the posting letter.

9.4.14 Welfare services and payments In addition to salary, part of the Company’s permanent employees also receive welfare services and payments, which include: subsidized meals for employees and gross-up of related taxes, medical examinations of employees, participation in medical and health care insurance and dental insurance for employees, clothing, uniforms, and partial participation in higher education. Part of these benefits is also given to temporary employees. Employees may, under certain conditions, receive guarantees for loans for various purposes. The loans are for periods of up to 60 months and are provided by the Company and Bank Yahav on terms that have been approved by the Ministry of Finance. See Note 7(B) to the financial statements for details.

9.4.15 Restriction on leasing aircraft in "wet lease" According to a letter by the Company’s CEO dated December 1999 to the Chairman of the Division for Professional Unions of the Histadrut, the Company is to restrict itself in the future to lease up to 4 aircraft from Israeli airlines, so that the flight hours that will be executed by the Israeli airlines for the Company will not exceed 10% of the Company's total flight hours (including flight hours that will be carried out in wet leases by the Israeli airlines, but not including leased aircraft from foreign companies), and they will operate in specified aircraft models in routes from/to Israel to destinations to which the flight range to them from Israel does not exceed 2,400 ocean miles. The Company will continue to plan the employment of its air crews in a volume of 83 monthly flying hours on an annual average, as it has done until now, and, in the event of a significant change in external circumstances that will create the necessity to change this policy, the CEO will discuss the matter with the Chairman of the Division for Professional Unions of the Histadrut, before making a decision on the subject.

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9.4.16 Executives and senior management employees The members of the Company’s Board of Directors are not Company employees.

The services of the Chairman of the Board are provided to the Company in the framework of a management agreement between the Company and K'nafaim, the controlling interest in the Company. The agreement, which was in effect for 3 years, terminated on January 9, 2008 and from such time, the Company did not pay management fees under the auspices of this agreement. The directors' compensation (other than the Board Chairman and the public directors) includes compensation for participation in meetings of the board of directors and/or its committees, as well as the right to free or discounted flight tickets on El Al fights, subject to the payment of income tax by law by those eligible, and any other payment imposed on Company managers. See the Immediate Report dated May 10, 2005 for additional details regarding the outcome of the shareholders' meeting for approval of a transaction with a controlling interest. In addition to the CEO, other senior personnel are employed under personal employment agreements. Until the Company was converted to a Mixed Company, the wording of the personal agreements had to be approved by the Government Corporations Authority. The salary of the senior personnel under personal agreement is updated, so that the overall salary is linked to the CPI and updated each year, in the month of January, after deduction of the cost-of-living increments that were paid. In cases where the personal agreement is silent as to eligibility to augmented severance pay, the Company customarily approves incremental severance pay at the rate of one month per year of work. See also Section 9.4.5© above regarding a description of the options plan. At a Special Meeting of Company Shareholders on July 14, 2005, a resolution was approved for an addendum to bylaw 158A of the Company's bylaws. The addendum stipulated, inter alia, that the salaries of officers (with the exception of directors not employed by the Company, and excluding the CEO, a controlling shareholder, a relative of a controlling shareholder, and an interested party of a controlling shareholder), where an exceptional transaction is not involved, will be approved by the Human Resources Committee and the appointment of directors.

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The following provides the number of employees in the category of Group executives and senior management personnel during the years 2006 and 2005:

Number of personnel49 December 31, 2007 December 31, 2006 CEO 1 1 Senior management 9 9 Expanded management and other senior 50 personnel 32 32

9.5 Raw materials and suppliers 9.5.1 Fuel A. The principal raw material that is used by the Company is jet fuel. Jet fuel is one of the main expense components of the Company, as it is for every airline. In 2007, jet fuel expenses represented approximately 36% of the Group’s operating expenses (as compared with 33% for 2006).

B. The price of jet fuel materially affects the Company’s profitability. In the Company’s estimation, at the operating level as of the date of the report, every change of 1 cent in the price of a gallon of jet fuel over the year increases the fuel expenses of the Company by 2.6 million dollars.

C. Beginning from the year 2001, the Group takes actions to hedge part of the forecasted jet fuel consumption. A special committee of the board of directors for the management of market risks sets the Company’s policies on the hedging of jet fuel prices, the hedge period and the proportion of the hedge out of total jet fuel consumption for that period. The Company requests proposals for framework arrangements from several financial institutions and fuel companies with which the Company has contacts, carries out commercial negotiations with them and executes the hedge transactions with them. The accounting between the parties is done once each period, and if the average price for the above period in the market is higher than the hedged price, the Company receives a refund in the amount of the price difference multiplied by the quantity for that period; where the average monthly market price is lower than the hedged price, the Company pays the difference multiplied by the quantity for that period. See the Section 7.2 of the Directors’ Report and Note 20(A) (1) to the financial statements for details on the Company’s hedge policies.

D. In 2007, the average market price of jet fuel rose by approximately 9% in comparison with 2006, before hedging transactions. The effect of this price rise on the Company's operating results is substantial. The hedging transactions undertaken by the Company have, up to now, mitigated part of the effect of this price increase. The Company also has undertaken a

49 Pursuant to the organizational structure (as opposed to salary levels). 50 Not including the CEO and senior management.

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process of conforming the prices of its services in order to moderate the effect of the rise in jet fuel prices on the operating results.

E. The Group purchases fuel in Israel and abroad. In Israel, the Company purchases fuel from three suppliers that were chosen in a tender process, and beginning from April 2007, the Company purchases approximately 70% of its fuel purchases in Israel from one supplier (the Paz Company).

F. The Group purchases jet fuel abroad from a number of suppliers, including fuel companies that supply jet fuel to a large number of airports. The foreign contracts are usually for a one-year period. Most of the contracts are signed after commercial negotiations with several parties which the Company approaches in order to obtain bids each year, except for those stations where there is only a single supplier or stations at which the Company has found it to be feasible to contract with the supplier for a period exceeding one year. As of the issue date of the report, the Group has agreements for the overseas purchase of jet fuel that will be in effect through May 31, 2008.

G. From time to time, the Company evaluates the feasibility of importing jet fuel on its own as opposed to the purchase from local suppliers, and carries out these activities based upon market conditions.

H. The Company purchased approximately 25% of its total fuel purchases (in Israel and abroad) during 2007 from one supplier (Paz). The Company has seven additional fuel suppliers from which it purchased more than 5% of its total fuel purchases in that year. The Company does not think that it is dependent on any fuel supplier.

I. During the year 2003, the Company initiated a policy of maintaining an inventory of jet fuel, which was purchased from local suppliers. As of December 31, 2007, the Company held fuel that was purchased from suppliers in Israel and abroad totaling 8 million dollars.

J. In addition to fuel suppliers, the Group receives fueling services in Israel from other suppliers.

9.5.2 Aircraft A. All of the aircraft operated by the Company were manufactured by the “Boeing” Company. The Company has substantial dependence on Boeing both with respect to spare parts as well as with respect to engineering support. At the same time, in the estimation of the Company, the likelihood of termination of engineering support is low.

B. See Notes 9 and 26 to the financial statements with regard to agreements to purchase aircraft.

9.6 Working capital 9.6.1 Inventory - The Company has an inventory of raw materials that include jet fuel for consumption, duty-free products to be sold in flight, and expendable inventory (blankets, cleaning materials, etc.) to take care of the passengers during flight. See Note 6 to the financial statements for details on the volume of the inventory. Most of the inventory is expendable inventory held for short periods.

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9.6.2 Reservation cancellation policies- In general, a customer is permitted to cancel the reservation, without payment, until the date that the ticket is issued to the customer (“ticketing”). The customer may cancel certain tickets even after “ticketing”, at times without payment of cancellation fees and at times with payment of a cancellation fee. There are also tickets that the customer may not cancel at all after “ticketing”. Generally, the higher the ticket price, the greater the willingness to allow cancellation of the ticket without cancellation fee or with a low cancellation fee.

9.6.3 Policies for providing assurance for services - The Group’s responsibility for damages (bodily damages and property damages) which are caused in the course of international air transport are stipulated in international conventions which have been adopted in the Air Transport Law, 1980 and the decrees which have been issued under its auspices. Recently, the Ministry of Transport distributed a legislative memorandum for updating the current law, while conforming it to the Montreal Convention of 1999. The Group also operates in accordance with the directives of IATA on various matters that are connected with responsibility for passengers and their luggage. The Group’s responsibility for denial of boarding of passengers due to overbooking of flights is established by the Aviation Services Licensing Regulations, 1985. In addition, with regard to everything that is related to bumping passengers from flights, flight delays and flight cancellations to and from countries that are members of the European Union, Regulation 261/04 of the European Union applies to the Company (see Section 9.11.2 (e) below). Recently, a bill for Compensation and Assistance to Passengers due to Delay or Bumping Passengers from Flights, 2007, which wishes to adopt Regulation 261/04 of the European Union and to apply it to all flights (scheduled and chartered) from all destinations, including flights departing from Israel. The regulation was discussed in the Knesset Finance Committee, and in view of the understanding that the wording of the bill could cause a lack of uniformity with existing legislation (local and international), and in order to conform it to the nature of Israeli aviation, it was agreed that the requisite adjustments will be made to the bill's wording. As of the report date, this updated version has not been completed. Passage of the bill could increase the scope of the financial damages paid to passengers by the airlines, including the Group. The Company's assessments of the increased scope of the damages in the event the legislation takes effect constitutes "Forward-Looking Information" as defined in the Securities Law, 1968, based on assumptions and forecasts of the Company. Forward-Looking Information is information that is uncertain with respect to the future, supported by existing information in the Company on a date close to approval of the report, and includes the Company's assessments or intentions as of the report date. Therefore, the actual results of the legislative change taking effect, as stated above, or the extent of its impact, if the legislative change is passed, on the Company's operations, could be materially different from the results estimated or resulting from this information.

9.6.4 Credit policies A. Credit to customers: Travel or cargo agents approved by IATA enjoy special payment arrangements in accordance with IATA regulations (a non-IATA agent is obliged to provide guarantees or pay in cash). The Group grants credit to agents in Israel for periods varying between 28 to 45 days. In general, direct sales of air transport to customers are made in cash, other than credit sales to Government ministries and certain commercial customers.

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B. Suppliers’ credit: The Group receives credit from its suppliers in Israel for periods varying between 30 to 90 days, in accordance with the type of supplier and the arrangement with him.

C. The following are the average credit volume and credit periods for customers and suppliers of the Group as of December 31, 2006:

2007 Average credit volume Average credit days in millions of dollars Customers 167 31 Suppliers 162 53

9.6.5 Working capital deficit As of December 31, 2007, the Group had a working capital deficit of approximately 146 million dollars compared with approximately 204 million dollars at the end of the prior year. The current ratio at the end of 2007 was approximately 77% compared with 65% at the end of the previous year. See Section 2.1 to the Directors' Report for detail of the factors leading to the rise in the working capital deficit. The overall working capital deficit results from the Group's current liabilities, which include two material components: deferred revenues from the sale of flight tickets and current installments of long-term loans. These elements, which are characterized by current business cycles, are included as mentioned in current liabilities and, in effect, explain most of the working capital deficit. The Group estimates that this working capital deficit does not create current cash flow problems for the Group.

9.7 Investments See Note 8 to the financial statements for details of all of the investees of the Company.

9.7.1 The following is a concise description of the businesses of the principal subsidiary companies:

A. Sun D’Or International Airlines Ltd. (“Sun D’Or”) The charter operations of the Group described above and below, are carried out through Sun D’Or (a company wholly-owned by El Al). Sun D'Or operates in the field of leasing the entire capacity of aircraft to third parties, or the capacity of part of an aircraft to a number of partners at prices agreed to in advance. Sun D'Or has a commercial operating and operational license for an indefinite period, to transport passenger and cargo on charter flights to and from Israel. The commercial operating license provides, inter alia, that the flights will be carried out on aircraft that EL Al will lease to it and that BGA will be Sun D’Or’s home-base. Following a government resolution from January 2008, as provided in Section 7.1.10 above, in March 2008, the Civil Aviation Authority approached Arkia, Israir and Sun D'Or, with a request to present before the Civil Aviation Authority the air routes on which the companies want to operate scheduled passenger flights during the summer of 2008.

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Sun D’Or’s revenues during the year 2006 were 50,178 thousand dollars. As of the date of the report, Sun D’Or had 27 employees. See Note 8.B.4. to the financial statements for further details on Sun D’Or.

B. Tamam Aircraft Food Industries (BGA) Ltd. ("Tamam") Tamam (a company wholly-owned by El Al) is primarily engaged in the production and supply of kosher prepared airline meals. El Al is the principal customer of Tamam. During 2007, approximately 89% of its sales were to El Al, and the remainder to other airlines and to other customers. Tamam’s revenues for the 2007 year totaled 20,852 thousand dollars. As of the date of the report, Tamam employed 301 workers (not including outsourced workers). See Note 8.B.1. to the financial statements for further details about Tamam.

C. Bornstein Caterers Inc. (USA) - (“Bornstein”) Bornstein (a company wholly-owned by El Al), incorporated in the United States and operating out of New York’s JFK airport, is engaged mostly in the production and delivery of prepared meals for airlines and other institutions. El Al is the major customer of Bornstein (approximately 81% of its sales for the year 2006). Bornstein’s revenues in 2007 totaled 9,469 thousand dollars. As of the date of the report, Bornstein employs 94 workers. See Note 8.B.2. to the financial statements for further details about Bornstein.

D. Superstar Holidays Ltd. (Britain) - (“Superstar”) Superstar (a company wholly-owned by El Al), is a tourism wholesaler, which markets tourism packages to travel agents and individual travelers, and sells airline tickets on El Al routes at reduced prices. In recent years, Superstar has become one of the largest tour operators in Great Britain for tourism to Israel. The Company has operations in several other countries. 51 Superstar’s revenues in 2007 were 21,840 thousand dollars . As of the date of the report, Superstar employs 19 workers. See Note 8.B.3. to the financial statements for further details about Superstar.

51 The amount in thousands of dollars has been translated from pounds Sterling at the rate of exchange as of December 31, 2007.

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9.7.2 The following is a concise description of the businesses of the principal investees that are not subsidiaries52:

A. Cargo consolidation: Air Consolidators Israel Ltd. ("ACI") ACI (a company 50%-owned by El Al) is primarily engaged in the consolidation of air cargo at BGA in order to reduce the price of air shipments The air shipments are made by El Al at special prices and, also, via foreign companies. The shares held by El Al entitle it to appoint half of the members of the board of directors and give it the right to participate and vote in general meetings. The shares do not provide El Al with the right to receive dividends or any other benefit to be distributed by ACI, other than earnings and dividends distributed from capital gains. During 2007, the Company paid commissions to ACI of 2,461 thousand dollars. The Group is evaluating the possibility of changing its holdings in ACI. ACI's revenues in 2007 were 46,318 thousand dollars. As of December 31, 2007, ACI employs 23 workers.

B. Flight marketing: Tour Air (Israel) Ltd. ("Airtour" or "Tour Air") Airtour (a company 50%-owned by El Al) markets the flights and special promotions of El Al to all destinations to which it flies. Approximately 45% of the total sales of the Israeli branch during 2007 were made through Air Tour. The shares of Air Tour held by the Group grant it the right to participate and vote in shareholders’ meetings and to appoint half of its directors, but do not grant the Group the right to receive dividends or earnings, other than earnings derived from share capital investments of Airtour. El Al pays Airtour a commission and participates in one half of its operating expenses. The few foreign airlines that use Airtour's services also pay a commission similar to that paid by El Al. It is Airtour's policy to transfer the lion’s share of the incentives it receives to the travel agents, based on their sales revenues at Airtour, and to distribute the earnings as dividends to its ordinary shareholders (the travel agents) through dividends. The revenues of Airtour in 2007 were 6,998 thousand dollars. As of the date of the report, Air Tour employs 81 workers. See Note 8(B) (5) to the financial statements for additional information regarding Airtour.

C. Touring and hotels: Kavei Chufsha Ltd. ("Kavei Chufsha") Kavei Chufsha (a company approximately 20%-owned by El Al) is engaged in the marketing and sale of tourism services, including as a wholesaler and as an organizer of charter flights to and from Israel. El Al’s investment in Kavei Chufsha was made for enlarging its marketing channels in the charter flights sector and to expand the Group's share in the marketing of tourism traffic. Kavei Chufsha markets via travel agents and by the distribution of seats and touring packages to the final consumer.

D. Reservation systems: Sabre Israel Travel Technologies Ltd. (“Sabre Israel”). Sabre Israel is a private company that was incorporated in Israel as a joint venture between El Al (49%) and Sabre Inc. (hereafter: “Sabre”) (51%). Sabre Israel provides reservation

52 The description in this section is to the best of the Company's knowledge, pursuant to data submitted by the companies described.

a-96 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding services for flights of airlines worldwide as well as reservations for a variety of additional tourism services in the world (hotels, car rental reservations, etc.). Sabre Israel also provides support and maintenance services to agents for the "Carmel" system. The "Carmel" system serves as a reservation system for flight tickets, costing, ticketing, inventory management and check-in services. The "Carmel" system is connected on an on line to all of the Company's sales offices in Israel and abroad, most of the travel agents in Israel, general agents of the Company. See Section 7.6.2 above for further details on the "Carmel" system and its planned replacement. The revenues of Sabre Israel in 2007 were 8,917 thousand dollars. As of the date of the report, Sabre Israel employs 36 workers.

There has been a cooperation agreement between the Company and Sabre Israel since 02.05.2001, under the terms of which Sabre Israel was founded. The replacement of the Carmel system might terminate the agreement between the parties and/or change the manner and scope of the agreement between the parties so as to lead to a reduction in the revenues of Sabre Israel from the agreement. The implications of this matter are being examined by the Company. Sabre approached the Company with various claims due to the Company's announcement that it was replacing the Carmel system and its choice of the Amadeus system as its reservations and inventory management system, including Sabre's resultant demands for financial damages. The parties are in contact with respect to the manner in which the cooperation between them will continue. In the Company's estimation, an agreement with Sabre, if achieved, will arrange the continued cooperation, with a resolution of the financial demand. Non-agreement could lead to legal proceedings between the parties. See Note 8(B)(7) to the financial statements for further details on Sabre Israel. The Company's estimations regarding the possibility of resolving the dispute through compromise or legal proceedings is "Forward-Looking Information", as defined in the Securities Law, 1968, based on the Company's assumptions and forecasts. Forward-looking information is information that is uncertain with respect to the future, supported by existing information in the Company on a date close to approval of the report, and includes the Company's assessments or intentions as of the report date. Therefore, the actual results of possibly settling the aforementioned dispute, or its being brought for legal proceedings, or the extent of their impact on the Company, could be materially different than the results estimated or resulting from this information.

9.8 Financing 9.8.1 Loans that are not for exclusive use The Group does not have any loans (whether from banking or non-banking sources) which are not for exclusive use, excluding a credit facility, as mentioned in Section 9.8.3 below.

9.8.2 Credit limitations on the Corporation

A. Observance of collateral ratio –

In accordance with the stipulations of each agreement, the Company has undertaken toward most of the long-term credit maintain a proper collateral ratio between the unpaid credit and the collateral pledged to the bank. In general, the agreements for credit taken by the Company

a-97 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding stipulate that the market value of the aircraft pledged should exceed the bank debt balance by 25% and that this should be verified once a year, on the basis of certain, agreed upon, international professional publications. Whenever the value of the collateral falls below that specified in the agreement, the Company is obligated to provide additional security to the lender, so that the ratio, as stipulated in the agreement, is maintained. As of the date of the report, the Company complies with the restrictions and the financial covenants that were prescribed with the banks.

B. Single borrower and group of borrowers limitation –

The directives of the Supervisor of Banks in Israel include restrictions according to which the debt of a “single borrower” and of a ”group of borrowers” to a bank in Israel shall not exceed a given percentage of that bank’s shareholders’ equity. From time to time, these directives may affect the ability of some of the banks in Israel to grant additional credit to the Company. Due to the change in the holdings in the Company, whereby K’nafaim is the controlling shareholder and holds more than 25% of the Company’s issued share capital, the Group is considered a part of the K’nafaim group with respect to the borrower-group restriction placed on the granting of bank credit. In addition, in light of the weight of the Company’s long-term liabilities to banks in Israel, and considering the volume of loans provided by these banks to the K'nafaim group, the Company may encounter difficulty in raising additional credit in significant amounts from Israeli banks that it may require for purposes of purchasing new aircraft or other investments.

C. Limitations on transferring control –

The Company has made commitments to banks, according to which, should there be a transfer or change of control of the Company in any manner without the consent of the lenders, the lenders are permitted to demand immediate payment of the loan balances. The following are the obligations of the Company and/or of the controlling shareholders with respect to these limitations: • In proximity to the publication of the prospectus in May 2003, the State committed to Ltd. that the holdings of the State and Company employees would not, at any time, decline below 50.00001% (fully diluted) of the Company’s issued share capital. On September 28, 2004, Bank Hapoalim consented it would not consider the transfer of control of the Company to K’nafaim as an event giving it the right to demand immediate repayment of the loans that are the subject of the agreements, or any part of them. • In May 2003, Bank Leumi le’Israel Ltd. ("Bank Leumi") informed the Company that should control of the Company be changed or transferred in any way without its prior written consent, Bank Leumi would be entitled to demand immediate repayment of the Company’s debts owed to it. Immediately prior to privatization, Bank Leumi removed its objection to the public offering of the shares. In addition, on March 28, 2005, Bank Leumi notified the Company that it had no objection to K’nafaim increasing its holdings in the Company to a level that it would become the controlling interest in the Company, on the condition that the controlling interest in K’nafaim would be the Borovich family (the term “control” for this purpose - as defined in the Banking Law (Authorization), 1981) and that the change in ownership referred to

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above would take place no later than June 5, 2007. Subject to the above, Bank Leumi announced that it would not exercise its right to demand immediate repayment of debts and liabilities solely because of the aforementioned change in control, this without detracting from the other rights of Bank Leumi towards the Company and from the obligations of the Company towards it pursuant to existing agreements. Concurrently, on March 28, 2005, K’nafaim, the holder of control in the Company, sent Bank Leumi a letter, as described in Section 4 above. See Note 14(F)(2)(b) to the financial statements for details.

D. Demand for immediate repayment by the bank –

The terms stipulated in certain agreements relating to loans taken by the Company include the bank's right to demand immediate repayment of the balance of the loans owed to that bank if, in the bank's opinion, based on reasonable criteria, a change had occurred which adversely affects the Company’s financial position or its operations or its business or its financial ratios, in a manner endangering or potentially endangering the ability to repay the bank loans. See Note 14(F) to the financial statements for details.

9.8.3 Credit facilities The Group has credit facilities with banks that totaled 89.5 million dollars as of December 31, 2007, an increase of approximately 2% compared to the approved facility as of December 31, 2006. The credit facilities are for a period of up to one year and at variable interest. Moreover, there is a long-term credit facility from an Israeli bank totaling 16 million dollars to finance guarantees to secure existing and future retirement plans.

9.8.4 Loans for exclusive use- • The Company has taken loans for the purchase of aircraft, the principal terms of which are listed in Note 14 to the financial statements. The balance of the bank loans as of December 31, 2007 stood at 785.5 million dollars. • In October 2006, the Company signed an agreement with a foreign bank for the receipt of financing of approximately 80 million dollars, against a lien on two 747- 400 aircraft (with an option for an additional 10 million dollars for each aircraft in order to finance the conversion to cargo- should it be decided to convert them to cargo). The proceeds to be received could be used to reschedule part of the existing loans or for other investments, as the Company will see fit at the time that it withdraws the loans. The financing is for a period of 10 years from the first withdrawal, with quarterly repayments of principal plus interest. In November 2006, the Company drew down approximately 40 million dollars of this facility. The Company has the right to draw another 40 million dollars of this facility. The bank relates to this right as through the Company has drawn down the amount with a principal payment prescribed in advance. The amount available to the Company is reduced according to principal repayments that were agreed in advance, until the date of actual withdrawal. • In November 2005, a preliminary commitment was obtained from the Export Import Bank of the United States (EXIM), which will facilitate the financing of two new Boeing 777 aircraft (which were received for the Company's service during 2007) which are scheduled to arrive in 2007.

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During November 2006, the Company's Board of Directors approved a commitment with two foreign banks which will jointly act as the financers of a transaction to purchase the two 777 aircraft, and in March 2007, the Company signed a document of intent with the two foreign banks regarding the principles of the financing. The agreement is based upon an EXIM guarantee and is subject to its terms. The financing banks took upon themselves an extension of such financing for a period of up to 15 years. Accordingly, an application was made to the Export Import Bank of the United States to convert the preliminary commitment previously given into a final commitment. The final commitment was received on July 12, 2007, for use as security to the financing banks. During July 2007, a financing agreement was also signed with the financing banks. For the first plane, which was delivered to the Company in July 2007, the Company received a 109 million dollar bank loan, of which 88 million dollars is designated for payment of the balance of the price of the plane to Boeing and the loan acquisition costs. The balance of 21 million dollars was returned to the Company' cash position. For the second plane, which was delivered to the Company in August 2007, the Company received a 110 million dollar bank loan, of which 88 million dollars is designated for payment of the balance of the price of the plane to Boeing. The balance of 22 million dollars was returned to the Company's cash position. See Section 7.11(A) above and Note 14(D)(9) of the financial statements for additional information on the acquisition of the two Boeing 777 aircraft.

The Group estimates that in the coming year, it will not need to raise additional financial resources in order to operate its regular business. This paragraph contains Forward-Looking Information, as defined in the Securities Law, 1968 (“the Securities Law”), which is based upon existing Company data as of the date of the report, and includes assessments or intentions of the Company as of that date. Accordingly, the actual results may be materially different than the results assessed or implied from this data, as the result of a large number of factors, including exacerbation of competition, liquidity considerations, equipment procurement and changes in interest rates.

9.9 Taxation 9.9.1 Tax laws to which the Company is subject The main subsidiaries of the Company operating in Israel are subject to the Income Tax Law (Inflationary Adjustments), 1985 ("the Adjustments Law") which measures results in real terms. According to the Adjustments Law and the Income Tax Regulations (Rules Concerning the Maintenance of Accounting Records of Airlines with Foreign Investments and of Certain Partnerships and the Determination of their Taxable Income), 1986, the results of the Company and some of its subsidiaries for tax purposes are measured based on adjustment to the exchange rate of the U.S. dollar. The operating results for tax purposes of the other subsidiaries in Israel are measured based on adjustment for changes in the Consumer Price Index. Some of the subsidiaries are assessed jointly with the Company. Pursuant to the Income Tax Regulations (Depreciation), 1941, the Company is entitled to depreciate aircraft that it owns at an annual rate of 30% of cost and spare engines that it owns at an annual rate of 40%. In accordance with the Value

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Added Tax Law, 1975, transactions for the sale of flight tickets to and from Israel, or from one destination abroad to another, as well as cargo transport by air to and from Israel, have been defined as transactions as to which the VAT rate is zero.

9.9.2 Status of the tax assessments of the Corporation

On May 26, 2003, the Company signed an agreement with the Income Tax Commission, according to which final tax assessments were determined up to, and including, the year 2002. Within this framework, it was established that the balance of tax losses to be carried forward to 2003, after the waiver of a debt to the Government, would amount to NIS 2,219 million. The Company and the subsidiaries have received final tax assessments (including self assessments that are regarded as final) for the period through the tax year:

Tax year The Company 2003 Principal direct subsidiaries 2003

9.9.3 Tax laws that apply to significant affiliated companies incorporated abroad The subsidiaries abroad are subject to the tax laws applicable in the countries of residence. Most of the countries in which the Company operates representative offices are signatories to treaties for the prevention of double taxation or mutual arrangements between the nations, which exempt the Company from the payment of income taxes on its operations in those countries.

9.9.4 Reasons for material differences between the effective tax rate and the statutory tax rate See Note 22.B. to the financial statements.

9.9.5 Cumulative losses for tax purposes The balance of income tax losses as of the end of the 2007 tax year (based on an estimated tax return for 2007) amounted to approximately NIS 1,917 million (approximately 498 million dollars at the representative exchange rate as of December 31, 2007).

9.9.6 Income tax – withholding:

See Note 17(A)(8) to the financial statements as to the disputes with the tax authorities regarding withholding taxes for employee benefits.

9.10 Environmental matters 9.10.1 Significant implications of rules pertaining to environmental matters Many countries, including Israel, have adopted the conventional international standards regarding engine noise of aircraft and have prescribed additional directives for environmental conservation. Restrictions exist in various airports in the world as to the times of takeoff or landing of aircraft. The schedules of airlines, including those of the Group, are determined in accordance with these restrictions.

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9.10.2 Restrictions on night takeoffs at BGA According to a Government resolution (PS/15 of July 15, 1997), BGA has halted takeoffs between the hours of 02:00 and 05:30, commencing on October 30, 1998. It was also stipulated in the decision that, as of July 1, 1999, the prohibition of night landings at BGA would be broadened to 01:00 to 05:30. In addition, it was prohibited to run engines during night hours (between 21:00 to 06:00). The Government resolution to broaden the restrictions was not carried out, but, in the summer of 2002, the Minister of Transport decided to expand the prohibition on night takeoffs and to set it between 01:30 until 06:00, beginning from October 2002. Some of the foreign airlines in Israel petitioned the High Court of Justice. The case was closed in a compromise under which the petitioners were permitted to start engines and to carry out arrangements that would allow the aircraft to leave at 05:50. The Ministry of Transport and the Civil Aviation Authority are examining the matter of operating BGA during night hours, subject to restrictions as to ceilings on the level of noise created by aircraft take-offs, and there is a proposed law on the matter. In April 2007, a proposal was brought before the Inter-ministerial Committee for Environmental Matters, which includes restrictions on take-offs from BGA of Noise level-3 category aircraft between 23:00 and 06:00, the ability to take off during all hours of the day for Noise level-4 category aircraft, reducing the permitted noise levels day and night, and various restrictions on the operation of aircraft. The Company submitted its reservations to the Commissioner of the Civil Aviation Authority, in view of the expected implications of passing a resolution that will affect the Company's flight schedule and its aircraft fleet. As of the report date, no binding decision had been made. In the Company's estimation, the decision that restricts activity to certain hours could affect its ability to operate certain aircraft or certain flights, thereby effecting the Company's ability to carry out flights. This paragraph contains Forward-Looking Information, as defined in the Securities Law, 1968 (“the Securities Law”), which is supported by existing Company data as of the date of the report, and includes assessments or intentions of the Company as of that date. Accordingly, the actual results may be materially different than the results assessed or implied from this data, as the result of a large number of factors, including final wording of the legislation to be enacted on this matter, legal or operational provisions in the destination airports or foreign airports, equipment purchases, environmental implications, etc.

9.10.3 Noise regulations at airports The noise restrictions that are specified by the U.S. aviation authorities are catalogued into four levels: Stage 1 to Stage 4. Stage 4 is the most severe level; the most prevalent restriction in most airports in the world is Stage 3. At central airports, such as London, Amsterdam, Brussels, Toronto, New York, Paris and BGA, there are even more severe restrictions than Stage 3. As a result, operational restrictions are placed on 747-200 aircraft at those airports (permissible takeoff weight, climb rate after takeoff). All Group aircraft meet the Stage 3 restrictions, and most even comply with Level 4 (for 747-200 aircraft which take off at maximum weight, the Stage 3 restriction is borderline; 747-200 aircraft do not comply with the Stage 4 restriction). In addition, according to the decision of the European Union Parliament and Joint Commission of March 2002, the Union's member nations are required to implement policies intended to restrict the operations of aircraft defined as borderline from the standpoint of noise level. The Group has 4 747-200 type aircraft to which this restriction

a-102 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding might apply. This policy is meant to be implemented in the following stages: (a) each Union nation will pass the legislation necessary to permit the removal from service of such aircraft; (b) the performance of an environmental survey at the airports of Union's nations, which includes a cost-benefit analysis regarding the continuation of the operation of borderline aircraft at the airports. The survey is to be performed in consultation with the parties affected by its conclusions; (c) in the event that the results of stage (b) lead to the conclusion that there is justification to restrict the continued operation of borderline aircraft in any of the airports, the aviation authorities will have the authority to instruct the airlines to freeze the number of flights on which these borderline aircraft will be operated at the subject airport, to an extent not to exceed the number of flights during the 6 months preceding the freeze notice; (d) commencing with a date to be determined by the aviation authorities of each nation, and after giving advance notice of 12 months, the activities of the borderline aircraft will be reduced by up to 20% annually in comparison with the maximum volume of activity that will be determined. In mid-2006, the Company received a notice from the authorities at Schipol Airport in Amsterdam regarding their intention to hold a hearing regarding noise and the imposition of operational restrictions on noisy aircraft. Furthermore, the Company received notice of changes in the rates charged for aircraft of the category of the cargo planes operated by the Company, commencing March 2008. In the Company's estimation, the changes included in the above notice will not have a material effect on the Company's cargo aircraft field. The Company's aforementioned assessment represents Forward-Looking Information, as defined in the Securities Law, 1968 (“the Securities Law”), which is supported by the Company’s assessments on the basis of the information it has as of the report date, supported by the notice of the Schipol Airport Authority in Amsterdam and on the existing operating costs of cargo aircraft, and changes in this data could change the assessment. Other than that, to the best of the Company’s knowledge, as of the date close to the approval of the report, the stage of consultation with the airlines has not begun in any European country and, in some of the countries, the relevant laws have not even been enacted. Based on this information, the Group estimates that the process of restricting the operations of the Group’s 747-200 aircraft will not begin before the second half of 2009. When the restrictions are imposed, operation of the 747-200 type aircraft may gradually become unfeasible economically, and finally impossible from a legal standpoint. The first aircraft, the operation of which is anticipated to become unfeasible, is the convertible aircraft (747-200C), since the engines mounted in them are older than those mounted on the other cargo aircraft. Should there be any progress in this matter, the Company will, in the future, consider the replacement of the aircraft or their adaptation to the relevant legislation. At present, there is a proposed Government resolution presented by the Ministry of Transport and the Ministry for Environmental Matters on the matter of restrictions on flight operations as regards noise ceilings created by aircraft taking off (see Paragraph 9.10.2 above). The information on the imposition of certain restrictions is Forward-Looking Information, as defined in the Securities Law, 1968 (“the Securities Law”), which is supported by the Company's assessments based on data the Company has regarding the progress of the legislative process and application in this matter. Therefore, the effective date of the restrictions on the operation of the aircraft could be materially different from that forecasted, as a result of many factors, including the conduct of the authorities in the various European countries and the Company's equipment purchases.

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The Company's representatives participate in professional conferences and insist on remaining at the global technological forefront in the environmental field and reciprocal ties between aviation and the environment. The Company's representatives are also members of an Inter-ministerial committee to improve the noise climate at BGA and the Company is investing a great deal of resources in this area.

9.10.4 Treatment of waste

The Company’s waste is treated in a plant within the confines of BGA that is operated by the Airports Authority, with the Company participating in 10% of the operating costs. This plant was due to shut down by the beginning of 2005, to be replaced by a modern plant, approved by the Ministry for Environmental Matters. Beginning in 2008, the Company is planning to operate a plant at a cost of 350 thousand dollars. The facility, to be built on the Group’s land, is to transfer the waste to a central treatment facility, to be built by the Airports Authority. The Group will pay usage fees to the Airports Authority for the use of the main plant of approximately 75,000 dollars per year over 22 years. At the same time, the toxic wastes created by the Company are transported to the Environmental Services Company in Ramat Hovav. According to the timetable obtained from the Airports Authority, the closing and replacement of the Airports Authority's central waste treatment installation within BGA, which had been scheduled for early 2005, was not completed in 2007. The Company will take action in 2008 to complete construction of the facility. A claim filed in 2006 by the Airports Authority against Tamam for the cost of cleaning and vacating crude oil ended in a compromise between the parties.

9.10.5 Fuel tanks All of the El Al fuel tanks were examined during the second half of 2002 by an outside consultant who found that all of the tanks are sealed. In addition, an examination was performed by an authorized laboratory in December 2003, and it was found that all of the tanks are in order. The Sonol fuel company also installed viscometers in some of the fuel tanks during the final quarter of the year 2004, pursuant to the regulations of the Ministry for Environmental Matters. The Group regularly carries out specific treatment of toxic soil waste, if any.

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9.10.6 The material environmental costs and investments for the reporting year and those anticipated subsequently:

2006 2007 2008 (expectations) Material costs 053 0 Usage fees for the waste treatment plant: up to 75 thousand dollars annually Material Approximately 250 About 100 thousand About 510 thousand investments thousand dollars54 dollars annually dollars annually annually Total About 250 thousand About 100 thousand About 585 thousand dollars annually dollars annually dollars annually

The information concerning the material anticipated environmental costs and investments represents Forward-Looking Information, as defined in the Securities Law, 1968 (“the Securities Law”). The information is supported based upon the requirements of the environmental laws presently in effect and on current market prices of the goods and services that the Group must purchase in the framework of the environmental investments. Therefore, the actual costs and investments may vary materially from the forecast as above, as the result of a large number of factors, including legislative changes, requirements of the authorities and changes in the prices of the goods and services that the Group will be required to buy in the framework of the environmental investments.

9.10.7 Restrictions on the level of emissions Following growing world awareness to global warming, governments have become interested in monitoring and restricting the level of air pollution caused by engines. During the coming years, laws are expected to be enacted on the matter in different countries all over the world. The Company is examining the possible implications that enacting such laws could have on its operations. Every weekly management forum of the Company opens with a report on follow-up of security events (including photographs) on environmental matters. The Company has mapped all of its areas, while placing each area under the responsibility of the Company's management, with each manager responsible for a hazard required to correct it. The management forum also monitors the correction of deficiencies.

9.10.8 Fly Green The Company is active in the Fly Green Forum of IATA, and carries out activities with the objective of positioning the Company at the forefront of environmental protection of the air,

53 Usage fees will be paid to the Airports Authority after the waste treatment plant at BGA is completed. Since according to the plan presented by the Airports Authority, the waste treatment plant was not completed during 2007, the Company did not pay for 2007 and only pay the relative portion for 2008, and, from the year 2009, it will pay the full sum.. 54 For the treatment of asbestos panels, upgrading of coatings workshop, renewal of processes facility, neutralization of soil in certain locations, oil separators and treatment of other environmental hazards.

a-105 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding inter alia, by using clean fuels (purchasing fuel only from suppliers that comply with the standard's conditions), significantly reducing the use of fuel and reducing the emission of pollutants from the Company's planes, but frequently washing the aircraft engines, adopting more efficient operating procedures, etc. The Company has a panel headed by VP Operations, which meets once a month and deals with this subject. In an outside audit performed for the Company by IATA with respect to fuel savings and reducing pollution, the Company was certified as "exceptional" in this area.

9.11 Restrictions and regulation on the Corporation’s business 9.11.1 General Most of the aspects related to the operations of the Company as an air carrier are subject to a system of regulatory arrangements - Israeli and international - which relate, among other things, to flight rights, setting of tariff's, capacity and flight safety standards, security and noise, and are conditional on a commercial operating certificate and an operation certificate. See Section 9.11.2 below as to regulatory arrangements and Sections 9.11.3 - 9.11.5 below as to business and operational licenses. In addition to operational licenses, the Company’s operations are conditional upon it being an Israeli air carrier (principal ownership and control by the State or its citizens), its appointment as a Designated Carrier and on the permits of foreign countries allowing it to make use of the flight rights given to it as a Designated Carrier. See Sections 9.11.6 - 9.11.8 below as to air transport agreements and the civil and international aviation policy of Israel. In addition, there are further restrictions that apply to the Company’s operations deriving from the Special State Share. See Section 9.11.9 as to the restrictions deriving from the Special State Share.

9.11.2 Regulatory arrangements The following are the main regulatory arrangements, Israeli and international, which relate to the Company’s operations as a Designated Carrier. (See Section 9.11.2 below for civil aviation security arrangements, and Section 9.11.13 below for operations under emergency circumstances).

(a) Aviation Law 1927 (hereafter “Aviation Law"). This law and the regulations issued under its provisions, regulate, inter alia, the following matters: registration and nationality of airplanes, approval of aircraft as fit for flying, approval of crews and licensing of flight personnel, safety, operation of airplanes and rules of flight, licensing of inspection institutes, self maintenance, etc (See also Order in Council on Air Navigation in the Colonies (Imposition of Laws), 1937 (hereafter-“Order in Council”).

In November 2007, the Ministry of Transport distributed a draft memorandum of Aviation Law – 2007, the purpose of which is to provide a comprehensive legal response to arranging the field of civil aviation for its safe, orderly and effective operation, conforming to international treaties. The memorandum proposes an amendment to existing legislation, inter alia, on the operation of aircraft, aviation licenses, accident investigations, transport of hazardous materials and it confers very broad authorities on the Civil Aviation Authority. The Company has sent preliminary comments on the Circular of Aviation Law to the Transport Ministry.

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55 (b) Aviation Services Licensing Law, 1963 (hereafter - “Licensing Law”) This law, which arranges the principles of aviation licensing, was amended in 200656, and the principles of the law (following the amendment) are as follows: (1) The law prohibits operation of aircraft in a commercial flight (passenger or goods transported for compensation) or the leasing of aircraft for flight to or from the State or within its territory, except under a license from the Minister of Transport and in accordance with the conditions of the license (Section 2 of the law). (2) The law grants authority to the Minister of Transport, after consultation with the Minister of Tourism and after obtaining the opinion of the professional committee,57 as follows: (a) When issuing or renewing the license (Section 3 of the law), to stipulate conditions regarding the operation of aircraft, the proposed services, the training and experience of those engaged in operating the aircraft and inspecting them, aviation routes to be operated by the license holder and operational standards by which he should operate, frequency of the services, rates and insurance. (b) To refuse to grant a license if, among other reasons, it might damage the regulation in the aviation market, or its planning or the security of the State or contrary to its interests or the matter does not comply with an agreement between Israel and a foreign country or if the flight might cause damage to public safety or could lead to unfair competition in the civil aviation industry due to the setting of a price below a fair price (Section 5 of the law). (c) To make a license conditional or to revoke it if he discovers one of the following: (a) one of the license's conditions or a directive under any law that applies to operation of aircraft has not been fulfilled; (b) the aircraft is not operated with safety, efficiency, capability or proper consideration of public need; (c) there is a cause among those that permit the Minister of Transport to refuse to grant a license under this law.

The significance of the amendment to the law is the involvement of the Ministry of Tourism (and, to a certain extent, the Ministry of Finance and the Office of the Prime Minister, as well) in the decisions of the Minister of Transport in the context of his authorities under the law. See Sections 7.1.10, 7.8.4 above and 9.18.3 below with relation to the effect of the changes in competition on the Company. See Sections 9.11.7.2, 9.11.7.4 and 9.18.5 below with regard to changes in aviation policies related to Designated Carrier and capacity, and their effect on the Government's decisions in matters of aviation and licensing of the Company as an air carrier.

(c) Licensing regulations The regulations that were issued under the auspices of the Licensing Law regulate, inter alia, aircraft operation and flight rules, operation of flight schools for flight instruction, transfer and endorsement of transport documents on scheduled flights, flying time restrictions for

55A commercial operating license and an operational license were granted to El Al under the authority of the law- see Sections 9.11.4-9.11.5

56 The law was amended in the framework of the State Economy Arrangements Law (Law Amendments in Order to Achieve Budget Goals and the Economic Policies for the Fiscal Year 2006). The amendment became effective on 1.7.2006. 57 A committee composed of the managing directors of the Ministries of Transport, Tourism, Prime Minister and Finance and the Civil Aviation Authority, the function of which is to render an opinion to the Minister of Transport on any matter relating to licenses, as to which an opinion is necessary.

a-107 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding aviation services, overbooking, licenses for operating and leasing aircraft and operations of charter flights (see below).

Aviation Services Licensing Regulations (Charter Flights), 1982 These regulations regulate, inter alia, the granting of authorizations to carry out charter flights, the types of charter flights and the restrictions and conditions for carrying out the different types of charter flights. In February 2007, an amendment to these regulations became effective, under which authority was granted to the director of the Civil Aviation Authority to allow an air carrier from a country that is not the country of departure or of the destination to or from which the flight is carried out, to also operate charter flights to and from Israel.

(d) Air Transport Law, 1980 This law and the orders and the notices issued thereunder adopt a number of international conventions which stipulate various rules relating to international air transport, particularly regarding the air carrier’s liability for damages (bodily damage and property damage), caused during international air transport, and the damages imposed on the air carrier for this liability. The Ministry of Transport distributed a legislative memorandum for updating existing law, conforming it to the 1999 Montreal convention.

(e) Regulation 261/04 of the European Union – new conditions to compensate "denied boarding passengers" On February 17, 2005, a European Union regulation became effective which stipulates conditions for denied boarding ("overbooking") of passengers from flights, flight delays and flight cancellations. This regulation pertains to scheduled and chartered flights that leave from countries that are members of the European Union (including flights to Israel). The regulation stipulates, inter alia, compensation to passengers denied from a flight and to passengers whose flight has been cancelled without giving them advance notice within the times specified in the regulation. Additionally, such passengers are entitled to a substitute flight or to a refund of the payment for the flight ticket, at their choice. The regulation also stipulates the right of passengers booked for a flight that sustained an extended delay in the time of takeoff, to a refund of the payment for the flight ticket. In 2004, , a private bill was submitted in Israel that is in essence based upon this regulation, but was rejected by the Ministers' Committee on Legislative Matters and did not pass on the first reading. Recently, the Bill for Damages and Assistance to Passengers due to Delay or Denial of Boarding a Flight, 2007 passed in a temporary reading in the Knesset. The bill wants to adopt Regulation 261/04 of the European Union and to impose it on all flights (scheduled and charter), from all destinations, including flights departing Israel. The regulation was discussed by the Knesset Finance Committee, and in view of the understanding that the bill's wording could create a lack of uniformity with the existing legislation (local and international), and in order to conform it to the nature of Israeli aviation, it was agreed that the necessary modifications would be made to the bill's wording. As of the report date, the updated wording had not yet been formulated. Passage of the bill could increase the scope of the financial damages paid to passengers by airlines, including the Group. The Company's assessment of the scope of the damages if this legislation takes effect could constitute "Forward-Looking Information" as defined in the Securities Law, 1968, which is based upon assumptions and forecasts of the Company.

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Forward-Looking Information is uncertain information that is based upon existing information in the Company as of the date close to the approval of the report, and includes estimations or intentions of the Company as of the report date. Therefore, the actual outcome of the change in legislation, as stated above, or the extent of the effect of the change in legislation, if passed, on the Company's operations, may be materially different from the outcome which is estimated or which might be deduced from this information.

(f) Equal Rights for Persons with Disabilities In the third chapter of the Equal Rights Regulations for Persons with Disabilities (Accessibility Arrangements to Public Transport Services), 2003, provisions were prescribed regarding the obligation to integrate assistance for persons with disabilities in aviation transport, which imposes various obligations on air carriers as a condition for operating aircraft.

In July 2007, Regulation 1107/2006 of the European Union took effect, imposing various obligations on the air carrier and the travel agent in all that relates to booking reservations and flight check-in, in order to provide special protection for people with disabilities. The Regulation's provisions apply to every flight to and from the European Union states. However, the provisions of the Regulation dealing with the obligation to make various assistance available to passengers with various disabilities is expected to take effect only in July 2008.

(g) Airport Authority Law – 1977 This law, the regulations and rules issued under its auspices, regulate, inter alia, the following matters: aviation fees, transport by import couriers, entry into restricted territories, license fees and the unloading and loading of aircraft.

(h) The Civil Aviation Authority Law, 2005 This law designates the functions of the Civil Aviation Authority, which replaced the Civil Aviation Administration. Among the functions of the Authority are: to determine and assure the existence of internal and international flight regulations according to aviation laws; to grant civil aviation licenses, permits and approvals, according to aviation laws; to supervise the civil aviation sector, including maintaining a proper level of flight safety for Israeli aircraft and for aircraft that are present in Israeli air space. It should be clarified that in 2006, Aviation Regulations (Registration, Licensing and Documentation Fees) (Temporary Order) 2006, took effect, which prescribe the fee amounts to be paid under the various aviation laws and regulations. The amendment made within these regulations was intended to finance the functioning of the Civil Aviation Authority, which was established under the auspices of the law.

(i) Business restrictions (1) The Business Restrictions Law, 1988 (“Business Restrictions Law”) applies to all of the Company’s operating areas, except for the exemption described below. Until recently, the Business Restrictions Law included an exemption in Section 3(7), which stated that an arrangement would not be considered as a restrictive arrangement if all of its restrictions relate to international transport by sea or air, or to integrated international transport by sea, by air or by land, and as to which a relevant notification has been submitted to the Minister of

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Transport, but only if all of the parties to it are: carriers by sea or by air or carriers as such, as well as an international association of airlines which has been approved for this purpose by the Minister of Transport. The provisions of this exemption do not apply to other activities of the Company. An amendment to Section 3 (7) of the Business Restrictions Law is included in the scope of the Law for Arrangement in the State Economy (Legislative Amendments for Achievement of Budget Goals and Economic Policies for the 2007 Fiscal Year), 2007, approved on January 3, 2007, according to which the exemption it includes will be reduced with regard to restrictive arrangements in the area of international transport, as described below. According to the amendment, an arrangement which presently falls within the purview of the exemption will, nevertheless, be considered a restrictive arrangement: (1) if the parties to the arrangement are Israeli air carriers; or (2) if the parties to the arrangement are air carriers of which at least one is Israeli and at least one is not Israeli; or (3) if the parties to the arrangement are non-Israeli air carriers and at least one of them carries on operations, or is the owner of an agency, in Israel and one of the major subjects of the arrangement is air transport to or from Israel, and the limitation in the arrangement relates to operations or the prevention of operations in Israel by one of the parties. In addition, according to the amendment, the arrangement in cases (2) and (3) above will not be considered restrictive if authorized by the Minister of Foreign Affairs and the Minister of Transport, in a well-reasoned decision, after consulting the Minister of Finance and obtaining the position of the Commissioner of Restrictions, for reasons of real impairment in the foreign relations of Israel, including its economic-commercial foreign affairs, or in order to ensure continuity of flight rights between Israel and other nations. The effective date of the amendment was fixed as July 1, 2008, although if until this date a class exemption (as defined in Section 15A of the Business Restrictions Law) regarding arrangements related to international air transport, the Finance Minister will defer the effective date, in an order, for additional periods of six months each. The Finance Minister is permitted to refrain from deferring the effective date, due to special reasons, and after giving the Israeli airlines and the airlines conducting activity in Israel, or having representation in Israel, the right to present their positions. On January 31, 2007, the Company received a communication from the Commissioner of Business Restrictions that included a call to the Company to present its position with respect to the class exemption as above, including the types of arrangements that should be properly considered in the framework of the class exemption. The Company sent its comprehensive reply to the Commissioner for purposes of the wording of an appropriate class exemption. In March 2008, the Business Restrictions Authority published a draft of the class exemption for restrictive arrangements between air carriers. The draft of the class exemption deals with a broad range of accepted arrangements between air carriers, including arrangements to lease aircraft, code share arrangements, interline arrangements, seat-sale arrangements, maintenance arrangements and various operational arrangements. A preliminary review of the draft of the class exemption shows that it proposes to distinguish between the two major categories of aviation arrangements: the first category contains various operational arrangements and frequent-flyer arrangements, which will be exempt from receipt of individual approval. Also included in this category are "dry" lease arrangements (leasing of the plane alone, without the crew), which will also be exempt from receipt of an individual approval, unless made between Israeli carriers. The second category includes accepted

a-110 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding commercial arrangements, such as code share arrangements, interline arrangements and arrangements for the sale of flight capacity. In view of the proposed wording of the class exemption provisions, since a major part of these arrangements will require individual approval from the Commissioner of Business Restrictions (as long as a class exemption will be received according to the published wording), this situation, in the Company's estimation, could impair the proper commercial operation of the aviation industry in general and the Company in particular. It is the Company's position that commercial arrangements such as code share and interline make it possible to increase the supply of flights, expand the range of destinations and reduce flight prices. The Company intends to study the class exemption draft and its expected implications for the Company's operations, and accordingly – to present its response to the Commissioner of Business Restrictions. The final wording of the class exemption for business arrangements between air carriers in the area of business restrictions, as it will apply, and the date that it becomes effective, represent "prospective information", as defined in the Securities Law, 1968 (“the Securities Law). Forward-Looking Information as to the future is information that is uncertain, which is based upon existing information in the Company as of a date close to the date of the report, and includes estimations or intentions of the Company as of that date. Therefore, the actual outcome of the regulatory or legislative changes may be materially different from the outcome which is estimated or which might be deduced from this information. See also Section 9.18.15 below (Discussion of Risk Factors – Business Restrictions) regarding this matter.

(2) Decisions and proceedings in the business restrictions area On August 4, 2004, the Commissioner of Business Restrictions (in this Section -“the Commissioner”) authorized K’nafaim to increase its holdings in El Al in excess of 25% of its issued share capital (“merger”, as defined in the Business Restrictions Law), conditional upon certain stipulated conditions (“the merger resolution”). Among the conditions stipulated by the Commissioner in the merger resolution is a condition that obligates K’nafaim, as a shareholder in El Al, to act in order to bring every arrangement between El Al and another Israeli air carrier for the consent of the Commissioner of Business Restrictions ("terms of arrangements between carriers"). Another condition stipulated in the merger resolution obliges K’nafaim, as a shareholder in El Al, to do everything necessary to bring about a shutdown or a transfer of the charter flight activities of El Al or any of its subsidiaries, including all activities connected with the charter flight operations of the Sun D’Or company, to an unrelated third party, in every location in which El Al operates scheduled flights (except for deviations) ("Sun D'Or conditions"). After the Company submitted an appeal of the conditions set by the Commissioner, on March 14, 2005, the Company and the Commissioner accepted the proposal of the Business Restrictions Tribunal to conclude the appeal process by accord (hereafter: "the compromise accord"). Pursuant to the compromise accord, the Sun D'Or conditions will not become effective before the end of two years from the date of the accord, whereas the terms of arrangements between carriers will not become effective before the end of one year from the date of the accord. The date for purposes of the terms of arrangements between carriers, and only it, was extended by agreement, as described below. According to the conditions, the Commissioner may, within 120 days before the termination of each period, again impose the conditions, or one of them, on K’nafaim if, in his opinion, it

a-111 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding is justified on such date. Before imposing the conditions, or one of them, the Commissioner will grant El Al the right to a hearing. Should El Al submit an appeal of any one of the conditions once again imposed by the Commissioner, the conditions will be suspended for a period of six months, during which period the Tribunal will decide their validity. No change will take place in the other conditions. On March 14, 2005, K’nafaim signed the compromise arrangement and on March 20, 2005, the compromise between the parties received the validity of a judgment. The merger resolution also includes a condition under which K’nafaim is obligated to sell all of its aviation activities as a going concern to an unrelated third party, including its holdings in Arkia Israeli Airlines, Maman- Cargo and Holdings Terminals Ltd., Kishrei Teufa, Issta Lines and additional companies, but excluding the aircraft leasing operations and a number of additional affiliates. The accord of El Al with the Commissioner did not alter this condition. K’nafaim announced on March 30, 2006 that the sale of the holdings of its aviation activities was completed with the sale of its holdings in Arkia and after carrying out additional transactions, including the sale of its holdings in Maman, Kishrei Teufa and Issta Lines, and thereby complying with the condition obligating K'nafaim to sell such holdings.

It should be noted that on December 29, 2005, the Commissioner notified the Company that he is considering imposing on K'nafaim the terms of arrangements between carriers. In addition, the Commissioner demanded data from the Company concerning agreements, arrangements or understandings between the Company and Arkia and between the Company and Israir, and concerning negotiations carried on between the companies. The Commissioner requested that he receive the above data as well as the Company's position regarding the possibility that the Commissioner will impose this condition on K'nafaim. The Company presented the requested documents to the Commissioner and stated that it objected to the condition. On March 14, 2006, in response to the Commissioner's notification and at its request, the Company decided to agree to a postponement of one year of the time period allotted to the Commissioner in the accord for imposing the aforementioned condition. On January 28, 2007, following the communication of the Commissioner and his request, the Company decided to agree to a postponement of one additional year in the time period allotted to the Commissioner in the compromise arrangement for imposition of the said condition (i.e. three years from March 14, 2005 instead of two years). The other conditions that were set by the accord concerning the manner of imposition of the condition, as described above, will remain in force during the time of the postponement. Since no request was made to extend the date, or to impose the condition under the auspices of the ruling from March 2005 (See Subpar. (1) above regarding the legislative change and draft of the class exemption). As stated in the compromise accord, the Commissioner was permitted within 120 days prior to the end of two years from March 14, 2005 (i.e. March 14, 2007) to re-impose the Sun D'Or conditions on K'nafaim, if, in his opinion, there was a basis on such date, and subject to granting El Al the right to a hearing. On March 14, 2007, the period ended, in the course of which, after notifying the Company and giving it the right to a hearing, the Commissioner was permitted to re-impose the Sun D'or conditions on K'nafaim. Since the Commissioner did not communicate with the Company, to the best of the Company's understanding and based on legal advice that it obtained, he is no longer permitted to impose this condition according to the March 20, 2005 ruling.

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(3) Decisions and proceedings on the subject of monopoly On October 27, 2005, the Company received notification from the Commissioner of Business Restrictions concerning his pronouncement of the Company as the holder of a monopoly in transporting time sensitive (business passengers) and price sensitive (vacation travelers) passengers in the civil aviation market to the destinations of: Johannesburg, Hong Kong, Bangkok and Bombay (hereafter: the Commissioner's decision). It should be pointed out that what is involved are 4 of the 5 routes that were mentioned in the Commissioner's notification of March 22, 2005 as routes for which the Commissioner intends to declare El Al as holding a monopoly. The Beijing route, also mentioned in the Commissioner's March notification, was not included in his notice of pronouncement as a monopoly. It should also be mentioned that, in March 2005, the Commissioner gave notice that he is examining the status of El Al on approximately 19 routes: Brussels, Marseilles, Paris, Berlin, Munich, Moscow, Geneva, New York, Odessa, London, Vilna, Oslo, Palermo, Turin, Crete, Koss, Rhodes, Stockholm and Dublin. The following are the principles of the Commissioner's decision, as received in the Company's offices: A. The Commissioner classified and characterized the consumers in the passenger aviation sector into two categories: time sensitive passengers (business passengers) and price sensitive passengers (vacation travelers). B. The Commissioner determined that, as a rule, for the aviation sector in Israel, the geographic market should be defined based on the departure points and the destination points of the flight route (city pairs). C. The Commissioner determined that as to substitutability between charter flights and scheduled flights, since charter flights had not been operated to the destinations included in the pronouncement as of the year 2004, or had existed marginally, there is no need for him to reach a decision on this matter. However, he did stipulate that, in principle, charter flights are not a substitute for business passengers. D. Regarding the substitutability between scheduled flights, the Commissioner has determined that, for vacation passengers, an indirect flight will be, in certain instances, a substitute for direct flights. However, this will apply mainly for long flights and when the overall flight time is not extended much longer than the direct flight. Regarding business passengers, the Commissioner determined that, as a rule, an indirect flight is not a substitute for a direct flight, except if it is particularly more advantageous for them than the direct flight, such as being more frequent than the direct flight. E. The Commissioner stated that for markets to which the pronouncement relates, El Al is the sole company operating direct, scheduled flights. He also stated that the Authority approached all of the foreign airlines that were thought to be relevant, and an examination of the market shares in the destinations covered by the pronouncement disclosed that El Al holds the following market shares: The Tel-Aviv – Johannesburg route- A market share in excess of 90%, both for business passengers and for vacation travelers. The Tel-Aviv –Bombay route – a market share in excess of 80% for both business passengers for vacation travelers. The Tel-Aviv – Bangkok route – a market share in excess of 80% for business passengers and in excess of 70% for vacation travelers.

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The Tel-Aviv – Hong Kong route – a market share in excess of 90%, both for business passengers and for vacation travelers.

The Commissioner also declared that the examinations performed had indicated that, even if indirect flights to other destinations in the same countries were included in the analysis of El Al's market share, this would not alter his conclusion.

On March 30, 2006, the Company filed an appeal with the Business Restrictions Tribunal regarding the Commissioner's decision. The appeal requests that the Tribunal revoke the declaration with regard to the markets that are the subject of the decision, in full or in part. Among the principal allegations on which the appeal is based: the assertion that the Commissioner's market definition is erroneous and disregards the characteristics of competition for flights from Israel to long-range destinations in the Far East; the assertion that the Commissioner's analysis relating to the substitutability of demand alone is a deficient and erroneous analysis, which ignores the current substitutability from the viewpoint of supply, despite it being immediate and lacking sunken costs; the assertion that the Commissioner's judgment in his decision to invoke his authority to declare a monopoly was erroneous in principle and that the Commissioner erred in the manner in which he used his judgment and in the probability of the results of his declaration; the assertion that even according to the definitions of the market that were adopted by the Commissioner, the Company does not transport more than 50% of the passengers between Israel and India. In October 2007, the Commissioner submitted his response to the appeal and a preliminary hearing was held in Business Restrictions Court, and the parties submitted their assertions with respect to the Commissioner's motion to dismiss the appeal outright. See 9.18.15 below for more details.

(j) The Consumer Protection Law, 1981.

On June 30, 2004, Amendment No. 13 to the Consumer Protection Law was published. The amendment, in essence, revokes the exemption given in the past to services relating to air transport from the requirement to publicize a comprehensive price. Under the amendment, airlines are required to publicize a price that includes all taxes that apply to the service and which they collect, and every other supplementary payment, which the consumer has no possibility from a practical standpoint to waive in the framework of the transaction. The amendment did not revoke the exemption that was given to airlines from the necessity to publicize a price in NIS. Under the law, the determining rate for payment is the sale rate for transfers and checks. The amendment also stipulates that for international cargo transport, as to which an arrangement has been established between the air carrier and an international association of airlines, the requirement to state a price in NIS on the basis of the sale rate for transfers and checks will not apply.

Additionally, the law stipulated that in the case of a "remote sale" of a flight ticket (including by mail, telephone, radio, television, electronic communication of any kind, facsimile, advertising in catalogs or notices, etc.), the consumer is permitted, subject to certain conditions, to give written notice of the cancellation of a transaction and to receive a refund of a certain percentage of the consideration paid, based on the circumstances of the transaction's cancellation. It should be noted that the Consumer Protection Law applies to

a-114 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding relationships between a dealer (the Company) and a consumer, and not between a dealer (the Company) and another dealer, but to the best of the Company's knowledge, certain persons intend to attempt to change the legislation on this subject, whereby the law's provisions relating to cancellation of a remote transaction will also apply to relations between the Company and travel agents. The possibility of applying the provisions of the Consumer Protection Law to relations between the Company and travel agents, if and to the extent it would apply, represents "Forward-Looking Information", as defined in the Securities Law, 1968 (“the Securities Law). Forward-Looking Information is uncertain information, which is based upon existing information of the Company as of a date close to the report date, and includes estimations or forecasts of the Company as of the report date. Therefore, the actual outcome of the noted legislative changes may be materially different from the outcome which is estimated or which might be deduced from this information. On October 24, 2007, Amendment No. 21 of the Consumer Protection Law took effect, enabling the courts to rule damages of up to NIS 10,000 as an example, without proving damage sustained, against a dealer that violates a series of the law's provisions, including the provision regarding the consumer's right to pay in Israeli currency at the exchange rate stipulated in the law, and the provision related to the consumer's right to cancel a remote sale transaction under certain conditions. According to the amendment, it is even possible to rule increased damages in the event of a serious violation, repeat or continuing violation. In March 2007, a Consumer Protection Law bill (Amendment No. 22), 2007 was issued, broadening the consumer's right to cancel a remote sale, under certain conditions, even after the providing of service was begun and even in cases in which the asset or service were not provided on the date stipulated in the contract. The bill even stipulates that the consumer will have the right to cancel the transaction if an act or omission was performed for it, which falls within the bounds of deceit or crisis, even if the dealer was not the deceiver. The position of the Company and other organizations in the tourism and aviation filed is that the bill is not appropriate for the aviation industry and in part, is inconsistent with existing legislation. In December 2007, submitted to the finance Committee was a proposal of Consumer Protection Regulations (Cancellation of Transaction), 2007, which gives the consumer a sweeping right to cancel any transaction for any reason whatsoever. The proposal does not consider the special nature of transactions in the aviation world, does not take into account exemptions and exceptions that were already prescribed by the legislator in the Consumer Protection Law, and contradicts the main existing legislation, such as the Sale Law, the Contracts Law and the proprietary rights of a dealer stipulated in the Fundamental Law: Honor and Freedom of Mankind. As of the report date, the two bills mentioned above have not yet been formulated into binding legislation. The Company's estimation is that the passage of the bill into binding legislation could affect the manner of the Company's agreements with its customers and the possibilities for collecting cancellation fees from customers. The effect of the legislation's provisions, as described above in the field of consumer protection, if they take effect, is "Forward-Looking Information" as defined in the Securities Law, 1968. Forward-Looking Information is uncertain information regarding the future, which is based upon existing information of the Company as of a date close to the report date, and includes its estimations or forecasts as of the report date. Therefore, the actual outcome of the noted legislative

a-115 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding changes may be materially different from the outcome which is estimated or which might be deduced from this information.

(k) Legislative provisions applicable to the Company as a “Mixed Company” (1) Until June 6, 2004, the Company was a “Government Corporation” being “privatized”, as defined in the Government Corporations Law. Starting from June 6, 2004, the Company is a “Mixed Company”, as defined in the Government Corporations Law, namely a company which is no longer a Government Corporation, for which half or less of the voting rights at its general meetings, or the right to appoint half or less than its directors, are held by the State. As a practical matter, as long as the State owns shares that provide it with voting rights in El Al, the Company will remain a “Mixed Company”. In June 2007, the State ceased being an "interested party" by virtue of its holdings in the Company, although as of a date close to the report date, the Company continues to hold 1.1% of the Company's share capital (in addition to the Special State Share in the Company). As a Mixed Company, the Company is subject to part of the provisions of the Government Corporations Law (as provided in Section 58 of the law, which applies various provisions of Government Corporations Law on a Mixed Company).

(2) Chapter 2H to the Government Corporations Law authorizes the Prime Minister and Minister of Finance, with the consent of the Ministerial Committee for Privatization, in consultation with the minister who is responsible for the company’s matters, to prescribe instructions by decree which are intended to protect the vital interests of the State in connection with a company under privatization. These provisions will apply for a specified period, or in general, they might also apply after the company’s privatization, as stipulated in the decree. The definition of vital interests includes various interests, which in part are similar to those which, in order to protect them, led to the issuance of a Special State Share (see below “Special State Share”), and also the avoidance of concentration in the economy, damage to the foreign interests of the State, etc. The position of the Government Corporations Authority is that Chapter 2H to the Government Corporations Law also applies to a Mixed Company. On November 17, 2004, a Government Corporations Decree (Declaration of Vital Interest to the State as to El Al Israel Airlines Ltd.), 2004 (hereafter in this paragraph: “the Decree”) was published under the aforementioned Section 2H. The Decree stipulates that the State has a vital interest with regard to the Company, in order to make effective use of vital assets during a time of emergency or for security purposes, to assure the continuation of activities which are vital to the security of the State. The Decree also prescribes that the Company is required to employ, at all times, Israeli air crew members, and Israeli ground crews in Israel, who are qualified and licensed as necessary in order to operate the “vital assets” (minimal fleet of aircraft; see “Special State Share”), in the number required for continuous and simultaneous operation of all of the “vital assets” during a time of emergency or for security purposes. The Decree adds that it does not intend to make the Company subject to the provisions of Section 59T of the Government Corporations Law (which deals with restrictions on the transfer of control), and that the Decree does not intend to detract from the provisions of the Special State Share. See Section 9.11.9 for details of additional restrictions to which the Company is subject under the auspices of the Special State Share.

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(l) The State Comptroller Law According to Section 9(10) of the State Comptroller Law, the Company will continue to be an audited entity for up to three years after the State ceased to participate in its management. In January 2008, three years from the date the State ceased to participate in the Company's management were completed, and therefore, as from this date, the Company ceased being an audited entity.

(p) Class Action Law, 2006 On March 12, 2006, the Class Action Law was published, which, inter alia, enables a motion to be filed for recognition of a suit against a dealer in connection with a matter between the dealer and a customer as a class action, whether or not they have engaged in a transaction. This provision broadens significantly the causes for filing class actions. The provision will be applicable as from the publication of the law also to motions for class action recognition that were filed before the publication of the law which have not been decided. According to the law, claimants in pending class actions may request to amend the claim and approve it as a class action (or the statement of appeal if the claim is in the stage of appeal) and adding additional causes or extending the existing causes, inter alia, as regards the deceit and abuse in the course of the contractual relations. See 9.14 below for details on class actions to which the company is a party.

9.11.3 Business licenses and building permits Some of the Company's activities require the obtaining of licenses under the Business Licenses Law, 1968. As from year 2003, the Company has filed requests for business licenses for the activities requiring licenses. Within the framework of the arrangement of business licenses, the Company acts to regularize all of the buildings within its properties, including old buildings, for which the Company does not have buildings permits from the period that the Company was a government company. The Company acts in coordination with representatives of the Ministry of Interior, and hires consultants to assist in the process. In this framework, the Company acts according to an orderly Outline Plan to complete the process of obtaining the building permits and in conforming them to the existing buildings, and to arrange the licenses for conducting the Company's business. In the absence of the receipt of the said permits and licenses, there could be a limit on the Company's activities related to the buildings covered by the permits and licenses, and impact the Company's operations. Non-receipt of the licenses and permits and the resultant implications are "Forward-Looking Information" as defined in the Securities Law, 1968. Forward-Looking Information is uncertain information about the future, supported by information the Company has on a date close to the approval of the report, and includes its estimations or forecasts as of the report date. Therefore, the actual outcome of not receiving the business licenses and building permits may be materially different from the outcome which is estimated or which might be deduced from this information.

9.11.4 Commercial operating license

The Company has a commercial operating license (No. 1/88 dated August 2, 1988) which was granted by the Minister of Transport under the Licensing Law. The following are the main points of the license:

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(1) The license holder may not operate aircraft operationally, except under an air operation license from the head of the Civil Aviation Authority (hereafter - “the Authority”) (See below as to the operational certificate).

(2) The license holder will meticulously follow the provisions of every law that applies to the operation of aircraft and all directives that have been or will be prescribed by the Authority.

(3) The license holder will not operate the aircraft in a manner that might jeoperdize national security, public safety and health and flight safety or in a manner that could endanger the public in any other way.

(4) The license holder will notify the Minister of Transport of any demand from a foreign country to submit a commercial document or commercial information that is found outside of the territorial authority of that nation and will not submit or provide such document or information without obtaining the Minister’s consent.

(5) The license holder will assure that at least 51% of the share capital of the license holder be owned by Israeli citizens and permanent Israeli residents and that at least two-thirds of its directors (board members), including the Chairman of the Board of Directors and the CEO, will be Israeli citizens and permanent Israeli residents58.

(6) The license holder will submit to the Authority, upon demand, reports, data or information concerning aircraft operation.

(7) The holder of an operations license will not operate aircraft, unless insurance coverage has been purchased as provided in the license.

(8) The license holder will submit for the approval of the Authority, at least 30 days before it becomes effective, a seasonal flight schedule with detail of aviation routes and frequency of flights on them. A change of a permanent nature in the timetable requires the Authority's prior approval.

(9) In its scheduled flights under this license, the license holder will transport passengers and goods, to the extent possible, in accordance with the fares and travel and transport conditions prescribed by IATA, or pursuant to other rates, all to be approved in advance by the Authority.

(10) The license holder will transport passengers and goods for free or at cheaper rates if requested to do so by the Authority and according to the terms of the license.

58 On May 26, 2003, Section 8 of the commercial operating license was amended so that the percentage of holdings by Israeli citizens was reduced from 76% to 51%, so that foreign ownership could reach 49%. Pursuant to the Special State Share, as long as no other decision has been reached by the holder of the Special State Share or the Company’s Board of Directors, the restriction which will apply to the percentage of foreign holdings of the Company’s shares will conform to the Company's commercial operating license, as it will be at all times. The decision as above on changing the restriction applicable to foreign shareholdings will be reported in an Immediate Report.

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(11) The services that the license holder is permitted to offer and perform are stated in the appendix to the license. The appendix represents an integral part of the license, and the Authority is permitted to change or revoke it.

The following are the main points of the appendix: (a) Transporting passengers and goods on scheduled flights between Israel and points in foreign countries, and between the points themselves. It should be noted that part of the points are not utilized by the Company due to lack of economic feasibility. (b) Transporting passengers and goods on international charter flights in accordance with the official licensing regulations. (c) Special assignments conditional upon the Authority’s consent.

The Minister of Transport is authorized to revoke the selection of the Company for a point(s) that are not utilized by the Company or under-utilized, and to authorize another Israeli carrier. See Section 9.11.7.2 below for details on Government policies with respect to the revocation of the Company’s selection.

(12) The license is valid as long as it has not been revoked or made conditional by the Minister of Transport or the Authority.

9.11.5 Operational operator's license

The Company has an operational license (No.1/88) which is issued every year. The current license is effective through December 31, 2008. It stipulates, inter alia, that the operator (El Al) be permitted to act as a “Designated Air Carrier” of large airplanes (under Chapter 13 of the Flight Regulations - “Operation of Aircraft and Flight Rules”). The operator is permitted to operate international flights and continuing internal commercial flights, conditional upon the operational restrictions and the conditions listed in the operational specifications that are part of the license.

It is stipulated in the general conditions of the operational specifications that the registered owners of the carrier “holder of the operational license” is/will be permanent citizens of the State of Israel with a permanent place of residence in the sovereign territory of the State of Israel. The mother base/bases of the operations license holder will be determined by the Civil Aviation Authority in its operational specifications, within the sovereign territory of the State of Israel.

The aircraft recorded in the license will have Israeli registration or foreign registration approved by the Authority, fully-owned by the license holder, or will be placed at the disposal of the license holder, with the consent of the Civil Aviation Authority. The operator has the obligation to report every change in the list of aircraft that appears in the operational specifications, such as sale, purchase, lease to another operator and/or lease from any Israeli operator or foreign operator, on the condition that the foreign aircraft is recorded in the Aircraft Registry of a country which is a member of ICAO. The report will be submitted to the operational division and the air capability department within 10 days of making the change.

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9.11.6 International regulatory arrangements The principle of universality dominates civil aviation, whereby every country is sovereign over its own air space, and therefore, each commercial flight to or over any country, requires that country's permission. The permission may be in the form of a bilateral agreement (as is customary for scheduled flights) or for a flight(s) on an ad-hoc basis. The international civil aviation industry operates in the context of a system of regulatory arrangements that affect most of the operational aspects of the airlines and, in particular, the subjects of flight rights, permissible capacity, fare setting, air carrier’s responsibility for damages (physical and property damage) and flight safety standards, security and noise. This system of arrangements is composed of international conventions, laws, regulations and administrative directives, and bilateral agreements. The existing basis for the international regulatory arrangement for international civil aviation is the Chicago Convention of 1944. In the wake of the Convention, the International Civil Aviation Organization (ICAO), an agency of the United Nations, was established. In the framework and under the auspices of ICAO, recommended standards and procedures were prescribed for various areas of aviation activities. The rights to transport passengers and cargo between countries for compensation, permissible capacity and rate setting are organized in agreements for air transport or aviation agreements (bilateral), which are based on reciprocity and provide fair and equal opportunities to airlines of the two countries.

9.11.7 Air Transport agreements and the Civil and International Aviation Policy of the State of Israel 9.11.7.1 Air Transport agreements- general Most of the flight rights by which the State of Israel permits a company to transport passengers and cargo on international routes are anchored in aviation agreements between Israel and foreign countries, and a minority (due to the absence of aviation agreements) by agreements between aviation authorities or commercial agreements between the Company and the air carrier of the other country, which require the approval of both countries. The principal elements of air transport agreements include, inter alia, the flight rights granted, appointment of the Designated Carrier, the permissible capacity and the methods of determining tariffs. When an aviation agreement is signed, each government appoints an air carrier as a “Designated Carrier” on its behalf that will operate the flights and utilize the traffic rights under the agreement. After the Designated Carrier is selected, it must obtain a permit from the aviation authority of the other country. In order to obtain a permit, the carrier must prove that the substantial ownership and effective control of the air carrier is held by the government of the country or by citizens of the country which selected it as Designated Carrier59, and that the carrier meets all of the international flight safety standards. Most of the aviation agreements to which Israel is a party may be terminated or cancelled by prior notice of one year. After such notice, negotiations are generally held between the two governments in order to set an interim arrangement or new conditions before the expiration of the agreement.

59 See Section 7.1.10 above for changes in aviation agreements related to the clause about ownership and control of the air carrier.

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In Government Resolution No. 441 dated September 12, 2006, titled "Encouragement of Competition in Civil Aviation to and from Israel", it was decided that an interministerial steering team would be established to accompany negotiations with the European Union related to the formulation of uniform global aviation agreement with the European Union member nations, to replace the existing bilateral agreements between Israel and the European Union. The team will appoint representatives for negotiations with the European Union and will instruct the representatives to include the following principles in the new aviation agreement: providing a proper response to the interests of the Israeli airlines, including and particularly, the utilization of the "Freedoms" as well as flight times and frequency; maximum utilization of the possibilities of reaching the State of Israel, including by increasing the number of Designated Carriers in cases in which the current bilateral agreements limit the number to one carrier per country, and the encouragement the entry of low cost airlines to operate in Israel. The Government resolution stated that the team would act to formulate the new aviation agreement within one year and will report to the Government on the progress toward formulating the agreement. Furthermore, in July 2007, contacts were initiated for negotiations between Israel and the European Union Commission, relating to a new global and uniform aviation agreement with European Union states, to replace the existing bilateral aviation agreements between Israel and the different Union states, and negotiations began in November 2007. In February 2008, the first memorandum of understanding was signed within the framework of aviation discussions to institute a uniform global aviation agreement with European Union member states (see Section 9.11.7.3 above for information). At the same time, the Ministry of Transport set up the "Public Committee for Evaluating the Issues of Open Skies" (the Siterman Committee), and Government Resolution No. 3024 was reached regarding an increase in the State's participation in the security expenses of the Israeli airlines. See Section 7.1.10 above. For information on these matters, also see Section 9.18.5 below.

9.11.7.2 Designated Carrier (1) In the aviation agreement, each government grants its counterpart the right to select one of 60 its air carriers as the Designated Carrier . The Designated Carrier is granted the right to carry passengers and cargo between the two countries. At times, the Designated Carrier also receives the right to operate scheduled flights from the second country to a third country (subject to an agreement with the third country). Until the second half of the 1990’s, the Company was the sole Designated Carrier of Israel for scheduled flights for the transport of passengers and cargo to and from Israel, except for Sharm-el-Sheikh. The change in the Company's aforementioned exclusive status occurred after licenses were given to additional Israeli carriers as “Designated Carriers” to several flight destinations, some in lieu of the Company.

60 The agreements with the United States, Argentina, Singapore, the Philippines, Chile, Korea (under certain conditions), Turkey and Spain permit a large number of designated carriers. The agreements with Germany, Belgium and the permit the selection of one carrier from each agreed point (city pair). The agreements with Germany and France permit the designation of two carriers from each agreed point (city pair). The agreement with the Russian Federation permits the designation of one carrier, but for the city pair of Tel Aviv – Moscow – two carriers. The agreement with Slovakia permits the selection of two carriers.

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As of a date close to the approval of the financial statements, the other Israeli airlines were appointed Designated Carriers to 13 international destinations, including the appointment of Arkia, beginning from the month of February 2008, as Designated Carrier for the Paris route. Shortly before publication of the prospectus, the Ministerial Committee for Social and Economic Matters decided (decision No. SE/14 dated May 19, 2003) that:

A. The Company would continue to serve as the Designated Carrier on all of the routes on which it served as Designated Carrier immediately prior to publication of the prospectus, subject to the following conditions: (1) The Company will at all times comply with the directives and obligations stipulated for it and which it had assumed vis-à-vis the State of Israel. (2) The Minister of Transport will consider canceling El Al's status as the Designated Carrier for a specific route if the number of passengers that fly with the Company on that route are 20% or less than the number of passengers that fly on the same route on scheduled flights, or if the number of El Al scheduled flights on that same route are 20% or less than the number of scheduled flights operated by the Designated Carrier of the destination country, during the period of one calendar year.

B. The Ministerial Committee for Social and Economic Matters also stipulated that the Minister of Transport will consider whether to grant rights to an additional Designated Carrier for scheduled flights on routes, should the number of passengers flying on the Company's scheduled flights on a specified route be 30% less than the total number of passengers of the scheduled flights on that same route during the period of one calendar 6162 year . It was also stipulated that, without detracting from the authority of the Minister of Transport by law, this policy would be considered if and when the volume of outgoing and incoming air passengers to Israel will exceed 10.7 million passengers annually.

In recent years, we have witnessed a trend of growing liberalization in the aviation industry, in Israel and globally, with the objective of removing the barriers to enable freedom of movement and greater competition for airlines. Therefore, aviation agreements signed in recent years permit numerous Designated Carriers (also see Section 7.1.10 above for information). Conforming with the global trend, in Israel as well the ministry of Transport has begun implementation of a liberal policy in the aviation industry, in order to increase the number of inbound tourists, and the number of outbound Israelis, as a springboard to economic

61 The positions of the Deputy Attorney General (Economic-Fiscal) and of the Legal Counsel of the Ministry of Transport are that Section 2 of the decision is a clear case in which the Minister of Transport must use his judgment, and according to the fundamental rules of administrative statutes, it does not contain, anything to restrict his judgment or to prevent him from invoking his authority under any law, including in the matter of a designated carrier on a scheduled air route, also under other appropriate circumstances.

62 On May 28, 2003, the Director of the Policy Division in the Ministry of Transport made it clear that the determination of the percentages of the Company's operation, both in Section 1 and in Section 2 of that decision, means “self-operation” by El Al at the rates stipulated and that the aforesaid in no way eliminates the possibility of operating the route by means of a code-share agreement, but then also, the necessary operation is only that carried out by the Company.

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growth. Accordingly, a committee was formed to examine the issue of "Open Skies", headed by the Director-General of the Ministry of Transport. Further to the recommendations of the public committee to examine the issue of "Open Skies", Government Resolution No. 3024 was passed on January 27, 2008 – see Section 7.1.10 above about the wording of the Government resolution and its implications. In the wake of the Government resolution, in March 2008, the Civil Aviation Authority approached Arkia, Israir and Sun D'Or with a request to present it with the routes on which the companies want to operate scheduled flights during the 2008 summer season. Regarding the appointment of other Israeli airlines for other destinations, it should be noted that in addition to Sharm-el-Sheikh, mentioned previously, Arkia was appointed Designated Carrier in the past also for the following destinations: Amman, Copenhagen, Eritrea, Stockholm, Tashkent and Tbilisi. Additionally, in February 2007, Arkia was appointed Designated Carrier to Larnaca, instead of the Company, which had halted its flight to this destination, and in February 2008, as Designated Carrier to Tashkent, instead of Arkia. "Israir" was appointed Designated Carrier to the following destinations: Ismir, Ankara, Bratislava, Riga, Lisbon and Ljubljana. Moreover, in January 2006, Israir was appointed an additional Designated Carrier (in addition to the Company) on behalf of the State of Israel on the Tel Aviv – New York route, to operate scheduled flights for a 24 month period. The decision stated that "during this period, the implications of adding a Designated Carrier will be evaluated, as well as other relevant considerations for this route". The Company filed an appeal with the High Court of Justice against the said appointment, and in February 2006, the High Court dismissed the Company's appeal and the other appeals that were filed by representatives of the Company's employees (including the employee's trust that purchased the Company's shares) and by K'nafaim against the said appointment. (2) In aviation talks held between Israel and France, it was agreed that the airlines of both companies would be able to fly between any point in Israel and any point in France, with each having two Designated Carriers for every city pair, and various commercial agreements with respect to operating the flight route. Furthermore, the French company "New Axis", which operated charter flights on the Tel Aviv – Marseilles route, began to operate scheduled flights on the route as from December 2007. In February 2008, Arkia was appointed an additional Designated Carrier on the Tel Aviv – Paris route. In aviation talks held between Israel and Thailand, it was agreed that the Designated Carriers would be able to operate flights between any point in Israel and any point in Thailand, including the possibility of combining two destinations in the second country, in the same flight, without a limitation on frequency, capacity or type of aircraft. Likewise, consent was given to the possibility of code share agreements between carriers from the two countries. In a new aviation agreement between Israel and Britain, which was signed in September 2007, it was agreed that any country might appoint up to two scheduled carriers for every city pair. Likewise, it was agreed that each party might appoint a carrier whose principle place of business is within the territory of the appointing party, and which holds and Air Operator's Certificate that was issued by the appointing party. In conversations, it was also agreed that the Luton Airport in western London would not be included in the London

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Airports system for appointing Designated Carriers to this destination. In the wake of this agreement: (a) The British company "Thomsonfly", which is a low-cost company from the TUI Group (German ownership) began in November 2007 to operate scheduled flights on the Luton – Tel Aviv and Manchester – Tel Aviv routes. (b) The British airline, British Midland (BMI), was appointed the second British Designated Carrier on the London – Tel Aviv route, began operating scheduled flights on this route as from March 2008. (c) Israir requested to be appointed the second Israeli Designated Carrier on the Tel Aviv – London route. See Section 9.11.7.2 regarding the conditions for the appointment of a Designated Carrier in addition to the Company. In August 2007, at the Company's request, the Minister of Transport appointed the Company the Designated Carrier on the Japan route. In aviation talks held between Israel and Russia, it was agreed that on the Tel Aviv – Moscow route, each country would be able to appoint an additional scheduled carrier for passengers and/or cargo, as a temporary arrangement for a two-year period. It was also agreed to increase the weekly frequency at which the route may be operated. In the charter sector, it was agreed that each party could appoint up to two carriers, and to increase the weekly frequency. Likewise, the flight framework – scheduled and charter – on the Tel Aviv – St. Petersburg route was expanded. In aviation talks held in December 2007 between Belgium and Israel, it was agreed that each country would be able to appoint one Designated Carrier for each city pair, with the frequency limit raised from 7 to 10 weekly flights to each side. In other words, additional carriers from each side are entitled to enter the Israel – Belgium route but not the Tel Aviv Brussels route (in which El Al and Brussels Airlines operate), with an overall limit of 3 times weekly limit. Therefore, Jet Air, the Belgian airline (owned by the German aviation company TUI) announced its intention to begin to operate three weekly scheduled flights between Tel Aviv and Liege commencing April 2008. It was further agreed that the Belgian and Israeli airlines could operate code share flights, including the possibility of flights to a third country through Belgium. It was also agreed that the Israeli airlines, El Al and CAL, would be able to add cargo flights between Israel and two additional destinations in China and Japan with "fifth freedom" rights, allowing the flying of cargo between Belgium and these destinations. In aviation talks held between Israel and Slovakia, it was agreed that each country would be able to appoint two Designated Carriers on the Tel Aviv – Bratislava route. Until now, the Slovakian airline, Air Slovakia, is the only operator of scheduled flights on this route, whereas Israir, which was appointed Designated Carrier, did not operate scheduled flights to this destination. According to the agreement, each country will be able to operate up to 4 weekly flights between Slovakia and Israel during the summer 2008 season and winter 2008/9. This quota enables the operation of up to eight weekly flights between the countries, compared with the only two flights now operated by Air Slovakia. In October 2007, the Group filed a request with the Civil Aviation Authority for its appointment as Designated Carrier on internal flights.

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9.11.7.3 Ownership and control of an air carrier There is no uniform international arrangement regarding the percentage of the practical ownership and control over an air carrier that must be held by a state or its citizens. The bilateral air transport agreements to which Israel is a party to include a provision according to which each of the contracting states maintains the right to suspend or to cancel the permit that it gave to the airline of the other state, if the “substantial ownership and effective control” are not held by the contracting state or the citizens of the contracting state. The agreements do not include the definitions of substantial ownership and effective control. The practice in the countries of the Western world is to receive the appointment of an airline as Designated Carrier as if it included an affidavit that the required demand for substantial ownership and effective control is complied with in full, and if it is found that the requirement no longer exists, the state will demand that the situation be rectified. As part of the liberalization policy being instituted by the Ministry of Transport and implementation of the recommendations of the Public Committee for examination of the "Open Skies" issue, aviation negotiations were opened in November 207 between Israel and the European Union states. The objective of the negotiations are elimination of the need for separate agreements with every country in Europe and the signing of one general agreement with the Union's Executive, with the goal of aviation liberalization. In February 2008, the first memorandum of understanding within the scope of the aviation negotiations to formulate a uniform global aviation agreement with the European Union's states. The agreement makes the barriers currently existing in aviation significantly more flexible, and as a result, multinational European aviation companies and their subsidiaries will be able to fly to Israel from every EU member state (even if the state from which the flight is operated is not the parent state of the airline), subject to limitations on the number of flights from the third country will not exceed the total allowed flights from that state according to the aviation agreement that country has with Israel. The commercial operating certificate that was given to El Al specifies that at least 51% of the Company’s share capital must be held by Israeli residents and permanent residents of Israel, and that at least two thirds of the directors (Board members), including the Chairman of the Board of Directors and the CEO, are Israeli citizens and permanent Israeli residents (see Section 9.11.4 above – the commercial operating license). In addition, the “Special State Share”, which is anchored in the Company's articles, includes instructions regarding “maintaining the status of the Company as an Israeli company” and “restrictions on the ownership of shares by foreigners” (see Section 9.11.9 above).

9.11.7.4 Capacity Most of the aviation agreements to which Israel is a party (excluding the agreement between Israel and the United States and Great Britain) contain a limitation on the maximum permissible capacity or frequency that each airline may offer on the agreed routes in order to assure equal opportunities to the air carriers of the two countries that are parties to the agreement. A substantial part of the aviation transport agreements between Israel and other states also stipulate that the capacity must be based on the volume of the traffic between Israel and the other state with which the agreement was signed. Accordingly, the policies of the Ministry of Transport in the past have been to restrict the flight capacity of the foreign airlines to and from Israel.

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At the beginning of the year 2006, and pursuant to the "Open Skies" policies led by the Israeli Ministries of Transport and Tourism, authorizations have been granted to the foreign airlines that operate on the routes to and from Israel to add capacity and frequency. This trend of liberalization and "Open Skies" also continued in 2007 and is expected to continue in 2008, with implementation of the Government's decision on "Open Skies" from January 2008 and the signing of uniform global agreement between Israel and the European Union states. See Section 7.1.10 for further details.

9.11.7.5 Approval of the Minister of Transport Government Resolution No. 161 prescribed that commercial agreements between Designated Carriers involving the restriction of competition require pre-approval by the Minister of Transport. See Section 9.11.2(i) above with regard to legislative changes concerning commercial agreements between air carriers.

9.11.7.6 Flight tariffs The tariffs for flights on international routes are determined within the framework of IATA, the international association of the scheduled airlines. These fares relate to the interline feature which allow the passenger to purchase a flight ticket from one company and to utilize it in a flight or flights for other companies. In addition to the fares within the framework of IATA, which are supervised by the aviation authorities, El Al is permitted to set special rates on a unilateral basis. The Israeli Ministry of Transport does not generally intervene in setting the rates that are advertised by the Group unilaterally, provided that the level of these rates is not higher than IATA fares. According to the new regulation of the European Union, IATA conferences are no longer held to determine the fares on routes to and from Europe. Presently, IATA evaluates the companies' fares, and accordingly, publishes flex fares that serve as agreed interline fares for these routes. It should be pointed out that American legislation against restrictive practices prohibits American carriers from coordinating fares with other carriers, except for fare coordination within the framework of IATA’s conferences on traffic. Under the aviation agreement between Israel and the United States, the carriers have freedom to set fares, and only if the two governments oppose a proposed rate (a method known as “double disapproval”) due to its being abnormal (exaggerated or within the boundaries of "dumping”), the new tariff will not be approved and it may not be offered to the public. Despite the arrangements described above regarding tariff setting, most of the flight tickets and cargo capacity are sold at prices below those that were agreed upon and approved or at conditions different from those prescribed for the various fares. The Company behaves as is customary in the industry, while conforming its policies to market conditions and to the actions of the competitors. A substantial part of the Company’s revenues is derived from sales under these conditions. During recent years, a broader variety of flight ticket fares has been created. In all of the service sections of an aircraft (first, business and tourist), there are different types of “reservation classes” (or classes of price). There is varied demand and different conditions for each “reservation class” during different periods of the year. The charter flight fares are set in a different manner than those for scheduled flights. Every organizer is committed to pay the air carrier for the capacity (number of seats) which he has leased and, on the other hand, he himself sets the price per seat, generally a package price that

a-126 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding includes seats and ground arrangements. The organizer who requests authorization to operate a flight or series of charter flights must state the price offered to the public and obtain approval to carry out the flights and their prices from the aviation authorities/administrations of the relevant countries. Due to the drastic global rise in jet fuel prices, the airlines, including the Company, collect fuel supplements. In June 2007, the Company began to collect a fuel supplement also when a frequent-flyer bonus ticket is used. Additionally, the airlines charge a security supplement as part of the flight ticket price.

9.11.8 Israel’s international civil aviation policy Over the years, the Government of Israel and ministerial committees (privatization or social and economic) have approved a series of decisions with regard to Israel’s international civil aviation policies, inter alia, MH/83 (dated December 25, 1994), which integrated Decision 2531 (recommendations of the “Sharon Committee”) (dated February 6, 1994)63, Decision No. 6061 (of August 27, 1995)64, No. 2465 and 2466 (of August 13, 1997)65 66, Decisions No.159, No.160 and No.161 (of August 22, 1999)67, No. 649 (of September 2, 2002), No. 2313 (of July 30, 2002), Decision 323 HC/14 (dated May 19, 2003) of the Ministerial Committee for Social and Economic Matters in the matter of "Aviation Policies of the State of Israel on Scheduled Routes" (see Sections 7.1.10 and 9.11.7.2. above. This decision revoked prior Government resolutions (Resolutions No. 160, 649 and 2313), the August 9, 2005 resolution regarding "Encouragement of Competition in Civil Aviation to and from Israel", following which the Aviation Services Law was amended (see 9.11.2 B above), Resolution 441 (dated September 12, 2006 regarding encouragement of competition in civil aviation to and from Israel, and the decision of the Minister of Transport to establish a public committee to examine "Open Skies"(see Section 7.1.10 above). As provided above, on January 27, 2008, Government Resolution No. 3024 was adopted, regarding the State's participation in the security expenses of Israeli airlines, including amendment of Government Resolution No. 353 (HC/14). See Section 7.1.10 above.

The possible changes in the aviation policies of Israel, as described above, represent "Forward-Looking Information", as defined in the Securities Law, 1968. Forward-Looking

63 The highlights of the decision are a designation of civil aviation policy, maintaining international scheduled flight, the number of carriers, charter flight fares and cargo flight tariffs. 64 This decision prescribes that an inter-ministerial team will evaluate and recommend the manner and schedule for appointing an additional designated Israeli carrier to operate international scheduled flights to destinations in the Middle East and closer destinations. 65 Decision 2465 provides that every Israeli carrier that will meet the requirements for receiving a license to carry out charter flights, as will be from time to time, will be entitled to receive a license to operate charter flights to and from Israel. 66 Decision 2466, regarding civil aviation, makes it possible to permit Israeli airlines in addition to the Company, to operate to existing and new nearby flight destinations, by issuing a license after a competitive process. The decision prescribes criteria for the appointment, including in cases in which the Company does not operate, or is not interested in operating, regional routes, or in cases in which the level of service on these routes is not reasonable. 67 In Decision 159 it was decided to make more flexible the criteria for approval of charter flights. In Decision 161, regarding the removal of competitive limitations, it was provided that the Head of the Civil Aviation Authority is to be instructed to prescribe procedures according to which international or commercial aviation agreements will not be made that involve limiting competition unless with the prior approval of the Minister of Transport.

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Information as to the future is uncertain information, which is based upon existing information of the Company as of a date close to the report date, and includes estimations or intentions of the Company as of the report date. Therefore, the actual outcome of the change in policy could be materially different from the outcome which is estimated or which might be deduced from this information.

9.11.9 Special State Share 9.11.9.1 Close to the publication of the prospectus, the Company issued a “Special State Share” to the State. The rights granted to the holder of the Special Share are listed in the Company’s Articles of Association, which also detail the vital interests of the State in the Company, which must be protected by means of the Special State Share. These vital interests are: √ Preserving the Company as an Israeli company so that it will remain subject to , including legislation that permits mobilizing equipment for security purposes and legislation for periods of crisis, and so that the conditions needed to maintain its operating license and traffic rights should be maintained.

√ Safeguarding the possibility of ensuring that the operating capability and ability to fly passengers and cargo by the Company will not fall below the capacity detailed in the Company’s Articles of Association, in order to permit the State to have effective use of vital assets in times of emergency or for security purposes, as will be determined from time to time by those authorized to do so, all as detailed in the Company’s Articles of Association.

√ Preventing parties hostile to the State of Israel or persons who could cause damage to the vital interests of the State or to the foreign or security interests of the State or to the aviation ties of Israel with foreign nations, or persons that are found in and/or likely to be found in substantial conflict of interest which could cause damage in one of the areas detailed above, from being an interested party in the Company or one who can influence its management in any other way.

√ Fulfilling the security directives and arrangements which apply, or which will apply as a result of Government resolutions or under any law, in the area of security of the flights, passengers, baggage, cargo and mail, in Israel and abroad, including in relation to the Company’s operations abroad and to the cooperation needed from local authorities abroad in these areas; in the area of security classification of employees and suppliers of services to the Company; and in the area of security over classified data and protection of security information.

√ The holder of the Special State Share is the State of Israel via a minister or ministers, all as stipulated by the Government or a ministerial committee, from time to time of for a specific purpose.

9.11.9.2 In order to protect these vital interests, instructions were prescribed for the Special State Share as to the following matters:

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√ Instructions in order to preserve the Company as an Israeli company, including restrictions as to citizenship and security classification of Company executives68;

√ Instructions in the matter of complying with the security rules and arrangements69;

√ Instructions in the matter of the Company’s rights to security related data and classified information70;

√ Instructions in the matter of Company discussions on security matters71;

68 (a) The Company will be a company incorporated and registered in Israel at all times, with everyday management and its business center in Israel and its head office in Israel, being subject to Israeli law, and being subject unqualifiedly to legislation applying to periods of emergency and to mobilizing security equipment. The Company will be permitted to also be registered as a foreign company in a foreign country as long as the aforesaid is fulfilled by the Company at all times, and that the aircraft which are included as vital assets, continue to be registered in the Aircraft Registry of the State of Israel, and after obtaining the prior consent of the holder of the Special State Share; (b) at least two-thirds of the members of the Board of Directors of the Company , including the Chairman of the Board of Directors, all outside directors and the CEO, COO, assistant CEO, deputy CEO, Vice-President, other executives reporting directly to the CEO, and any other official as above in the Company, even if his title is different, will be Israeli citizens and permanent residents and holders of proper security clearance according to the directives of the General Security Service Law, unless the General Security Service gave its prior written consent to a deviation from the conditions that will be prescribed. It should be understood that foreign Company representatives need not be citizens and residents of the State, after advance clearance of the General Security Services has been obtained and under the conditions stipulated. Should the proper security clearance not be given, that person will not be appointed or serve in the Company in a position which requires security clearance. A corporation may not serve as a director in the Company; (c) as a rule, meetings of the Board of Directors shall be held in Israel. The legal quorum for opening a Board of Directors’ meeting and adopting board resolutions will be created only if at least one-half of the directors present meet the requirements specified in subsection (b) above; (d) no resolutions will be adopted on liquidation, including voluntary liquidation, or on a change in the corporate structure of the Company or a reorganization of the corporate structure of the Company or on a merger, or on a spin-off, including a compromise or arrangement under Sections 350 and 351 of the Companies Law, 1999, or a decision on assuming the powers of the Board of Directors regarding the aforementioned matters, if opposed by the holder of the Special State Share; (e) the Company will provide prior written notice of every decision which it resolution it intends to adopt on the matters described above; the holder of the Special State Share is permitted to give notification of his opposition to the proposed decisions.

69 Without detracting from the relevance of the directives of any law and from the other rights of the Special State Share, the holder of the Special State Share will be permitted to order the Company to comply - and the Company will comply - with the security rules and arrangements that apply or that will apply, under Government decisions or under all laws relating to the security of the flights, passengers, baggage, cargo and mail, in Israel and abroad, including in relation to the Company’s operations abroad and to the cooperation needed from local authorities abroad in these areas; in the area of security classification of employees and suppliers of services to the Company; and the area of security over classified data and safeguarding of security information. The holder of the Special State Share will be permitted to order the Company not to operate flights in cases in which, for any reason, the necessary security arrangements cannot be complied with in full. Should the holder of the Special State Share so order, the Company will comply with such order and the State will indemnify the Company for the direct expenses which it sustained due to executing that order under the terms and at the rates that will be determined in an agreement between the State and the Company. In the event of a dispute regarding the existence of the conditions which created the right to indemnification, how indemnification is made, the conditions or the rates of the indemnification, the State and the Company will be permitted to refer to an agreed-upon person in order to conclusively settle the matter under dispute or to appoint another to decide as aforesaid. However, the existence of the disputes or actually making indemnification will not detract from the Company's obligations to comply with the instructions of the holder of the

Special State Share, as per this subsection. 70 The rights to security-related information, including proprietary rights thereto, are the property of the State - General Security Service; the Company or any of its officers or employees will be permitted to make use of the aforementioned security-related data solely for purposes of protecting Israeli aviation in accordance with the directions of the General Security Service and conditional upon observing secrecy arrangements. Every other use of the security-related data will require the prior written approval of the holder of the Special State Share. 71 The Company's Board of Directors will appoint, from among its members who have been classified according to the General Security Service Law (“classified directors”), an authorized organ under Section 46 of the Companies Law, 1999, to be known as the “Committee for Security Matters”. The Committee will be composed of the Chairman of the Board of Directors and two classified directors, one of whom will be an outside director. The Chairman of the Board of Directors will

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√ Instructions in the matter of reviewing Company documents and data72;

√ Instructions on the matter of observing minimal flight capacity73 - the Company is not permitted to carry out certain transactions relating to its aircraft without consent of the serve as Chairman of the Committee for Security Matters; matters relating to security will be discussed, subject to what is written below, within the scope of the Committee for Security Matters alone; security matters which the Board of Directors is required to discuss according to the mandatory provisions of the Companies Law, 1999, will be discussed, to the extent that they are to be discussed by the Board of Directors, with the participation of the classified directors alone. The directors who are not classified will not be permitted to participate in this Board of Directors’ meeting and will not be entitled to receive information or to look at documents related to the matters discussed there; a decision which will be made or an action that be taken by the Committee for Security Matters has the same significance as a decision made or an action taken by the Company and it will be discussed by the Board of Directors alone and only if the matter is mandatory under the Companies Law, as mentioned above; discussions and resolutions of the Audit Committee on matters related to security will be discussed, to the extent that they must be discussed in the Audit Committee, before a panel of 3 classified directors among the members of the Audit Committee, of which two will be outside directors. These directors will only be permitted to invite members of the Committee for Security Matters and the internal auditor to the discussion; these instructions will apply to Board of Directors’ meetings with security matters on the agenda, and only if the quorum at each such meeting includes only classified directors; a director will not serve as an alternate to a classified director unless he has the proper security clearance under the General Security Law; security matters will be discussed, subject to the aforesaid, by the Board of Directors, by the Committee for Security Matters and the Audit Committee, after the matter has been cleared and approved by the security officer of the Company who has been authorized for that position, as provided by the Law for Security Arrangements in Public Entities; the Company is not permitted to transmit security-related information to an unclassified director, including security information, and the unclassified director may not receive security-related information, including security information, because transmittal of such information is a violation of a provision of the General Security Service directives, under the authority of the General Security Law, and the Law for Security Arrangements in Public Entities or an offense against the Company’s well being; the classified director shall not transfer or transmit data and documents on security matters, except for the transmittal of data to the Audit Committee as mentioned above; an officer who, as part of his duties and under the bylaw provisions, was to receive information or participate in meetings on security matters and this was denied him because of the aforementioned, will be free of liability due to breach of his duty of caution toward the Company, should the obligation for caution have been breached due to his not participating in the meeting or due to not having received the information; the General Meeting will not be entitled to take, to delegate, to transfer or to invoke authority which was given to another organ of the Company, on matters of security. 72 The Company is not permitted to transmit classified data or security-related information or to allow the review of classified documents to be found in the Company’s possession, to a shareholder, if the disclosure is contrary to the directives of an authorized officer of the General Security Service under the Law for Security Arrangements in Public Entities. The holder of the Special State Share will have the right to receive from the Company all information and documents which a holder of ordinary shares of the Company is entitled to receive, and in addition, he will have the right to receive, on demand, all information and documents which a director and/or outside director is entitled to receive, and he will be permitted to make use of the information that he received, as aforesaid, solely as is necessary in order to protect the vital interests of the State. All information which will be published in advance of the General Meeting and/or will be sent to the members of the Stock Exchange or to the Securities Authority, as well as every notice which a holder of an ordinary share of the Company has the right to receive, will be forwarded to the holder of the Special State Share at the time that it is issued in advance of convening the General Meeting. Each proposal to appoint or select directors will be sent to the holder of the Special State Share before such appointment or selection. The holder of the Special State Share will be permitted to demand that all of the information and documents which are necessary in order to invoke his rights under the memorandum of association and articles of association for the purpose of protecting the vital interests of the State will be attached to the proposal. The holder of the Special State Share will make use of this information solely in order to invoke his rights under the memorandum of association and the articles of association for the purpose of protecting the vital interests of the State. 73 (a) Transfer of vital assets will be invalid as regards the Company, shareholders, and any third party without the prior written consent of the holder of the Special State Share if, as a result, the usable, proper, and ready for- immediate-operation fleet of aircraft will be reduced (including due to any law provision) or the operational capability and flight ability of the Company will be reduced (including due to provision of any law) below what is itemized in one of the following sub sections: (1) At least 4 cargo aircraft as to which the minimal cargo transport capability from the United States to Israel is 320 tons daily; (2) At least 3 broad hulled passenger aircraft as to which the overall minimal passenger transport capability from the United States to Israel is 1,000 passengers daily; (3) At least 6 medium and small aircraft as to which the overall minimal passenger transport capability from Europe to Israel is 2,000 passengers daily. (b) Should there be a significant change in the relevant circumstances, the holder of the Special State Share will be permitted, with the Government’s authorization, to decide to increase the number of vital assets and/or to change their

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holder of the Special State Share if, as the result of such transactions, it might reduce the Company's flight capacity below the level that was set by the Special State Share;

√ The acquisition of influence or status in the Company requires the State's consent - in accordance with the Company's Articles of Association. Transactions in the Company’s shares at a certain scope will not grant any right that is derived from holding and/or from purchasing shares in the Company without the prior written consent of the holder of the Special State Share (the State through the ministers designated by the Government)74. The quantity and/or the composition of the assets on a permanent basis or for a specific matter, all for up to half of the number of aircraft owned by the Company at that time. This decision will not be made before the Company is given a fair opportunity to express its position to the Government - the total of the vital assets after increasing the number of vital assets according to this paragraph is limited to up to half of the number of aircraft owned by the Company at the time of the decision. A change in the composition of the vital assets will be made in the framework of the composition of the current fleet of aircraft owned by the Company at the time of the decision. The Company will not be required to acquire new aircraft under this sub- paragraph (b); (c) Despite what appears in sub-paragraph (a) above: (1) An aircraft leased by the Company from an Israeli corporation, which is lawfully incorporated and registered in Israel, will be deemed owned by the Company, as long as that aircraft is owned by such corporation and Israeli law specifically applies to the lease agreement regarding the terms of lease and the aircraft. (2) The holder of the Special State Share will be permitted, at the request of the Company, to approve the lease of an aircraft by the Company from a non-Israeli entity, as long as the State's vital interests are protected and the agreement contains the proper provision which grants the State the authority to use the aircraft, including mobilizing it at any time under Israeli law, all to the satisfaction of the holder of the Special State Share. (d) As long as the provisions of sub-paragraph (a) above are not complied with, the Company will not purchase and/or own shares or means of control, at a rate providing it with control, in corporations which own, directly or indirectly, including by subsidiaries, aircraft or auxiliary equipment, other than with the consent of the holder of the Special State Share. (e) Without detracting from the above, should a vital asset be transferred in contravention of this section, and the sale cannot be revoked and/or the situation cannot be restored to what it was within a reasonable time, the Company will be obliged to immediately purchase a substitute vital asset and to cover the expenses incurred by the State due to the temporary absence of the vital asset. (f) In a case in which the holder of the Special State Share refuses the Company’s request to transfer a vital asset, an arrangement will apply to indemnify the Company for the damages it incurred, principally, that the State will indemnify the Company in monthly payments to the extent of the leasing fees which the Company would have received, had it leased the vital asset when the monthly indemnification began, in the open market to a willing lessee, the transfer of which was refused, as will ultimately be determined by the appraiser(s) appointed by the State and the Company. (g) Should the period in which the holder of the Special State Share refuses the Company’s request to transfer the vital asset exceed 6 months, or in the State's judgment, at an earlier date, the State will purchase the hindered asset at the price which the Company would have received had it sold the hindered asset to a willing purchaser at the time of the purchase, as will ultimately be determined by the appraiser(s) appointed by the State and the Company. (h) Without detracting from the above, should the holder of a specific fixed lien on an aircraft or auxiliary equipment, including the loading equipment necessary to protect flight operation capability, wish to realize it (subject to the approval of the lien under the terms which were stipulated), the Company and the lien holder will so notify the holder of the Special State Share at least 45 days in advance, and the State will be permitted, at its sole judgment, and after giving prior notice of one week of its intention to the Company and the holder of the lien, to sustain the charge against which the asset had been pledged as collateral. If the State sustains the charge in accordance with the contents of this section, it will be permitted, if the holder of the lien had the right to return to the Company and receive payment from it, including expenses that were connected with sustaining the charge, and the lien will serve it to secure this right. The contents of this section will be included, as an obligation of the parties to the State, in every agreement for the lien on an aircraft or auxiliary equipment, including the loading equipment that is necessary to protect flight operation capability, which will be entered into after the Special State Share was issued, as a condition of the lien agreement with the Company, its shareholders and any third party.

74 (a ) Holdings of 5% or more of the issued share capital of the Company; (b) holdings of 15% of more of the Company's issued share capital (also if agreement had been received in the past for an holding percentage below 15%); (c) holdings of 25% or more of the Company's issued share capital (also if agreement had been received in the past for a holdings percentage below 25%);(d) holdings of 40% or more of the Company's issued share capital (also if agreement had been received in the past for a holdings percentage below 40%); (e) holdings which provides “control” of the Company even if agreement had been received in the past as to the holdings percentage (though not agreement as to “control”). For this purpose, control is defined in accordance with the Securities Law. In addition, the largest shareholder, at any time, will be

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Articles of Association will stipulate a detailed arrangement on the subject of the manner of submitting the request for obtaining the consent to own shares in the Company, in a case in which such consent is necessary as above.

√ Instructions in the matter of obtaining approval to vote at the General Meeting - the right to vote at the General Meeting requires the approval of the Company75. An approval to vote at the General meeting will not be given when circumstances exist that require the consent of the holder of the Special State Share, and such has not been given. The articles of association also prescribe special instructions in cases when there is reasonable concern that the ownership of the Company’s shares by foreigners might cause damage to the Company's flight rights or to its operating license76. deemed the controlling interest; (f) holdings or acquisition as a result of which “foreigners” will own 24% of the Company's issued share capital, or a higher proportion, which might, in the opinion of the State or in the opinion of the Company’s Board of Directors, cause damage to the Company’s flight rights and/or to its operating license, which will be and/or has been given by the State, in its sole judgment (the commercial operating license given to the Company stipulates that at least 51% of the Company’s share capital must be held by Israeli citizens and permanent Israeli residents). In any event, the holdings by foreigners of the Company's shares exceeding 49% of the Company’s issued share capital is a proportion which might damage the Company’s flight rights; (g) every security and/or pledge transaction of the Company’s shares, which, following its realization or invoking of underlying rights, the security holder or the pledge holder is likely to own shares out of the Company’s share capital in the proportions mentioned in sub paragraphs (a) to (f).

75 One who is interested in voting at the General Meeting must contact the Company no later than 7 days prior to the convening of the meeting (the Company is permitted to shorten the period until 3 days before the meeting is convened) while declaring whether the shares for which he requests to vote are owned by a foreigner. And so he should declare, if the vote is executed by the grantor of a power of attorney, if the grantor of the power of attorney is a foreigner. Such person who so requests to vote for shares that are owned by a foreigner, or the person who requests to vote by means of the power of attorney is a foreigner (“foreign applicant”), should detail the citizenship of the foreign shareholder, his residence and/or the citizenship or the place of residence of the grantor of the power of attorney, as applicable, the purchase dates of the shares and the number of shares purchased on each date, or other details which will be requested by the Company; with the details of the purchases verified by the registration company that managed the trading in the shares or the stock exchange member through which the shares were purchased. The Company is permitted, where necessary, to also demand details of the time of the purchase whenever required to decide on voting rights. Additionally, the vote by virtue of the shares held by an interested party in the Company will be made contingent on the delivery of a written statement, as of the date of the meeting, that his vote in the general meeting is by right of the shares, the ownership of which was approved by the holder of the Special State Share, under the Company’s articles. The Company will have the right to approach, including upon demand of the holder of the Special State Share, any person who has requested to invoke any right under the shares he holds, to receive any information or additional document that is necessary for the holder, in his judgment, to invoke his rights according to the Memorandum of Association and the Articles of Association for the purpose of protecting the State's vital interests. The holder of the Special State Share will be permitted to prescribe that the additional data be submitted by written statement. 76 The Company shall act to obtain the above information from its shareholders, if there is reasonable concern that due to the foreign ownership, damage may be caused to the traffic rights of the Company and/or its operating license. If the total voting rights of the foreign applicants out of the total voting rights of all of the voting applicants surpasses the permissible rate for foreign ownership (“the determining rate”), the Company's Secretary will be permitted to defer the Company’s General Meeting to another date, which is not later than 14 days, but only if he has grounds for thinking that by the deferred meeting as above, the rate of foreign ownership that has requested to vote in the General Meeting will not have surpassed the determining rate. Should the Secretary not defer the convening of the meeting, the Company will act as follows: (1) the Company Secretary shall arrange the voting requests of the foreign applicants in the order of the dates that they purchased the shares, as the foreign applicants will establish to his satisfaction; (2) the Company Secretary will approve the voting in the General Meeting, with respect to the share ownership of the foreign applicants in the order of their purchase, with each of the earlier ones receiving a consent to vote until the ownership of the foreign voters in the General Meeting reaches the determining rate. In any event, foreign applicants who purchased their shares on the same date, will be permitted to vote on a pro-rata basis out of the amount of their shares that were purchased as aforesaid; (3) the remaining shares owned by the foreign applicants (which were purchased on a date subsequent to the shares of the foreign applicant, the vote of whom under their rights was approved as mentioned in sub paragraph (2) above) will not be entitled to a voting right at that General Meeting; (4) if the foreign applicants have not proven the date of purchase of the shares that they own to the satisfaction of the Secretary, the purchase date of the shares will be treated as though purchased on a date subsequent to the purchase date that the last foreign applicant verified to the secretary, as described above in sub-paragraph (1).

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9.11.9.3 Every change, including an amendment or cancellation, in the provisions of the Memorandum of Association and Articles of Association (incorporation) of the Company which relate to the rights granted and/or ascribed to the Special State Share and to its holder, will be ineffective as regards the Company, its shareholders and any third party, without the prior written consent of the holder of the Special State Share.

9.11.10 Standardization The Company's maintenance system has been certified by the Israeli Standards Institute under quality standard ISO 9001/2000. In addition, the Company's maintenance system has been certified as an inspection institute, approved by the Civil Aviation Authority in Israel, the U.S. Federal Aviation Agency (FAA) and the certifying authority of the European Union's association (EASA).

9.11.11. Quality control El Al's maintenance system is monitored by an internal quality control system that operates according to the manufacturer’s specifications and a maintenance program approved by the Civil Aviation Authority. In October 2006, the Group successfully underwent a review performed by the ACS Company (authorized by IATA) for purposes of granting an IOSA Standards seal to the Group. The IOSA Standard is an international standard for operations, safety and quality of an airline and it is a condition for code sharing agreements. In addition, beginning from the year 2008, the standard will be a condition for membership in IATA. The Company is the first of the Israeli airlines that has successfully passed such a review.

9.11.12 Security arrangements The civil aviation industry, particularly the routes to and from Israel, could be targeted by various parties, particularly terror organizations worldwide. The Company takes extraordinary security measures, under the guidance of the governmental entity responsible for this area. Until the early 1980’s, the State had covered all of the Company's direct and indirect security costs. Over the years, the State has instituted a policy of reducing the rate of its participation in security expenses. In accordance with a decision by the Government of Israel, the rate of the Company’s participation in security expenses is 50%, since January 1, 2003. During 2002, the rate of participation was between 30% and 34.14%, while in 2001, it was between 25% and 30%.

In April 2007, the Government of Israel reached a resolution on facilitating the establishment of regular aviation ties with the neighboring countries (Egypt and Jordan), whereby it was decided to assist the Israeli Designated Carriers operating on these routes (including the Company on the Egypt route), by providing direct financial support, as provided in the decision. The decision stipulated that a joint team of representatives from the Ministries of Transport and Road Safety and Finance and the Prime Minister's Office would prescribe the level of support to be given to the Israeli Designated Carriers on these routes, based on an economic evaluation that considered, inter alia, the expenses of the Israeli Designated Carriers on said routes and occupancy rates. Support will be provided subject to operation of scheduled routes at

a-133 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding frequencies not less than that to which the countries had undertaken in the aviation agreements between them and as is currently the practice, and not less than that carried out in 2006. The support pursuant to this decision is given unilaterally, for year 2007. The Company approached the Ministry of Transport with a request to finance the full cost of security for the flights to Cairo in 2008, although no response has been received yet.

On January 27, 2008, the Government passed Resolution No. 3024, which prescribes the rate of the State's participation in the security expenses of Israeli airlines at 80% of the total direct expenses for the operation of existing and future international routes, in an attempt to enable these companies to content, to the extent possible, with fair and equal competition opposite foreign airlines, keeping in mind the importance of liberalizing the civil aviation industry, while recognizing the need for the existence of strong Israeli aviation. The decision revokes Government Resolution No. 2325 dated January 27, 2008. See Section 7.1.10 above. Despite said resolution, as of the date close to the report date, a return at the level of the new participation (80%) by the State in security expenses had not been received. The Company approached the Ministry of Transport with a request to actually carry out the Government's decision.

The following details the direct costs of security of the passengers, aircraft and employees of the Group, divided between the portion financed by the Group and the portion financed by the State:

State financing Group portion Total (thousand dollars) 2007 40,998 39,413 80,411 2006 39,967 40,002 79,969 2005 39,027 39,027 78,054 2004 36,220 36,220 72,440

The Company also has indirect security costs that are caused, inter alia, by flying security personnel in seats of paying passengers. Beginning from October 2001, the Company has been allowed to collect a supplement for insurance and security of 8 dollars per flight leg. The Company also provides security services to Israeli airlines in consideration for full reimbursement of such expenses of the Company. The information provided above regarding the scope of the State's participation in the Company's security expenses and the actual financing of these expenses is Forward-Looking Information, as defined in the Securities Law, 1968. This information is supported by the Company's assessments. The actual change in the Company's performance could be significantly different than the forecasts, due to many factors, including regulatory changes and enforcement of legislative regulation by the State authorities.

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9.11.13 Operations during times of emergency and for vital purposes Under existing law, at times of emergency, the Israeli airlines, including the Company, may be operated for purposes of national defense or public security or maintaining supplies or vital services. In addition, there are arrangements between the Company as to flights for the security of the State, or at times of emergency, as well as flights for other extraordinary purposes, including the consideration to be paid for them on a commercial basis. The Law for the Registration and Mobilization of Equipment for the , 1987, empowers the Minister of Defense, if he is convinced that the defense of the State so requires, to declare by decree the need to mobilize equipment (including aircraft). The law relates to equipment that will be owned by the Company during times of emergency. The law obligates the State to pay usage fees for the equipment that was mobilized, and, if the equipment was damaged during the period of emergency - compensation for the damages. The Law for Work Services during Times of Crisis, 1967, empowers the Minister of Labor to certify an enterprise as “a vital enterprise”, and after such certification, to mobilize all of its workers for vital work service. El Al has been certified a “vital enterprise”. The approval is renewed from time to time at the Company’s request. The current certification is effective through December 31, 2009. The Law for Supervision of Goods and Services, 1957, grants the minister who is so empowered by the Government, the authority to issue a “personal decree” or a “general decree” for the performance, inter alia, of a “vital action” for the defense of the State, for the security of the public, to maintain regular supplies or services. This action includes, among other things, the obligation to operate an enterprise or to perform any regulated service. Likewise, Section 11A of the law gives the Finance Minister, with the Government's approval, the authority to order in a decree that a government company or a mixed company engaged in an area in which the State has a vital economic interest, to continue to operate according to the Minister's instructions, and the Minister is allowed to appoint a person to manage the company or supervise its conduct. A company subject to such order – acts of liquidation, receivership, temporary relief, execution and enforcement under any law will not be instituted against it. On May 25, 2003, the Finance Minister informed the Company that he would not invoke his authority under Section 11A of the said law, after the Company's shares were listed for trading on the .

9.11.14 Public commission for evaluating civil aviation safety in Israel

During 2007, a public commission was appointed to evaluate civil aviation safety in Israel, headed by Brigadier (ret.) Amos Lapidot. In December 2007, a detailed report was submitted to the Minister of Transport and Road Safety, indicating a series of serious flight safety deficiencies, including the need for improved technology in the command and control systems at BGA, a deficient ability by the Civil Authority in Israel, and a shortage of manpower, the need to update legislation in the field of aviation and the need to train and monitor air traffic controllers.

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9.12 Material agreements • The Company is party to material agreements with regard to employees and their rights (see Section 9.4 above), an agreement with the State related to covering the deficit in the employees' severance pay fund (see Section 9.4.8 above), agreements for the lease of real estate (see Section 9.1.1 above), agreements for the lease and financing of aircraft (see Sections 7.11 and 8.10 above), loan agreements for a designated purpose (see Section 9.8.4 above), various agreements with airlines (see Sections 7.2, 9.11.7 and 9.13 above), and insurance agreements (see Section 9.2 above). • The Company also has an obligation to indemnify officers of the Company with respect to activities that were connected with the Company’s privatization and also for performing an act and/or fulfilling an obligation on behalf of the Company under the Securities Law, 1968, for as long as the options that were issued in the framework of the May 2003 prospectus are listed for trading, which includes filing reports, notifications and approvals that are derived from the Securities Law. The overall amount of indemnification to all of the Company's officers according to this decision will not exceed 100 million dollars. • In addition, on May 10, 2005, the Shareholders' General Meeting approved the following resolutions: A. To approve granting an advance commitment for indemnification and exemption to officers (giving an exemption to officers was not approved). The extent of indemnification according to this decision will be the lower of: 25% of the Company's shareholders' equity according to its consolidated financial statements as of December 31, 2004, or 25% of the Company's shareholders' equity according to its most recent consolidated financial statements as of the date of indemnification. B. To approve transactions in the context of insurance for Company officers (ongoing) and for insurance of executives for a run-off disclosure period. The premium amount that the Company will pay for its part in the insurance costs for these two types of insurance will not exceed $ 450 thousand per year. In October 2006, the officers insurance that was executed through K'nafaim was renewed for an additional period of 18 months, as described in an Immediate Report by the Company dated October 4, 2006. The Company is prepared for renewal of the insurance.

9.13 Cooperation agreements The Company is party to agreements with other airlines (interline agreements) which permit passengers on scheduled flights, subject to certain restrictions, to use flight tickets which were issued by one airline for the services of another airline. In addition, the Company is party to “code-share” agreements, which permit an air carrier to market flights of another air carrier, as if they were its own flights. See Section 7.2 above for details. See Section 9.11.2(i) in the Chapter on restrictions and regulation of the Corporation's businesses – business restrictions for legislative changes that could have a material effect on the Company's ability to enter into "code-share" agreements. In December 2007, the Company signed a code-share agreement with American Airlines – see Section 7.4 above for details.

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The Company has commercial agreements with some of the airlines operating in Israel, and with Designated Carriers that do not fly to Israel. The commercial agreements relate, inter alia, to coordinating flight schedules, the capacity offered by each company, the division of revenues from the route (pooling agreement) and payments for the utilization of aviation rights. The Company is also a party to agreements with airlines with respect to accountings for the use of continuing flights, recording reservations, for handling (passengers or cargo) and for commercial representation. There are also agreements with airlines to provide maintenance services.

9.14 Legal proceedings The following are the most significant pending claims in which the Company and/or its subsidiaries are involved:

9.14.1 In October 1998, a lawsuit for NIS 230.4 million (equivalent as of the date of the report to approximately 59.9 million dollars) was filed in the District Court against the Company, along with a motion for class action recognition. The claim relates to an allegation of the collection of excess flight ticket prices by travel agents that, according to the plaintiffs’ allegation, resulted from the use of improper exchange rates. In 2002, the court approved the motion for class action recognition for one cause - deception under the Consumer Protection Law and rejected other causes that had been alleged by the plaintiff. The Company filed a motion with the Supreme Court for leave to appeal and, concurrently, an appeal was filed by the plaintiff regarding those causes that had been rejected by the District Court, which were primarily based upon the filing of a class action under Regulation 29 of the Civil Law Regulations. The hearing was delayed following a request by the court, with the 77 consent of the parties, until a ruling in another hearing in the matter of A.S.T. , and after the ruling on the additional hearing was issued on September 1, 2005, the plaintiff gave notice of its request to remove the reference to the grounds in the general law from the appeal, and the court ruled that the hearing on the appeal would take place solely on the basis of grounds from the Consumer Protection Law. In January 2006, the plaintiff filed a motion to amend the appeal, in the context of which it requested to add additional grounds in accordance with the directives of Amendment 18 to the Consumer Protection Law. A hearing was held in January 2007, but a ruling has not yet been received.

9.14.2 A lawsuit for NIS 21.7 million (approximately 5.6 million dollars as of the date of the report),was filed in Tel-Aviv District Court in September 1999 against the Company and against the Airports Authority and Ophir Tours (a travel agency), together with a motion for recognition as a class action suit. The plaintiff alleges that the travel agent collected the travel levy from him at a rate above the legal rate for this purpose, which is the representative exchange rate, and that the Company is responsible for the acts of agents in this matter. During the year 2002, the court approved the motion for class

77 In the matter of A.S.T., the Supreme Court decided that class actions are possible under the specific legislation which include this possibility and, essentially cancelled the possibility of using Regulation 29 of the Civil Law Regulations for the purpose of filing class actions for a cause which is outside of the specific laws as above. As mentioned, on September 1, 2005, the ruling in a further hearing on the A.S.T case was issued, in which the previous ruling issued by the Supreme Court on this matter was ratified in which it was determined that Regulation 29 could not serve as a source for class actions.

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action recognition on one charge - violation of a legislated obligation based on Regulation 29 of the Civil Law Regulations. The Company filed a motion for leave to appeal with the Supreme Court. The Court requested and obtained the position of the parties regarding this claim, in light of the A.S.T. judgment. Following the ruling in an additional deliberation on A.S.T, the plaintiff gave notice of its request to expunge the reference to the causes in the general law from the appeal, and requested that deliberation on the appeals take place solely based on causes from the Consumer Protection Law. A hearing was held in February 2008.

9.14.3 In October 2005, a claim was filed in the Supreme Court of Ontario, Canada against the Company and additional defendants by a former employee of the Company for alleged sexual harassment and sexual assault. The amount of the claim was approximately 2.2 million Canadian dollars (approximately 2.2 million U.S. dollars as of the date of the report).

9.14.4 In June 2006, a suit was filed against the Company and the State of Israel - Ministry of Finance in the Tel-Aviv District Labor Tribunal, by 94 claimants who were employed by the Company and took early retirement between the years 2001-2003. The claimants have appealed to amend their retirement agreements in a manner in which they state that the retiree will receive the early pension stipend, including fringe benefits, until the legal retirement age, instead of until the age of 65. Alternatively, the claimants appealed to revoke the retirement agreements. The case is in the stages of preliminary proceedings. The Court ordered the claimants to quantify their claim and to pay a fee accordingly. The claimants quantified the claim at NIS 18,055,897 (as of the report date – 4.7 million dollars).

9.14.5 In February 2006, the Restrictive Practices Division of the U.S. Justice Department ("Restrictive Practices Division") began an open investigation, together with additional competition authorities in Europe and other countries, of alleged suspicion of price fixing with respect to certain increments to prices of air cargo transport. Several cargo transporters announced that they had received Grand Jury subpoenas demanding information and documents related to the pricing practices and certain price increments in the air cargo field, from 1999 to the date of the order. The Restrictive Practices Division notified the Company that the Company is being investigated as a suspect in this investigation. The Company is cooperating with the investigation, while performing an internal audit of its own of the cargo costing practices. The Company sent the Restrictive Practices Division the information demanded and it is continuing to cooperate with it and acting according to its instructions. At this stage, the Company is unable to assess the outcome of the investigation of the Restrictive Practices Division or to estimate the possible financial effect of the investigation on the Company. Nevertheless, it should be pointed out that the consequences could include administrative or civil procedures and/or a criminal indictment, including penalties and/or civil charges. It should also be stated that punishments for the violation of competition statutes could be serious, both with regard to criminal charges and as to civil charges.

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9.14.6 On December 20, 2006, the Company received a letter from the European Competition Commission ("the Commission") at its head office, which contained a request for information in connection with an investigation being carried out by the Commission in connection with activities that, seemingly, cause damage to competition in the sector of air transport services for cargo. The letter stated that the Commission has information regarding extensive contacts that took place between airlines and other entities with regard to various price increments and other matters such as cargo transport rates. In the context of the letter, the Company was requested to transmit data and documentation regarding the Company and its cargo activities, commencing with the year 1995. The Company is cooperating with the investigation and has transferred its reply as requested by the Commission's letter, while carrying on an internal audit of cargo pricing practices. At this stage, the Company is unable to evaluate the outcome of the investigation of the Commission or to estimate the possible financial effect of the investigation on the Company. Nevertheless, it should be pointed out that the implication might include an administrative proceeding against the Company, include a severe fine that could be imposed on the Company at the end of the proceeding.

9.14.7 On February 28, 2007, the Company received a statement of claim that was filed in the United States District Court for the Eastern District of New York in the matter of the rates for cargo air transport services. The Company was included as a defendant in the statement of claim, along with 38 other airlines, which alleged that the defendants were partners in a conspiracy to fix prices for cargo air transport services, beginning in the year 2000, while violating competition and other laws in Europe and the United States. The claim was filed in the name of entities that purchase air transport services, directly and indirectly. It also includes a motion for class action recognition. The claim includes a request for damages in an unspecified amount as well as additional remedies. The Company joined a mutual defense team of the other airlines being sued, within the framework of which several preliminary motions were filed with the Court, including a motion to dismiss the claim or parts of it. In view of the early stage of the process, the Company is unable to assess the possible outcome or the possible financial effect of the proceeding on the Company.

9.14.8 In January 2007, a suit was filed against the Company in the District Court, along with a motion for class action recognition, in the amount of about NIS 483.4 million (approximately $ 125.7 million as of the balance sheet date). The plaintiffs allege that the collection of a security levy in the amount of $8 per flight leg from passengers on flights not carried out by the Company itself, but by other airlines, in the framework of code-sharing agreements with the Company, represents consumer misrepresentation, breach of the agreement with him, absence of good faith, and unlawful gain, since on these flights, the plaintiffs allege, no security or protection services were provided which were identical at their level and quality to the security services provided by the Company. The plaintiffs want to require the Company to pay $8 to each of these passengers as well as damages of NIS 500 for pain and suffering. The Company filed its statement of response. A preliminary hearing was held in March 2008.

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9.14.9 In February 2007, a claim was filed against the Company and other parties in the New York State Supreme Court by an employee of the Company for allegations of sexual harassment by another Company employee in the U.S. The Company filed its statement of response and hearings were held on this case.

9.14.10 On March 18, 2007, a claim against the Company was filed in Tel-Aviv District Court, together with a motion for recognition as a class action. The claimant alleges that the charge to customers who purchase airline tickets directly (and not through a travel agent) by means of credit cards in foreign currency instead of Israeli currency, with payment of a conversion commission of 2% of the price of the flight ticket (for conversion of the payment in foreign currency into a payment in Israeli currency) to the credit card companies represents a violation of the Consumer Protection Law - 1981, a violation of the duty of good faith and unjust enrichment. It was also alleged that this was a breach of the requirement to publish an "overall price", and that it is the Company that must bear these conversion charges. In addition, the claimant alleged that charging customers in foreign currency and not in NIS represents in itself, a violation of the Consumer Protection Law. The claimant has requested that the Company be required to pay damages to each member of the class to the extent of all of the amounts of the conversion fees collected unlawfully, and to refund to each the amounts of the conversion fees unlawfully collected, as alleged by the claimant. The claimant also has requested that an order be issued to the Company which stipulates that the collection of the payments in foreign currency and the charging of the relevant conversion commissions were unlawful and to prohibit the Company to continue to collect payments in foreign currency and to pass on the conversion fee charges for foreign currency payments to its customers. The Company filed its statement of response. A hearing on the motion was scheduled for May 2008.

9.14.11 In November 2007, a claim was lodged in District Court against the Company, as well as a motion for recognition as a class action pursuant to the Class Action Law, in the amount of NIS 105 million (27.3 million dollars as of the report date). The plaintiffs claim that the prices charged by the Company for overweight baggage on its flights are excessive and are calculated without any connection to the Company’s ordinary flight prices. A statement of response has not yet been filed.

9.14.12 In February 2008, a claim was filed with Tel Aviv Regional Labor Court against the Company and against the New Histadrut Labor Federation by 24 pilots of the Company, all over the age of 65, some of whom retired and some of whom are employed by the Company. The claimants requested that the Court declare their right that the Company would take measures to obtain a permit from the Civil Aviation Authority enabling their employment in Positions of Trust and examination after age 65 and slot them into Positions of Trust and examination according to its needs. The claims against the Histadrut are that the Histadrut breaches its duty of fair representation of the claimants, inter alia, due to the unwillingness of the Pilots Committee to negotiate on their behalf. Alternatively, the Court was asked to require the defendants to negotiate with the claimants about their continued employment and the terms of employment. A statement of defense has not yet been filed.

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The following are major claims in which the Company and/or the subsidiaries were defendants, and which concluded during 2007 and until a date close to the approval of the report:

9.14.3 In July 2002, a claim was filed in Tel Aviv District Court against the Company and against Sun D'Or, as well as a motion for class action recognition, under the Consumer Protection Law and under Regulation 29 of Civil Procedure, for a total of NIS 32 million. The plaintiffs alleged that the security assessment of 8 dollars for each flight leg, collected from every passenger commencing October 2001, was assessed while making misrepresentations, according to which, it was intended to fortify the security system after the events of September 11, 2001, while the plaintiffs allege that the assessment was essentially imposed in order to ease the burden of security expenses imposed on El Al. The plaintiffs requested that El Al and Sun D'Or be required to refund the security assessment to all the passengers that had paid it, and to prohibit the continued collection of the assessment. On August 9, 2005, the Tel Aviv District Court issued a ruling, dismissing the plaintiffs' motion for class action recognition. Consequently, the claim was dismissed for lack of cause. The plaintiffs were required to pay attorneys fees. On September 20, 2005, the plaintiffs filed an appeal of the District Court's ruling with the High Court of Justice. In a hearing held in the Supreme Court in October 2007, the appeal filed by the plaintiffs of the District Court's ruling, whereby the motion against the Company for class action recognition, was dismissed, and the claim was dismissed for lack of cause.

9.14.14 In July 2004, a claim was filed in Tel Aviv District Court against the Company, Sun D'Or, Arkia International, Unitel and Flying Carpet, as well as a motion for class action recognition under the Consumer Protection Law, in an amount estimated by the plaintiffs at "millions of dollars". The plaintiffs argued that the purchasers of non- refundable tickets, who paid, inter alia, various airport taxes and a security assessment, are entitled to a refund of those taxes and assessments if they did not use their flight ticket, and that consumers are misled into believing that they are not entitled to a refund of the taxes and assessments. The plaintiffs argued that the calculation of the refund to all consumers, in the seven years preceding the filing of the claim, could be complicated or impossible, and in such a case, they asked thee Court to rule that the plaintiffs would be required to transfer funds in favor of a "public institution". A statement of response was filed on behalf of El Al and Sun D'Or. In September 2007, the Tel Aviv District Court issued a ruling that dismisses the motion against the Company for class action recognition. The plaintiffs filed an appeal of the ruling with the Supreme Court. The appeal was dismissed.

9.15 Goals and business strategy On September 20, 2005, the Company's Board of Directors approved the Company's strategic program for the next five years and the principles of implementing it, entitled "El Al 2010", the major points of which are:

1. The ultimate goals of the strategic program include a substantial improvement in the business results by the year 2010 by means of an increase in sales and improved profitability.

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2. The goals of the program include: (a) significant improvement in servicing the customer by enhancing the customer's experience in all of the Company's activities according to the needs of specific fields, focusing on the business customer and dealing with his special needs, emphasis on developing customer loyalty, improving the treatment of the incoming tourist and establishing an integrated service center; (b) cultivation of operational excellence, in the dealings with customers and other processes, as well as by striving to reduce the level of fixed assets relative to revenues and investment in systems and processes for optimal management of the organization's resources; (c) business innovation and initiative, including initiatives for developing traffic to and from Israel, development of additional revenue sources in the areas of maintenance, tourist services and ground services, development of BGA as a transit airport for continuing flights and conversion into a global company, advancement of cooperation with aviation wholesalers and development of the Internet as a distribution channel; (d) outfitting, including investment in modern equipment for long range routes, gradual rejuvenation of the aircraft fleet in accordance with financing terms, repayment ability and market development, and weighing continued outfitting based upon market developments; (e) improvements in the areas of cargo and maintenance, through continued growth in cargo operations while, at the same time, evaluating the operational structure, strengthening the ability to sell maintenance services and examining the development of maintenance as a profit center for the Company, and investigating cooperative arrangements with Israeli and international airlines for expansion of the ranges and areas of activities; (f) cultivation of human resources by means of updating labor agreements, developing and updating training systems, employee compensation and incentives, and embedding the culture of a private entity in a competitive market.

3. In accordance with these goals and the basic assumption of the strategic program by which the average annual rate of growth in passenger traffic at BGA will be 5%, the strategic program also outlined the principles of the operational plan regarding aircraft outfitting, which includes the acquisition of two broad hulled, long-range aircraft to provide the solution for long-distance routes, conforming capacity to anticipated growth in demand for the various destinations, short-term solutions and improvements to the cargo aircraft fleet. In addition, the program also outlined principles of the operational plan relating to improvement in profitability and primary activity directions.

4. During 2007, the Group continued to implement the strategic program in its operations while conforming it to developments that occurred in the security, political and economic situation, including the Second Lebanon War and its effect on passenger traffic, the continuing trend of rising jet fuel prices, the ongoing weakening of the dollar and intensifying competition. The Group is examining its operations in order to bring about optimization of the route network, while conforming means of production to the demand environment and the profitability of routes by increasing or decreasing capacity, or reducing operations to unprofitable destinations.

Implementation of the strategic program reflected by, inter alia: A. Improved customer service, focusing on the business customer (premium), the diverse pre-flight services provided by the Company (check-in from the

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customer's home, express check-in, etc.), in-flight services (including in-flight entertainment and content, improved seat comfort, etc.), and post-flight services (including operating ground transport services in Israel and abroad). B. Improving the handling of customers, reflected, inter alia, by merging the call center of New York and Tel Aviv. C. Decisions made by the Company in 2007 and in the first quarter of 2008, on outfitting through the purchase and leasing of aircraft (See Section 7.11 above for details). D. Development of revenue sources in the maintenance sector, by providing services to airlines, including an agreement from July 2007 to provide route maintenance in Israel and overseas, baggage maintenance, logistical and engineering support, in a manner that enables expansion of the Company's services to Airbus aircraft and to other companies. E. Improving organizational processes and operational systems, including by replacing the booking system with the Amadeus system (see Section 7.6.2 above), expanding use of the Internet and integrating external technology systems (such as ERP – see Section 7.1.5 above), all with the goal of improving customer service. F. The Company is evaluating the cargo field, especially in view of the need to be outfitted with aircraft, due to the various restrictions on continuing use of its cargo fleet in its current format and the resulting large investments. G. Further to the outfitting trend and with a while placing it sights on the future of the quality and scale of the Company's future aircraft fleet, an evaluation is being made of setting up an aircraft lease operation, whether through the Company or through a subsidiary that will be established for this purpose. H. The Company attributes great importance to safety and the environment, including the hazards of air and noise pollution. The Company is working within the scope of various international standards, and has placed itself for ongoing monitoring, including as a result of the IOSA Standard that the Company was awarded in 2006, and continues its implementation in 2008, while expanding the scope and applicability of the Standard. See Section 9.10 for additional details.

5. The business strategy that is presented above and the manner in which it is implemented by the Group are “Forward-Looking Information” as defined in the Securities Law, 1968, and is based upon the Group’s assumptions, assessments and forecasts as to its business environment, which could change – totally or in part – from time to time, thus effecting how it is actually implemented by the Group and the achievement of the program's goals. Forward-Looking Information is uncertain information concerning the future, which is based upon the Group's information as of a date close to the approval of the report, and includes assessments by the Group or its intentions as of the report date. Accordingly, actual results, wholly or partially, may not be realized as above, be realized in part or to be materially different than the results that are estimated, derived or implied from this information, inter alia, for the reasons detailed below. Applying the strategy may be affected by regulatory changes (including changes in business restriction laws, as described in Section 9.11.2(i) above) and the manner of implementation and/or changes in the aviation policy of the State of Israel, including civil aviation policy relating to Designated Carriers for the network of routes and permissible capacity of foreign airlines

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(in light of the changes and trends described in Sections 9.11.7.1 and 9.11.7.2 above). Among other things, this business strategy is based upon the assumption that Company's status as a Designated Carrier in the network of routes it operates will remain substantially unchanged. Any change in this situation will necessitate making changes, inter alia, in the route network and aircraft fleet. In addition, the Company currently bears exceptional security costs, compared to competing airlines, which are not under its control, and an increase in these expenses due to circumstances or with respect to a governmental decision might necessarily reduce the Company’s profitability. The implementation of the strategy is also subject to the possible implications on the volume of the Company’s operations, which might be caused by global economic, political and/or security changes in general, and in Israel, in particular. These changes could place a threat on the Company that results from inflexibility in the ability to make changes in part of the expense components (such as flight equipment and salaries) and to make it difficult to implement the processes of conforming the Company’s expenses. Additionally, implementation of the strategy in the matter of outfitting with aircraft is subject to the extent of the institution of more stringent pollution-noise conditions permitted at airports, which could force the airlines to take steps to quiet the aircraft or to replace them with quieter and “cleaner” aircraft. The exacerbation of competition due to any reason and/or factor and, in particular, conditions to which the Company may find it difficult to respond might also affect the Company's competitive position and the possibility of or manner of implementing the business strategy. The exacerbation of competition might also be caused, inter alia, by: changes in the aviation policy of the State of Israel and/or the manner of its implementation (including the "Open Skies" policy, see Section 7.1.10 above) ; from the expansion of operations of “network” airlines(which represent a part of a global pact) into the Israeli market, in a manner which might make it difficult for the Company to join such a pact, and impair its market share; the entry of the low cost airlines into the market and the extent to which they will impact the intensifying competition in the industry, the price reductions and the necessity to conform the Company’s costs; the creation of a European Aviation Bloc or approval of an aviation pact ("Open Skies") between the European Union and the United States which might fundamentally change the structure of aviation rights in the EU states, to increase the number of airlines and the capacity being offered between Israel and the members of the market in an unchecked manner, and to place a threat on the price level of the flights and the Company’s share in these routes. In addition, implementation of the strategy could be affected by fluctuations in jet fuel prices, which is a substantial part of the Company's expenses, and from the level of cooperation of the workers' associations with regard updates of labor agreements and maintaining "industrial peace".

It is the Group's practice, from time to time, to evaluate the conformity of the strategic program and its goals to developments in the Group's business environment.

9.16 Forecasted developments in the coming year

The Group intends to continue implementation of the strategic program described above, while regularly evaluating the trends and developments created in the Company's business environment and the global aviation industry, including changes in the "Open Skies" policy, as described in Section 7.1.10 above, and in the memorandum of understanding signed

a-144 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding between the State of Israel and the European Union, as described in Section 7.1.8. The goals of the strategic program will be accomplished by being attentive, inter alia, to strengthening the Group's ability to cope with and prepare for tough competition, and striving to improve the business results in 2008 by enhancing the mix of revenues, improving yields, implementing organizational efficiency measures and cutting expenses. The Group is also continuing to evaluate various technological enhancements, further to the replacement of the Company's reservation system with a global system expected to be carried out in the second quarter of 2008, further to developing marketing and service tools by means of the Internet and ways to implement a CRM solution (concurrent with application of a comprehensive resources management system (ERP)). The information concerning the forecast of developments during the coming year represents Forward-Looking Information, as defined in the Securities Law, 1968. The information is supported, inter alia, by the Company’s assessments, forecasts or intentions as of the report date. Therefore, the actual developments during the coming year may be, in whole or in part, materially different than the developments assessed, derived or implied from this information, as the result of a large number of factors, including those listed in Section 9.15 above and the risk factors described in Section 9.18 below.

9.17 Financial data on geographic segments See Note 24A. to the financial statements for data on geographical segments. See Section 3.5 (a) of the Directors’ Report for explanations as to developments in these segments.

9.18 Discussion of risk factors The information below concerning the effect of the risk factors on the Group represents Forward-Looking Information, as defined in the Securities Law, 1968. The information is supported, inter alia, by the Company’s estimates as of the date of the report. The actual effect on the Company’s performance may be materially different than that forecast, due to a large number of factors, including changes in the economic, geopolitical and security conditions in Israel. Like other airlines, the operations of the Company are affected by several external and internal factors that could lead to material changes in its profitability (positive or negative). The risk factors may be divided according to macro risks, industry risks and risks that are unique to the Group. The major risk factors are:

9.18.1 Political or security events or terrorist acts Political or security events or terrorist acts in the world or in the region have an immediate, negative effect on the demand for passenger and cargo transport and influence the Company’s economic condition and volume of activity. So, for example, after the outbreak of the Intifada in the fourth quarter of 2000, there was a decrease in the number of travelers to the region. During the years 2004- 2005, there was a relative recovery but the scope of tourism still did not reached the levels of the years prior to the crisis. During the year 2006, the War in Lebanon caused a decline in demand and had a material negative effect on the Company's financial results. In 2007, following a period of security calm and stability, there was an increase in the number of tourists visiting Israel, as well

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as the number of travelers departing from BGA (which was expressed particularly in the second half of this year.

9.18.2 Jet fuel prices Jet fuel is a significant component of an air carrier's operating expenses. During the years 2004-2007, the price of jet fuel rose at a substantial rate. Jet fuel prices are subject to severe fluctuations. The Company has used hedge activities for part of the forecasted jet fuel consumption. This policy could change according to circumstances. Due to the great weight of jet fuel in the Company's operating expenses, every increase in jet fuel prices negatively affects its operating expenses and business results, see Section 9.5.1 above. See Section 7.3 to the Directors’ Report for details of actions that the Company has taken to protect against changes in fuel prices.

9.18.3 Changes in competition The aviation industry is characterized by a high level of competition, which becomes more acute during periods of excess capacity. The entry of additional charter airlines into the market, the entry of additional foreign scheduled carriers into the Israeli market or an increase in capacity of existing foreign carriers, the entry of additional Israeli carriers into the market and the appointment of additional Israeli carriers as Designated Carriers, the granting of operating licenses to additional Israeli airlines in the passenger and cargo areas will necessarily cause a worsening of competition in the Israeli aviation industry, a situation which may reduce the Company’s share in the industry's operations, create excess capacity, lower the level of passenger and cargo transport prices and hurt the Company’s business results. This trend of stiffening competition intensified during the year 2006 with the entry of foreign airlines and the increased capacity of these companies, which even maintained the excess means of production during the period of the War in Lebanon. In 2007, this trend continued with the entry of new airlines and the increased capacity and frequency of airlines that operate in the Israeli market (see Sections 7.1.10 and 7.8 for details). In January 2008, the Government decided to change the "Open Skies" policy, as discussed in Section 7.1.10 above. In addition, increasing efficiency measures in competing airlines, including as a result of organizational changes and/or changes in capital structure, and government support or subsidizing of foreign airlines, might place the Company in a position that is inferior to its competitors. Changes in international agreements, including commencement of the aviation agreement between the European market and the United States, could negatively affect the operations of the Company in the industry due to the exacerbation of competition and the addition of carriers and capacity. Moreover, in February 2008, a memorandum of understanding was signed between the State of Israel and the European Union, as discussed in Section 7.1.8. It should be stated further, that the increase in the flight capacity of foreign airlines in the passenger aircraft field, also led to a substantial increase in the capacity of cargo flown in the belly of passenger aircraft of these companies, to and from Israel, and exacerbated the competition also as relates to

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the air cargo field. Additionally, the appointment of CAL as a Designated Carrier to destinations in which the Company is the sole Designated Carrier could lead to stiffening competition in the air cargo field. See Sections 7.1.10, 7.8, 8.1.10 and 8.7 above.

9.18.4 Seasonal influences The operations of the Company are seasonal by nature and are focused during peak periods (see Section 7.9 above). Tourism traffic, mostly during the summer season and at holidays (Jewish and Christian), is greater than the annual average. The cargo transport field is also characterized by high seasonal fluctuations due to the large relative weight of agricultural exports. (See Section 8.8 above for more details.) Since the component of the capital expenditures and fixed expenses out of the total Company expenses is significant, an impairment of operations during the peak season (due, for example, to political and security events, such as the War in Lebanon in the summer of 2006) or the inability to obtain replacement aircraft, even if concentrated over a relatively short period, can have a substantial negative effect on the business results of that year.

9.18.5 Government resolutions on aviation and licensing the Company as an air carrier (A) A change in the Government’s policy with respect to the Company’s status as a Designated Carrier for all or part of the routes on which the Company serves as Designated Carrier could materially affect the Company’s financial results, according to the type of route. Additionally Government resolutions could change the Company's position and have a negative effect on its financial results (see Sections 7.1.10 and 9.11.7.1 above for details on the decision of the Government and the Public Committee to Evaluate "Open Skies" Issue). Further to the Committee's recommendations, in January 2008, the Government approved the Minister of Transport's proposal to revoke the Company's appointment as sole Israeli Designated Carrier among Israeli airlines on most of the international air routes, in return for increasing the Government's participation in the direct security expenses of Israeli airlines, from 50% to 80%. Thus, the Government retracted its commitment to El Al prior to its privatization (Resolution of the Ministerial Committee for Society and the Economy HC?14 from 19.05.03 regarding aviation policy). Following this Government resolution, the Civil Aviation Authority Director requested that the Israeli airlines – Israir, Arkia and Sun D'Or provide their position on those scheduled routes they wish to operate as Designated Carrier.

(B) The Company’s operating licenses as an air carrier and its rights as such are conditional upon the practical ownership and the effective control being in the hands of Israelis. The Company's ability to always know the extent of foreign ownership of its shares is restricted to the records that it administers, and, accordingly, there may be a situation in which the foreign owners of shares did not report their holdings to the Company (purchase or sale) and were not recorded in the shareholders' registry, so foreign ownership will exceed the permissible percentage or will be less than the percentage recorded in the

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shareholders’ registry, without the Company being aware of it. If the Company will become aware that the foreign ownership exceeds the permissible percentage, then it will be able to act in conjunction with the Special State Share to reduce the percentage of foreign ownership. Should it be unable to do so and the foreign holdings in the Company’s shares exceed the permissible percentage, the Company could lose its status as a Designated Carrier. However, whenever the holder of the Special State Share and/or the Minister of Transport believe that the actual control and the ability to direct the Company’s operations remains in the hands of the Board of Directors, of which two thirds of its members, including the Chairman, the CEO and Company officers, are Israeli citizens and permanent residents of Israel, the risk is minimal that the Company will lose its status as Designated Carrier just because of the rate of foreign ownership in the Company’s shares.

9.18.6 Exposure to currency risks Most of the Company’s revenues and expenses are denominated in or linked to foreign currency (mainly the US dollar). The Company is exposed to a rise in the value of the shekel relative to the dollar with respect to current wage expenses and other liabilities denominated in shekels in the Company's balance sheet, principally with respect to termination of employee-employer relationships. The revaluation of the shekel vis-à-vis the dollar increases the Company's current expenses and also increases in dollar terms (without effecting cash flows) the Company's obligations related to termination of employee employer relations. In addition, the Company's policy to reduce exposure to the risks of the principal foreign currencies (Sterling, Euro, Rand, etc ) is executed by matching payments and receipts in each branch. In years when the volume of the receipts was not significantly different from the volume of payments in European currencies, the mixture served as internal protection against currency exposure vis-à-vis the dollar, whereas in years in which there is an excess of payments over receipts, the Company has exposure to those currencies, and mainly against the Euro. From time to time, the Company examines the necessity of an investment in derivative financial instruments in order to reduce the exposure to foreign currency risks. See the Section 7.5 to the Directors’ Report, as well as Note 20(a)(1) to the financial statements for details with regard to the actions taken by the Company for hedging the exposure to currency risks.

9.18.7 Changes in economic activities The aviation and tourism industries are sensitive to changes in economic activity that affect the demand for passenger and cargo transport. The expense structure of the aviation industry, which includes a high component of fixed expenses, makes it very difficult to implement procedures to conform the Company's supply to changes in short-term demand. During periods of an economic slowdown, the demand for air transport is reduced for different reasons, excess capacity, labor and flight equipment, which are not fully utilized, is created.

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Consequently, the Company’s economic position is worsened, as reflected in its business results.

9.18.8 Outbreak of epidemics and natural disasters Outbursts of epidemics (such as the SARS epidemic) and natural disasters (such as the Tsunami disaster) have a negative effect on passenger traffic to the disaster areas and on the business results of the Company.

9.18.9 Exposure to variable interest rates The Company finances part of its investments by credit from banking institutions. The Company’s loans and most of its deposits are in dollars and bear interest. Most of the loans bear variable interest and, accordingly, any change in interest rates might materially affect the Company’s financing expenses. See Section 7.2 of the Directors' Report as to policies for hedging interest risks that have been established by the Company. From time to time, the Company examines the necessity of hedging exchange rates and interest and the extent of the hedge. See Section 7.4 to the Directors’ Report for details with regard to the actions taken by the Company to hedge the exposure to variable interest rates.

9.18.10 Operations in an industry with a high fixed-cost structure The Company operates in the aviation industry, which has a structure of relatively high fixed costs and profit margins that are relatively low. Therefore, small changes in the level of revenues or expenses could have a direct effect on whether there will be earnings or losses.

9.18.11 Noise and environmental restrictions on flight operation Every change in restrictions on night operations at BGA or other airports from/to which the Group flies and each additional restriction or prohibition on the operation of aircraft due to air pollution, noise, etc. might have a material effect on the Company's business results. A number of alternatives are presently being examined as to a change in the hours of operation at BGA and the permissible noise levels, which, if they are carried out, could materially affect the Company’s business results. (See Sections 9.10.2 and 9.10.3 above for further details.)

9.18.12 Effect of operations of low cost airlines on the Israeli market Airlines, with a low production cost structure (low cost carriers) have increased their market share substantially in the past two years, principally in the United States and in Europe. This growth has negatively affected the veteran airlines with higher production cost structures, and has caused a decrease in their market share and a drop in their yield due to fare reductions as the result of competition. Most low cost airlines specialize in short flight legs. Under the terms of new aviation agreements signed during 2007 between Israel and Britain, France and Belgium, low cost airlines began operating on routes to Israel, which had not operated on routes to Israel in the past. Thomsonfly, owned by the German TUI, began operating scheduled flights on the Luton and Manchester (both in England) to Tel Aviv routes. In December 2007, the French company New Axis

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began scheduled flights on the Marseilles – Tel Aviv route, and in April 2008, the Belgian company Jet Air is expected to operate scheduled flights on the Liege – Tel Aviv route. The entry of these and other companies to operations in the Israeli market could have a negative effect on the Company's business results, due to the increased capacity offered by these airlines at reduced prices. See Section 7.1.10 above for additional details.

9.18.13 Costs of maintaining flight security Since the Company is required to maintain security arrangements which are determined by a governmental body and it bears security expenses over which it has no control, most of which do not apply to foreign, competing airlines, this situation hurts its profitability, its competitive ability, and the development of a route network. The Government's decision from January 2008 stipulated, inter alia, that the Government's participation in direct security expenses of Israeli airlines would rise to 80%, compared with the existing rate of 50%, as has been the practice in recent years (see Section 9.11.12 above). If the percentage of the State’s participation in the flight security expenses of the Group should be reduced and/or if changes will be caused due to a worsening situation of attempts to attack the Company’s aircraft and its passengers and/or additional means of security will become necessary and/or if the Company is forced to cease its flights to a destination or additional destinations for reasons of security, it might have a material effect on the Company's business results. It should be pointed out that the Company ceased flights to a number of destinations during the year 2007, because of high security costs and operational limitations in matters of security.

9.18.14 Restrictions on the future receipt of credit and/or additional loans in Israel The directives of the Supervisor of Banks in Israel include restrictions according to which the debt of a “single borrower” and of a ”group of borrowers” to a bank in Israel shall not exceed a given percentage of that bank’s shareholders’ equity. From time to time, these directives may affect the ability of some of the banks in Israel to grant additional credit to the Company. Due to the change in the holdings in the Company in which K’nafaim is the controlling shareholder and holds more than 25% of the Company’s issued share capital, the Group is considered a part of the K’nafaim group, as far as the per-borrower-group restriction on giving bank credit to a group of borrowers is concerned. In addition, in light of the weight of the Company’s long-term liabilities to banks in Israel, and due to the volume of loans provided by these banks to Israeli airlines, the Company may encounter difficulty in receiving significant amounts of additional credit in Israel that may be required for purposes of purchasing new aircraft or other investments.

9.18.15 Business restrictions (A) The Commissioner for Restrictive Business Practices (in this Section - “the Commissioner“) set conditions which obligate K’nafaim, as a shareholder in El Al, as detailed in Section 9.11.2(i) above. The Commissioner will be able, within 120 days preceding the end of each period, to re-impose any or all of the

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conditions upon K’nafaim, if he believes that a basis exists at the time. Before imposing any or all of the conditions, the Commissioner will grant El Al the right to a hearing. Should El Al file an appeal as to any of the conditions re- imposed by the Commissioner, the conditions will be postponed for a period of six months, and during this period, the court will decide whether they should become effective. These conditions, if they should become effective, might have a negative effect on the business results of the Company. There is no assurance that the Commissioner will decide to impose these conditions, and even if he should so decide - there is no assurance that the Company will operate according to such decision, which is not directed towards it, but towards K’nafaim. See Section 9.11.2(i) above for more details. (B) The Law for Arrangement in the State Economy for the year 2007, included an amendment to Section 3 (7) to the Business Restrictions Law, according to which the application of the exemption included in it will be reduced with regard to restrictive arrangements in the area of international transport (see Section 9.11.2(i) above for details). The effective date of the amendment was deferred to July 2008 and is contingent upon the Commissioner issuing a class exemption. On March 16, 2008, the Business Restrictions Authority published a draft, for review, of the class exemption for restrictive arrangements between air carriers. See Par. 9.11.2(i) above for additional details. The amendment to the Business Restrictions Law, and the resultant limiting of the exemption for arrangements related to aviation, could hurt the competitive ability of the Israeli carriers, including the Group, and it could have a negative effect on the Group's business results due to the regulatory restrictions on compliance with international agreements in the Group's operating fields and the failure to ratify these agreements by the Business Restrictions Authority. Final drafts of the class exemption for restrictive arrangements between air carriers as relates to business restrictions, if imposed, and the date it takes effect, are "Forward- Looking Information" as defined in the Securities Law, 1968. Forward-Looking Information is information that is uncertain as to the future, based principally on existing Company information at the reporting date and includes estimates, assumptions or intentions of the Company, as of the report date. Accordingly, the actual change in the volume of world activity (passenger transport) and in the cargo Transport area may be materially different from that forecast as aforementioned, as the result of a large number of factors, including a change in world economic, security and political conditions in the world, regulatory changes could be materially different from the results estimated, derived or implied from this information.

(C) On October 27, 2005, the Commissioner of Business Restrictions declared that the Company is the holder of a monopoly for flying time-sensitive (business passengers) and price-sensitive passengers (vacation passengers) in the civil aviation markets to the destinations: Johannesburg, Hong Kong, Bangkok and Bombay. On March 30, 2006, the Company appealed this designation to the Tribunal for Business Restrictions (See Section 9.11.2(i) above for details of the appeal).

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A determination by an authorized body that the Company is a monopoly in any relevant market could limit the Company's freedom of action, as will be described below: • The owner of a monopoly is not permitted to refuse to sell a product as to which it is the owner of a monopoly, unless the refusal is "reasonable" (i.e., there is a legitimate business rationale); • The owner of a monopoly may not sell the product as to which it is the owner of a monopoly at unfair prices and, in particular, it may not sell at loss prices the product for which it is the owner of a monopoly, for the purpose of driving away competitors from the market ("predatory prices"); • The owner of a monopoly is forbidden to decrease or increase the quantity of the monopoly product which it supplies to the market with the intention of exploiting its power as the owner of a monopoly to increase the price of a product, or in an attempt to drive a competitor out of the market or prevent his entry into it; • The owner of a monopoly is forbidden to determine varying prices or terms of sale for a product for which it is the owner of a monopoly, to customers or suppliers in parallel or similar transactions, if this discrimination gives some of the customers or suppliers an unfair advantage over other customers or suppliers; • The owner of a monopoly is forbidden to make the sale of the monopoly product conditional on another product that it supplies, including giving an economic benefit that is conditional upon purchasing the monopoly product or certain quantities of the monopoly product. • The owner of a monopoly is forbidden to adversely use his status in the market in a manner that might reduce business competition or harm the public in any other way. In addition, under Section 30 of the Business Restrictions Law, 1988, the Commissioner of Business Restrictions is permitted to approach the Business Restrictions Tribunal with a request to give an order to the owner of a monopoly if he feels that, due to the existence of a monopoly, business competition or the public is harmed. Moreover, the declaration of someone as the owner of a monopoly is one of the grounds for price control, under Section 6(a)(1) of the Law for Control over Prices of Goods and Services, 1996. From the date of declaration, and for as long as the declaration has not been cancelled by the Business Restrictions Tribunal, there is a supposition that El Al is the owner of a monopoly, both with regard to the definition of the relevant market and also as regards the fact that it is the owner of a share exceeding half of the market, for as long as the declaration has not been revoked by the Business Restrictions Tribunal. Under Sections 26(a) and 43(e) of the Business Restrictions Law, 1988, the declaration allegedly serves as prima fascia evidence of its accuracy in any legal proceeding, and is likely to facilitate the invoking various statutory tools in order to monitor the owners of a monopoly, among them public enforcement (conferring orders on the monopoly-owner, breaking up a monopoly, etc.), and private enforcement (ordinary civil suits by

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competitors or consumers who were harmed by acts of the monopoly, including class actions). The rejection of the appeal filed by the Company, as well as an additional declaration of the Commissioner as to the status of El Al as a monopoly on additional flight routes could have a negative effect on El Al's status, its ability to compete and its business results. (D) During the month of February 2006, the Restrictive Practices Division of the U.S. Justice Department ("Restrictive Practices Division") began an open investigation, together with additional competition authorities of other countries, of alleged suspicion of price fixing with respect to certain increments to prices of air cargo transport. A number of cargo transporters announced that they had received Grand Jury injunctions in connection with this investigation. On September 27, 2006, the Company received a subpoena from the Restrictive Practices Division that had been issued by the Grand Jury, which demands information and documents concerning certain costing and cost increment practices in the cargo transport field, commencing from the year 1999 and through the date of the subpoena. The Restrictive Practices Division notified the Company that the Company is being examined as a suspect in this investigation. The Company is cooperating with the investigation, while performing an internal examination of its own of cargo costing practices. The Company sent the requested information to the Restrictive Practices Division, and continues to work together with it and according to its instructions. See Section 9.14 for additional information.

(E) On December 20, 2006, the Company received a letter from the European Competition Commission ("the Commission") at its head office, which was sent to the Company's offices in Germany, requesting information pertaining to an investigation being carried out by the Commission in connection with activities that allegedly hurt competition in the air cargo transport field. According to publications by the Commission and several airlines, the Commission sent a statement of objection in December 2007 to several airlines relating to the said investigation, containing claims of alleged breach of the competition laws of the European Union. To date, the Company has not received the said statement of objection and to the best of its knowledge, is not included among the companies to whom the statement of objections was addressed. See Section 9.14 above for additional information. (F) On February 28, 2007, the Company received a writ of civil claim that was filed in the United States District Court for the Eastern District of New York in the matter of the prices for cargo air transport services. See Section 8.14 above for additional information. (G) Regarding the investigations and proceedings for which the Company is unable to assess the possible outcome of legal proceedings described in sub- paragraph (D), (E), and (F) above, or to estimate the possible financial effect of these proceedings – all or each separately – on the Company. Nonetheless, it should be noted that the implications could include an administrative or civil proceeding against the Company and/or a criminal indictment, including penalties of significant amounts, which could be imposed on the Company at the

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end of the proceeding, and a financial charge in the ruling. It should be noted that the punishments for violating competition laws could be serious, in the context of criminal liability and civil liability.

9.18.16 Immediate repayment of loans for the purchase of aircraft and complying with financial covenants The Company has undertaken towards the long-term loan providers to maintain a proper collateral ratio between the unpaid loan balance and the collateral pledged to the bank, as stipulated by each agreement. Whenever the ratio falls below that specified in the agreement, the Company is obligated to provide additional security to the lender so that the ratio, as stipulated in the agreement, is maintained. In addition, the terms stipulated in certain agreements relating to loans taken by the Company include the bank's right to demand immediate repayment of the loan balances owed to that bank if, in its opinion, based on reasonable criteria, a change had occurred which adversely affects the Company’s financial position or its operations or its business or its financial ratios, in a manner endangering or potentially endangering the ability to repay the bank loans. Additionally, the Company has made commitments to the banks that if there will be a transfer or change of control of the Company in any manner without the consent of the lenders, the lenders are permitted to demand immediate payment of the loan balances. For this purpose, a public offering will not be considered a transfer of control, unless, as a result, the control of the Company changed. See Section 9.8.2 above and Note 14(g) to the financial statements for more information. The failure of the Company to comply with financial covenants stipulated in the loan agreements, including with regard to the decrease in market value of the collateral, and/or the demand for immediate repayment of Company loans by the banks, might have a negative effect on the business results of the Company.

9.8.17 The municipal status of BGA From time to time, the addition of BGA to the jurisdiction of the city of is considered. If the transfer of BGA to the jurisdiction of any local authority should become a reality, the expenses of the Company might rise (due to the payment of municipal taxes which up to now have not been paid), and the matter will negatively affect its business results.

9.18.18 Labor relations Every interruption of operations of an air carrier due to sanctions or a strike causes a non-recoverable loss and damage to customer confidence. The situation in the industry and the increasing competition in the industry necessitate continuing efforts to increase Company efficiency and to improve service to the customer public. These are conditional upon stable labor relations in the Company, in the employees' identification with the Company and in readiness to cooperate and in an understanding with management. Although the “industrial calm” in the Company has been maintained since 1983, excluding a small number of disruptions, the efficiency that is expressed in

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structural changes, in the reduction in the number of personnel (with the emphasis on permanent employees), and the reduction of labor costs, could cause a shake-up, even for a short period, in the delicate texture of labor relations in the Company. The incident could cause damage in the immediate term and hurt the Company’s goodwill over the longer term, and it might have a negative effect on the business results of the Company for that year and thereafter. Additionally, there could be difficulty in utilizing business opportunities and dealing with changes due to limitations in the labor agreements. On June 28, 2007, notice was received in the Company's offices from the Histadrut, under the Resolution of Labor Disputes Law, 1957, whereby the Histadrut was given the right to declare a strike, as from July 18, 2007 (see Section 9.4.7 above for details). Until this approval date, no actions were taken by the Histadrut. Therefore, the collective labor agreements will be in effect until 31.12.2007. Negotiations are currently being held on changes to the terms of the collective agreement. As long as the negotiations do not develop into a binding collective agreement, after Jun 2008, the collective agreement will be an agreement for an indefinite period, when, according to Section 14 of the Law, each party is allowed to terminate it, upon serving notice two months in advance. The consent or lack of consent regarding the Company's efficiency measures and the collective labor agreements in the Company could have a material effect on the Company's financial results and on its ability to carry out orderly operations.

9.18.19 Legal proceedings The Company is a party to legal proceedings, including a number of lawsuits which the courts have been requested to recognize as class actions (and two of them have actually been recognized as such), which might cause it to be charged with material amounts that cannot be estimated, and for a majority of which, no provision has been made in the Company’s financial statements. In addition, during 2006 and early 2007, legal proceedings were begun in the United States and Europe to which the Company is a party, that are connected to investigations by competition authorities in the U.S and Europe involving price supplements collected for cargo transport. These proceedings could have a substantial effect on the Company because of the penalties that these authorities are permitted to impose, which could be exceedingly high (See Section 9.11.2(i) above for details regarding these proceedings; see Section 9.14 above and 9.18.15 above for a description of the main claims).

9.18.20 Restrictions due to certain provisions of the Special State Share The restrictions relating to maintaining a minimal flight capacity, especially for cargo aircraft, and the prospect of the State demanding to increase the minimal flight capacity with which the Company must comply, diminish operational flexibility and impose burdensome obligations (assurance of fitness). The indemnification in these cases does not cover the Company’s expenses. In addition, the Government Corporations Law gives the Company the authority to prescribe instructions that are intended to protect the vital interests of the State with respect to the Company, this according to decrees under Chapter 2H of the

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Government Corporations Law. Such a decree was issued on November 17, 2004. See Section 9.11.2(k) above for additional details. Such decrees might restrict the Company's business judgment and, as a result, could hurt its financial results. See Section 8.10 above for information concerning the approval received by the Company from the holder of the Special State Share with respect to the reduction of the fleet of cargo aircraft in its ownership.

9.18.21 Dependence on aircraft manufacturer The “Boeing” Company manufactured all of the aircraft in the service of the Company. The discontinuation of the operations of Boeing could cause temporary operational difficulties for the Company. The Company is materially dependent on Boeing, both with respect to spare parts and with respect to engineering support. At the same time, the Company estimates that the likelihood of the termination of this support is low.

9.18.22 Dependence on normal operations at the home airport (BGA) Most of the Company’s operations are carried out at the home airport, BGA. Therefore, an interruption or breakdown in the normal operations of BGA and/or changes in the policies of giving out takeoff and landing authorizations (slots) at the central airports in which the Company operates might have a material negative effect on the Company’s operations.

9.18.23 Flights on the Sabbath and Jewish holydays The Company continues to operate pursuant to a 1982 Government resolution and does not carry out passenger flights on the Sabbath and on Jewish holidays. During the month of November 2006, as the result of a dispute that broke out between the Company and representatives of the Committee of Rabbis for Sabbath Observance on the background of a flight that the Company executed on the Sabbath, an agreement was reached between the parties. (See Section 7.10 above for details of the understanding). Non-fulfillment of the understandings regarding flights on the Sabbath and Jewish holidays, or a change of the Company's policies with respect to this subject, could cause a dispute with this customer field, which could affect the Company's results due to a consumer boycott.

9.18.24 Impairment of flight safety or flight security In order to preserve flight security, the Company maintains security arrangements in accordance with the instructions of the authorized governmental agency. In order to maintain flight safety, the Company carries out the instructions and provisions stipulated by the relevant entities, including the instructions of the manufacturer and the Civil Aviation Authority. Damage to the Company's flights and/or its customers and/or its installations and/or its employees, due to an event connected with flight security and/or flight safety is liable to have a material negative effect on the Company's operations.

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9.18.25 Information systems and information security The current operations of the Company, the business activities and the services that it provides are based upon information systems and databases. In the second quarter of 2008, the Company is expected to change to its new reservation system (the "Amadeus" system, which will replace the "Carmel" system that has been used by the Company for many years), and the customizing of the interfacing systems. This change is expected to be a complex process involving all of the Company's sales systems for passenger flights, which involve the sales, retail and service entities, as well as travel agents, the Company's branches and stations in Israel and abroad. With the change to the "Amadeus" system, there is a risk that the data related to a part of the reservations transferred from the Carmel system to the Amadeus system will not be transferred completely. This risk is both an economic and service risk. An extended failure of critical information systems, including the Amadeus system and/or damage to the Company's information security could have a major negative effect on the Company's operations.

The following table presents the risk factors that are described above according to their nature (macro risks, industry risks and risks particular to the Group), which have been ranked, as estimated by the Group’s management, according to their effect on the Group’s business as a whole-large, moderate and small effect. The Company’s approximations as to the ranking of the risks was determined in consideration of the likelihood of the occurrence of the event and the measure of damage which might be caused to the Group, should the event take place.

Extent of risk's effect on the Company Large effect Moderate effect Small effect Macro risks Political or security events or terrorist actions √ Exposure to currency risks √ Changes in the economic situation √ Natural disasters and epidemic outbreaks √ Exposure to variable interest risks √ Industry risks Jet fuel prices √ Changes in competition √ Seasonal influence √ Government resolutions on aviation matters and √ licensing of the Company as an air carrier Operations in an industry with a high fixed-cost √ structure

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Extent of risk's effect on the Company Large effect Moderate effect Small effect Noise restrictions and environmental matters √ Effect of low cost airlines operation on the Israeli √ market Impairment of flight safety or flight security √ Risks particular to the Company Costs of maintaining flight security √ Restrictions on receipt of credit and/or additional √ future loans Business restrictions √ Immediate repayment of loans for the acquisition √ of aircraft Municipal status of BGA √ Labor relations √ Legal proceedings √ Restrictions due to provisions of Special State √ Share Dependence on aircraft manufacturer √ Dependence on regular operations at home √ airport (BGA) Saturday and religious holiday flights √ Information systems and information security √

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2007 ANNUAL REPORT

CHAPTER B DIRECTORS' REPORT

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El Al Israel Airlines Ltd. Report of the Board of Directors on the State of the Corporation's Affairs For the Year Ended December 31, 2007

We hereby present the Report of the Board of Directors on the State of the Corporation's Affairs for the year ended on December 31, 2007.

El Al Israel Airlines Ltd. ("The Company") closed year 2007 with net income of $31.7 million. The Company's consolidated revenues in 2007 grew by 16% compared with 2006, reaching a total of $1,932 million.

In 2007, the Company flew 3.7 million flight segments and 153 thousands tons of cargo.

Net cash provided by operating activities in the year 2007 totaled $231.2 million, and the balance of cash, cash equivalents and short-term investments as at December 31, 2007 totaled $267.3 million.

Shareholders' equity as at December 31, 2007 totaled $292.5 million.

The year 2007 was characterized by recovery of traffic in Ben Gurion Airport (BGA), against the backdrop of the Second Lebanon War that occurred in the third quarter of 2006. The sharp growth was manifest in traffic of departing Israelis and incoming tourists, and overall, passenger traffic in BGA in 2007 increased by 15% compared with 2006.

The "Open Skies" policy of the Israeli Government continued in 2007. Four additional foreign airlines began operating scheduled flights to and from Israel, and other companies added frequency and capacity.

The total supply of seats by scheduled foreign airlines on the routes to and from Israel grew this year by 10% compared with 2006 and by 33% in the last two years.

The growth in the number of foreign airlines operating in BGA, in the number of scheduled flights and the seating capacity of the foreign companies caused an escalation in competition on some of the routes, and to a decline in El Al's market share of total passenger traffic in BGA. The Company's decision to halt flying to locations such as Turkey and Cyprus, because of the lack of economic feasibility, also contributed to the decline in the Company's share at BGA.

The Company's policy of revenue management generated an increase in return on passenger kilometer of 12% compared with 2006, whereas the return on cargo ton per kilometer relative to 2006 fell by 2%.

In 2007, the costs of inputs deriving mainly from the increase in the effective price of jet fuel to the Company (after hedging) of 18% relative to 2006, and from the appreciation of the shekel and the euro relative to the dollar at an average rate of 8% and 9%, respectively, compared with 2006, which increased the Company's shekel and euro expenses in dollar terms, especially salary expenses.

In 2007, El Al continued implementation of its strategic plan "El Al 2010", which was expressed in the acquisition in the third quarter of the year of two updated Boeing 777-200 aircraft, which are equipped with seats and flight entertainment systems that are the most advanced of their kind, and also entered into agreements to purchase and lease several other aircraft.

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In December 2007, a code-share agreement was signed with American Airlines, which gives the Company's passengers the possibility of continuing flights to more than 20 major destinations of American Airlines throughout the U.S.

Additionally, the Company has continued its activity to purchase and integrate advanced computer systems, including the Amadeus reservation system and an ERP system.

In 2007, the Company distributed a dividend to shareholders for the first time in its history.

The range of commercial and operational actions adopted by the Company's management and its return to profitability, testify to realization of the Company's vision to lead the aviation market in Israel and to constitute the first and preferred choice for all air traffic to and from Israel.

The financial statements as at December 31, 2006 and as at December 31, 2005 and for the year then ended were restated due to the first-time application of Accounting Standard No. 27 – Fixed Assets, and due to a correction of the deferred tax liability – see Note 2.z to the interim financial statements.

1. The Company and its business environment

1.1 General

The Company serves as the designated air carrier of the State of Israel on most of the international routes operating to and from Israel.

The key activities of the Company and its subsidiaries are the transport of passengers and cargo, including baggage and mail, through scheduled flights, and regarding the transport of passengers, also on charter flights between Israel and overseas. The Company is also engaged in the leasing of flight equipment, in providing security services and maintenance services, including for other airlines at BGA, in the sale of duty-free products, and through investees – in ancillary activities, mainly the manufacture and supply of airline food and the management of several travel agencies.

The business environment in which the Company operates is the international civil aviation industry, and inbound and outbound tourism, which is characterized by a seasonal nature and strong competition, which is grows stronger in periods of over-capacity. In the segment of passenger transport, the Company competes with 2 Israeli airlines and 45 foreign airlines, which operate scheduled flights to and from Israel, and with 40 foreign charter companies that operate regular flights.

In the cargo segment, the Company competes with seven airlines that operate cargo planes, and with most of the scheduled airlines that operate passenger planes that carry cargo in their holds.

The Group has two operating segments:

A) Air transport in passenger planes – In this segment, the Group transports passengers, as well as cargo (including mail and baggage) in the hold of passenger planes, and provides ancillary services, such as: the sale of duty-free products and the leasing of passenger planes. The revenues of this segment constitute 88% of the Group's total revenues in 2007.

B) Air transport in cargo planes – In this segment, the Group transports cargo in cargo planes and also provides ancillary services. Revenues of this segment constitute 11% of the Group's total revenues in 2007. The Group has additional revenues that are not allocated to the major segments, accounting for 1% of total revenues.

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1.2 Privatization of the Company

By June 5, 2007, all of the call options (Series B) were exercised, for a total of 157,600,000 options. As a result of the exercise of the call options (Series B), as from June 5, 2007, the State was no longer an interested party in the Company. The State still holds 1.1% in the issued and paid-up capital of the Company as a well as one special State share.

Additionally, by June 5, 2007, 99,998,588 options (Series 1) out of 100,000,000 options were exercised. The balance of options (Series 1) that were not exercised by June 5, 2007 (1,412 options) expired, and are null and void.

As at December 31, 2007, the holdings in the Company were: Knafaim Holdings Ltd. ("Knafaim") – 39.3%, Pinchas Ginsburg – 7.7%, "Holdings in Trust of El Al Employees Ltd." ("Employees Corporation") – 6.6%, State of Israel – 1.1%, others – 45.3%. For additional information related to the Company’s privatization, see Note 1.B to the Periodic Report.

Shareholdings in Company at December 31, 2007 (undiluted):

employees’ Trust Others Holdings pinchas 45.3% 6.6% ginsborg 7.7%

State of K'nafaim Israel 39.3% 1.1%

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2. Financial position (consolidated financial statements)

31.12.2007 31.12.2006 * change in in thousands in thousands thousands US dollars US dollars US dollars % Assets Cash, cash equivalents and short-term investments 267,303 150,840 116,463 77% Trade accounts receivable 143,617 132,544 11,073 8% Receivables and other current assets 51,953 47,342 4,611 10% Deferred income taxes 19,569 30,645 (11,076) (36%) Inventory 15,981 17,190 (1,209) (7%) Investments 6,190 5,945 245 4% Fixed assets 1,286,421 1,176,528 109,893 9% Other assets 3,719 3,455 264 8% 1,794,753 1,564,489 230,264 15% Equity & liabilities Short-term borrowings and current maturities 66,316 105,100 (38,784) (37%) Trade accounts payable 167,420 144,990 22,430 15% Payables and other current liabilities 407,842 332,691 75,151 23% Dividned proposed for payment 3,009 - 3,009 - Long-term loans from financial institutions 713,793 566,104 147,689 26% Accrued severance pay, net 70,936 126,171 (55,235) (44%) Deferred income taxes 72,510 74,603 (2,093) (3%) Other long-term liabilities 423 730 (307) (42%) Shareholders’ equity 292,504 214,100 78,404 37% 1,794,753 1,564,489 230,264 15%

* Restated – see Note 2.z to the financial statements.

2.1 The main changes in asset, liability and shareholders' equity items as at December 31, 2007 compared with December 31, 2006 are:

• Increase in cash, cash equivalents and short-term investments, due mainly to the positive cash flows from operating activities in the year of $231.2 million and to $219.5 million in loans received, offset by investments in fixed assets of $248.6 million and the repayment of loans of $103.6 million.

• Increase in trade accounts receivable, due mainly to growth in passenger sales. • A decrease in short-term deferred tax assets, resulting from the reclassification of a deferred tax asset from short-term to long-term during the current year.

• Increase in fixed assets, due mainly to investment in the purchase of aircraft and flight equipment and other fixed assets of $248.6 million in the current year, offset in part by annual depreciation expenses and consumption of spare parts and accessories.

• Decrease in short-term credit and current maturities, due to the repayment of a bank loan. • Increase in trade accounts payable, due to the growth in activity and to the increase in the payables to jet fuel suppliers, as a result of the rising prices of jet fuel.

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• Increase in the balance of payables and other current liabilities, due mainly to the increase in prepaid income as a result of the increase in sales of not yet utilized flight tickets, the increase in salaries payable to employees and institutions (including increases due to the devaluation in the exchange rate of the dollar against the shekel) and the increase in the liability for airport taxes and an increase in the liability for the frequent flyer club.

• A dividend was declared on December 31, 2007 of $3,009 thousand and distributed during January 2008.

• The balance of long-term loans increased as a result of the receipt of a loan from a foreign bank to finance the two new model 777-200 passenger planes, offset by current repayments of long- term loans.

• Decrease in accrued severance pay, net, due mainly to the deposits made by the Company and the State in the employee severance pay fund, as a result of the exercise of the call options pursuant to the terms of the prospectus.

• Increase in the Company's shareholders' equity, due mainly to the income in the current period, to the deposits by the State of Israel in the severance pay fund, which led to an increase in the capital reserve from transactions with a former controlling owner, to the exercise of options for shares and the recording of a benefit to a capital reserve for the employee options plan, offset by the dividend paid and dividend declared to shareholders.

Current ratio by % - Cash, cash equivalents and short-term at December 31: investments - at December 31 (in $ millions):

90% 300 80.8% 267.3 77.3% 206.8 225 65.0% 62.7% 151.3 150.8 53.9% 60% 150

93.1

75

30% 0 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007

As at December 30, 2007, the Company has a working capital deficit of $146.2 million, compared with a deficit of $204.2 million as at December 31, 2006. The decrease in the working capital deficit is due to the increase in balances of cash and short-term investments, to the decrease in short-term credit and current maturities of long-term loans, resulting from the payment of a bank loan, offset by the increase in the balances of trade accounts payable and other payables. The working capital deficit is due to the Company's current liabilities, which contain two significant elements: prepaid income from the sale of airline tickets and the current maturities of long-term loans.

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These elements, which are characterized by a cyclical nature, are included in current liabilities, and essentially explain most of the working capital deficit.

2.2 First-time application of Accounting Standard No. 27 – Fixed Assets Commencing January 1, 2007, Accounting Standard No. 27 – Fixed Assets, took effect, providing the accounting treatment for fixed assets. The Company's management decided to institute the accounting policy of measuring fixed assets by the cost method, as was its practice before publication of the Standard. Regarding the provisions of the Standard and the restatement of the financial statements as at December 31, 2006 and as at December 31, 2005, as a result of application of the Standard – see Note 2.i and Note 2.z. to the interim financial statements.

3. Analysis of operating business results of El Al

3.1 Market data Passenger and cargo 2007 2006 change traffic at BGA in thousands in thousands in thousands % Incoming tourists * 1,790 1,565 225 14% Departing Israelis * 3,433 3,145 288 9%

Cargo import - tons ** 139 135 4 3% Cargo export - tons ** 199 183 16 9%

* Source: Central Bureau of Statistics. ** Does not include cargo in transit.

Passenger traffic at BGA Incoming tourists & departing Israelis, by year: (In thousands)

3,600

3,433 3,145 2,800 3,013 2,869 2,689 2,000

1,790 1,653 1,565 1,200 1,339 972 400 2002 2003 2004 2005 2006 Incoming tourists Departing Israelis

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Imports & Exports of cargo by air to and from Israel, by year (in thousands tons):

250 199 194 178 183 176 200

150

139 130 127 135 100 115 50

2003 2004 2005 2006 2007 Import Export

3.2 Company operating data

2007 2006 change

Passenger leg (scheduled and chartered) - in thousands 3,744 3,569 5% RPK (scheduled) - in millions 17,068 16,055 6% ASK (scheduled) - in millions 20,104 19,750 2% Load factor (scheduled) 84.9% 81.3% 4% Market share (scheduled and chartered) 38.1% 41.7% (9%) Flown cargo, in thousand tons 153 159 (3%)

RTK - in millions 862 885 (3%) Weighted flying hours (including leased equipment) - in thousands (*) 172 172 0% Average man-years (El AL only): Permanent 3,542 3,685 (4%) Temporary 2,409 2,500 (4%)

Total 5,951 6,185 (4%)

Aircraft in operation - end of period - number of units 36 35 1 Average age of owned fleet at the end of the period - in years 14.8 14.8 0

** Total employees (permanent and temporary) in job slots – as at 31.12.2007 – 5,929 and as at 31.12.2006 – 5,897.

Glossary: Passenger leg – Flight coupon in one direction. RPK – Revenue Passenger Kilometer – number of paying passengers multiplied by distance flown. ASK – Available Seat Kilometer – number of seats offered for sale multiplied by distance flown. RTK – Revenue Ton Kilometer – weight of paid flown cargo in tons multiplied by distance flown. Passenger Load Factor (occupancy) – flown passenger-km is expressed as a percentage of available seat-km. * Weighted flight hours in terms of Boeing 767/757. Weighted value of the planes: Boeing 767/757 = 1.0; Boeing 747 = 2.0; Boeing 777 = 1.6; Boeing 737 = 0.6. These weighted values were determined based on an estimate of the total expenses of each type of aircraft, and are used consistently to calculate weighted flight hours as an indicator of the volume of aviation activity.

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Operating data, by year (in millions): 25,000 100% 20,324 19,750 20,104 18,665 20,000 17,068 16,035 16,141 16,055 90% 14,347 15,000 12,139 84.9% 80% 10,000 81.3% 79.4% 76.9% 75.7% 70% 5,000

0 60% 2003 2004 2005 2006 2007 RPK ASK L. F.

3.3 Statement of operations data

For the year ended December 31, 2007 (consolidated financial statements):

2007 2006 in % of in % of in thousands operating thousands operating thousands US dollars revenues US dollars revenues US dollars % Operating revenues 1,932,450 100% 1,665,446 100% 267,004 16% Operating expenses (1,539,658) (79.7%) (1,394,159) (83.7%) (145,499) 10% Gross profit 392,792 20.3% 271,287 16.3% 121,505 45% Selling expenses (230,637) (11.9%) (187,805) (11.3%) (42,832) 23% General and administrative expenses (90,781) (4.7%) (91,952) (5.5%) 1,171 (1%) Operating income (loss) before financing 71,374 3.7% (8,470) (0.5%) 79,844 Financing expenses, net (33,393) (1.7%) (29,492) (1.8%) (3,901) 13% Other income (expenses), net 2,423 0.1% (2,764) (0.2%) 5,187 Income (loss) before taxes on income 40,404 2.1% (40,726) (2.4%) 81,130 Income taxes (9,001) (0.5%) 6,397 0.4% (15,398) Income (loss) after taxes on income 31,403 1.6% (34,329) (2.1%) 65,732 Company’s equity in results of affiliates, net 332 0.0% 417 0.0% (85) (20%) Net Income (loss) for the year 31,735 1.6% (33,912) (2.0%) 65,647

* Restated – see Note 2.z to the financial statements.

The key factors that influenced the business results in the year ended December 31, 2007 compared with the same period last year:

• The increase in operating revenues is due mainly to the increase in passenger revenues, which is due to the increase in the RPK by the Company during the current year compared with 2006 and to the increase in average revenue per passenger km. Likewise, there was an increase in other operating income, mainly from the maintenance services provided to other airlines and to the sale of duty-free items.

• The increase in the Company's operating expenses is due mainly to the growth in turnover, to the increase in jet fuel prices, to the increase in salary expenses, to the increase in maintenance expenses for aircraft and flight equipment, and to the expenses for air/flight fees. Notice should be paid to the continued operational improvements shown by the Company, as expressed in the rising occupancy rates, from 81.3% I 2006 to 84.9% in 2007.

Operating expenses as a % of annual turnover fell from 83.7% in 2006 to 79.7% in 2007.

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Breakdown of operating expenses in 2007:

Maintenance of aircraft Jet fuel Wages and Meals 6% 36% 3% social benefits 18%

Depreciation Other Air navigation & 7% expenses communication Airport fees & 13% 6% service 11%

• The average price of jet fuel to the Company in 2007, after hedging payments, rose by 18% compared with 2006. The Company's expenses for jet fuel rose by 19% from $465.9 million in 2006 to $556.3 million in 2007, after payments received for hedging totaling $8.3 million (compared with $52.3 million in 2006).

• Current salary expenses increased, due mainly to the appreciation of the shekel and euro against the dollar, which was offset mainly by the decrease in the average number of employees during the year. Regarding the effect of the changes in the shekel/dollar exchange rate on the Company's provisions, see Par. 3.4 below.

• Selling expenses increased mainly as a result of the growth in distribution expenses, resulting from the growth in sales, which led to an increase in the base commissions and volume commissions paid to agents, and to the growth in commissions to credit card companies due to the growth in direct sales through the Internet.

• The general and administrative expenses decreased compared with the same period last year, and their percentage of turnover fell from 5.5% in 2006 to 4.7% in 2007.

• The loans taken by the Company to finance two new 777-200 aircraft which it purchased and the related expenses, as well as the increase in the exchange rate differences resulting from the devaluation of the dollar against other currencies, increased financing expenses compared with 2006. On the other hand, financing income increased, as a result of the increase in deposits and gains from exchange rate hedge transactions. Operating income, Selling expenses & general and administrative by year (in millions of dollars): expenses as % of turnover, by year:

1,932 2000 15% 1,619 1,665 12.3% 11.3%11.9% 1600 1,386 1,168 10% 1200 5.5% 5.5% 4.7% 800 5%

400 0% % Selling % Ge ne ral and 0 expenses administrative 2003 2004 2005 2006 2007 expenses 2005 2006 2007 b-9

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• During the year, the Company recorded income of $4.4 million for compensation for discontinuation of in-flight Internet services by a subsidiary of Boeing. Moreover, the Company recorded income from Boeing of an additional $6.5 million as damages for loss of income for two joint projects, and in addition, income of $3.4 million for vacating a property in Heathrow Airport in London. On the other hand, expenses were recorded totaling $12.1 million for early retirement plans, mainly for the addition of two groups of additional retirees and the appreciation of the shekel exchange rate against the dollar ($4.4 million expense for early retirement in 2006). In 2006, the Company had capital gains of $1.7 million, mainly from the sale of a cargo plane.

The key factors that influenced the business results in the three-month period ended December 31, 2007 compared with the same period last year:

In the fourth quarter of 2007, the Company recorded a loss of $8.4 million, compared with a loss of $15.9 million in the fourth quarter of last year.

In the fourth quarter of 2007, there was an increase in turnover compared with the same period last year, expressed in growth in the weighted number of flight hours of 7.9%, growth in RPK of 11.7% and growth in RTK of 2.3%.

Operating revenues in this quarter grew by 26% compared with the fourth quarter last year, totaling $524.3 million. Operating expenses grew mainly as a result of growth in turnover and the increases in fuel expenses and salary expenses, but as a percentage of turnover, the rate fell from 83.8% in the fourth quarter of 2006 to 81.9% in the current quarter.

The average price of jet fuel to the Company in the fourth quarter of 2007, after hedge payments, rose by 33% compared with the fourth quarter of 2006. The Company's jet fuel expenses rose by 40%, from $119.4 million in the fourth quarter of 2006 to $167.2 million in the fourth quarter of 2007.

Salary expenses increased due to reasons including the appreciation in the exchange rate of the shekel to the dollar, compared with the same quarter last year.

Selling expenses in the fourth quarter of 2007 increased compared with the same quarter last year, mainly due to the sales growth which brought an increase in the base commissions and volume commissions paid to agents.

General and administrative expenses remained without material change, and their percentage of turnover decreased compared with the fourth quarter last year.

Financing expenses decreased in the fourth quarter of 2007 compared with the fourth quarter of 2006, mainly due to the income from exchange rate hedges and an increase in interest on deposits.

3.4 Effect of changes in the exchange rate on the Company's accrued severance pay liability (including voluntary retirement plans) and on the provision for vacation and sick pay ("effect of changes in exchange rate on Company provisions")

In the year ended December 31, 2007, the exchange rate of the shekel appreciated against the dollar by 9.0%, compared with appreciation in the exchange rate of the shekel against the dollar of 8.2% in 2006. The Company has a liability to its employees for severance pay, retirement plans, sick pay, and vacation pay as at December 31, 2007 of $112 million.

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Since most of these liabilities are denominated in shekels, whereas the functional currency of the Company is the dollar, these liabilities must be translated into dollars, which causes differences deriving from changes in the exchange rate of the shekel against the dollar. Exchange rate changes are not one-directional, and cause accordingly revenues or expenses in the Company's financial statements. These revenues or expenses do not impact cash flow or operating costs of the Company in the short run.

In order to enable a comparison of the Company's business results over time, these revenues or expenses should be neutralized. This effect is diminishing since the State deposited monies into the severance pay fund.

Change in US dollar exchange rate: 4.8

4.665 4.5 4.603 4.440 4.302 4.2 4.225 4.249 4.155 4.013 3.9 3.846

31.12.05 31.03.06 30.06.06 30.09.06 31.12.06 31.03.07 30.06.07 30.09.07 31.12.07 3.6

In the year ended December 31, 2007, the expenses for this element increased by $8.3 million, compared with the same period last year, in which the expenses for this element increased by $10.2 million.

Presented below are details of the business results, after neutralizing the effect of the exchange rate on the accrued severance pay element, as described above:

Before After neutralizing the exchange-rate effect Year ended December 31, on the accrued severance pay 2007 2006 2007 2006 (in thousands US dollars) Operating expenses 1,539,658 1,394,159 1,535,380 1,387,757 Gross profit 392,792 271,287 397,070 277,689 Gross profit rate 20.3% 16.3% 20.5% 16.7% Selling, general and administrative expenses 321,418 279,757 320,754 278,509 Operating income (loos) before financing 71,374 (8,470) 76,316 (820) Operating income (loos) rate before financing 3.7% (0.5%) 3.9% (0.0%) Other income (expenses), net 2,423 (2,764) 5,773 (215) Net income (loss) for the period 31,735 (33,912) 40,027 (23,713) Net income (loss) rate 1.6% (2.0%) 2.1% (1.4%)

In the fourth quarter of 2007, the exchange rate of the shekel appreciated against the shekel by 4.2%, compared with appreciation of 1.8% in the same quarter last year. In the fourth quarter of 2007, salary expenses increased, due to the effect of the changes in the shekel/dollar exchange rate on these salary-related liabilities, by $3.0 million, compared with the same quarter last year, in which the expenses for this element increased by $2.3 million.

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3.5 Segment reporting

A. Presented below are geographical segment data on a consolidated basis – primary reporting1:

For year ended 31 December : Central Asia Rest of North America Europe & Far East the world Total (in millions US dollars) 2007 operating revenues ** 674.7 822.3 356.8 42.1 1,895.9 Non-segment revenues 36.5 Total consolidated revenues 1,932.5 Operating income by segment 48.8 135.6 29.3 10.8 224.5 Overall segment expenses, net (153.1) Operating income, before financing expenses - consolidated 71.4 % of operating revenues 7.2% 16.5% 8.2% 25.7% 2006 * operating revenues ** 582.3 699.2 315.2 36.7 1,633.4 Non-segment revenues 32.0 Total consolidated revenues 1,665.4 Operating income by segment 14.9 84.1 39.5 8.0 146.6 Overall segment expenses, net (155.1) Operating loss, before financing expenses - consolidated (8.5) % of operating revenues 2.6% 12.0% 12.5% 21.7% 2005 * operating revenues ** 569.2 706.4 280.1 34.8 1,590.5 Non-segment revenues 29.0 Total consolidated revenues 1,619.5 Operating income by segment 57.5 165.5 33.3 11.5 267.8 Overall segment expenses, net (181.3) Operating income, before financing expenses - consolidated 86.5 % of operating revenues 10.1% 23.4% 11.9% 33.1%

* Restated – see Note 2.z to the financial statements. ** Revenues are allocated to geographic segments based on the flight destinations.

In the year ended December 31, 2007, revenues increased in all the geographic segments compared with the same period last year, due to the growth in activity and the growth in RPK. Operating income rates in 2007 increased in all the segments, except for Central Asia and the Far East. The decrease in the operating income rate in Central Asia and the Far East is due to the cargo segment, which on one hand posted a decreased return on RPK unit, while on the other hand, the increase in fuel expenses and variable expenses per RPK unit , so that the contribution of the cargo aircraft segment fell significantly from last year. ______1 It should be noted that for the year 2006 and 2005, the Company's revenues system and its breakdown between passenger and cargo aircraft were examined, according to a more precise measurement model than in the past. The results of this examination indicated an increase in the relative weight of revenues from cargo in the hold of passenger planes, compared with the data computed at the start. According to the Company's estimates, this effect is estimated at $8.7 million for 2006 and $6.2 million for 2005. Accordingly, revenues from the passenger plane segment increased, and correspondingly, revenues from the cargo planes decreased by the same amount. The new calculation was implemented as from these financial statements. It should be clarified that this change has no effect on the operating results in the financial statements for these years, and this change has no effect on the financial data for the operating segments as presented by the Company, but rather, affects the classification of the revenues between the operating segments and the resultant income.

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Operating revenues attributed to geographical segments Year 2007:

Re s t of Nor th the America Asia world 36% 19% 2%

Europe 43%

B. Presented below are operating segment data on a consolidated basis – secondary reporting2 for the year ended December 31:

passenger aircraft cargo aircraft others Total (in millions US dollars)

2007 Passengers 1,547.5 - - 1,547.5 Cargo and mail 106.2 216.3 - 322.6 Other revenues 38.7 1.0 22.7 62.4 Total revenues 1,692.4 217.3 22.7 1,932.5

Distribution - in % 88% 11% 1% 100%

2006 Passengers 1,277.7 - - 1,277.7 Cargo and mail 98.7 232.9 - 331.6 Other revenues 34.4 1.0 20.7 56.1 Total revenues 1,410.9 233.9 20.7 1,665.4 Distribution - in % 85% 14% 1% 100%

2005 Passengers 1,259.8 - - 1,259.8 Cargo and mail 98.8 210.3 - 309.1 Other revenues 33.3 0.8 16.5 50.6 Total revenues 1,391.8 211.1 16.5 1,619.5 Distribution - in % 86% 13% 1% 100%

______

2 See footnote 1 above.

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Revenues attributed to operating segments Year 2007:

Others cargo 1% aircraft 11%

passenger aircraft 88%

In 2007, there was a 20% increase in revenues from passenger planes relative to 2006, and the segment's share of the Group's revenues rose from 85% in 2006 to 88% in 2007, as a result of the growth in passenger kilometers traveled and in RPK in the reporting period, and from an increase in the RTK flown in the holds of passenger aircraft. In the cargo plane segment, there was a 7% decrease in revenues compared with 2006, and the segment's share in the Group's revenues fell from 14% in 2006 to 11% in 2007, as a result of the decrease in revenues from cargo tons flown and in RTK .

4. Seasonal factors

Passenger traffic in Ben-Gurion Airport has a strong seasonal nature. Most of the activity occurs in the summer months, peaking in July-September. The winter months (January-March) are characterized on one hand by low passenger traffic, but on the other hand, the cargo transport of agricultural exports to Europe during those months is higher. Revenues according to quarters and percentage of turnover Year 2007 (in $ millions):

50% 600 566.7 524.3 500 452.8 40% 388.6 400 300 30% 29.3% 200 27.1% 23.5% 20% 100 20.1% 0 10% Q1-07 Q2-07 Q3-07 Q4-07 revenues % of revenues

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5. Liquidity and financing sources

The cash flows in the three-month period ended September 30, 2007 compared with the same period last year are:

2007 2006 change in thousands in thousands in thousands US dollars US dollars US dollars Cash flows from operating activities 231,154 98,136 133,018 Cash flows used for investing activities (420,853) (14,554) (406,299) Cash flows from (used for) financing activities 130,211 (31,353) 161,564 Net increase (decrease) in cash equivalents (59,488) 52,229 (111,717)

* Restated – see Note 2.z to the financial statements.

The change in the Company's cash flows from operating activities in 2007, compared with last year, derives mainly from the pre-tax income this year, compared with the loss posted in 2006, and from the increase in trade accounts payable and other payables.

In the year ended December 31, 2007, the Company used $248.6 million to purchase fixed assets, overhaul engines and make payments on account of the purchase of planes (compared with $128.9 million last year), and created short-term deposits of $176.0 million (compared with the withdrawal of deposits of $107.9 million, net, last year). Likewise, in 2007, $3.8 million was received as a refund on account of an investment in fixed assets, whereas in 2006, $7.0 million was received from the sale of fixed assets.

Overall, the Company used $420.9 million in investing activities in 2007, compared with $14.6 million used in investing activities last year.

In the year ended December 31, 2007, the Company received long-term loans to finance the purchase of two Boeing 777-200 planes totaling $219.4 million, whereas in 2006, a loan totaling $40 million was received from a foreign bank.

On the other hand, the Company used $103.6 million to repay long-term loans, compared with $70.0 million last year. Moreover, the Company paid $7.6 million for loan fees ($1.1 million in 2006). In the current year, the Company paid $9.3 million to its shareholders as a dividend and received proceeds from the exercise of options for shares of $31.8 million ($0.3 million in 2006).

In total, cash flows from financing activities of $130.2 million were generated to the Company, compared with $31.4 million used in financing activities last year.

The cash and cash equivalents and short-term investments balance as at December 31, 2007 totaled $267.3 million, compared with $150.8 million as at December 31, 2006.

In the current year, the State deposited $25.3 million ($0.8 million in 2006) into the severance pay fund of Company employees, pursuant to the terms of the prospectus, and the Company received $31.8 million from the exercise of options (Series 1) of which $24.4 million ($0.3 million in 2006) was deposited in the severance pay fund. For additional information, see Note 15.b.3.b of the financial statements.

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The average amount of long-term credit from banks (including current maturities) during 2007 stood at $711 million ($676 million in 2006).

The average amount of trade payables received by the Company during 2007 was $162 million ($145 million in 2006).

The average amount of credit given by the Company to its customers during 2007 was $167 million ($152 million in 2006).

6. Disclosure about critical accounting estimates

The implementation of accounting principles by the Company's management when preparing financial statements occasionally involves various assumptions, assessments and estimates that influence the asset and liability amounts and the business results reported in the financial statements. Some of the assumptions, assessments and estimates are critical to the financial position or operating results reflected in the Group's financial statements, due to their materiality, complexity of the calculations or likelihood of realization of matters that are uncertain.

Presented below is information on critical accounting estimates to the Company:

Contingent claims – The Company records a provision for legal claims that were lodged against it in Israel and overseas, including class actions, according to the degree of risk assessed for each claim, based on the opinion of the Company's legal counsel.

There are several legal claims against the Company (including class actions and legal proceedings relating to restrictive trade practices in the cargo segment), for which the Company's legal counsel cannot estimate the Company's exposure. In those cases, no provision was included in the financial statements.

By their nature, the courts' rulings could differ from the Company's estimates, and thereby have an adverse effect on the Company's operating results. For additional information, see Par. 9.14 of Chapter A – Description of the Corporation's Businesses and Notes 17a and 17b of the financial statements.

Accounting Standard 15 – Impairment of Assets – Accounting Standard 15, which was published by the Israel Accounting Standards Board, provides that a corporation must ensure that its assets are not stated at an amount exceeding its "recoverable value". The "recoverable value of an asset" is the higher of the net sales price and the present value of the estimated future cash flows expected from it. The Company has a fleet of model 767 aircraft with net book value as at December 31, 2007 exceeding the prices on the pricelist for these planes. The Company performed a valuation, in which it calculated the recoverable amount of this fleet. The conclusion of the valuation is that the recoverable amount of this aircraft fleet exceeds its net book value. The Company, when determining the present value of the estimated future cash flows expected from the use of this fleet, relied on forecasts regarding factors including expected volumes of activity, flight ticket prices and cargo deeds, operating costs and future interest rates.

Material changes in these estimates, or in some of them, could affect the recoverable amount of these assets, thereby influencing the Company's operating results.

For additional information, see Note 2.y of the financial statements.

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7. Qualitative reporting on exposure to and management of market risks

7.1 General – Description of market risks to which El Al is exposed

Presented below is a summary of the market risks to which the Company is exposed:

Changes in prices of jet fuel – which constitutes a significant element of the Company's operating expenses, having a material effect on the Company's profitability. In the Company's estimation, at the current level of activity, every increase of $0.01 in the price of a gallon of jet fuel during an entire year, increases the Company's fuel expenses by $2.6 million. The Company has taken hedging measures to reduce the exposure, as provided in Par. 7.3.

Exposure to changes in interest rates – Most of the Company's long-term loans are at variable interest. Therefore, an increase in the Libor rate could impact the Company's profitability.

At the present level of activity, every 1% increase in the Libor rate for a full year increases the Company's financing expenses by $7.8 million.

The Company has adopted hedging measures to reduce the exposure, as provided in Par. 7.4.

Currency exposure – Most of the Company's revenues and expenses are in foreign currency (mainly the U.S. dollar), except for several shekel expenses, mainly salary expenses paid in Israel. Accordingly, a change in the shekel/dollar exchange rate influences the Company's shekel expenses in dollar terms. In the Company's estimation, at the present level of activity, appreciation of the exchange rate of the shekel relative to the dollar of each 1% for an entire year, increases the Company's annual expenses by $3.0 million. Likewise, in the event of a devaluation of the euro against the dollar, the surplus of receipts in excess of payments in euro reduces the Company's revenues.

The Company has adopted hedging measures to reduce the exposure, as provided in Par. 7.5.

Exposure in long-term framework loans – According to the provisions of the loan agreements, the Company must maintain a minimal collateral ratio between the market value of the planes and the balance of the loans that financed their purchase. Likewise, the Company is required to comply with certain covenants (including as a result of the transfer of control in the Company), which, if not complied with, the Company could be demanded to immediately repay the loans. The Company's exposure to market risks in this area derives from the changes that occur in the market value of planes globally, due to exceptional security events, and to the oversupply of seats on airlines in the world.

7.2 Company market risks management policy, officials responsible for their management and means of controlling and executing policy

The Company has a Board of Directors committee for market risks management headed by the chairman of the finance, budget and financial statements committee, who is responsible for prescribing the policy for covering the existing exposure. The CFO is responsible for executing the policy and reporting to the market risks management committee.

The market risks management committee prescribes the framework for future consumption of jet fuel. The significance of the financial hedge of jet fuel prices is to guarantee the range of purchase prices of jet fuel. In the event of a decrease in jet fuel prices, which is guaranteed beyond the range, then the Company pays the difference. In the event of an increase in jet fuel prices, the Company receives the difference from the guaranteeing company (mainly overseas banks).

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The goal of the hedge of jet fuel prices is to hedge the Company's exposure to changes in global jet fuel prices.

The average market price of jet fuel in the year 2007 was an average of 9% higher than in 2006. The effect of this price increase on the Company's financial results is material.

The hedging activities adopted by the Company mitigated part of the effect of the price increase. Likewise, the Company has instituted a process of adjusting flight ticket prices in order to mitigate the effect of the price increases for jet fuel on the business results.

Accordingly, the hedge policy is: hedging jet fuel quantities for up to 24 months forward, so that for every period, a minimum percentage of total expected consumption is designated for hedging, and the maximum percentage to be hedged out of total expected consumption gradually decreases. Therefore, the maximum hedge percentage as at the beginning of the period is 80% and the minimum percentage as at the end of the period is 20%. The market risks committee of the board of directors occasionally instructs the Company's management to deviate from these rates, for specified periods of time, according to market developments.

From time to time, the Company evaluates the need to invest in derivatives, to reduce the exposure from interest and currency risks.

The Company's policy with respect to exchange rates is – to hedge about half of the shekel exposure with instruments, as recommended by the board of directors from time to time.

The Company's policy with respect to interest is – that about half of the Company's credit portfolio will be at variable interest and about half at fixed interest, through financial instruments that convert variable interest to fixed interest for a range of up to 5 years.

For details on the policy adopted, see Par. 7.3, 7.4 and 7.5.

7.3 Hedging jet fuel prices

The Company executes financial transactions to hedge against changes in jet fuel prices. As at December 31, 2007, the Company entered into several undertakings, in order to hedge jet fuel prices, at a scope of 31% of expected consumption in 2008 and 11% of expected consumption in 2009.

Presented below are data on positions in transactions hedging jet fuel prices that were executed by the Company (recognized in accounting terms) as at December 31, 2007:

Type of Transaction’s Fair value transaction Period currency in thousand US dollars HJFP Financial instruments Up to One year US dollar 21,881

HJFP Financial instruments Over One year US dollar 7,569 Total US dollar 29,450

For additional information, see Note 20.A.1 of the financial statements.

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Total Jet-fuel expenses & % of operating revenues, by years: (in $ millions)

40% 600 556.3 465.9 450 388.0 30%

281.1 28.8% 300 28.0% 191.7 24.0% 20% 150 20.3% 16.4% 0 10% 2003 2004 2005 2006 2007 Jet-fuel expenses % of operating revenues

7.4 Hedging interest on loans

The Company executes, with banking institutions in Israel, hedges of the exposure in its long- term credit portfolio, due to changes in interest rates.

Some of these financial instruments are not recognized for accounting purposes as hedge transactions. The fair value of these instruments as at December 31, 2007 is $1.0 million, which is stated in the financial statements in the line item "receivables and other assets".

Additional agreements are recognized for accounting purposes as hedge transactions.

After executing these hedges, as at December 31, 2007, 55% of the balance of the Company's loans is at fixed interest rates for a period of up to 5 years.

It should be noted that as at December 31, 2007, some of these hedging transactions were not effective, since the interest crossed the exit point stipulated in the agreements with the banks as at that date.

For additional information on these transactions, see Note 20.A.4 to the of the financial statements.

7.5 Exchange rate hedges

During 2007, the Company executed several financial transactions intended to protect the Company from decreases in the exchange rate of the dollar against the shekel. These transactions are not recognized for accounting purposes as hedges.

As at December 31, 2007, the Company has exchange rate hedges for 2008. The fair value of these transactions as at December 31, 2007 is $3.6 million, which is included in the financial statements in "receivables and other assets".

For information on currency and linked balance sheet risks, see Note 20 to the financial statements.

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7.6 Sensitivity analysis reporting

Presented below is a sensitivity analysis of the fair value of the financial instruments sensitive to possible changes in the risk factors to which they are exposed.

The sensitivity analyses were performed relative to the fair value of the financial instruments as at December 31, 2007.

Presented below is a description of the models for examining the fair value sensitivity of the various financial instruments:

1. Sensitivity to changes in interest rates for fixed-interest long-term liabilities – The fair value is based on a calculation of the present value of the cash flows at the interest rate prevailing for a similar loan with similar characteristics (as at balance sheet date: 4.94%).

2. Interest hedge – Interest hedges are executed by means of financial instruments opposite Israeli banks. The underlying asset for these transactions is the Libor (London Inter Bank Offered Rate) rate as published on the "Reuters" screens for various periods (3 months, 6 months, year), whereby the interest return on the Company's variable-interest loans (plus a margin).

Interest hedges are executed "back to back", in order not to create additional exposure of timing differences between the expiration date of the transaction for actual payment against the existing loans, so that the settlement dates match the repayment dates of the loans. On the loan repayment dates, the settlement amount is calculated for the next period, according to the market interest that prevailed on the two prior business days, and based on the structure of the transactions as determined in advance.

Existing interest hedges include options and fixing interest rates (IRS).

The fair value of interest hedges is calculated according to the projected Libor rate. In interest hedges in which the interest rate is fixed, the fair value is determined based on the difference between the projected interest and the interest published periodically by the world's leading banks, for the interest stated in the transaction, multiplied by the size of the hedge in each period. In hedge transactions that include options, the fair value is determined based on mathematical formulas for pricing options in recognized models.

3. Exchange rate hedge – Exchange rate hedges of the Company are executed through financial instruments opposite banks in Israel, similar to interest hedges.

The underlying asset for these transactions is the representative exchange rate for dollar/shekel fixed by the Bank of Israel. Dollar/shekel exchange rate hedges are executed in order to hedge the shekel flows exposure deriving mainly from the payment of salaries at the beginning of every month.

The scope of the annual exposure is $300 million, with the open hedge transactions on December 31, 2007 hedging 40% of the exposure in 2008. The transactions are monthly, corresponding with the conversion dates of dollars to shekels for the purpose of paying salaries.

The open transactions are cylinder transactions, with the Company receiving a refund if the exchange rate falls below a certain level, and pays if the exchange rate exceeds a certain level. These transactions are not recognized as hedges for accounting purposes. The fair value of

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these transactions is calculated based on mathematical formulas for pricing options in recognized models.

4. Jet fuel hedges – Jet fuel hedge transactions are executed by the Company through trading in financial instruments opposite the leading financial institutions and banks in the world engaged in this market (Morgan Stanley, Goldman Sachs, Merrill Lynch, BP, Mitsui, JP Morgan Societe Generale, Citibank).

The underlying asset in these transactions is jet fuel in the various markets that serve as the basis for determining the jet fuel prices that the Company actually pays, and mainly Jet Aviation FOB Med. In addition to this market, the Company purchases jet fuel according to its price in other markets, of which the key ones are: US Gulf Coast, North West Europe, Singapore.

Jet fuel is an essential raw material for the Company for its operations – the Company is obligated to purchase the raw material in order to fly its planes, and there is no substitute or ability to maneuver between the costs of these raw materials and other raw materials. The price of jet fuel is very volatile.

The market price of jet fuel is determined according to several parameters, including:

Crude oil prices, include market expectations and supply and demand. The pace of demand for oil and it products has risen in recent years, due to the global growth (especially the growth rate in China). The supply of oil and its products is limited physical and infrastructure factors (oil reserves, production infrastructures, refining, storage, transport, etc.), and by geopolitical and cartel influences of the large oil producers (OPEC).

Price fluctuations – Due to the meeting of the limited supply and the surging demand in recent years, any change, or expectations for change, in one of these factors, causes strong price fluctuations.

Seasonal demand for various crude distillates, including jet fuel (In the winter there is high demand for heating oil; in the summer there is high demand for gasoline. Likewise, transport costs vary, conforming to seasonal risks in sea shipping).

Production cost and infrastructure limitation – Distillate prices vary according to various constraints of the oil refining industry, refining infrastructures, storage and transport of oil and its products are limited, cost of their development is very high and their expansion takes many years (construction of a refinery lasts for 5-7 years).

Moreover, future prices for oil and its derivatives (including jet fuel) are affected strongly also by the power of the financial demands of institutional investors and speculators, which include these products in their investment portfolios.

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Investors inject fresh money into the market

$Bn Estimated capital invested on commodity indices $ 160

$ 140

$ 120

$ 100

$ 80

$ 60

$ 40

$ 20

$ 0 2000 2001 2002 2003 2004 2005 2006 2007

The graph shows the sharp growth in financial trading in this market.

In recent years, due to various reasons (including those mentioned previously), the risk embedded in the markets and the price fluctuations are very high. In recent quotes received by the Company, a very high standard deviation was derived, of 20-30%.

Jet CIF N.W.E

300.00 280.00 260.00 240.00

C/G 220.00 200.00 180.00 160.00 01-2007 02-2007 03-2007 04-2007 05-2007 06-2007 07-2007 08-2007 09-2007 10-2007 11-2007 12-2007

Behavior of jet fuel prices since the beginning of 2007.

In view of the behavior of the markets, investment houses and the world's leading analysts are having difficulty in precisely and consistently estimating the price-change trends. The forecasts that are published from time to time by the various investment houses and analysts range with differences of hundreds of percent per barrel.

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The forecasting ability of the various investment houses and analysts represent, at most, the immediate current estimate of the macroeconomic influences prevailing when the estimate was made. Furthermore, these estimates are calculated according to the different economic analyses of each analyst and investment house. The structure of the forward curves are unable to predict, and at most, they represent the expectation and risk level embedded in the markets. One of the clearest proofs of this is the markets' shift from a situation of "backwardation" (falling slope) to a situation of "contango" (rising slope) from time to time, as can be seen in the graph:

The headache of contango

15 Backwardation

10

5

0 96 97 98 99 00 01 02 03 04 05 06 07 08 Brent IPE (US$/bbl) -5

-10 Record low prices Contango Record high prices -15 Indicator: 80% (1 year) + 50% (2 year) + 20% (3 year)

According to the structure of the Company's hedge transactions, on the settlement date vs. the financial entity with which the hedge was executed (settlement date of the trade), a calculation is made of the transaction's strike price vs. the average monthly price of the underlying asset (Asian options) (published by Platts, a division of McGraw-Hill companies, which is the authorized and leading international party for providing data services on the energy market) and constitutes an accepted point of reference with respect to the trading of oil and its derivatives. The payment or receipt for the transactions is based on the transaction's structure as designated in advance.

The financial instruments traded by the Company (mainly options on jet fuel) are traded over-the- counter (OTC) between the Company and the financial entities opposite which the trade is executed, and are not contracts traded directly on various exchanges.

The future price of the jet fuel, as traded in these instruments, is comprised of three main elements: crude oil price, the GasOil crack and the jet differential.

Each of these three elements are actually traded separately (between financial institutions and brokers), and are priced separately. The pricing of each of the elements is affected by various factors, including the current price, duration, price fluctuations, supply and demand, seasonal factors, storage costs, transport, etc., and has a different effect on the overall price change of jet fuel.

This pricing is done differently by every financial entity, according to models and algorithms that they developed (based on models such as Black & Scholes, Monte Carlo, etc.), opposite the investment portfolio of that party.

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As is accepted in this field by global aviation companies, the companies obtain the fair value estimates from the investment houses opposite which they execute the trades. These investment houses have macroeconomic models that take into account the individual behavior of each element, the proportionate mix in the formula among the elements, the individual fluctuation of each element, the cross influence between the prices and the fluctuation and between supply and demand (supply and demand flexibility), future development of production, refining, storage and transport (tankers and pipes) capabilities, geopolitical forecasts in the world and the behavior of the cartels, macroeconomic models of global growth rates and demand for energy sources, forecasts for changes in interest and exchange rates, forecasted production of alternative energy sources for the materials being discussed, the behavior of the financial markets in connection with trade in the relevant securities and derivatives and other factors. All the above elements are processed according to economic models that were developed by the different investment houses that own them. These models are capable of generating estimates and forecasts, with the qualification that they are correct as of the moment they are generated. Some of the investment houses use the "Monte Carlo" simulation model on these estimates, in order to predict the future price/value expectancy.

In this report, we rely on these calculations as prepared by the different financial entities opposite which the transactions were executed (Goldman Sachs, Morgan Stanley) and were sent to us.

The sensitivity analysis for fair value was prepared under the assumption of a uniform change in the final price of jet fuel over the entire future price curve, at margins of 5%, 10% - up and down.

Platts' calculation formula for the underlying asset was changed during 2001, and therefore it was not possible to examine the change previously. As from 2001, no negative or positive daily change exceeding 10% of jet fuel prices was found.

Jet fuel is the most significant element of the Company's expenses.

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Presented below are sensitivity analysis tables for instruments sensitive to changes in market factors:

A. Sensitivity to changes in shekel/dollar exchange rate – thousands of dollars:

Gain (loss) from changes Gain (loss) from changes Increase Increase Decrease Decrease 10% 5% Fair value 5% 10% 4.231 4.038 3.846 3.654 3.461 NIS/$ NIS/$ NIS/$ NIS/$ NIS/$ Cash and cash equivalent (1,640) (857) 18,020 947 2,005 Short-term investments (786) (410) 8,633 454 960 Trade accounts receivable (38) (20) 422 22 47 Receivables (688) (360) 7,561 397 841 Long-term bank deposits (201) (105) 2,207 116 246 Total financial Assets (3,353) (1,752) 36,843 1,936 4,098 Short-term bank borrowings 27 14 (292) (15) (32) Trade accounts payable 2,448 1,279 (26,902) (1,414) (2,993) Payables and other current liabilities 10,774 5,630 (118,398) (6,221) (13,171) Dividned proposed for payment 274 143 (3,009) (158) (335) Total financial liabilities 13,522 7,066 (148,601) (7,808) (16,530) Exposure in linkage balance sheet due to surplus financial liabilities over financial assets* 10,169 5,314 (111,758) (5,872) (12,432)

* Does not include exposure for the effect of the changes in the exchange rate on accrued severance pay, as provided in Section 3.4.

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B. Sensitivity to changes in euro/dollar exchange rate – thousands of dollars:

Gain (loss) from changes Gain (loss) from changes Increase Increase Decrease Decrease 10% 5% Fair value 5% 10% 0.748 0.714 0.680 0.646 0.612 Euro/$ Euro/$ Euro/$ Euro/$ Euro/$ Cash and cash equivalent (77) (40) 842 44 94 Receivables (1,878) (983) 20,653 1,087 2,295 Trade accounts receivable (385) (202) 4,235 223 471 Total financial Assets (2,339) (1,225) 25,730 1,354 2,859 Short-term bank borrowings 92 48 (1,007) (53) (112) Trade accounts payable 2,513 1,316 (27,645) (1,455) (3,072) Payables and other current liabilities 317 166 (3,492) (184) (388) Total financial liabilities 2,922 1,531 (32,144) (1,692) (3,572) Exposure in linkage balance sheet due to surplus financial liabilities over financial assets* 583 305 (6,414) (338) (713)

* Does not include exposure for the effect of the changes in the exchange rate on accrued severance pay, as provided in Section 3.4.

C. Sensitivity to changes in jet fuel prices on inventory (dollar/gallon) – in thousands of dollars:

Gain from changes Loss from changes Type of instrument Increase Increase Decrease Decrease 10% 5% Fair value 5% 10% 2.900 2.768 *2.636 2.505 2.373 $/gallon $/gallon $/gallon $/gallon $/gallon

Jet fuel Inventory 803 401 8,027 (401) (803)

* Jet fuel prices according to moving average as at 31.12.2007.

D. Sensitivity to changes in interest rates on the Company's long-term liabilities at fixed interest – in thousands of dollars:

Gain from changes Loss from changes Type of instrument Increase Increase Decrease Decrease 10% 5% 5% 10% in interest in interest in interest in interest rate rate Fair value rate rate 5.43% 5.19% 4.94% 4.69% 4.45% Long-term liabilities at fixed interest 2 1 (798) (1) (2)

Note: Since most of the Company's loans are at variable interest, the Company has almost no exposure to a change in the fair value of financial liabilities, for a change in the market interest rate.

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E. Sensitivity of jet fuel hedge to changes in jet fuel prices – in millions of dollars:

According to the model's principles, the jet fuel hedges that react in a similar manner to market factors were grouped together, since there was no loss of material information required to understand the Company's exposure to market risks as a result of the grouping.

Gain from changes Loss from changes Type of Increase Increase Decrease Decrease 10% 5% Fair value 5% 10% instrument 2.935 2.802 *2.668 2.535 2.402 $/gallon $/gallon $/gallon $/gallon $/gallon 3 WAY -

transactions 6.7 3.0 29.5 (3.3) (6.9)

* The price of diesel fuel in the Middle East as at 31.12.2007, according to which the fair value of the Company's hedge transactions is computed.

The 3-way option is a combination of 3 options having a zero cost premium.

For the Company, which is interested in hedging against increases in jet fuel prices, the instrument's structure includes the purchase of call options having a strike price = x, and the sale of a put option at a cost of x > strike and call options having a cost of x < strike:

Option Call Put Call Company Buys Sells Sells buys/sells Strike Price X YX

The hedge of this instrument works as follows: When the market price on the expiration date is less than Y, the put option that the Company sold is invoked, and it pays the difference between the actual market price and Y, multiplied by the quantity of fuel hedged in the transaction. When the market price on the expiration date is between Y and X, neither of the parties pays or receives money. When the market price on the expiration date exceeds X but is less than Z, the call option that the Company purchased is invoked, and it receives the difference between the actual market price and Y multiplied by the quantity of fuel hedged in the transaction. When the market price on the expiration date exceeds Z, the call option that the Company purchased is also invoked (having an X strike price), and the call option that the Company sold, so that the Company receives only the difference between Z and X, multiplied by the quantity of fuel hedged in the transaction. The transaction's structure enables the Company to benefit, to some degree, from a decrease in the market price, at the expense of its partial waiver of hedging against a price increase.

F. Sensitivity of an interest hedge to changes in market interest rates – in thousands of dollars: According to the principles of the model, the Group executed interest hedges that respond in a similar way to market factors (swap transactions are not recognized as accounting hedges, IRS hedges are recognized as accounting hedges, and cylinder transactions are recognized as accounting hedges), since no loss of significant information is sustained, that is required to understand the Company's exposure to the market risk, as a result of the grouping.

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Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding Gain (Loss) from changes Loss from changes Type of instrument Decrease Decrease Increase 10% Increase 5% 5% 10% in interest in interest in interest in interest rate rate Fair value * rate rate SWAP transactions with KNOCK OUT- not recognized accounting wise 344 (266) 954 (1,787) (2,705) IRS transactions- recognized accounting wise 633 319 (1,060) (326) (661) Cylinder transactions- recognized accounting wise 4,573 2,931 (1,310) (415) (2,121) Total 5,550 2,984 (1,415) (2,529) (5,487)

* Fair value was calculated according to the market Libor rate as at the balance sheet date, at the following rates: 3-month Libor: 4.70%, 6-month Libor: 4.60%, and 12-month Libor 4.22%, all as applicable and according to the relevant transaction.

G. Sensitivity of shekel/dollar hedge to changes in market exchange rates – in thousands of dollars:

Loss from changes Gain from changes Type of instrument Increase 5% Fair value Decrease Decrease Increase 10% in 5% in 10% in in exchange exchange exchange exchange rate rate rate rate 4.231 4.038 3.846 3.654 3.461 Cylinder transactions - not recognized accounting wise (9,930) (5,842) 3,649 2,675 7,738

8. Disclosure in the Report of the Board of Directors regarding the financial statement approval process

The body charged with ultimate control in the Company is its board of directors.

At the approval date of these financial statements, the members of the board of directors are: Professor Israel (Izzy) Borovich – Chairman of the Board of Directors, Mrs. Tamar Moses Borovich – Deputy Chairman, Nadav Palti – Chairman of the Finance, Budget and Financial Statements Committee, Ami Sagis and Shimon Katznelson – director from the public, Yair Rabinovich – director from the public, Amnon Lipkin-Shachak, Eran Ilan and Yehuda Levi.

Within the framework of the board of directors, the Company operates several committees, including the Audit Committee, the Market Risks Management Committee, the Human Resources and Appointments Committee and the Finance, Budget and Financial Statements Committee, which has four members, including an outside director. The four members of the committee have accounting and financial expertise, as defined in the Companies Law, 1999, and the regulations promulgated thereunder.

A draft of the financial statements is sent in advance for the review of the members of the board of directors.

The Finance, Budget and Financial Statements Committee meets for extensive and thorough discussion of the draft financial statements, in the presence of the independent auditor. The Chief Executive Officer and the Chief Financial Officer present the members of the committee

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with extensive details on the financial statements, including detailed financial analyses about the Company's performance during the reporting period.

The committee examines the significant financial reporting issues, including material transactions that are not in the ordinary course of business – if any, the significant assessments and critical estimates that were applied in the financial statements, the reasonableness of the data, the accounting policy applied and the changes that occurred in them, if any, the application of the principle of fair disclosure in the financial statements and various aspects of control and management of risks.

When complex or significant issues are on the agenda, special discussions are held by the Finance, Budget and Financial Statements Committee about the matter on the agenda with the participation of the independent auditor.

The committee holds a discussion about the financial statements presented to it, including directing questions to the members of management present and to the independent auditor. Likewise, the independent auditor is asked to present his comments to the committee members – if any, including accounting policy applied and special events that arose during the audit.

The committee adopts a resolution to recommend to the Company's board of directors to approve the financial statements, subject to making corrections, changes and supplements – if so requested by the members of the committee.

The financial statements are presented to the members of the board in a separate meeting, in which the CEO, the CFO and other officers of the Company participate, also attended by the independent auditor.

A discussion is also held in this forum regarding the financial statements, including questions addressed to the independent auditor and members of the Company's management, and special issues in the reporting period are presented. At the end of the discussion, the board of directors adopts a resolution on approval of the financial statements.

9. Explanation of matters to which the company's independent auditors draw attention in their review report on the financial statements

The Company's independent auditors draw attention, in their opinion on the financial statements, to Note 17.a to the financial statements – regarding the Company's exposure to lawsuits that were recognized as class actions, to Note 17.b to the financial statements – regarding additional legal proceedings against the Company and to Note 2.z to the financial statements regarding the restatement of the financial statements as of December 31, 2006 and for the year then ended, and as of December 31, 2005 and for the year then ended, due to the first-time application of Accounting Standard No. 27 – Fixed Assets, and for the correction of the deferred tax liabilities.

Although the matters to which the independent auditors drew attention do not constitute a change in the uniform wording of the auditor's report, the drawing of attention is required because of the possible material effect on the Company, and the effect on the business results for the years 2005 and 2006 as presented in these financial statements.

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10. Employee compensation

Regarding the compensation agreement of the Company's CEO, see Note 23.q to the financial statements. Regarding the options plan for senior employees approved by the board of directors, see Note 19.i to the financial statements.

Pursuant to a board of directors resolution from March 2008, a bonus will be distributed to compensate employees and executives of the Company, based on the business results of 2007, totaling $6.1 million, the expense for which was included in the financial statements for 2007.

11. Dividend distribution policy

On November 20, 2007, the Company's dividend policy was updated. Pursuant to the new dividend policy, the Company will distribute a dividend from time to time, at the discretion of the board of directors and subject to the Company's needs. As to the dividend distribution and declaration of an additional dividend to shareholders in 2007, see Note 19.h to the financial statements.

12. Charitable contributions

El Al attributes great importance to making charitable contributions and assisting the needy and the community. Within the scope of its activities, the Company donated $85 thousand in 2007 ($85 thousand in 2006).

During 2007, El Al continued the long-standing tradition of action for the community.

The activity continued to focus mainly on two channels:

1. Employee volunteer activities within the scope of the departmental steering committee for the weaker populations, including holocaust survivors without relatives, at-risk children, special- needs children, people with disabilities and the infirm.

2. Support with money or money-equivalents, for the needy:

A. By management – within the framework of the Contributions Committee – the Company contributes considerable sums of money and in addition, money-equivalents, such as dozens of hot meals daily, flight tickets free-of-charge, transport of special cargo free-of-charge and the distribution of food containers.

B. By the employees themselves – whether in money or money-equivalents (electrical appliances, clothing, books, games, etc.) to kindergartens for special-needs children, battered women shelters, at-risk children dormitories, etc.

In 2007, employees did fundraising in the "full plate" project for the needy.

Moreover, there were fundraising projects for soup kitchens and a contribution of more than one thousand trees to rehabilitate the forests in northern Israel.

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13. Use of securities proceeds

Pursuant to the commitment given by the Company and by the State of Israel, as expressed in the prospectus from 2003, in 2007, the State and the Company deposited $49.7 million in recognized severance funds to secure severance payments to employees.

After making these deposits and covering the entire deficit in the severance fund, as is required by the agreement, the Company deposited NIS 28.6 million, constituting the balance of the offering proceeds, in a special account (included in short-term deposits as of December 31, 2007 – see Note 3.c and Note 15.b.3.b to the financial statements). The Company is evaluating the existence of limitations related to the ability to use the proceeds balance, pursuant to the aforementioned agreement, between it and the State and the employees' representatives, and in this connection, the Company communicated to the State.

14. Directors with accounting and finance skills

A) Under the Companies Law, 1999, and the regulations enacted under its auspices regarding the reporting about directors with accounting and finance skills, the Company's board of directors resolved that the minimum number of directors with accounting and finance skills in the Company would be one-third of the number of directors serving at any time. As of the approval date of the financial statements, nine directors are serving the Company, and therefore, the minimum number of directors with accounting and finance skills is three. In the opinion of the board of directors, considering the scope and complexity of the Company's operations, this number of directors with accounting and finance skills will enable the Company's board of directors to meet the obligations imposed on it, especially as relates to examining the Company's financial position, preparation of financial statements and their approval.

B) Presented below are the directors who have accounting and finance skills, while stating the facts by virtue of which they are seen as such directors:

Prof. Israel (Izzy) Borovich – Chairman of the Board of the Company since January 2005. Professor of Computers and Data Systems. Presently serves as Deputy Chairman of K'nafaim Holdings Ltd.

Mr. Nadav Palti – Director of the Company since January 2005. Mr. Palti is an accountant by training and serves as Chairman of Mapal Communications Ltd. and as CEO and President of Dori Media Group Ltd.

Mr. Shimon Katznelson – Outside director of the Company from December 2003 to December 2006. In February 2007, his tenure was approved for another term. Mr. Katznelson has masters degrees in electrical engineering and in public administration. He served for 5 years as Deputy Mayor of Ashdod, with responsibility for financial management of the municipality and its engineering matters. In 2003 – 2007, he served as Chairman of Mifal Hapayis. Has extensive financial management experience.

Mr. Yair Rabinowitz – Outside director of the Company since February 2007. Mr. Rabinowitz is a certified public accountant since 1970. Owns a firm specializing in taxation and finance and in the past served as the managing partner of a large CPA firm, and also served as Commissioner of Income Tax and Property Tax. Served in the past as a member of the Bank of Israel advisory

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committee on banking matters and as a member of the presidency of the Institute of Certified Public Accountants, and also served as a lecturer in institutes of higher education.

15. Disclosure about Internal Auditor of reporting corporation

Below are details about the corporation's Internal Auditor:

1. Details on Internal Auditor

1.1 The Company's Internal Auditor is Eli Reich, CPA.

1.2 The Internal Auditor commenced his service on December 15, 1989.

1.3 The Internal Auditor meets all the suitability requirements stipulated in Section 3(A) of the Internal Audit Law.

1.4 The Internal Auditor fulfilled the provisions of Section 146(B) of the Companies Law and the provisions of Section 8 of the Internal Audit Law.

1.5 The Auditor holds options that were granted to the Company's managers in the 2006 Options Plan. Likewise, the Internal Auditor, through the Company's employees' trust, holds shares that were granted to all of the Company's employees within the scope of the Company's privatization. Beyond this, the Internal Auditor has no positions in the Company's securities or in another related company.

1.6 The Internal Auditor does not have, nor has he had in the past, any business ties with the audited party, or with a related body.

1.7 The Internal Auditor is employed in the Company as a full-time employee.

2. Manner of Internal Auditor's appointment

The Internal Auditor was appointed on December 15, 1989 by the person then serving as the Company's temporary receiver, based on his skills (accountant by training with a bachelors degree in psychology from Tel Aviv University), and based on his experience in managing large organizations.

3. Identity of Internal Auditor's superior

The Internal Auditor is subordinated in the Company to the Chairman of the Board of Directors and the CEO of the Company, in accordance with the Company's bylaws.

4. Work plan

a. The Internal Auditor has an annual work plan.

b. The Internal Auditor's work plan is determined based on the following considerations:

• The risk embedded in an area of activity and profitability of the Company.

• There are adequate, applicable and effective controls in the audited area.

• Proposals of vice-presidents and department heads.

• Previous audit findings and pace at which the recommendations submitted were implemented.

• Effect of the area on servicing passengers.

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c. Involved in determining the work plan are the Company's Chairman, members of the Audit Committee and the Company's CEO.

d. The proposed work plan is received annually by the Chairman of the Board, members of the board of directors' Audit Committee and the Company's CEO. All approve the proposal in accordance with Section 149 of the Companies Law.

e. The work plan leaves the Internal Auditor with discretion to deviate from the plan.

f. Within the scope of his work, the Internal Auditor also tests material transactions and the manner of their approval.

5. Audit overseas or of investees

The Company's Internal Auditor also serves as the Internal Auditor of all the active subsidiaries. Therefore, his work plan takes these companies into account. The Internal Auditor's work plan also includes performing testing of the Company's activities overseas.

6. Scope of employment

The Internal Auditor is employed by the Company on a full-time basis, and reporting to him are five full-time internal auditors. In 2007, work hours were invested in the audit of the Company and subsidiaries – in Israel and abroad, as provided below:

Work hours for Work hours for Work hours Total Company's Company's for operations in operations investees** Israel overseas* 10,000 1,500 500 12,000

* Approximately 50% of the work hours for overseas subsidiaries were performed in Israel. ** Audits were performed on three subsidiaries, of which 250 hours were invested in auditing for operations outside of Israel.

7. Performance of audit

The Company's Internal Auditor conducts his work in accordance with the Companies Law, 1999, the Internal Audit Law, 1992 and the professional regulations of the Institute of Internal Auditors in Israel.

The Chairman of the Board holds a comprehensive monthly discussion with the Internal Auditor about his work and the professional regulations according to which he works.

The Audit Committee holds meetings in which it discusses the Internal Auditor's work and the audit standards.

Before the proposed annual audit plan is approved, the Chairman of the Board holds a discussion with the Internal Auditor about the standards according to which he formulated the proposed work plan. Later, the Audit Committee discusses the proposed annual audit work plan and the standards according to which the proposal was formulated, and then approves it.

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8. Access to information

The Internal Auditor has free, continuous and direct access to any document or information held by the Company or by one of its employees, as well as access to any ordinary or computerized data base, to any data base and to any automatic data processing system in the Company, including financial data, as notes in Section 9 to the Internal Audit Law.

9. Internal Auditor's Report

A. The Internal Auditor's reports are submitted in writing.

B. In 2007, the Internal Auditor produced three to four audit reports every month. In total 44 reports were submitted during the year. The audit reports were submitted to the Chairman of the Board, the members of the Audit Committee of the board of directors, and to the Company's CEO.

C. In 2007, the Audit Committee convened four times to discuss the Internal Auditor's reports.

10. Board of directors' assessment of the Internal Auditor's activities

In the opinion of the board of directors, the scope, nature and continuity of the Internal Auditor's activities and his work plan are reasonable under the circumstances, and they achieve the internal audit objectives of the corporation, since they relate to all of the material and key activities of the Company.

11. Compensation

The total salary cost of the Internal Auditor in 2007 amounted to NIS 1,281,822. The amount includes obligations for payments that the Company assumed in respect of the reporting year, including with respect to retirement terms, as well as the value of the benefit for the options that were granted to the Internal Auditor under the 2006 Options Plan (it should be noted that as of the report date, the value of the benefit from the options totaled NIS 423,130. As of the date of this report, this is the theoretical value, since the value of the options is lower than exercise cost).

In the opinion of the Company's board of directors, the amount of the compensation given to the Internal Auditor and its elements do not impair his ability to use independent judgment in carrying out his assignments, inter alia, in view of the fact that the audit work is performed through several internal auditors. The right to the options and shares of the Company were granted to the Internal Auditor within the scope of the options plan to employees and within the framework of the Company's privatization, according to objective criteria, and in the Company's opinion, this is insufficient to detract from the independence or judgment of the Internal Auditor.

16. Disclosure regarding Independent Auditors' fees

On November 30, 2006, the Securities Authority issued a guideline under Section 26.A(b) of the Securities Law, 1968, regarding disclosure of the independent auditors' fees for audit services and audit-related services, for tax services and for other services. Below are the Company's fee expenses to Brightman Almagor, CPA's for the year 2007:

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Fees for audit services, audit-related services and tax services: $369 thousand for 7,808 work hours performed in 2007 ($359 thousand for 6,952 hours in 2006). Fees for additional services: $3 thousand for 103 hours of work performed ($8 thousand for 390 hours in 2006).

17. Disclosure regarding consent to perform peer review

On July 28, 2005, the Securities Authority issued a guideline under Section 36A of the Securities Law, 1968 regarding disclosure of consent given to perform peer review, the objective of which, according to this guideline, is to spur the process of controlling the work of accounting firms and examining for the existence of the requisite procedures during the audit work they perform, which will contribute to the existence of an advanced capital market. On 29th March 2006, the Board of Directors gave the necessary consent for undertaking the peer review.

18. Disclosure regarding the change to International accounting Standards

In Note 2.aa to the financial statements, disclosure is given about the adoption of International Financial Reporting Standards (IFRS).

In Note 25 to the financial statements, the adjustment of financial statements between reporting according to Israeli GAAP and IFRS reporting are presented.

19. Subsequent events

Regarding subsequent events, see Note 26 to the financial statements.

The board of directors thanks the Company's management and employees for their devoted work and efforts for the development of the Company and advancing its businesses.

Prof. Israel (Izzy) Borovich Haim Romano Chairman of the Board Chief Executive Officer March 25, 2008

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______

2007 ANNUAL REPORT

CHAPTER C 2007 FINANCIAL STATEMENTS

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EL AL ISRAEL AIRLINES LTD. FINANCIAL STATEMENTS AS OF DECEMBER 31, 2007

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EL AL ISRAEL AIRLINES LTD FINANCIAL STATEMENTS AS OF DECEMBER 31, 2007

C o n t e n t s

Page

Independent auditors' reports C-1 – C-2

Balance sheets C-3 – C-4

Statements of operations C-5

Statement of changes in shareholders' equity C-6

Statements of cash flows C-7 – C-8

Notes to the financial statements C-9 – C-113

Appendix A - List of Principal Investees C-114

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Brightman Almagor 1 Azrieli Center Tel Aviv 67021 P.O.B. 16593, Tel Aviv 61164 Israel

Tel: +972 (3) 608 5555 Fax: +972 (3) 609 4022 [email protected] www.deloitte.com

INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS OF EL AL ISRAEL AIRLINES LTD.

We have audited the attached balance sheets of El Al Israel Airlines Ltd. ("the Company") as of December 31, 2007 and 2006 and the consolidated balance sheets as of those dates, and the statements of operations, changes in shareholders' equity and cash flows - of the Company and on a consolidated basis - for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.

We did not audit the financial statements of subsidiaries, whose assets included in consolidation constitute 0.6% and 0.9% of total consolidated assets as of December 31, 2007 and 2006, respectively, and whose revenues constitute 0.5% of total consolidated revenues for the year ended December 31, 2007 and 0.4% of total consolidated revenues for each of the two years ended December 31, 2006, respectively. The financial statements of those subsidiaries were audited by other auditors, and our opinion, insofar as it relates to the amounts included in respect thereof, is based on the reports of those other auditors.

We conducted our audits in accordance with generally accepted auditing standards, including those prescribed by the Israeli Auditors’ Regulations (Mode of Performance), 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the board of directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of other auditors as noted above, the financial statements referred to above present fairly, in all material respects, the financial position - of the Company and on a consolidated basis – as of December 31, 2007 and 2006, and the results of operations, changes in shareholders’ equity and cash flows- of the Company and on a consolidated basis - for each of the three years in the period ended December 31, 2007, in conformity with generally accepted accounting principles. In addition, it is our opinion that the financial statements referred to above are prepared in accordance with the Israeli Securities Regulations (Preparation of Annual Financial Statements), 1993.

C-1 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

As explained in Note 2b, the financial statements referred to above are presented in U.S. dollars, in accordance with accounting standards of the Israeli Accounting Standards Board.

Without qualifying our above opinion, we draw attention to the contents of Note 17a to the financial statements with regard to the Company’s exposure to lawsuits approved as class actions, the contents of Note 17b to the financial statements with regard to additional legal proceedings against the Company, and the contents of Note 2z to the financial statements with regard to the restatement of the financial statements as of December 31, 2006 and for the year then ended, and as of December 31, 2005 and for the year then ended, due to the first-time application of Accounting Standard No. 27 – Fixed Assets and for the correction of deferred tax liabilities.

The accompanying financial statements are a translation of the original Hebrew-language audited financial statements.

Brightman Almagor & Co Certified Public Accountants A member firm of Deloitte Touche Tohmatsu

Tel Aviv, March 25, 2008

C-2 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. BALANCE SHEETS

Consolidated Company December 31, December 31, 2 0 0 7 2 0 0 6 2 0 0 7 2 0 0 6 Note (in thousand US dollars)

Current assets Cash and cash equivalents 86,670 146,158 80,727 139,408 Short-term investments 3 180,633 4,682 179,435 4,000 Trade accounts receivable 4 143,617 132,544 140,276 129,000 Receivables and other current assets 5 51,953 47,342 53,415 49,394 Deferred income taxes 22d 19,569 30,645 19,169 30,171 Inventory 6 15,981 17,190 15,379 16,464 498,423 378,561 488,401 368,437

Investments Long-term bank deposits and investment in another company 7 3,922 3,665 3,922 3,665 Investees 8 2,268 2,280 11,444 11,275 6,190 5,945 15,366 14,940

Fixed assets 9 1,286,421 * 1,176,528 1,284,371 * 1,174,355

Other assets 10 3,719 3,455 3,719 3,455

1,794,753 1,564,489 1,791,857 1,561,187

(*) Restated – see Note 2z.

The accompanying notes are an integral part of the financial statements.

C-3 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD.

Consolidated Company December 31, December 31, 2 0 0 7 2 0 0 6 2 0 0 7 2 0 0 6 Note (in thousand US dollars)

Current liabilities Short-term borrowings and current maturities 11 66,316 105,100 66,316 105,100 Trade accounts payable 12 167,420 144,990 167,478 145,441 Payables and other current liabilities 13 407,842 332,691 404,508 328,982 Dividend proposed for payment 19h 3,009 - 3,009 - 644,587 582,781 641,311 579,523

Long-term liabilities Long-term loans from financial institutions 14 713,793 566,104 713,793 566,104 Accrued severance pay, net 15 70,936 126,171 71,198 126,412 Deferred income taxes 22d 72,510 * 74,603 72,796 * 74,506 Other long-term liabilities 16 423 730 255 542 857,662 767,608 858,042 767,564

Total liabilities 1,502,249 1,350,389 1,499,353 1,347,087

Contingent liabilities, guarantees, commitments and liens 17,18

Shareholders' equity 19 Share capital 155,012 131,536 155,012 131,536 Premium on shares 9,248 904 9,248 904 Capital reserve from transactions with a former controlling party 243,787 * 218,498 243,787 * 218,498 Capital reserve from employees' option plan 4,464 2,582 4,464 2,582 Accumulated loss (120,007) * (139,420) (120,007) * (139,420) 292,504 214,100 292,504 214,100

1,794,753 1,564,489 1,791,857 1,561,187 (*) Restated – see Note 2z.

Prof. Israel (Izzy) Borovich Haim Romano Nissim Malki Chairman of the Board Chief Executive Officer Chief Financial Officer

Approval date of financial statements - March 25, 2008.

The accompanying notes are an integral part of the financial statements.

C-4 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. STATEMENTS OF OPERATIONS

Consolidated Company Year ended December 31, Year ended December 31, 2 0 0 7 2 0 0 6 2 0 0 5 2 0 0 7 2 0 0 6 2 0 0 5 Note (in thousand US dollars)

Operating revenues 21a 1,932,450 1,665,446 1,619,469 1,917,885 1,654,373 1,608,447 Operating expenses 21b 1,539,658 * 1,394,159 * 1,245,570 1,529,961 * 1,389,001 * 1,241,236 Gross profit 392,792 271,287 373,899 387,924 265,372 367,211

Selling expenses 21d 230,637 187,805 198,591 230,262 187,371 197,945 General and administrative expenses 21e 90,781 91,952 88,758 85,313 86,335 83,349 321,418 279,757 287,349 315,575 273,706 281,294

Operating income (loss) before net financing expenses 71,374 (8,470 ) 86,550 72,349 (8,334 ) 85,917 Net financing expenses 21f 33,393 29,492 20,606 33,843 29,732 20,727

Operating income (loss) after net financing expenses 37,981 (37,962 ) 65,944 38,506 (38,066 ) 65,190

Other income (expenses), net 21g 2,423 * (2,764) (4,519) 2,418 * (2,746) (4,628)

Pre-tax income (loss) 40,404 (40,726 ) 61,425 40,924 (40,812 ) 60,562

Income taxes 22 (9,001) * 6,397 * (13,060) (9,292) * 6,531 * (12,756)

Income (loss) after income taxes 31,403 (34,329 ) 48,365 31,632 (34,281 ) 47,806

Company's equity in earnings of affiliates, net 21h 332 417 633 103 369 1,192

Net income (loss) for the year 31,735 (33,912) 48,998 31,735 (33,912) 48,998

Basic earnings (loss) per share of NIS 1 par value (in US dollars): 21i 0.07 * (0.08) * 0.12 Number of shares used in computation (in thousands)-basic 476,289 400,680 399,633 Diluted earnings (loss) per share of NIS 1.00 par value (in US dollars): 21i 0.06 * (0.08) * 0.10 Number of shares used in computation (in thousands)-diluted 495,934 400,680 495,721

(*) Restated - see Note 2z

The accompanying notes are an integral part of the financial statements.

C-5 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

Capital reserve Capital reserve Differences from from from translation transactions employees' of investees’ Share Premium with a former option financial Accumulated capital on shares controlling party program statements loss Total ( I N T H O U S A N D U S D O L L A R S )

Balance - January 1, 2005 130,940 699 * 191,932 - 2,232 * (154,506 ) *171,297 Differences from the translation of investees’ - (104 ) financial statements - - - - (104 ) Realization of investment in an investee - - - - (2,128 ) - (2,128 ) Receipts on account of Government of Israel - 25,791 debt (3) - - 25,791 - - Exercise of options into shares 378 127 - - - - 505 Net income for the year - - - - - * 48,998 * 48,998 Balance - December 31, 2005 131,318 826 * 217,723 - - * (105,508 ) *244,359 Receipts on account of Government of Israel - 775 debt (3) - - 775 - - Exercise of options into shares (2) 218 78 - - - - 296 Value of benefit of employee option plan (1) - - - 2,582 - - 2,582 Loss for the year - - - - - * (33,912) * (33,912) Balance - December 31, 2006 131,536 904 *218,498 2,582 - * (139,420 ) *214,100

Receipts on account of Government of Israel debt (3) - - 25,289 - - - 25,289 Exercise of options into shares (2) 23,476 8,344 - - - - 31,820 Value of benefit of employee option plan (1) - - - 1,882 - - 1,882 Dividend distributed (4) - - - - - (9,313 ) (9,313 ) Dividend declared (5) - - - - - (3,009 ) (3,009 ) Net income for the year - - - - - 31,735 31,735 Balance - December 31, 2007 155,012 9,248 243,787 4,464 - (120,007) 292,504

* Restated – see Note 2z. (1) See Note 19i (2) See Note 19c. (3) See Note 15b3b (4) See Note 19h1 (5) See Note 19h2 The accompanying notes are an integral part of the financial statements.

C-6 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. STATEMENTS OF CASH FLOWS

Consolidated Company Year ended December 31, Year ended December 31, 2 0 0 7 2 0 0 6 2 0 0 5 2 0 0 7 2 0 0 6 2 0 0 5 (in thousand US dollars)

CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) for the year 31,735 * (33,912 ) * 48,998 31,735 * (33,912 ) * 48,998 Adjustments required to present net cash flows provided by operating activities - Appendix A 223,795 * 132,344 * 153,056 223,858 * 132,257 * 151,618 Net cash provided by operating activities, before deposit of proceeds from exercise of options in severance pay fund to cover past liabilities 255,530 98,432 202,054 255,593 98,345 200,616 Deposit of proceeds from exercise of options in severance pay fund to cover past liabilities (24,376) (296) (535) (24,376) (296) (535) Net cash provided by operating activities 231,154 * 98,136 * 201,519 231,217 * 98,049 * 200,081

CASH FLOWS FOR INVESTING ACTIVITIES Investment in other assets (644) (1,188 ) (1,485 ) (644 ) (1,188 ) (1,485 ) Additions to fixed assets (including engine overhauls and payments on account of aircrafts) (248,558) * (128,894 ) *(100,722 ) (248,141) * (128,459 ) * (100,327 ) Proceeds from disposition of fixed assets 504 6,965 954 496 6,955 883 Decrease (increase) in short-term deposits, net (175,951) 107,912 (26,428 ) (175,435 ) 107,500 (26,000 ) Investment in service providers' deposits (131) (82 ) (121 ) (131 ) (82 ) (121 ) Repayment of service providers' deposits 245 73 130 245 73 130 Redemption of long-term deposits 225 560 678 225 560 678 Investments in long-term deposits (398) (226 ) (368 ) (398 ) (226 ) (368 ) Proceeds from realization of investments in investees - - 13,656 - - 13,656 Decrease (increase) in investments and loans to investees, net - 326 151 (411 ) 964 227 Dividend received net of equity in affiliates' earnings, net** 12 - - 242 - - Refund of investment in fixed assets 3,843 - - 3,843 - - Net cash used in investing activities (420,853) * (14,554) *(113,555) (420,109) * (13,903) * (112,727)

CASH FLOWS FOR FINANCING ACTIVITIES Proceeds from exercise of options for shares 31,820 296 505 31,820 296 505 Receipt of long-term loans from financial institutions 219,420 40,000 14,169 219,420 40,000 14,169 Repayment of long-term loans from financial institutions (101,267) (67,745 ) (77,160 ) (101,267 ) (67,745 ) (77,160 ) Receipt of other long-term loans 98 1,014 - 98 1,014 - Repayment of other long-term loans (2,309) (2,248 ) (2,017 ) (2,309 ) (2,248 ) (2,010 ) Payment of loan arrangement fees (7,570) (1,080 ) - (7,570 ) (1,080 ) - Increase (decrease) in short-term borrowings, net (668) (1,590 ) 5,821 (668 ) (1,590 ) 5,821 Dividend paid (9,313) - - (9,313) - - Net cash provided by (used in) financing activities 130,211 (31,353) (58,682) 130,211 (31,353) (58,675)

Increase (decrease) in cash and cash equivalents (59,488) 52,229 29,282 (58,681 ) 52,793 28,679

Cash and cash equivalents - beginning of year 146,158 93,929 64,647 139,408 86,615 57,936

Cash and cash equivalents –end of year 86,670 146,158 93,929 80,727 139,408 86,615

* Restated – see Note 2z **Dividend received 345 - - 345 - -

The accompanying notes are an integral part of the financial statements.

C-7 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. STATEMENTS OF CASH FLOWS

Appendix A – Adjustment to present cash flows provided by operating activities

Consolidated Company Year ended December 31, Year ended December 31, 2 0 0 7 2 0 0 6 2 0 0 5 2 0 0 7 2 0 0 6 2 0 0 5 (in thousand US dollars) Income and expenses not involving cash flows: Depreciation and amortization (including disposals of accessories and components no longer in use and consumption of disposable equipment) 135,777 * 134,150 * 128,541 135,240 * 133,650 * 127,956 Adjustment in value of long-term deposits (198) (151 ) 108 (198 ) (151 ) 108 Equity in earnings of investees, less dividend received, net (**) - (417 ) (273 ) - (369 ) (832 ) Deferred income taxes 8,983 * (6,510 ) * 12,679 9,292 * (6,531 ) * 12,756 Decrease in accrued severance-pay, net (4,586) (963 ) (9,763 ) (4,565 ) (1,033 ) (9,715 ) Capital losses (gains) from disposition of fixed assets, net 1,440 * (1,642 ) (590 ) 1,445 * (1,659 ) (585 ) Capital gain from realization of investment in investees - - (8,297 ) - - (8,297 ) Adjustment in value of service providers’ deposits - 58 (51 ) - 58 (51 ) Value of benefit of employee options plan 1,882 2,582 - 1,882 2,582 -

Changes in assets and liabilities: Increase in trade accounts receivable (11,073) (4,327 ) (15,521 ) (11,276 ) (3,178 ) (16,067 ) Decrease (increase) in receivables and other current assets (6,216) 93 (13,233 ) (5,626 ) (1,380 ) (12,827 ) Decrease (increase) in inventory 1,209 5,255 (12,970 ) 1,085 5,369 (12,941 ) Increase (decrease) in trade accounts payable 22,430 (11,573 ) 18,920 22,037 (11,723 ) 18,248 Increase in other current liabilities 74,167 15,824 53,566 74,542 16,622 53,865 Decrease in other long-term liabilities (20) (35) (60) - - - 223,795 132,344 153,056 223,858 132,257 151,618 (*) Restated – see Note 2z

(**) Dividends received that were deducted - - 360 - - 360

Appendix B – Non- cash transactions Consolidated Company Year ended December 31, Year ended December 31, 2 0 0 7 2 0 0 6 2 0 0 5 2 0 0 7 2 0 0 6 2 0 0 5 (in thousand US dollars)

Deposits made by the Government of Israel in an employees’ severance-pay fund (Note 15b.3.b) 25,289 775 25,791 25,289 775 25,791

Dividend declared and paid subsequent to balance sheet date 3,009 - - 3,009 - -

The accompanying notes are an integral part of the financial statements.

C-8 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 1 - GENERAL

a. Operations

EL AL Israel Airlines Ltd (hereafter-"the Company") was incorporated on November 15, 1948 as a public company. The Company is the Israeli designated carrier on most routes to and from Israel, other than a number of routes on which other Israeli carriers were granted the status of designated carriers (see Note 10c). An additional Israeli carrier was also granted a certificate as a cargo carrier.

Regarding the change in the Company's status as designated carrier subsequent to the balance sheet date - see Note 26.1.

The Company is primarily engaged in the transport of passengers and cargo, including luggage and mail, on scheduled flights and charter flights between Israel and foreign countries. Passenger transport on charter flights is carried out mainly by Sun D'Or International Airlines Ltd (hereafter - "Sun D'Or"), a wholly owned subsidiary of the Company.

The Company is also engaged in leasing flight equipment, providing luggage-handling and maintenance services at its home airport, sale of duty-free products and - through investees - in related activities, mainly production and supply of airline meals and management of several travel agencies in Israel and abroad.

The financial statements of the Company have been prepared in accordance with the Securities Regulations (Preparation of Annual Financial Statements), 1993.

b. Privatization

1. Starting June 6, 2004 EL AL is defined as a “mixed company” pursuant to the Government Corporations Law, 1975, which defines a “mixed company” as one that is not a government corporation, with half or less than half of the voting rights in its General Meetings or the right to appoint half or less than half of its directors, in the hands of the State. As of December 31, 2007, the State holds only 1.1% of the ownership and voting rights in the Company (as of December 31, 2006: 20.97%), in addition to the rights derived from the Special State Share it holds.

2. On June 2, 2004, following the exercise of options that it had held for shares of the Company, K’nafaim Holdings Ltd. (“K’nafaim”) became an interested party in the Company. In January, 2005, the Company’s Board of Directors appointed Prof. Israel (Izzy) Borovich as its chairman and Mrs. Tamar Mozes Borovich as deputy chairman of the board. In addition, new directors were appointed, replacing all the former ones whose appointment were terminated at that time (except for public directors). Accordingly, starting at that time, K’nafaim became the Company’s controlling party.

As of December 31, 2007, K'nafaim holds 39.33% of the ownership and voting rights in the Company (as of December 31, 2006: 39.49%).

C-9 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 1 - GENERAL (Cont.)

b. Privatization (cont.)

3. On February 23, 2005, a company established by the Company’s employees called “Holdings in Trust of EL AL Employees Ltd." (hereafter-"the Employees Corporation") acquired from the Government of Israel a total of 32,527,216 ordinary shares, pursuant to an undertaking document granted by the State to the employees’ representatives. Thus the Employees Corporation became an interested party in the Company. As of December 31, 2007, the Employees Corporation held 6.56% of the Company’s issued and outstanding share capital (as of December 31, 2006: 8.12%).

4. On August 5, 2004 the Company was informed by the Commissioner for Restrictive Trade Practices (“the Commissioner”) of his decision concerning the merger between K’nafaim and EL AL. According to the decision, K’nafaim would be allowed to increase its holdings of Company shares above 25%, subject to the terms stipulated in the decision, which also stated that since K’nafaim is a shareholder in the Company, it would present any arrangement between EL AL and another Israeli carrier to the approval of the Commissioner. In addition, being a shareholder, K’nafaim would do everything necessary to cease or transfer the charter flights of the Company or any of its subsidiaries, including any activity related to the charter operations of Sun D’Or, to an independent third party wherever the Company operates scheduled flights, other than places where another Israeli carrier also operates scheduled flights.

On January 5, 2005 the Company appealed the Commissioner's decision to the Court for Restrictive Trade Practices while also asking the court for an interim injunction in regard to the conditions stipulated in the Commissioner’s decision.

On March 14, 2005, the Company and the Commissioner accepted the court’s proposal for a voluntary conclusion of the appeal against the Commissioner’s stated conditions. Pursuant to this understanding, it was agreed that the stated condition stipulating that K’nafaim, being a shareholder in the Company, would do everything necessary to cease or transfer the charter flights of the Company wherever the Company operates schedules flights, will not go into effect prior to two years subsequent to March 14, 2005. The condition whereby K’nafaim, being a shareholder in the Company, would present any arrangement between the Company and another Israeli carrier to the approval of the Commissioner will not go into effect prior to the end of the year following March 14, 2005.

The Commissioner would be able, within 120 days preceding the end of the period referred to above, to reimpose any or all of the conditions upon K’nafaim if he believes that a basis for it exists at the time. Before imposing the conditions, the Commissioner will grant the Company the right to a hearing and if the Company appeals the conditions, they will be suspended for a period of six months during which the court will decide on their effect. The parties’ agreement was approved by a consent judgment of the Court.

On December 29, 2005, the Commissioner informed the Company that it was considering the imposition on K’nafaim of the condition which states that, being a shareholder in the Company, it would act to submit any arrangement between the Company and another Israeli carrier for the approval of the Commissioner. In addition, the Commissioner required that the Company provide information pertaining to any agreements, arrangements or understandings between the Company and Arkia as well as between the Company and Israir, and on negotiations being carried on between the companies.

C-10 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 1 - GENERAL (Cont.)

b. Privatization (cont.)

(4) (cont.)

On March 14, 2006, following the Commissioner’s request, the Company decided to consent to a one-year postponement in the period of time allotted to the Commissioner in the compromise arrangement for the imposition of the abovementioned condition (i.e., two years instead of one). The remaining conditions stipulated in the compromise agreement regarding the manner of imposing the condition, as described above, would remain in effect during the period of the deferral.

Following a request by the Commissioner, on January 28, 2007, the Company decided to agree to a deferral for an additional year of the time period allotted by the Commissioner for imposing such condition (that is, three years instead of two).

On March 14, 2008, the period during which the Commissioner was allowed to reimpose the said condition on K'nafaim ended. This condition was not actually imposed and therefore, based on the legal counsel received by the Company, this condition may not be reimposed.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

a. Definitions for these financial statements:

1. Subsidiary – a company controlled by the Company in excess of 50%, the financial statements of which are, directly or indirectly, fully consolidated with the Company’s financial statements. 2. Affiliate – a company, other than a subsidiary, in which the Company exercises material influence and the Company’s investment therein is accounted for by the equity method. 3. Investees - subsidiaries and affiliates. 4. The Group - the Company and its investees. 5. Another company – a company in which the Company's investment does not grant the Company material influence over the other company’s financial and operating policies. 6. Related parties - as defined in Opinion No.29 of the Institute of Certified Public Accountants in Israel. 7. Interested parties - as defined in the Securities Regulations (Preparation of Annual Financial Statements), 1993. 8. Dollar – the U.S. dollar. 9. Controlling party - as defined in the Securities Regulations (Financial Statement Presentation of Transactions between the Company and Its Controlling Party Statements), 1996. 10. Former controlling party - on the approval date of these financial statements - the State of Israel. 11. Date near the approval date of the financial statements - March 17, 2008, unless otherwise indicated.

C-11 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

b. Financial statements in U.S. dollars

1. General

The financial statements are presented under the historical cost convention in U.S. dollars. The Group companies operating in Israel maintain their accounts, on a current basis, in nominal shekels and dollars. The Company’s overseas branches and the main foreign investees maintain their accounts in foreign currency (mainly dollars). The Group's transactions are mostly carried out in foreign currency, mainly in dollars, with Group revenues received primarily in dollars or linked thereto and its principal fixed assets mainly paid for in dollars. Accordingly, the dollar is the currency of the economic environment in which the Group operates ("functional currency") and thus the currency of measurement in these financial statements. The term "cost" in these financial statements refers to the cost in dollars, unless otherwise stated.

Appendix B to the financial statements is a Hebrew translation of the financial statements converted into shekels, in accordance with Regulation 4 of the Israeli Securities Regulations (Preparation of Annual Financial Statements), 1993.

2. Balance sheet

Balances in other currencies have been translated into dollars, as follows: Non-monetary items have been translated at the exchange rate of the dollar ("the rate") in effect at acquisition (or origination). Monetary items (items reflecting current or realizable value) have been translated at the rate in effect on the date of the financial statements. The values of non-monetary assets do not necessarily represent realization value or economic value in real terms and, therefore, these amounts should not be construed as either representing dollars receivable or payable or convertible into dollars.

3. Statement of operations

Sales revenues and expenses, other than financing and expenses arising from non-monetary items, have been translated at the rate in effect on the transaction date. Expenses deriving from non-monetary items and components relating to balance-sheet accruals have been translated concurrently with the translation of the corresponding balance- sheet item. Exchange-rate differences relating to monetary assets and liabilities have been allocated to operations in the net financing expenses section, except for those relating to obligations for the termination of employee-employer relationships, which were recorded to wages and social benefit expenses.

4. Translation of investees’ financial statements

The financial statements of part of the branches abroad and part of the investees, the operations of which are not autonomous, are prepared in local currency and translated as described in items b2 and b3 above. Differences resulting from such financial statement translation differences are, accordingly, included in the statement of operations in the financing section. C-12 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

c. Consolidated financial statements

The consolidated financial statements include the financial statements of the Company and all of its (over 50%) controlled companies. Material inter-company balances and transactions have been eliminated.

A list of the main active investees is presented in appendix A to the financial statements.

d. Cash and cash equivalents

Cash and cash equivalents include bank demand deposits as well as unrestricted time deposits with original maturities not exceeding three months.

e. Allowance for doubtful debts

The allowance is computed for specific outstanding amounts, the collection of which – in management’s opinion – is doubtful. Doubtful debts having no apparent chance of being collected are written off, based on management’s decision.

f. Inventory

As from January 1, 2007, the Company applies Accounting Standard No. 26 – "Inventory".

Inventory is stated at the lower of cost or net realizable value. Inventory cost includes all purchase costs as well as other costs incurred in bringing the inventory to its current location and condition.

Net realizable value represents the estimated sales price in the ordinary course of business net of the estimated costs to completion and estimated costs needed to effect the sale.

Until December 31, 2006, inventory was stated at the lower of cost or market value.

Inventory purchased on credit, which includes a financing element, is stated at cost, which is equivalent to the purchase cost under ordinary credit terms. The difference between the actual purchase amount and the cost equivalent to the purchase cost under ordinary credit terms, is recognized as interest expense in the credit period.

Cost is determined by the weighted moving average method.

The Standard's taking effect did not have an effect on the Company's financial statements.

g. Investment in another company

An investment in another company has been included at cost, which – in management’s assessment – does not exceed its fair value.

C-13 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

h. Investments in investees

Investments in investees have been accounted for by the equity method.

i. Fixed assets

As from January 1, 2007, the Company applies Accounting Standard No. 27, "Fixed Assets" and Accounting Standard No. 28 "Amended Transitional Provisions for Accounting Standard No. 27, Fixed Assets".

Fixed assets are tangible items that are held for use in providing services or to be leased to others, which are expected to be used for more than one period.

The Company states its fixed asset items according to the cost model, as follows:

Fixed asset items are stated in the balance sheet at their cost net of accumulated depreciation and net of accrued impairment losses, if any. The cost includes the asset's purchase cost as well as costs that can be attributed directly to bringing the asset to the location and condition necessary for its operation in the manner intended by management. The cost of qualified assets also include credit costs that should be capitalized.

Regarding application of Standard 15 on the impairment of assets – see Note 2.y.

Until December 31, 2006, the elements of fixed asset items having a different useful life were not depreciated separately.

As from January 1, 2007, when Accounting Standard No. 27 "Fixed Assets" took effect, fixed assets are depreciated separately for each element of depreciable fixed asset items having cost that is significant relative to the cost of the item. The assets are depreciated over the expected useful life of the item's elements, from the date the asset is ready for its intended use, taking into account the residual value expected at the end of the useful life.

The cost of an overhaul of an aircraft engine is capitalized as an asset in the balance sheet, and is depreciated over the period of economic benefit expected from this overhaul (based on the estimate of projected engine hours). Until the Standard took effect, the costs of general overhauls were expensed when the overhaul was performed.

Residual value, depreciation method and useful life of the asset are reviewed by the Company's management at the end of every fiscal year. Changes are treated as a change in estimate, prospectively.

Assets under financing leases are depreciated over their expected useful life, on the same basis as owned assets, or over the period of the lease, whichever is shorter.

A gain or loss resulting from the sale or disposal of an asset is determined according to the difference between the receipts from sale and book value of the asset, and is charged to the statement of operations.

C-14 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

i. Fixed assets (cont.)

As a result of the retroactive application of the Standard's provisions, the Company retroactively separated the overhaul costs that had been included in the original cost of the planes, and depreciated them separately. Additionally, the costs of the subsequent overhauls were recorded retroactively as an asset in the balance sheet, instead of as an expense, as was done in the past. Consequently, the Company retroactively updated the capital gains it had recorded on the sale of assets effected in the past. See Note 2.z regarding the effect of retroactive application of the Standard on the financial statements for prior periods. The cost of accessories and spare parts included in fixed assets has been determined by the moving weighted-average method. Accessories and spare parts attributed to a specific fleet are depreciated over the remaining average useful life of that fleet. Accessories and replacement parts which are not attributed to a specific fleet are depreciated at a fixed annual rate. Obsolete and slow-moving accessories and spare parts are included at their written down value, based on management’s estimate. As for annual depreciation rates – see Note 9.

j. Other assets

Rights to use security-related equipment are stated at their cost to the Company and amortized over the estimated economic life, subject to an examination for impairment. The estimated life and amortization method are examined at the end of every reporting year, with the effect of changes in estimate treated prospectively.

k. Deferred expenses for credit costs

Commencing January 1, 2006, when Accounting Standard No. 22, "Financial Instruments: Disclosure and Presentation", took effect, the loan costs are offset against the balance of the liability for such loans, and are amortized by the effective interest method.

l. Obligations for frequent flyer programs

The provision has been computed for passengers accumulating minimum points in relation to an estimate of the plans’ effective cost to the Company arising from the utilization of the benefits granted under those plans. The effective cost is based on management’s assessment of the anticipated relative weight of the marginal expenses likely to be incurred by the Company and of the loss of alternative revenues attributable to rejection of a paying passenger upon the utilization of those benefits.

C-15 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

m. Obligation for termination of employee-employer relationships, net

The obligation for termination of employee-employer relationships covers all obligations to employees required by law, agreement, practice and management expectations.

The monies received from the Government of Israel to cover the deficit in the severance-pay fund are included in the financial statements on a cash basis, when deposited in the severance- pay fund by the Government of Israel-see Note 15b.3.b.

n. Basis for revenue recognition and allocation of commissions to agents

Revenues from flight-ticket sales are included as deferred income within current liabilities until the earlier of the date of the service provided or two years from date of sale.

Revenues from the carriage of passengers include income for service provided by the Company in cases in which the sale of flight tickets has been made by other airlines. Additionally, revenues from the carriage of passenger also include income derived from Code Share Agreements with other airlines. In such case, the service is rendered by other airlines while the sale is made by the Company, with the income being presented at a net amount.

Revenues from carriage of cargo are recorded as revenues in the statement of operations upon rendering the service.

Agent commissions attributed to unrecognized revenues are included in the financial statements in “other current assets-prepaid expenses” and charged to the statement of operations as selling expenses concurrent with the recognition of revenue.

o. Maintenance and engine overhaul expenses

Maintenance and engine improvement expenses that are not overhauls, as discussed in Note 2.i, are charged to the statement of operations upon actual performance of the maintenance or engine overhaul. In cases in which the Company entered into warranty contracts, the Company records expenses as defined in the warranty agreement, and the cost of the overhaul is borne by the warrantor.

p. Security expenses for Company services

The Company's participation in the government’s expenses for providing security for the Company's services is allocated to operations as incurred, based on the Company's share of such expenses. Regarding a subsequent event – see Note 26.1.

q. Jet-fuel hedging transactions

The outcome of financial transactions to hedge jet-fuel prices designed to secure the price of fuel against changes in world prices are allocated to operating expenses in the statement of operations concurrently with the recording of the results of fuel purchase transactions.

C-16 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

r. Hedging interest and foreign exchange rates

Part of the financial instruments used by the Company to replace the variable-interest component with a fixed interest component are designed to hedge, but are not recognized for accounting purposes. These financial instruments are presented in the financial statements based on their fair value with other current assets or current liabilities, as applicable. Changes in fair value are allocated to the financing section in the statement of operations for each period.

The fair value of the derivative financial instruments referred to above is determined by market prices.

Another part of the financial instruments used by the Company to replace the variable interest component in the fixed interest component is recognized for accounting purposes as hedging transactions. The outcomes of these financial instruments is charged to financing expenses in the statement of operations, concurrently with recording the financing expenses on the loans to which the financial instruments relate.

The financial instruments used by the Company to hedge against changes in foreign-exchange rates are not recognized for accounting purposes. These financial instruments are presented in the financial statements at their fair value, determined based upon data received from the banks with which the Company has entered into agreements related to these transactions.

s. Deferred income taxes

The Company and subsidiaries allocate taxes for temporary differences between the value of assets and liabilities in the financial statements and their tax basis, and for tax losses whose realization is anticipated. The deferred income taxes are computed at the tax rates expected upon realization, as known as of the balance-sheet date (between 25%-27%).

Not taken into account when computing deferred taxes are the taxes that would apply in the event of realization of investments in investees, since the Company intends to hold and develop these investments. Also not taken into account are deferred taxes on the distribution of earnings in these companies, since the dividends are not taxable.

t. Use of estimates in the preparation of financial statements

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions which affect the amounts of the assets and liabilities included in the financial statements, disclosure of contingent assets and liabilities as of the date of the financial statements and amounts of revenues and expenses in the reporting periods. Although these estimates and assessments are made with the best judgment, actual results may differ from these estimates.

C-17 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

u. Linked balances

Balances in, or linked to, foreign currency are included in the financial statements on the basis of the representative exchange rate in effect on the balance- sheet date.

Following is data on the Consumer Price Index ("CPI") in Israel and the exchange rates of foreign currencies in relation to the U.S. dollar: December 31 2 0 0 7 2 0 0 6 2 0 0 5

CPI - in points 191.2 184.9 185.1

Dollar rate - in NIS 3.846 4.225 4.603 Dollar rate - in EURO 0.680 0.759 0.845 Dollar rate - in POUND STERLING 0.499 0.510 0.580

Rate of change - in %: Year ended December 31 2 0 0 7 2 0 0 6 2 0 0 5

CPI 3.4% (0.1%) 2.4% Dollar rate - in NIS (9.0%) (8.2%) 6.8% Dollar rate - in EURO (10.4%) (10.2%) 15.3% Dollar rate - in POUND STERLING (2.2%) (12.1%) 11.7%

v. Earnings (loss) per share

The Company computes the amounts of basic earnings per share by dividing earnings or loss attributable to ordinary shareholders of the Company (numerator), by the weighted average of the outstanding ordinary shares (denominator) during the reporting period. In its computation of diluted earnings per share, the Company adjusts earnings or loss attributable to the ordinary shareholders and the weighted average of the outstanding shares for the effects of all the potential dilutive ordinary shares.

C-18 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

w. Share-based payments

Commencing January 1, 2006, the Company applies Accounting Standard No. 24, “Share-Based Payments” (hereafter – "the standard"). Pursuant to the directives of the standard, the Company recognizes share-based payment transactions in the financial statements, including transactions with employees or other parties that are settled by means of equity instruments of the Company or in cash.

For share-based payment transactions that are settled in cash, the Company measures the goods or services acquired and the liabilities incurred according to the fair value of the liability. Until the liability is settled, the Company remeasures the fair value of the liability at each reporting date, and at the date of settlement, with any changes in fair value being recognized in earnings or loss for the period.

With respect to share-based payment transactions with employees, the Company measures the fair value of the equity instruments granted on the grant date. If the equity instruments do not vest until those employees have completed a defined period of service, the Company recognizes the service in the financial statements over the vesting period.

x. Transactions with a former controlling party

Until December 31, 2006, transactions between the Company and its former controlling party were treated according to the Securities Regulations (Financial Statement Presentation of Transactions between a Company and its Controlling Party), 1996 ("the regulations").

Commencing January 1, 2007, the Company applies Accounting Standard No. 23, "Accounting Treatment of Transactions between an Entity and its Controlling Party".

This Standard provides that the valuation basis in transactions between an entity and its controlling party is fair value. Transactions having the nature of an owner's investment or a distribution to owners belong in shareholders' equity, and they are not to be included in the operating results of the controlled entity. Differences between the consideration prescribed in transactions between and an entity and its controlling party and between the fair value of those transactions will be recorded to shareholders' equity. Current and deferred taxes related to items recorded to shareholders' equity for transactions with controlling parties will also be recorded directly to shareholders' equity.

The Government’s waiver of a Company obligation to the Government of Israel executed in the year 2003, has been allocated to a capital reserve for transactions with a former controlling party.

Moreover, amounts received from the Government of Israel to cover the deficit in the severance pay fund are allocated, upon deposit, to the capital reserve for transactions with a former controlling party.

C-19 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

y. Impairment of assets

The Company applies Accounting Standard No.15, “Impairment of Assets”. Standard 15 sets forth the accounting treatment and presentation of asset impairment and establishes procedures to be implemented by a corporation in order to ensure that assets are not presented in amounts exceeding their recoverable amount. The recoverable amount of an asset is defined as the higher of the net selling price of the asset and the present value of estimated future cash flows expected to be derived from the use and realization of the asset. The standard also stipulates the rules for presentation and disclosure of impaired assets.

Company management believes that the recoverable amounts of the aircraft should be compared to their net book value on the basis of grouping the fleets and that it is incorrect to compare the recoverable value of each plane to its net book value individually.

Following the grouping conducted by the Company for its aircraft fleets, it became evident that the recoverable value for each group of aircraft exceeds its net book value at that time. Accordingly, no provision for impairment has been included in these financial statements for impairment of the value of these aircrafts.

z. Restatement

The financial statements as of December 31, 2006 and 2005 and for the two years then ended were retroactively adjusted, in accordance with the provisions of Accounting Standard No. 27, "Fixed Assets" (hereafter – "the Standard"), as in Note 2i above.

Presented below are the key changes made as a result of the Standard taking effect:

1. The cost of general engine overhauls was separated from the original cost of the aircraft and was depreciated over the period of economic benefit from that overhaul (average of 8 years).

2. The cost of subsequent overhauls are recorded as an asset in fixed assets and depreciated as aforesaid, whereas in the accounting policy practiced until the Standard took effect, the overhaul was recorded to operating expenses.

3. The capital gain recorded in the third quarter of 2006 from the sale of a cargo plane was retroactively adjusted as a result of the change in the net book value of the plane on the date of sale, as aforesaid.

4. The increase in fixed assets as of December 31, 2006 and 2005 requires the recording of a provision for deferred taxes of $7,147 thousand and $6,272 thousand, respectively.

Likewise, within the scope of the processing of fixed asset data, it was found that depreciation differences taken into account in the past in the computation of the deferred tax liability requires a change. This change increases the deferred tax liability as of December 31, 2006 and 2005 by $37,188 thousand and $44,594 thousand, respectively.

C-20 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.) z. Restatement (cont.) The effect on the financial statements – consolidated and Company - of the restatement for the aforementioned matters is as follows: 1. Consolidated balance sheets December 31, 2006 December 31, 2005 Effect In these Effect In these Before of financial Before of financial restatement restatement statements restatement restatement statements (in thousand US dollars) (in thousand US dollars)

Fixed assets 1,148,389 28,139 1,176,528 1,163,765 24,216 1,187,981

Deferred taxes payable (30,268) (44,335) (74,603) (46,300) (50,866) (97,166)

Capital reserve from transactions with former controlling party (299,894) 81,396 (218,498) (299,119) 81,396 (217,723)

Accumulated deficit 204,620 (65,200) 139,420 160,254 (54,746) 105,508

Total shareholders' equity (230,296) 16,196 (214,100) (271,009) 26,650 (244,359)

2. Consolidated statements of operations

Year ended December 31, 2006 Year ended December 31, 2005 Effect In these Effect In these Before of financial Before of financial restatement restatement statements restatement restatement statements (in thousand US dollars) (in thousand US dollars)

Operating expenses 1,402,652 (8,493) 1,394,159 1,243,198 2,372 1,245,570

Other expenses (income), net (1,806) 4,570 2,764 4,519 - 4,519

Tax expenses (savings) 134 (6,531) (6,397) 304 12,756 13,060

Net income (loss) for year 44,366 (10,454) 33,912 (64,126) 15,128 (48,998)

Basic earnings (loss) per share in $ 0.11 (0.03) 0.08 (0.16) 0.04 (0.12)

Fully-diluted earnings (loss) per share in $ 0.11 (0.03) 0.08 (0.13) 0.03 (0.10)

C-21 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.) z. Restatement (cont.) 3. Consolidated statements of cash flows: Year ended December 31, 2006 Year ended December 31, 2005 Effect In these Effect In these Before of financial Before of financial restatement restatement statements restatement restatement statements (in thousand US dollars) (in thousand US dollars)

Cash flows provided by operating activities 73,436 24,700 98,136 183,619 17,900 201,519

Cash flows provided by (used for) investing activities 10,146 (24,700) (14,554) (95,655) (17,900) (113,555)

4. Balance sheets - Company: December 31, 2006 December 31, 2005 Effect In these Effect In these Before of financial Before of financial restatement restatement statements restatement restatement statements (in thousand US dollars) (in thousand US dollars)

Fixed assets 1,146,216 28,139 1,174,355 1,161,500 24,216 1,185,716

Deferred taxes payable (30,171) (44,335) (74,506) (46,173) (50,866) (97,039)

Capital reserve for transactions with former controlling party (299,894) 81,396 (218,498) (299,119) 81,396 (217,723)

Accumulated deficit 204,620 (65,200) 139,420 160,254 (54,746) 105,508

Total shareholders' equity (230,296) 16,196 (214,100) (271,009) 26,650 (244,359)

5. Statement of operations – Company: Year ended December 31, 2006 Year ended December 31, 2005 Effect In these Effect In these Before of financial Before of financial restatement restatement statements restatement restatement statements (in thousand US dollars) (in thousand US dollars)

Operating expenses 1,397,494 (8,493) 1,389,001 1,238,864 2,372 1,241,236

Other expenses (income), net (1,824) 4,570 2,746 4,628 - 4,628

Tax expenses (savings) - (6,531) (6,531) - 12,756 12,756

Net income (loss) for year (44,366) (10,454) (33,912) 64,126 15,128 48,998

C-22 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.) z. Restatement (cont.) 6. Statement of cash flows – Company: Year ended December 31, 2006 Year ended December 31, 2005 Effect In these Effect In these Before of financial Before of financial restatement restatement statements restatement restatement statements (in thousand US dollars) (in thousand US dollars)

Cash flows provided by operating activities 73,349 24,700 98,049 182,181 17,900 200,081

Cash flows provided by (used for) investing activities 10,797 (24,700) (13,903) (94,827) (17,900) (112,727)

aa. Effect of new Accounting Standards in period before application: Accounting Standard No. 29 – Adoption of International Financial Reporting Standards (IFRS) In July 2006, the Israel Accounting Standards Board published Accounting Standard No. 29, "Adoption of International Financial Reporting Standards (IFRS)" ("the Standard" or "Standard 29"). The Standard provides that the financial statements of entities that are subject to the Israeli Securities Law and obligated to report according to the regulations of this law, except for foreign corporations, as defined in the Securities Law, will be prepared as from reporting periods commencing January 1, 2008 in accordance with the International Financial Reporting Standards (IFRS) and their interpretations, which are published by the International Accounting Standards Board (IASB). An entity that will apply the IFRS Standards as from January 1, 2008, and will choose to report comparative figures for the year 2007 alone, in accordance with the IFRS Standards, will be required to prepare an opening balance sheet as at January 1, 2007 in accordance with the IFRS Standards ("opening balance sheet"). The transition to reporting in accordance with IFRS Standards will be carried out in accordance with IFRS Standard 1, initial adoption of IFRS Standards. IFRS Standard 1 provides rules on how an entity will carry out the transition from the previous financial reporting on the basis of previous local accounting principles to financial reporting based on the IFRS. IFRS Standard 1 supersedes all transitional provisions provided in the other IFRS Standards (including transitional provisions provided in previous local accounting standards) and provides that all the international financial reporting standards are to be adopted retroactively in the opening balance sheet. However, IFRS 1 grants accommodations for certain matters by not imposing the obligation to apply them retroactively. Additionally, IFRS 1 provides several exceptions regarding the retroactive application of certain aspects of other IFRS Standards. Standard 29 enables entities to choose to prepare their financial statements in accordance with IFRS Standards on a date earlier than January 1, 2008, commencing the financial statements issued after July 31, 2006. Company management elected to adopt the IFRS Standards as from January 1, 2008. Regarding the adjustments that will be made at the time of the change to reporting in accordance with IFRS Standards and the exceptions elected by the Company under the provisions of IFRS No. 1, see Note 25.

C-23 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 3 - SHORT-TERM INVESTMENTS Consolidated Company December 31, December 31, a. Composition 2 0 0 7 2 0 0 6 2 0 0 7 2 0 0 6 (in thousand US dollars)

Short-term bank deposits – in dollars 172,000 4,000 172,000 4,000 Short-term bank deposits – in NIS 8,633 682 7,435 - 180,633 4,682 179,435 4,000

b. The short-term bank deposits as of December 31, 2007 bear annual interest at an average rate of 5.13%.

c. The short-term deposits as of December 31, 2007 include a shekel deposit equivalent in value to $7,435 thousand (including interest), originating in the proceeds from the exercise of options (Series 1) received by the Company, which exceed the "deficit" in the severance pay fund of eligible employees – as in Note 15.b.3.b. The Company is examining for limitations on the ability to use the balance of these proceeds, pursuant to its agreement with the State and the employees' representatives. Subsequent to the balance sheet date, the Company approached the Controller-General in the Ministry of Finance regarding this matter.

NOTE 4 - TRADE ACCOUNTS RECEIVABLE Consolidated Company December 31, December 31, 2 0 0 7 2 0 0 6 2 0 0 7 2 0 0 6 a. Composition (in thousand US dollars)

Outstanding accounts 125,903 119,231 122,560 115,617 Less: allowance for doubtful accounts (1,535) (2,086) (1,533) (2,016) 124,368 117,145 121,027 113,601 Airlines (see b. below) 19,249 15,399 19,249 15,399 143,617 132,544 140,276 129,000

b. The accounting settlement among the airlines is mostly arranged through IATA’s clearing system.

NOTE 5 - RECEIVABLES AND OTHER CURRENT ASSETS Consolidated Company December 31, December 31, Composition 2 0 0 7 2 0 0 6 2 0 0 7 2 0 0 6 (in thousand US dollars) Prepaid expenses 32,022 24,960 31,781 24,684 VAT authorities 3,697 4,138 3,517 3,982 Fair value of hedging instruments 4,603 2,904 4,603 2,904 Loans and advances to employees 494 289 259 282 Subsidiaries - - 1,658 2,621 Interest receivable 2,380 473 2,380 473 Other receivables 8,757 14,578 9,217 14,448 51,953 47,342 53,415 49,394

C-24 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 6 - INVENTORY Consolidated Company December 31, December 31, Composition 2 0 0 7 2 0 0 6 2 0 0 7 2 0 0 6 (in thousand US dollars) Jet fuel for consumption 8,027 10,484 8,027 10,484 Other (mainly chemicals, consumable equipment, duty-free products and food products) 7,954 6,706 7,352 5,980 15,981 17,190 15,379 16,464

NOTE 7 - LONG-TERM BANK DEPOSITS AND INVESTMENT IN ANOTHER COMPANY

Consolidated and Interest rates on Company December 31, December 31, 2 0 0 7 2 0 0 7 2 0 0 6 % (in thousand US dollars) a. Composition:

Bank deposits in unlinked NIS (see b below) 2.43-2.79 2,207 1,836 Investment in another company (see c below) 1,715 1,829 3,922 3,665

b. The unlinked NIS bank deposits as of December 31, 2007 include $2,027 thousand used as security for the repayment of bank loans received by Company employees (as of December 31, 2006 -$ 1,829 thousand). The deposits have no predetermined redemption date.

c. Investment in another company of $1,715 thousand in Societe Internationale de Telecommunications – Aeronautiques (“SITA”) - a non-profit cooperative society of airlines and related entities, whose objective is mainly to provide international telecommunication services to airlines and others.

As of December 31, 2007, the Company held 36 shares of €5 par value each, constituting 0.5% of SITA’s share capital.

C-25 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 8 - INVESTEES

a. Composition: December 31, 2007 December 31, 2006 Company's Company's Loans and equity in Loans and equity in inter- retained inter- retained Shares, company earnings Shares, company earnings at cost balances (deficits) Total at cost balances (deficits) Total ( I n t h o u s a n d U S d o l l a r s)

1. Consolidated: Affiliates (1): Sabre Israel (2) - 1,228 982 2,210 - 1,228 771 1,999 Air Tour 13 - - 13 13 - - 13 ACI and Kavei Chufsha (3) 44 - 1 45 44 - 224 268 57 1,228 983 2,268 57 1,228 995 2,280 2. Company: Subsidiaries: Superstar (4) 349 411 (115) 645 349 - (150) 199 Tamam 1 - 4,571 4,572 1 - 4,862 4,863 Borenstein 1 - 3,955 3,956 1 - 3,929 3,930 Sun D'Or 3 - - 3 3 - - 3 354 411 8,411 9,176 354 - 8,641 8,995 Affiliates (1): Sabre Israel (2) - 1,228 982 2,210 - 1,228 771 1,999 Air Tour 13 - - 13 13 - - 13 ACI and Kavei Chufsha (3) 44 - 1 45 44 - 224 268 57 1,228 983 2,268 57 1,228 995 2,280

411 1,639 9,394 11,444 411 1,228 9,636 11,275 1. Includes Airtour and ACI which are presented at cost – see note 8b.5 and 8b.6. 2. The loan to Sabre is denominated in US dollars and bears interest of Libor + 1.5%. 3. In 2007, equity in retained earnings was net of a dividend received from Chufsha of $345 thousand. 4. The loan to Superstar, which was given in the current year, is in pounds sterling and is non-interest bearing. The loan does not have a pre-determined maturity date.

C-26 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 8 - INVESTEES (Cont.)

b. Additional information pertaining to the investments and activity in main investees:

1. Tamam Aircraft Food Industries (BGA) Ltd. ("Tamam")

Tamam is primarily engaged in the production and supply of prepared meals for airlines, with most of its sales made to the Company and a small fraction to other airlines and customers. Tamam provides the Company with catering and food services on its aircraft at prices specified by agreements, the last of which was extended until December 31, 2007. As of the approval date of these financial statements, the Company had not yet signed a new agreement with Tamam.

Tamam's plant is located at BGA and it has an agreement with the Airports Authority ("AA"), according to which it may use the area owned by AA in exchange for agreed-upon authorization fees based on Tamam's turnover.

Following the opening of BGA 2000, Tamam estimates that it will have to relocate its plant from its present location and move to a new location in 2010.

As for transactions carried out by the Company with Tamam – see Note 23.

2. Borenstein Caterers Inc. (USA) – (“Borenstein”)

Borenstein, a wholly owned subsidiary, is a USA corporation operating out of New York’s JFK, and is mostly engaged in the production and delivery of kosher meals for airlines and other institutions, with the Company being its major customer.

As for transactions carried out between the Company and Borenstein – see Note 23.

3. Superstar Holidays Ltd. (England) – (“Superstar”)

Superstar is registered in England and Wales and is wholly-owned by the Company. It is engaged in the marketing of wholesale tourism packages to travel agents and individual travelers, as well as airline tickets.

Superstar has a branch in Israel, as well as branches in several cities abroad.

As for transactions carried out between the Company and Superstar – see Note 23.

C-27 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 8 - INVESTEES (Cont.)

b. Additional information on investments and activity in main investees: (Cont.)

4. Sun D'Or International Airlines Ltd. ("Sun D'Or")

Sun D'Or operates charter flights within the framework of a commercial policy coordinated with the Company, by means of aircraft leased from the Company, or through the Company. In addition, Sun D’Or sells seat packages on EL AL flights to agents in exchange for a commission.

Sun D'Or has a commercial operation certificate, valid for an indefinite period, to transport passengers and cargo on charter flights to and from Israel. The license provides, inter alia, that the operation of aircraft requires Civil Aviation Authority (CAA) approval that flights will be carried out by planes owned by the Company or Arkia Israel Airlines Ltd. or aircraft leased by the Company, with BGA being Sun D’Or’s home-base.

In addition, Sun D’Or operates charter flights under an independent code (“7L”). It has an air operation certificate, which is based on two aircraft leased from the Company, subject to requirements set by the CAA which pertain mainly to the receipt of maintenance services from an authorized inspection institute and to the employment of substitute workers in certain functions.

According to the method used by the two companies to settle their accounts, Sun D’Or ends each year at a breakeven point.

As for an understanding reached between the Company and the Commissioner for Restrictive Trade Practices – see Note 1.b.4.

As for transactions between the Company and Sun D’Or – see Note 23.

5. Tour Air (Israel) Ltd. ("Air Tour ")

The shares of Air Tour are held by Israeli travel agents (50%) and the Company (50%). Air Tour acts as a reduced-price ticket provider for individuals, almost exclusively for the Company, and also markets the Company’s flights and special promotions of the Company to all of its flight destinations.

The shares held by the Company grant it the right to participate and vote in Air Tour’s General Meetings with 50% voting rights and to appoint half of its directors, but do not grant it the right to receive dividends or profits, other than profits derived from investing in Air Tour’s share capital.

The investment in Air Tour is stated at cost.

As for transactions between the Company and Air Tour – see Note 23.

C-28 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 8 - INVESTEES (Cont.)

b. Additional information on investments and activity in main investees: (Cont.)

6. Air Consolidators Israel Ltd. ("ACI")

ACI is primarily engaged in the consolidation of air cargo at BGA to facilitate the reduction in price of air shipments. Air transport is carried out by the Company, at special prices, and by foreign companies.

The shares held by the Company entitle it to participate and vote in the General Meetings of ACI to the extent of 50% and to appoint half of its board members, without the right to receive earnings by way of a dividend distribution or any other benefit, other than earnings and dividends derived from capital gains.

The investment is presented at cost.

As for transactions between the Company and ACI – see Note 23.

7. Sabre Israel Travel Technologies Ltd. (“Sabre Israel”)

Sabre Israel was established within the framework of an agreement signed in 2001 to set up a joint venture between the Company and Sabre Inc. The Company’s share in Sabre Israel is 49% while the share of Sabre Inc. is 51%. Sabre Israel commenced its activities in December 2001 and it provides the travel agents segment in Israel with flight-order services for the airlines of the world, as well as orders for a wide range of additional tourism services worldwide. Those services are provided to travel agents, who acquire a license for using an integrated system that includes the use of the “Carmel” system owned by the Company, as well as the use of Sabre system and technology.

In addition, Sabre Israel provides support and maintenance services to travel agents in Israel.

According to the agreement, the Company and Sabre Inc. pay marketing fees to Sabre Israel, as well as additional marketing fees, which complement Sabre Israel’s pre-tax operating income to cost plus 7%.

The investment is presented on the equity basis.

As for mutual transactions between the Company and Sabre Israel– see Note 23.

C-29 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 9 - FIXED ASSETS

a. Composition: Consolidated Buildings Aircraft Payments and and flight on account Machinery Computers Vehicles installations equipment of aircraft and ground and office and hanger (1) (2) & engines(3) equipment furniture equipment Total (in thousand US dollars)

Cost Balance - January 1, 2007 96,835 * 2,127,003 82,719 54,686 115,617 8,539 * 2,485,399 Reclassification - 82,108 (82,108 ) - - - - Additions 3,656 235,829 3,052 1,821 4,026 175 248,558 Disposals (30) (25,099) - (714) - (563) (26,406) Balance - December 31, 2007 100,461 2,419,841 3,663 55,793 119,643 8,151 2,707,551

Accumulated depreciation Balance - January 1, 2007 66,955 * 1,082,364 - 48,983 103,635 6,934 * 1,308,871 Annual depreciation 2,569 108,272 - 2,340 6,326 294 119,801 Disposals (6) (6,325) - (821) - (390) (7,542) Balance - December 31, 2007 69,518 1,184,311 - 50,502 109,961 6,838 1,421,130

Net book value: December 31, 2007 30,944 1,235,530 3,663 5,291 9,680 1,313 1,286,421 December 31, 2006 29,880 1,044,639 82,719 5,703 11,982 1,605 1,176,528

Annual depreciation rate 4%-10% See b2 - 5%-20% 5%-33% 5%-15% (mainly 10%) (mainly 33%) (mainly 15%)

* Restated – see Note 2z. (1) See f. below. (2) See b. below. (3) See c. below.

C-30 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 9 - FIXED ASSETS (Cont.)

a. Composition: (Cont.)

Company Buildings Aircraft Payments and and flight on account Machinery Computers Vehicles installations equipment of aircraft and ground and office and hanger (1) (2) & engines(3) equipment furniture equipment Total (in thousand US dollars)

Cost Balance - January 1, 2007 92,951 * 2,127,003 82,719 48,218 113,618 7,200 *2,471,709 Reclassification - 82,108 (82,108 ) - - - - Additions 3,600 235,829 3,052 1,555 3,930 175 248,141 Disposals (30) (25,099) - (714) - (538) (26,381) Balance - December 31, 2007 96,521 2,419,841 3,663 49,059 117,548 6,837 2,693,469

Accumulated depreciation Balance - January 1, 2007 63,676 * 1,082,364 - 43,823 101,731 5,760 *1,297,354 Annual depreciation 2,456 108,272 - 1,998 6,261 277 119,264 Disposals (6) (6,325) - (821) - (368) (7,520) Balance - December 31, 2007 66,126 1,184,311 - 45,000 107,992 5,669 1,409,098

Net book value: December 31, 2007 30,395 1,235,530 3,663 4,059 9,556 1,168 1,284,371 December 31, 2006 29,275 1,044,639 82,719 4,395 11,887 1,440 1,174,355

Annual depreciation rate 4%-10% See b.2 - 5%-20% 5%-33% 5%-15% (mainly 10%) (mainly 33%) (mainly 15%)

* Restated – see Note 2z. (1) See f. below. (2) See b. below. (3) See c. below.

C-31 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 9 - FIXED ASSETS (Cont.) b. Boeing aircraft and flight equipment

1. Composition Consolidated and Company December 31, 2 0 0 7 2 0 0 6* Accumulated Net book Net book Cost depreciation value value (in thousand US dollars) Quantity Type of aircraft As of 31.12.07 747-400 4 458B (passenger) 424,047 208,845 215,202 236,952 Spare engines 6,600 3,914 2,686 3,026 Engine overhauls 77,280 38,640 38,640 38,640 507,927 251,399 256,528 278,618 747-200 4 245F/258C (cargo) 121,030 113,798 7,232 12,776 Spare engines 17,481 17,481 - - Engine overhauls 83,366 50,795 32,571 36,535 221,877 182,074 39,803 49,311 757 5 258B (passenger) 175,339 121,741 53,598 56,840 Spare engines 3,347 2,757 590 914 Engine overhauls 54,303 35,722 18,581 12,576 232,989 160,220 72,769 70,330 737 5 700/800 (passenger) 141,573 46,302 96,271 99,054 Spare engines 6,390 1,954 4,436 3,900 Engine overhauls 34,705 23,673 11,032 11,086 182,668 71,929 110,739 114,040 767 4 200 (passenger) 143,182 135,705 7,477 13,833 2 200ER (passenger) 81,125 48,358 32,767 38,781 Spare engines 1,649 979 670 757 Engine overhauls 77,921 46,499 31,422 33,323 303,877 231,541 72,336 86,694 777-258 ER ** 6 Passenger 663,496 108,145 555,351 329,365 Spare engines 21,157 4,164 16,993 18,173 Engine overhauls 67,030 33,515 33,515 23,940 30 751,683 145,824 605,859 371,478

2,201,021 1,042,987 1,158,034 970,471

Accessories and spare parts - general 218,820 141,324 77,496 74,168 2,419,841 1,184,311 1,235,530 1,044,639

Including capitalized financing costs 5,859 2,260 3,599 3,833

* Restated – see Note 2z. ** Includes three aircraft in financing leases – see Note 9e.

C-32 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 9 - FIXED ASSETS (Cont.)

b. Boeing aircraft and flight equipment (Cont.)

2. Depreciation rates

The annual depreciation rate of each aircraft is decided considering its residual value, as it appears in the prevailing aircraft pricelist, which estimate the value of an aircraft for the year that management assesses the use to the Company of that aircraft will end.

On December 31, 2007, the balance of years remaining for the Company's aircraft fleet is between one and twenty years.

The annual depreciation rate of the spare engines was determined according to the average number of years remaining for that fleet of aircraft to which the engines are allocated.

Engine overhauls are depreciated according to potential engine hours that the overhaul added to that engine, and according to an estimate of the projected engine hours for that aircraft fleet in the coming years.

As of December 31, 2007, the balance of years remaining for general engine overhauls ranges between two months and 12 years.

Accessories and spare parts allocated to a specific aircraft fleet are depreciated over the average remaining life of that fleet. Accessories and spare parts that are not allocated to a specific fleet are depreciated at the rate of 10% annually.

c. Payments on account of aircraft and flight equipment - composition

Consolidated and Company December 31 2 0 0 7 2 0 0 6 (in thousand US dollars)

Advance for the purchase of two 777-200 aircraft - 82,108 Advance for the purchase of four 777-200 aircraft 980 - Replacement of seats in 777 fleet 687 112 Advances for replacement of computer systems 624 - Other 1,372 499 3,663 82,719

d. Acquisition of aircraft from the State and settlement of the Company’s liabilities for use of aircraft -

1. Overview-

On May 5, 2003, prior to privatization, the Company signed an agreement with the Government of Israel to arrange the repayment of Company liabilities to the Government of Israel for the Company's use, since 1983, of four Boeing 767 aircraft (two of the ER model) and two 737-200 aircraft (sold in 1999) as well as related equipment. Within the framework of this agreement, which was approved by the Knesset’s Finance Committee on May 5, 2003, the acquisition of four 767 aircraft from the State and an allotment of share capital to the Government of Israel were arranged. The effect of this agreement on the Company’s financial statements was reflected in the financial statements for the year ended December 31, 2003.

C-33 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 9 - FIXED ASSETS (Cont.) d. Acquisition of aircraft from the State and settlement of the Company’s liabilities in respect of aircraft use (Cont.) 2. Agreement highlights - The Company’s liabilities to the Government of Israel as of the end of 2002 amounted to approximately $274.5 million, of which a total of $226.3 million was waived by the government while the Company waived an identical amount of carryforward business tax losses. The market value of the four planes on May 5, 2003 amounted to approximately $ 41 million. The net book value of the four aircraft which had been owned by the State as of May 5, 2003, had the Government of Israel included them in financial statements prepared in conformity with generally accepted accounting principles, would have been $ 41.1 million. The planes were recorded in the Company’s accounts at this net book value. In exchange for the purchase of the four planes from the government and the amounts previously received for the sale of two 737 aircraft on account of share capital (including the settlement of payments made in previous years on account of the aircraft) and to settle the remaining debt owed to the Government of Israel, the Company allotted ordinary shares amounting to $ 84 million to the Government of Israel in May, 2003.

3. In accordance with the Securities Regulations (Financial Statement Presentation of Transactions between a Company and a Controlling Party), 1996, the difference between the market value and the net book value as above, was recorded to a capital reserve from transactions with a former controlling party. In addition the waiver by the Government of Israel of usage fees for these planes, net of a reduction in the Company's deferred taxes receivable, due to the Company's waiver of business losses, was recorded to a capital reserve from transactions with a former controlling party in the net amount of $142.2 million..

e. Aircraft under financing leases:

1. In June 2002, the Company received and operated a fourth 777-200 aircraft (hereafter- "the fourth aircraft). Citi Bank financed most of the cost of the fourth aircraft by means of a loan, and, for that purpose, a new foreign company, Zipporah Leasing Ltd. (hereafter: "the foreign company"), was established in the Cayman Islands. The ExIm Bank provided Citi Bank with a guarantee while Citi Bank, the foreign company, ExIm Bank and the Company appointed Wells Fargo as trustee of the collateral (hereafter: "trustee of the collateral"). The shares of the foreign company were pledged in favor of the trustee of the collateral, which also appoints the directors of the foreign company. The fourth aircraft, which is leased by the foreign company from Boeing, is subleased to the Company for 12 years in exchange for leasing fees identical in amount to the repayment of the principal and interest amounts payable to Citi Bank. The Company has an option to acquire this plane at the end of the loan-repayment period for $1.00. The fourth aircraft, which is included in the financial statements within the Company’s fixed assets, is depreciated over the expected period of economic benefit, against an entry to long- term loans for the loan received from Citi Bank to finance most of the plane’s cost. As for credit terms – see Note 14.d.5. C-34 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 9 - FIXED ASSETS (Cont.)

e. Aircraft under financing leases:

2. In July and August 2007, the Company received and operated two new 777-200 aircraft (fifth and sixth of this model) from Boeing. In July 2007, a financing agreement was signed with a consortium of several foreign banks to finance the purchase of the planes. For this purpose, a new foreign company, Yochevet Leasing LLC (hereafter: "the foreign company"), was established in the Cayman Islands. The ExIm Bank provided a bank guarantee to the lending banks. The lending banks, the foreign company, ExIm Bank and the Company appointed Wells Fargo as trustee of the collateral (hereafter: "trustee of the collateral"). The shares of the foreign company were pledged in favor of the trustee of the collateral, and the planes were pledged to the ExIm Bank. Additionally, the trustee of the collateral appoints the board of directors in the foreign company. Both aircraft, which are leased by the foreign company from Boeing, are subleased to the Company for 12 years in exchange for leasing fees identical in amount to the repayment of the principal and interest amounts payable to the lending banks. The Company has an option to acquire this plane at the end of the loan-repayment period for $1.00. The aircraft, which are included in the financial statements within the Company’s fixed assets, are depreciated over the expected period of economic benefit, against an entry to long-term loans for the loan received from Citi Bank to finance most of the plane’s cost. As for credit terms – see Note 14.d.9.

f. Buildings and installations December 31, 2 0 0 7 2 0 0 6 Accumulated Net book Net book Cost depreciation value value (in thousand US dollars) Consolidated Buildings, hangars, warehouses, workshops and offices at BGA 64,764 41,366 23,398 22,485 Leasehold improvements of rented offices 21,318 14,699 6,619 6,427 Freehold offices 2,855 1,931 924 962 Passenger and cargo terminals 11,524 11,521 3 6 100,461 69,517 30,944 29,880 Company Buildings, hangars, warehouses, workshops and offices at BGA 64,764 41,366 23,398 22,467 Leasehold improvements in rented offices 17,378 11,308 6,070 5,840 Freehold offices 2,855 1,931 924 962 Passenger and cargo terminals 11,524 11,521 3 6 96,521 66,126 30,395 29,275

As for the contract with the Airports Authority – see Note 17.d. 5.

C-35 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 9 - FIXED ASSETS (Cont.)

g. Acquisition of additional equipment under financing lease

During 2006, the Company acquired computer and other equipment under a financing lease at an overall cost of $ 1,014 thousand. Additionally, in the current year, the Company upgraded its computer system under the terms of a financing lease, at a cost of $98 thousand. These assets were recorded in the Company's accounts when received against a long-term liability (see Note 16).

h. Liens – see Note 18.

NOTE 10 - OTHER ASSETS a. Composition – consolidated and Company

Rights to use security equipment (in thousand US dollars) Cost - Balance – January 1, 2007 3,968 Current additions 644 Balance – December 31, 2007 4,612

Accumulated amortization - Balance – January 1, 2007 513 Amortization for the year 380 Balance – December 31, 2007 893

Net book value - December 31, 2007 3,719

December 31, 2006 3,455

Annual amortization rate 10%-33%

In accordance with Standard 22, loan costs are presented as an offset to the loan balance – see Note 14.b.

b. Rights to use security equipment

As explained in Note 21c, the Company bears 50% of the security costs of the Government of Israel pertaining to safeguarding the Company's passengers and aircraft from acts of terror. Accordingly, the Company recorded the payments made for its share in financing the protective systems and security inspection equipment in other assets. The Company has an arrangement with the Ministry of Defense, according to which this equipment will be exclusively used by the Company over its anticipated useful economic life. Part of the security equipment had not yet been put into operation as of December 31, 2007.

C-36 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 10 - OTHER ASSETS

c. Traffic rights

The Company operates in a regulatory environment, under government supervision, in addition to its being a "mixed" company, according to licenses and permits held by the Company by law. These characteristics restrict the Company which operates in competitive international markets. Until the mid 90’s the Company had been the sole air carrier in the area of scheduled flights ("designated carrier") of passengers and cargo to and from Israel, except for one regional destination. This exclusive status was changed following the granting of licenses to additional Israeli carriers as "designated carriers" to several destinations, partially replacing EL AL as the designated carrier of the State of Israel, granting a full operating license to KAL as a cargo carrier, and licenses for international charter flights granted to additional Israeli carriers. Prior to the privatization, on May 19, 2003, the Ministerial Committee for Social and Economic Affairs resolved as follows: “The Government of Israel assigns prime importance to EL AL’s continued activities as designated carrier of the State of Israel in light of its imposed as well as voluntarily assumed obligations. Accordingly, the Government of Israel ratified the Minister of Transport's policy, according to which: a. EL AL will continue to serve as a designated carrier on all routes for which it served as a designated carrier prior to the publication of the prospectus, subject to the following conditions: 1. EL AL fulfils, at all times, its imposed as well as voluntarily assumed obligations towards the State of Israel. 2. The Minister of Transport will consider the cancellation of EL AL’s status as a designated carrier on a given route if the number of passengers flying with EL Al is 20% or lower than the number of passengers flying on that route on scheduled flights, or if the number of EL AL's scheduled flights is 20% or less than the scheduled flights operated by the designated carrier of the country of destination during the period of a calendar year. b. Within the framework of his aviation-policy considerations, and under his legal authority, the Minister of Transport will determine whether to grant rights to an additional carrier on scheduled routes if the number of passengers flying on EL AL’s scheduled flights is lower than 30% of the total number of passengers using scheduled flights on that route during a period of a calendar year. c. Without derogating from the authority of the Minister of Transport, this policy will be reconsidered if, and when, the volume of exiting and arriving airline passengers to Israel exceeds 10.7 million per annum. d. This decision supersedes Government Resolutions No’s.160, 649 and 2313 of August 22, 1999, September 2, 2001 and July 3, 2002, respectively. e. This resolution will go into effect upon the registration of the Company’s shares on the Tel Aviv Stock Exchange."

C-37 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 10 - OTHER ASSETS (Cont.)

c. Traffic rights (cont.)

On January 16, 2006, the Minister of Tourism announced that he had decided to accede to the request of Israir Aviation and Tourism Ltd (hereafter: "Israir") and to appoint it as an additional designated carrier on behalf of the State of Israel on the Tel Aviv-New York route, and accordingly, to expand Israir's commercial operating certificate. The selection was given for the operation of scheduled flights for a period of 24 months, and it was stated in the resolution that "during this period, the implications of the addition of a designated carrier would be examined, as well as additional relevant considerations regarding this route."

On January 29, 2006, the Company filed a petition to the High Court of Justice in which it requested the court to order that the decision of the Minister of Tourism is without any legal basis, therefore it is annulled or should be revoked.

On February 23, 2006, the High Court of Justice rejected the Company's petition.

Regarding the decision of the Government of Israel, which was reached subsequent to the balance sheet date, which changes the decision from May 19, 2003, see Note 26.1.

NOTE 11 - SHORT-TERM BORROWINGS AND CURRENT MATURITIES

a. Composition:

Consolidated and company As of December 31 2 0 0 7 2 0 0 6 (in thousand US dollars) Current maturities of long-term loans from financial institutions 62,313 98,505 Current maturities of other loans (see Note 16) 384 2,308 Bank overdrafts 3,619 4,287 66,316 105,100

b. As for liens and collateral – see Note 18.

NOTE 12 - TRADE ACCOUNTS PAYABLE Consolidated Company December 31, December 31, 2 0 0 7 2 0 0 6 2 0 0 7 2 0 0 6 (in thousand US dollars) a. Composition: Open accounts 154,494 132,658 149,033 128,485 Airlines (see b) 12,926 12,332 12,926 12,332 Subsidiaries - - 5,519 4,624 167,420 144,990 167,478 145,441

b. Most of the liabilities to other airlines are secured – see Note 4b.

C-38 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 13 – PAYABLES AND OTHER CURRENT LIABILITIES

a. Composition: Consolidated Company December 31, December 31, 2 0 0 7 2 0 0 6 2 0 0 7 2 0 0 6 (in thousand US dollars)

Deferred income (mainly from sale of flight tickets) 188,751 142,345 187,407 141,853 Employees and wage-related liabilities 98,301 80,061 97,219 79,096 Accrued vacation 40,166 36,231 39,498 35,480 Accrued expenses 25,158 18,604 23,963 17,381 Accrued interest on long-term loans 9,491 9,311 9,491 9,311 Accrual for frequent-flier programs 23,102 19,863 23,102 19,863 Current maturities of a consensual retirement plan (see note 15.b.12) 1,821 837 1,821 837 Accrual for productivity incentives (see b) 11,400 11,400 11,400 11,400 Investees - - 698 5 Other creditors 9,652 14,039 9,909 13,756 407,842 332,691 404,508 328,982

b. Productivity incentives:

Under the terms of the collective labor agreement, the Company pays productivity incentives to its ground crew for efficiency measures and reducing manpower inputs (measured by hours of pay) per unit of output (hereafter – productivity), according to the "improshare method" ("improve efficiency and share").

The "improshare method" is based on an equal division between the parties (the Company and employees) of the savings that the Company will achieve by efficiency measures and reducing the manpower inputs per unit of output.

Productivity incentives are paid monthly, and they are limited to a ceiling of 20% of salary. Surplus productivity (if any) is saved in a "bank" for future use. Based on the indices taken into account in determining the "overall productivity rate" and based on management's estimate, the financial statements as of December 31, 2007 include an accrual of $11,400 thousand (as of 31.12.06: $11,400 thousand).

C-39 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 14 - LONG-TERM LOANS FROM FINANCIAL INSTITUTIONS

Interest rates - Consolidated and Company December 31, December 31, a. Composition: 2 0 0 7 2 0 0 7 2 0 0 6 % (in thousand US dollars) Dollar bank loans - bearing interest of Libor plus a margin 4.66-5.55 785,515 667,362 Less: current maturities (62,313) (98,505) 723,202 568,857 Less: balance of loan arrangement costs (see b.) (9,409) (2,753) 713,793 566,104

b. Loan arrangement costs: In thousand US dollars

Cost As of January 1, 2007 10,603 Current additions (see Note 14.d.9) 7,570

As of December 31, 2007 18,173

Accumulated amortization As of January 1, 2007 7,850 Amortization for the year 914

As of December 31, 2007 8,764

Net book value: As of December 31, 2007 9,409 As of December 31, 2006 2,753

c. Repayment schedule: December 31, 2007 (in thousand US dollars)

First year 62,313 Second year 64,396 Third year 64,625 Fourth year 132,685 Fifth year and thereafter 461,496 785,515 Less: current maturities (62,313) 723,202

C-40 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 14 - LONG-TERM LOANS FROM FINANCIAL INSTITUTIONS (Cont.)

d. Additional information:

1. For financing three 777-200 aircraft (marked ECA, ECB and ECC), the Company signed a contract with Bank Hapoalim Ltd. on July 27, 2001 to receive a loan totaling approximately $ 300 million over a 12-year period, bearing a variable interest rate of Libor plus a margin.

2. In order to finance a fourth 747-400 aircraft (ELD), the Company received a loan of $ 150 million on May 20, 1999 from BLL for a period of 12 years, with a variable rate of interest of Libor plus a margin, repayable in 24 semi-annual installments. During 2004 the bank agreed to split the loan balance into two separate loans, each with a designated annual repayment date.

The loan agreement stipulated that a sale of more than 25% of the Company’s ownership rights to a single purchaser is subject to the bank’s consent, lack of which would constitute a cause for immediate loan repayment.

As for the Company's approach to BLL following the transfer of control of the Company in December 2004, see note 14.g.2.b.

3. The Company received a loan of $ 70 million on April 15, 1999 from Ltd. in order to finance the purchase of two second-hand 767-200 aircraft (EAE and EAF), for a period of 12 years, repayable in 24 semi-annual installments at variable interest of Libor plus a margin.

4. For the financing of five 737 aircraft (EKA, EKB, EKC, EKD, EKE), the Company received a loan of $ 190 million from Bank Hapoalim Ltd. on January 13, 2000 for a period of 12 years, repayable in 24 semi-annual installments with variable interest of Libor plus a margin. During 2004, the bank agreed to split the loan balance into two separate loans, each with a designated annual repayment date.

5. The Company received a loan of approximately $ 102 million in June 2002 from Citi Bank for financing the acquisition of a fourth 777-200 aircraft (ECD) (by means of the subleasing referred to in Note 9.e.1 above), for a period of 12 years, with variable interest of Libor plus a margin.

6. As financing for a first spare engine for the 777-200 aircraft fleet, the Company received a loan of $ 12 million from Bank Leumi Leasing Ltd. on December 14, 2000 for a period of 10 years, repayable in quarterly installments with variable interest of Libor plus a margin.

7. For the financing of most of the acquisition cost of another spare engine for the 777-200 fleet, the Company obtained a loan of approximately $ 14 million on December 29, 2005 from BNP Paribas Bank. This 12-year loan will be repaid in semi-annual installments, at a Libor variable interest rate plus a margin.

The Bank for the Encouragement of Industry in England (ECGD) provided the Company with a loan repayment guarantee for which the Company paid a one-time premium to ECGD.

C-41 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 14 - LONG-TERM LOANS FROM FINANCIAL INSTITUTIONS (Cont.)

d. Additional information (cont.):

8. In October 2006, the Company signed an agreement with a foreign bank for the receipt of financing in the amount of approximately $ 80 million, against a lien on two 747- 400 ELA and ELB aircraft (with an option for an additional $10 million for each aircraft in order to finance the conversion for cargo- should it be decided to convert them for cargo). The financing bears variable interest at the rate of Libor plus a margin and was given for a period of 10 years from the first withdrawal, with semi-annual repayments of principal plus interest. The Company withdrew approximately 40 million dollars of this facility in November 2006, to make a balloon payment on the loan from BLL that matured. The Company has the right to draw another 40 million dollars through November 2016. This amount will decrease, corresponding with the date on which the loan will be drawn down.

9. For financing most of the cost of two 777-200 aircraft (ECF and ECE) through a sub- lease, as in Note 9.e.2 above, a loan was received in July-August 2007 from a consortium of several foreign banks totaling $219 million, for a 12-year period, to be repaid quarterly, and including a balloon payment of principal at the end of the period. The loan bears variable Libor interest plus a margin.

The Company incurred costs to arrange the loans, mainly a one-time commission paid to the ExIm Bank, which provided a guarantee for repayment of the loan.

e. As for hedging transactions to fix variable interest rates – see Note 20.a.4.

f. Early repayment:

All existing loans as of December 31, 2007 may be repaid early by the Company. Moreover, in accordance with the terms stipulated in certain agreements, if, in the opinion of the bank, based on reasonable criteria, an event has occurred which adversely affects the Company’s financial position or its business or its financial ratios in a manner endangering or potentially endangering the ability to repay any bank loans, then the bank may demand immediate repayment of the outstanding loans owed to it.

g. Restrictions and financial covenants of long-term loans:

1. Ratio between loan balances and collateral-

All of the loan agreements described in items d.1 – d.4 above stipulate that the market value of the pledged aircraft should exceed the bank-loan balance by 25% and that such an examination should be conducted once a year (in some agreements – twice a year) based on certain, stipulated, international professional publications. The Company has also undertaken that should the actual ratio be lower than the above ratio, it will provide additional collateral, or repay its bank loans earlier, in order to fulfill the ratio requirement.

As of the financial statements date, the Company has complied with the restrictions and financial covenants stipulated with the banks.

C-42 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 14 - LONG-TERM LOANS FROM FINANCIAL INSTITUTIONS (Cont.)

g. Restrictions and financial covenants of long-term loans (cont.):

2. Arrangement with banks prior to privatization –

a. During April - May 2003, the Company received letters from Bank Hapoalim Ltd. (“the Bank”), claiming that, based on the loan agreements the Bank is entitled to demand immediate repayment of all outstanding loans in the event of a change in the Company’s status as a “government corporation” under the Government Corporations Law.

Before the privatization, the Bank removed its objection to carrying out the offering of shares to the public, and the State concurrently undertook that, starting from the date of the share offering and tender offer and through December 2004, the State and employee holdings in the Company would not, at any time, decline below 50.00001% of the Company’s outstanding share capital (fully diluted). Within the framework of the abovementioned agreement, the Bank agreed to rescind its demand for early repayment.

On September 28, 2004, the Bank gave the Company its consent that the transfer of control to K’nafaim (see Note 1.b.2) in any manner would not be considered by the Bank as a breach event in the context of the agreements and would not give the Bank the right to demand immediate repayment of any outstanding loans, in whole or in part.

b. In May 2003 Bank Leumi Le'Israel Ltd. (BLL) informed the Company that, should control in the Company be changed or transferred in any way, without its prior written consent, BLL would be entitled to demand immediate repayment of all outstanding loans. Before the privatization, BLL removed its objection to carrying out the offering of shares to the public.

During the year 2004, management requested that BLL agree that the transfer of control to K’nafaim would not give the BLL the right to demand immediate repayment. In this connection, BLL informed the Company that it had no objection to the change of control in the Company whereby K’nafaim would increase its holdings in the Company in a manner that would cause it to be the controlling party in the Company.

BLL’s consent is contingent upon the fulfillment of the following conditions:

1. The controlling parties in K’nafaim would be the Borovich family. The term “control” for this purpose is as defined in the Banking Law (Authorization), 1981.

2. The change in ownership referred to above would take place no later than June 5, 2007.

Subject to the above, it was agreed that BLL would not exercise its right to demand immediate repayment of outstanding debts and liabilities of the Company solely as the result of the abovementioned change in control.

C-43 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 14 - LONG-TERM LOANS FROM FINANCIAL INSTITUTIONS (Cont.)

f. Restrictions and financial covenants of long-term loans (cont.):

2. Arrangement with banks prior to privatization (cont.) –

b. (Cont.)

Moreover, within this framework, K’nafaim informed BLL that, in light of the Company’s present outstanding debt to BLL, and due to the fact that the Company’s Board of Directors will, from time to time, formulate a profit-distribution policy for the Company, then as long as the open principal balance of the outstanding debt of the Company to BLL is not less than $50 million, K’nafaim will not support a resolution for profit-distribution at a rate exceeding 60% of distributable retained earnings of the Company from time to time, unless it will consult with BLL regarding any amount in excess of 60%. In the current year, the Company approached BLL to consult about the distribution of a dividend exceeding this rate - see Note 19h.

3. Obtaining additional loans in Israel -

The directives of the Israeli Supervisor of Banks include restrictions according to which the debt of a "single borrower" or "borrowers-group" to a bank in Israel shall not exceed a certain percentage of that bank’s shareholders’ equity.

These directives may, from time to time, affect the ability of some of the banks in Israel to grant the Company additional credit.

Due to the change in the holdings in the Company, such that K’nafaim holds more than 25% of the Company’s issued and outstanding share capital, the Company is deemed to be a part of the K’nafaim Group as far as the restriction of bank credit to a borrowers- group is concerned.

In light of the weight of the Company's long-term loans from banks in Israel, and considering the volume of loans provided by these banks to the K'nafaim Group companies, the Company may have difficulty obtaining additional loans in considerable amounts from banking institutions in Israel that may be required for purchasing new aircraft and for other investments.

g. Liens – see Note 18.

C-44 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 15 - OBLIGATIONS FOR THE TERMINATION OF EMPLOYEE-EMPLOYER RELATIONSHIPS, NET

a. Composition: Consolidated Company December 31, December 31, 2 0 0 7 2 0 0 6 2 0 0 7 2 0 0 6 (in thousand US dollars)

Liability for severance pay 140,243 133,743 138,405 132,116 Less: amounts funded (153,358) (86,752) (151,234) (84,865) (13,115) 46,991 (12,829) 47,251

Liability for grant for unutilized sick leave (see Note 15b.4), accrued vacation pay and benefits to retirees 46,977 42,036 46,953 42,017

Liability for consensual retirement plan, net 38,895 37,981 38,895 37,981 Less: current maturity (see Note 15b.12) (1,821) (837) (1,821) (837) 37,074 37,144 37,074 37,144

70,936 126,171 71,198 126,412

b. Additional information

1. General

The liabilities of the Company and its subsidiaries for the termination of employee- employer relationships included in these financial statements represent those not covered by current deposits to recognized pension and severance-pay funds, provident funds and insurance companies. The amounts accumulated in the aforementioned pension funds, provident funds and insurance companies are not under the custody or management of the Group companies and, therefore, neither these amounts not the related liabilities are reflected in the financial statements.

Against part of the above liabilities not otherwise covered, the Company maintains accounts in recognized severance-pay funds into which it deposits amounts in its name and in the name of its subsidiaries. These amounts, which include accrued income, may be withdrawn only after fulfilling the conditions stipulated in the Severance Pay Law.

C-45 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 15 - OBLIGATIONS FOR THE TERMINATION OF EMPLOYEE-EMPLOYER RELATIONSHIPS, NET (Cont.)

b. Additional information (cont.)

2. Pension agreement

The social benefits of some of the Company employees have been formalized in a pension agreement signed on September 1, 1992 between the Company, the Histadrut, representatives of employees and the Mivtachim pension fund, based on the industrial pension agreement that was adapted for the particular structure of the population of Company employees.

Membership in the comprehensive pension plan was previously voluntary for veteran employees and mandatory for new employees to whom the collective labor agreement applied and who were able to accumulate the qualification period for entitlement to a pension. (Veteran employees with an age exceeding 55 for men and 50 for women could, under certain conditions, join a comprehensive pension plan and receive a pension even without having completed 10 years of membership.) An employee joining the comprehensive pension must insure part of his salary by pension (ground worker - 50%, air- crew personnel - 25%) and the balance can be covered by managers' insurance or the provident fund for Company employees.

The agreement provided that the Company's payments to the pension fund and an approved fund (managers' insurance or provident fund) for an employee joining the pension plan, will, for all intents and purposes, come in lieu of its severance-pay obligation for that employee, pursuant to Section 14 of the Severance Pay Law for that part of the salary and for that period as to which the payments were made. The employees joining the pension plan are eligible for severance pay and provident fund pay upon retirement from work, for the period beginning with commencement of employment through the date of joining the pension fund and, subsequently, to the rights accrued to their credit in the pension fund.

Starting January 1, 1995, new employees are insured for pensions with the Mivtachim comprehensive pension plan, according to the pension rules to new members.

The retirement age was raised effective 2004. For the effect of this change on the early retirement programs – see Note 15.b.12.e below.

The amendments to the Income Tax Ordinance (Rules for Approving and Managing Pension Funds) (Amendment), 2004, which were enacted in 2005, change the rules pertaining to deposits in, and withdrawals from, pension plans, also in regard to the reduction of the ceiling of the amount insured as equity insurance. In June 2005, the Company signed a special collective labor agreement with the New Histadrut Labor Union-the Professional Union Branch and the Joint Representatives for EL AL employees, enabling the adaptation of the existing provisions to the new rules, at the employee's preference.

C-46 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 15 - OBLIGATIONS FOR THE TERMINATION OF EMPLOYEE-EMPLOYER RELATIONSHIPS, NET (Cont.)

b. Additional information (cont.)

3. Severance pay

a. Overview –

Employees who received permanent status through the month of September 1992 are entitled to severance pay for their employment until then, computed on the basis of one month for each year of employment. With regard to the employment period thereafter, the abovementioned employees are entitled to severance pay if they have not joined a pension plan, or a combined plan of pension, managers' insurance and savings in a provident fund (at their personal election) according to the rules prescribed in the collective labor agreement. Employees who subsequently received permanent status in the Company were then obligated to join the pension plan by selecting the appropriate pension combination, but are not entitled to severance pay.

By the privatization date, the Company had concluded arrangements with the employees for assuring severance pay and with the State of Israel to assure financing sources. See item b below.

b. Arrangements with the employees for assuring severance pay and with the State of Israel to assure financing sources

1. On June 3, 2003 the Company reached an agreement with the employees' representatives for covering the deficit of NIS 516,240 thousand (“the Deficit”) in the obligation for termination of employee-employer relationships, with this amount linked to the CPI and bearing annual interest of 5.05% starting June 1, 2003, net of the amounts transferred to a recognized pension fund, from time to time.

The Company and the State agreed to cover the Deficit by assuring the raising of capital, as outlined below:

a. Any immediate as well as future proceeds from the initial offering and any proceeds from future offerings of shares or other securities received by June 5, 2007 ("immediate and future proceeds") up to the amount of the Deficit will be transferred to the severance-pay fund as soon as it is received, with the Deficit reduced accordingly;

b. Should the Company’s immediate and future proceeds not be sufficient to cover the balance of the Deficit at that given point in time, the State would then transfer the amount required to fully cover that Deficit.

C-47 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 15 - OBLIGATIONS FOR THE TERMINATION OF EMPLOYEE-EMPLOYER RELATIONSHIPS, NET (Cont.)

b. Additional information (cont.)

3. Severance pay (cont.)

b. Arrangements with the employees for assuring severance pay and with the State of Israel to assure financing sources (cont.)

As soon as this agreement took effect, and subject to its execution, the employees’ representatives waived, on behalf of each and every Company employee, any claim against the State with respect to the Deficit or financing it. Moreover, the Company and the employees’ representatives undertook to refrain from making any claim, allegation or demand against the State concerning this matter. This understanding went into effect upon the registration of the Company’s shares for trade on the Tel Aviv Stock Exchange.

On June 2, 2003 the Knesset’s Finance Committee resolved to approve a commitment with respect to this arrangement for purposes of providing a safety net for the employees’ severance-pay fund.

On June 3, 2003 the Company’s Board of Directors ratified the above agreement.

The following table presents the amounts deposited to the employees’ severance- pay fund originating from the proceeds of exercise of purchase options and options exercisable into shares:

Year ended December 31 Amounts deposited by - the State the Company Total (in thousand US dollars) 2003 11,296 4,909 16,205 2004 38,396 712 39,108 2005 25,791 535 26,326 2006 775 296 1,071 2007 25,289 24,376 49,665 101,547 30,828 132,375

After the Company and the State made the above deposits during the current year, the Deficit, as defined in the agreement between the Company, the State and the employees' representatives signed on the eve of the privatization, was covered in full.

Any proceeds received by the Company from the exercise of options (Series 1) were deposited in the severance-pay fund of eligible employees, except for NIS 28 million not yet deposited, which is included in the short-term deposits item as of December 31, 2007.

The Company examines for restrictions on the use of the balance of the proceeds, pursuant to the agreement between it, the State and the employees' representatives signed on the eve of the privatization. Subsequent to the balance sheet date, the Company approached the Controller-General in the Ministry of Finance.

C-48 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 15 - OBLIGATIONS FOR THE TERMINATION OF EMPLOYEE-EMPLOYER RELATIONSHIPS, NET (Cont.)

b. Additional information (cont.)

4. Redemption of sick leave

Pursuant to the collective labor agreement, employees are eligible for full payment of up to 30 days' illness per annum (other than new employees who have limited accumulation), which may be accrued throughout all years of employment.

Upon retirement from the Company, in mandatory retirement or retiring after attaining the age of 45, permanent employees (other than executives, beginning from their transition to personal employment contracts) are eligible, if they retired under terms entitling them to severance pay, to a grant for unutilized sick days, at a rate of up to 26.6% of the value of the unused days. The liability for this grant was determined on the basis of the rights accrued for those eligible employees who reached the age of 45 as of the date of the financial statements and is presented in the financial statements at its full, non-discounted value.

5. Temporary employees

Pursuant to the labor agreement signed by the Company and the temporary employees, these employees have joined the comprehensive pension plan, and the Company deposits monthly amounts for them on a current basis.

These deposits cover the Company’s obligations for the termination of employee-employer relationships for its temporary employees.

As for the temporary employees who commenced work before the requirement to join the pension plan took effect, the Company records an adequate provision in its accounts.

As regards the extension of the special collective labor agreement pertaining to the employment of temporary staff (collective labor agreement for the continuing generation) – see Note 17.d.1 above.

In November 2002 the New Histadrut Labor Union (hereafter: "Histadrut") filed a motion to become a party to a collective dispute with regard to the temporary air and ground stewards on the following topics:

Non-payment of minimum wage and social benefits during the training course, non- payment of minimum wage and overtime during advanced studies, non-payment of wages to air stewards for ground hours, breach of the collective labor agreement on the issue of new assignment and breach of the collective labor agreement on the subject of vacation and sick-leave.

The relief requested by the Histadrut was declaratory and relates to future entitlements of stewards who will undergo training as well as entitlements of stewards who were trained in the past (subject to the statute of limitation).

C-49 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 15 - OBLIGATIONS FOR THE TERMINATION OF EMPLOYEE-EMPLOYER RELATIONSHIPS, NET (Cont.)

b. Additional information (cont.)

5. Temporary employees (cont.)

The Tel Aviv District Labor Court handed down its judgment on March 15, 2005. The principal operative rulings in the judgment were that an employer-employee relationship does exist during the training period and, accordingly, the trainee is entitled to compensation that is not less than minimum wage plus social benefits. As for stewards who took the course in the past, the court stated that each steward is entitled to file a personal claim, as to which the Company would be allowed to assert the statute of limitations and the rate of benefits and payments. The court also ruled that the temporary stewards are entitled to minimum wage plus overtime pay during the training period and are also entitled to vacation days based on years of employment and have the right to receive pay differentials for the past with respect to these two components.

The court dismissed the claim for ground hours for temporary air stewards and dismissed the claim for new assignment and the computation of sick-leave compensation for the ground stewards.

On July 27, 2005 the Company signed a special collective labor agreement constituting a compromise agreement between the Company, the Histadrut and the employees’ representatives, that went into effect at the beginning of September 2005. This followed the signed consent to the agreement by the currently employed 1,250 stewards who are entitled to file a claim under the court judgment. This compromise agreement detailed the payments and the rules based on which the Company’s obligations to the employees would be fully discharged in accordance with the court judgment.

6. Air-crew personnel

Air-crew personnel are entitled, according to an agreement, to receive the higher of severance pay for their period of employment through December 1979, computed on the basis of their last salary, or their salary for the month of December 1979 (net of the part of the salary for which severance pay had been paid in the past - 20%), linked to the Israeli CPI. As for the period subsequent to December 1979, the Company's liability for severance pay is computed on the basis of their last salary.

As for the Company’s communication regarding the retirement age of the pilots – see Note 15b.12.e below.

7. Company executives

Company executives are employed under personal employment agreements. These employees are entitled to receive additional severance pay for the period of their employment of 100%, in excess of the balances accumulated in the pension funds and/or insurance companies.

C-50 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 15 - OBLIGATIONS FOR THE TERMINATION OF EMPLOYEE-EMPLOYER RELATIONSHIPS, NET (Cont.)

b. Additional information (cont.)

8. Employees posted abroad

Among the Company employees abroad are permanent workers who are Israeli residents, relocated to fulfill managerial positions abroad, usually for periods ranging from four to six years ("posted employee").

Salaries of the posted employees while serving abroad ("compensation abroad") are different than Israeli wages, and take into account the local standard of living and taxation, and the fact that the salary is subject to tax and social-insurance deductions both abroad and in Israel.

In addition to the salaries of the posted employees, the Company bears the cost of their housing and tuition fees for their children. Salaries plus rent and tuition are paid by the Company under the Israeli income tax regulations. As for the income tax authorities' claim regarding deductions–see Note 17.a.8 below.

The obligations for termination of employee-employer relationships for those employees are determined on the basis of wages paid to employees at their level that they are employed in Israel.

9. Local employees in Company branches abroad

Most Company employees abroad, other than the Israeli posted employees, are engaged under collective labor agreements between the Company and the union in that country, or under employment agreements with the employees’ representatives, with a few under agreements between the employers' organization (foreign airlines) and the umbrella organization of airline employees, or under other agreements. The employment terms of Company personnel in certain countries are not covered by a collective agreement but rather stipulated by the Company, in accordance with the acceptable practice in the airline industry or the national airlines in those countries. In some branches, the employees are engaged under personal contracts or through a contractor.

Some of the branches are committed to pay severance pay according to law or agreement while other are obliged to adhere to national or other pension insurance. The Company transfers regular payments for the pension insurance while providing in its accounts for the obligation for severance pay.

Some of the local employees of the Company who are residents of the US and Britain benefit from pension plans ("the plans"), with the pension cost of the branch employees being paid for by the Company. The cost of the pension is computed as a multiple of the "years of eligibility" for the pension multiplied by the rate of salary determined as entitled to pension. Retirement commencing at the age of 65 ordinarily entitles the employee to full benefits. The pension-plan assets, which are invested mainly in marketable securities, are not owned by the Company. The Company is obliged to cover any deficit that would be created in the value of the funds’ assets relative to any actuarial obligation, should such deficit be created.

The Company adequately provided in its financial statements as of December 31, 2007 for the difference between the actuarial liability for the employees in the US and Britain, who were included in the pension plans, and the amount of the pension plans.

C-51 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 15 - OBLIGATIONS FOR THE TERMINATION OF EMPLOYEE-EMPLOYER RELATIONSHIPS, NET (Cont.)

b. Additional information (cont.)

10. Security personnel

Payments to discharge obligations for termination of employee-employer relationships related to personnel employed by the Company or by a governmental entity to protect the Company's services are made out of the State budget for aviation security. There is no employee-employer relationship with the Company for most of these employees and, accordingly, no provision was included in these financial statements to cover such payments.

With regard to the Company's participation in the Government's expenses for defending the Company’s services (including participation in the above expenses) - see Note 21c.

11. Employees of subsidiaries

Employment terms of the Company's main subsidiaries in Israel are regulated by labor agreements, pursuant to which the obligation for termination of employee-employer relationships is computed on the basis of their last salary and of pension arrangements, as applicable.

The employment terms of the main foreign subsidiaries are regulated by collective labor agreements in those countries and in accordance with local laws and practices.

12. Consensual early retirement programs

a. General -

Within the framework of the Company's cost-cutting and efficiency measures, the Company has, since 2000, been implementing a retirement plan pertaining mainly to veteran employees.

In this context, the Company has signed agreements with Mivtachim – Institution of Social Insurance for the Employees Ltd. (“Mivtachim”) with Clal Pension and Provident Services Ltd ("Clal"), guaranteed by the State of Israel or by a bank guarantee.

b. Highlights of the agreement with the retiring employees and with Mivtachim and Clal:

1. Receipt of an annuity from date of retirement until the age of 65, and for part of the employees until legal retirement age (men and women), up to 70% of pension-base gross salary. The payment of the annuity shall not exceed 10 years;

2. Mivtachim or Clal will pay the pension directly to the employee;

3. The retirement arrangements have been formalized in a series of agreements between the Company and the employee, the employee and Mivtachim or Clal and the Company and Mivtachim or Clal; Pursuant to these agreements, Mivtachim and Clal undertake to guarantee the pension payments against a back-to-back guarantee to be given to it;

4. All employee-employer relationships between the Company and the employee are terminated upon retirement. C-52 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 15 - OBLIGATIONS FOR THE TERMINATION OF EMPLOYEE-EMPLOYER RELATIONSHIPS, NET (Cont.)

b. Additional information (cont.)

12. Consensual early retirement programs (cont.)

c. Highlights of the agreement with the State of Israel, as approved by the Knesset Finance Committee:

In an effort to assist the Company in implementing the above retirement programs, the Company signed an understanding with the Controller-General, representing the State, on April 4, 2002, to arrange the commitment made by the State at the time of privatization to finance the deficit in the provision for severance pay for those personnel continuously employed by the Company up to the end of the year 1982. In the context of the accord, the following was agreed, irrespective of privatization:

1. The State will provide a guarantee to Mivtachim – Institution of Social Insurance for the Employees Ltd. or other financial institutions, including banks, in connection with the financing of the provision deficit related to the employee retirement program. The State guarantee will be $ 80 million.

2. Following the State’s discharge of its obligation to provide that guarantee, the Company would have no further demands of any kind against the State in connection with the historical accounting regarding those employed by the Company until the end of the year 1982.

3. In the event of privatization, the Company’s new owners would be required to provide guarantees in lieu of the State’s guarantee. This requirement was abolished by the Knesset’s Finance Committee on June 2, 2003, before the privatization date.

d. Additional information:

During the years 2000 through 2007, the Company's management adopted resolutions relating to early retirement programs for 655 employees, for which provisions were recorded in the Company's accounts. As of December 31, 2007, 558 employees had concluded their actual retirement from the Company within the framework of the abovementioned programs.

The aforementioned retirement plans include two new groups of 22 and 28 additional employees, for whom decisions were reached by Company management during the current year, and for which a provision was recorded in the financial statements as of December 31, 2007 (see Note 21.g.2). These employees will be included in the early pension payments.

The financial statements as of December 31, 2007 include the balance of an accrual in a total amount of $ 59,269 thousand for financing the retirement of approximately 467 employees, (after a group of employees included in the original retirement programs reached retirement age through December 31, 2007 with a provision no longer recorded for them in the financial statements).

Within that framework the Company deposited funds for assuring early retirement pension payments to employees, the balance of which as of December 31, 2007 amounted to $ 20,374 thousand. The total net provision for retirement plans as of December 31, 2007 is $38,895 thousand.

C-53 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 15 - OBLIGATIONS FOR THE TERMINATION OF EMPLOYEE-EMPLOYER RELATIONSHIPS, NET (Cont.)

b. Additional information (cont.)

12. Consensual early retirement programs (cont.)

d. Additional information (cont.):

The balance of the State’s guarantees in favor of Mivtachim and Clal with respect to the retirement programs amounted as of December 31, 2007 to approximately $ 27.4 million.

As the Company formulates and decides upon consensual retirement programs in the future, subject to the cooperation of the employees’ representatives, the Company will not be entitled to receive additional guarantees from the State of Israel. Additional retirement programs will be executed with Company guarantees.

e. Change in retirement age

Within the scope of the Law for Economic Recovery of the Israeli Economy and the Retirement Age Law, 2004 it was determined, among other things, effective from the year 2004, that:

1. The age at which employees (both men and women) may be forced to retire from their jobs will be 67 (“Mandatory Retirement Age”). Mandatory retirement age will apply to every employee whether insured by managers’ insurance, or not insured by any insurance.

2. Employees who are insured by pension plans may be forced to retire at the ages of 67 (male) and 64 female (the age is graduated according to the transitional provisions stipulated in the law and the addendum to the law).

Employees (male or female) retiring after the age of 60 but before reaching retirement age will be entitled to receive reduced early pension during this period.

3. Starting January 1, 2004, the pension contribution rates (for both employee and employer) were raised (gradually over the years 2004-2006, up to an additional rate of 1.5% for the employee and 1.5% for the employer).

The effect of the above change on the early retirement programs:

a. The raising of the retirement age and the increase in pension contributions has increased the Company’s liability with respect to the consensual retirement programs by approximately $ 2.5 million (including the additional pension contribution that the Company will be required to transfer to the pension fund until retirement age), which was recorded to other expenses for the year ended December 31, 2004 and which is fully provided for in these financial statements.

C-54 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 15 - OBLIGATIONS FOR THE TERMINATION OF EMPLOYEE-EMPLOYER RELATIONSHIPS, NET (Cont.)

b. Additional information (cont.)

12. Consensual early retirement programs (cont.)

e. Change in retirement age (cont.)

b. In addition, there is a group of veteran employees that retired pursuant to an early retirement program before the date of the change in retirement age (“the Veteran Employees”). Pursuant to an agreement signed between the Government and the Economic Organizations’ Liaison Bureau on January 5, 2005 to amend the package agreement signed by the parties, it was agreed that the Government would finance the additional cost associated with the raising of the retirement age for employees leaving under early retirement programs by December 31, 2003.

c. Furthermore, the Company asked the Director-General of the Finance Ministry to keep the retirement age of pilots (as stipulated in the flight regulations) unchanged (65 years) but this request was rejected. Otherwise, the change in retirement age and the increase in pension contributions do not materially affect the Company’s current expenses.

d. As for a lawsuit filed against the Company in this matter – see Note 17a.7 below.

C-55 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 16 - OTHER LONG-TERM LIABILITIES

Consolidated Company December 31, December 31, 2 0 0 7 2 0 0 6 2 0 0 7 2 0 0 6 a. Composition: (in thousand US dollars)

Loans to finance purchase of cargo plane (see b) - 1,992 - 1,992 Capital leases (see c) 807 1,046 639 858 807 3,038 639 2,850 Less: current maturities (384) (2,308) (384) (2,308) 423 730 255 542

b. The Company received a loan during the year 2004 in the amount of approximately $ 6.3 million in order to finance the acquisition of a cargo aircraft, repayable in 36 monthly installments. The loan bears a fixed interest rate. In the current year, this loan was paid off.

As for liens - see Note 18b.10.

c. During 2006, the Company entered into two capital lease agreements for the acquisition of computer and other equipment in a total original amount of $ 1,014 thousand. This equipment is included in the framework of the Company's fixed assets.

During 2007, the Company entered into another agreement to upgrade a computer system, against long-term credit totaling $98 thousand (see Note 9.g).

NOTE 17 - COMMITMENTS, GUARANTEES AND CONTINGENT LIABILITIES

a. Lawsuits and other claims

As of December 31, 2007, legal claims in a total amount of approximately $ 229 million had been filed against the Company with respect to which the Company had recorded provisions in the financial statements, based on the Company's legal counsel, of approximately $ 4.1 million.

Legal claims non-quantified in monetary amounts have also been filed against the Company. The above provision in the financial statements also includes provisions for non-quantified claims, as estimated by Company management.

The above amounts exclude various claims against the Company which, in management’s opinion, are covered by adequate insurance policies and handled by the insurance companies under their responsibility.

The aforementioned amounts of claims and provisions do not include income tax-withholding assessments and income tax demands (see Note 17.a.8 below).

In the assessment of Company management, based upon the opinions of its legal counsel, it is not anticipated that the Company will be exposed to an additional loss with respect to the abovementioned claims in excess of the above provisions recorded in the financial statements.

C-56 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 17 - COMMITMENTS, GUARANTEES AND CONTINGENT LIABILITIES (Cont.) a. Lawsuits and other claims (Cont.) The following is a detailed summary of material legal and financial claims: 1. In October 1998, a lawsuit for NIS 230.4 million (approximately $59.9 million as of the balance sheet date) was filed in the Nazareth District Court against the Company, along with a motion to recognize it as class action. The claim relates to excess collections of airline ticket prices by travel agents derived, allegedly, by using improper exchange rates. During 2002, the court approved the request for class-action recognition under the Consumer Protection Law. The Company filed an appeal with the Supreme Court. Based on the opinion of its legal counsel, Company management believe that the Company will not be found liable in this claim. No provision for this claim has been included in the financial statements. 2. A lawsuit for NIS 21.7 million (approximately $ 5.6 million as of the balance sheet date), was filed in September 1999 in the Tel-Aviv District Court against the Company, the Aviation Authority and Ophir Tours (a travel agency), together with a motion for recognition as a class action. The plaintiff alleges that the travel agent charged it travel tax at a rate above the legal limit, which is the representative exchange rate, and that the Company is also responsible for the actions of the agents in this matter. During 2002, the court approved the motion to recognize the claim as a class action for breach of a legal obligation based on Regulation 29 of the Legal Order Regulations. The Company filed a motion for leave to appeal to the Supreme Court. In October 2005, judgment was handed down in the matter of Eshet, in which the Supreme Court ruled that class actions are possible strictly on the basis of specific laws which include that possibility but not in accordance with Regulation 29 of the Civil Legal Order Regulations. Consequently, the parties were requested to submit their position to the court in connection with the continuance of the proceedings. The plaintiff gave notice that it planned to continue the proceedings on the basis of the Consumer Protection Law, and this was not approved by the District Court. The court has not yet ruled on that issue. Based on the opinion of its legal counsel, the Company believes, at this stage, that the Company is not expected to be found liable in this claim.. No provision for this claim was included in the financial statements. 3. On January 22, 2007, a claim was filed against the Company in Jerusalem District Court, together with a motion for recognition as a class action, in the amount of NIS 483.4 million ($125.7 million as of the balance sheet date). The plaintiffs allege that the collection of a security fee of $8 per flight leg, from passengers in flights that are not flown by the Company itself, but by other airlines under code sharing arrangements, constitutes misleading the consumer, breach of the agreement with him, the absence of good faith and unlawful enrichment, since, the plaintiffs allege, these flights do not provide security services at the same standard and quality as the services provided by the Company. The plaintiffs are requesting that the Company be required to pay each of these passengers the sum of $8 as well as damages of NIS 500 for emotional distress and loss of benefit. In the Company's estimation, based on the opinion of its legal counsel, the Company is not expected to be found liable for this claim. A provision for this claim was not recorded in these financial statements.

C-57 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 17 - COMMITMENTS, GUARANTEES AND CONTINGENT LIABILITIES (Cont.)

a. Lawsuits and other claims (Cont.)

4. On March 19, 2007, a claim was filed in Tel Aviv District Court against the Company, together with a motion for recognition as a class action. The plaintiff alleges that customers who purchase airline tickets directly (and not through travel agents), using credit cards, are charged in foreign currency instead of in Israeli currency, with a payment of a conversion fee of 2% of the price of the ticket (for conversion of the foreign currency payment into an Israeli currency payment) to the credit card companies, which constitutes a violation of the Consumer Protection Law, 1981, a breach of the duty to act in good faith and unlawful enrichment. Also alleged was a violation of the obligation to advertise the "total price", and that it is the Company that needs to bear the conversion fees. Additionally, the plaintiff alleges that the charging of customers in foreign currency and not in shekels is by itself a violation of the Consumer Protection Law. The plaintiff is requesting that the Company be required to pay damages to every member of the class in the amount of all the conversion fees unlawfully collected and to issue an order against the Company stipulating that the collection of payments in foreign currency and the related charges of fees was unlawful, and to prohibit the Company from continuing to collect payments in foreign currency and to roll the conversion fee payments to its customers. In the estimation of Company management, based on the opinion of its legal counsel, the Company is not expected to be found liable for this claim. A provision for this claim was not recorded in these financial statements.

5. In November 2007, a claim was lodged in Haifa District Court against the Company, as well as a motion for recognition as a class action pursuant to the Class Action Law, in the amount of NIS 105 million ($25 million as of the balance sheet date). The plaintiffs claim that the prices charged by the Company for overweight baggage on its flights are excessive and calculated without any connection to the Company’s ordinary flight prices. The Company is studying the claim and is preparing to file its response. A provision for this claim was not recorded in these financial statements.

6. In October 2005, a claim was made in the Supreme Court of Ontario, Canada against the Company and additional defendants by a former employee of the Company for alleged sexual harassment and sexual molestation. The amount of the claim was approximately 2.2 million Canadian dollars (approximately $2.2 million as of the balance sheet date). A provision for this claim was not recorded in these financial statements.

C-58 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 17 - COMMITMENTS, GUARANTEES AND CONTINGENT LIABILITIES (Cont.)

a. Lawsuits and other claims (Cont.)

7. In June 2006, a suit was filed against the Company and the State of Israel-Ministry of Finance by 94 claimants who were employed by the Company and took early retirement between the years 2001-2003. The claimants in their suit have appealed for declaratory relief/order of performance to amend their retirement agreements in a manner in which the retiree will receive the early pension stipend, including fringe benefits, until the legal retirement age, instead of until the age of 65; alternatively, the claimants appealed for declaratory relief/order of performance to revoke the retirement agreements.

The principal relief claimed is to "amend" the retirement agreement so that the claimants will be eligible to receive budgetary pension through the age of 67, in parallel to which they will be entitled to have the Company continue to deposit provisions for them until that time to the pension funds.

The claim was not quantified and therefore it means the continuation of such payments for an additional period for each claimant of two years.

A writ of defense was filed in which it was alleged that the claim should be rejected out of hand, both for the reason that all of the claimants left their employment under early retirement and signed retirement agreements which included a section stating absence of claims, and also due to lack of quantification of the claim.

It was also alleged that the claimants who had elected not to join the pension fund, over the years, did not pay the employee's share of pension contributions to the pension fund, in contrast to the employees who joined the pension fund; and unlike the employees who joined the pension fund, the claimants chose not to do so and received full severance pay for the entire period of their service upon termination of their employment. The Company also presented additional defense claims.

The claim is in the stage of preliminary proceedings.

Pursuant to the court's ruling, the claimants quantified the claim at NIS 18.1 million ($4.7 million as of the balance sheet date). In these financial statements, the Company recorded an adequate provision, based on the opinion of its legal counsel.

8. Income tax – withholding tax

The Company received agreed assessments for withholding tax through the 2004 tax-year.

As for the matters remaining in dispute, the Company received assessments for the years 1998-2004, followed by demands for the years through 2002, amounting to approximately $27.4 million, including interest and linkage (not including fines).

The Company appealed the demands to the Tel Aviv District Court, and, the Company filed an objection with the courts with regard to the demand for the years 2003-2004.

C-59 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 17 - COMMITMENTS, GUARANTEES AND CONTINGENT LIABILITIES (Cont.)

a. Lawsuits and other claims (Cont.)

8. Income tax – withholding tax

The following issues remain in dispute:

a. Computation of benefit-in-kind to employees for flight tickets –according to Company procedures, the Company charges a benefit-in-kind to employees for airline tickets granted to them on the basis of seats available at a rate of 22.5% of the average price to the public at large for a flight ticket in the most common tourist section, and at value of 50% of airline tickets on the basis of a guaranteed seat. The tax authorities demand that this computation be based on economic value, whereas the Company claims, based on the advice of its professional advisors that the economic benefit does not exceed the amount that it charges.

b. Company employees posted abroad –a demand to pay tax in Israel for Company employees posted abroad in excess of four years, when their occupation abroad is identical to that in Israel and, as to employees in the US, the disallowance of city, state and social-security taxes paid by the Company.

The financial statements as of December 31, 2007 include an adequate provision, which, in management’s opinion, based on the advice of legal counsel, covers the anticipated liability with respect to the above withholding tax assessments and tax demands, including the additional period up to, and including, the year 2007.

b. Legal proceedings abroad in the area of business restrictions

1. In February 2006, the Restrictive Practices Division of the U.S. Justice Department ("Restrictive Practices Division ") began an open investigation, together with additional competition authorities of other countries, of supposed suspicion of price fixing with respect to certain increments to prices of air cargo transport. A number of cargo transporters announced that they had received Grand Jury injunctions in connection with this investigation. On September 27, 2006, the Company received an injunction from the Restrictive Practices Division that had been issued by the Grand Jury, which demands information and documents concerning certain costing and cost increment practices in the area of cargo transport, commencing from the year 1999 and through the date of the injunction. The Restrictive Practices Division notified the Company that the Company is being examined as a suspect in this investigation. The Company is cooperating with the investigation, while performing an internal audit of its own of the cargo costing practices. The Company has sent the requested information to the Restrictive Practices Division, and is continuing to work in coordination with it and according to its instructions. At this stage, the Company is unable to assess the outcome of the investigation of the Restrictive Practices Division or to estimate the possible financial effect of the investigation, and consequently, the financial statements do not include a provision for this investigation. Nevertheless, it should be pointed out that the consequences could include administrative or civil procedures and/ or a criminal indictment, including penalties and/ or civil charges. It should also be stated that punishments for the violation of competition statutes could be serious, both with regard to criminal charges and also as to civil charges.

C-60 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 17 - COMMITMENTS, GUARANTEES AND CONTINGENT LIABILITIES (Cont.)

b. Legal proceedings abroad in the area of business restrictions

2. During the month of December 2006, the Company received a letter from the European Competition Commission ("the Commission"), which was transmitted to the Company's offices in Germany and contained a request for information in connection with an investigation being carried out by the Commission. The letter stated that the demand for information is in the context of an investigation being carried out by the Commission in connection with activities which, seemingly, cause damage to competition in the sector of air transport services for cargo, and that the Commission has information regarding extensive contacts that took place between airlines companies with regard to various price increments and other matters such as cargo transport rates.

In the context of the letter, the Company was requested to transmit data and documentation regarding the Company and its cargo activities, commencing with the year 1995. The Company sent its response as requested by the Commission's letter, while carrying on an internal audit of cargo pricing practices. At this stage, the Company is unable to evaluate the outcome of the investigation of the Commission or to estimate the possible financial effect of the investigation on the Company. Consequently, these financial statements do not include any provision for this investigation.

According to the publications of the Commission and several foreign companies, the Commission in December 2007 sent a "claim letter" to several airlines in connection with the said investigation, containing claims of alleged violation of the competition laws of the European Union. The Company has not as yet received the said claim letter, and to the best of its knowledge, is not among the companies to which the claim letter was addressed.

Nevertheless, it should be pointed out that the implication might include an administrative proceeding against the Company, include a severe fine which could be imposed on the Company at the end of the proceeding.

3. The aforementioned proceedings related to the investigations of restrictive practices authorities could have a material effect on the Company due to the penalties that these bodies are authorized to impose and which could be particularly high..

4. At the end of February 2007, the Company received a writ of civil claim that was filed in the court in New York in the matter of the prices of cargo air transport services.

The Company was included in the writ of claim which was filed as aforesaid, along with 38 other airlines, with the claim being that the defendants were partners in a conspiracy to conform prices for cargo air transport services since 2000, in violation of the competition laws in Europe and the United States.

The claim was filed on behalf of bodies purchasing air cargo services, directly and indirectly, in Europe and the U.S., and includes a motion for class-action recognition. The claim includes a request for damages at an amount not estimated and other relief.

The Company joined a joint defense team in which other airlines being sued are included, within the scope of which several preliminary motions were filed with the court, including a motion to dismiss the writ of claim.

In view of the early stage of the process, the Company is unable to assess the implications or the monetary effect of the proceeding on the Company and therefore, has not made any provision for this claim in these financial statements.

C-61 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 17 - COMMITMENTS, GUARANTEES AND CONTINGENT LIABILITIES (Cont.)

c. Guarantees

Composition of guarantees provided by the Company to third parties:

December 31, 2007 (in thousand US dollars)

To secure employee retirement programs 6,943 To secure employee loans 227 To secure subsidiaries’ liabilities 1,676 To airport authorities, customs authorities and other third parties 4,643 13,489

d. Commitments

1. Collective labor agreements

On May 20, 2004 the Company signed several collective labor agreements with the Histadrut and the employees’ representatives, as follows:

a. The special collective agreement for Company employees was extended to December 31, 2005.

b. At the same time, a collective labor agreement for the next generation of employees in administrative, operative and air-steward professions was signed. This agreement, which will remain in effect until December 31, 2008, will enable the Company to hire trained temporary workers, will prevent the loss of professional know-how, will enable the Company to achieve efficient improvement in the wage area during the coming years for the Company and will allow it to acquire administrative flexibility.

c. The effective date of the special collective labor agreement concerning the hiring of temporary workers was extended to December 31, 2008.

On September 5, 2006, the Company, the Histadrut and employees' representatives signed a special collective agreement that extends the effective date of the special collective agreement with respect to the permanent Company employees ("Generation A Agreement") through December 31, 2007. On October 5, 2006, the Board of Directors of the Company ratified this agreement.

Under the terms of the special collective agreement, the Company committed that if the Company will have pre-tax income for 2007 exceeding $10 million, the employees will receive a grant deduced from their salaries. The financial statements as of December 31, 2007 included adequate provisions to cover the liabilities deriving from the labor agreements.

As of the approval date of the financial statements, the Company's management has entered into negotiations with the employees' representatives for purposes of finding joint and agreed solutions for introducing efficiency steps in the Company, and changing the terms of the above special collective agreement.

Pursuant to the collective agreement, during the period of negotiations, although for no more than six months from its effective date, this agreement will remain in effect and at the end of the said six months, will be deemed a collective agreement for an unspecified period. C-62 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 17 - COMMITMENTS, GUARANTEES AND CONTINGENT LIABILITIES (Cont.)

d. Commitments (Cont.)

2. Leasing and rental fees

a. The Company leases planes under operating leases, generally in consideration of monthly leasing fees plus a payment for reserves for maintenance, based on actual flight hours. Most of the agreements include options for extending and shortening the leasing contracts.

b. The following is detail of the minimum lease fees for the fixed components (but excluding the payment for the maintenance reserves) payable for the leased aircraft:

Aircraft operating leases Year (in thousand US dollars)

2008 22,691 2009 21,583 2010 18,365 2011 7,653 Total 70,292

c. In addition, the Company has agreements for leasing aircraft, generally on payment of monthly leasing fees plus a payment for maintenance reserves.

d. The Company has lease commitments for land and buildings in Israel and abroad, including in various airports, as well as offices used by its branches.

3. Commitments with the Airports Authority (AA)

a. The Company has a use-right (permit) to 290 hectares of land at BGA until December 31, 2010 (with an option to renew it for an additional 25-year period).

Before privatization, on May 19, 2003, the Company and the AA, with the approval of the Ministerial Committee for Social and Economic Affairs, reached an understanding concerning new permit fees for which the Company will be obligated to the AA.

Under this agreement, the annual payment for the areas referred to above will be $ 960 thousand in 2005, rising by 7.4% per annum up to a maximum of $4 million per annum.

b. On October 19, 2004, this agreement was amended, to include, in addition for the payment for the land, annual usage fees for certain fully depreciated buildings and installations. The payment will rise gradually, starting with $ 900 thousand for the year 2006 and up to a maximum amount of $ 4 million in 2025.

c. The Company has a usage fee agreement (permit) with the AA for a passenger service warehouse in BGA encompassing 4,380 square meters. The annual usage fees are $480 thousand. The agreement is in effect until December 31, 2009.

d. The Company is obliged to pay flight fees, airport taxes and permit fees to the AA. The Company enjoys the maximum reduced rate due to the volume of its activity at BGA. C-63 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 17 - COMMITMENTS, GUARANTEES AND CONTINGENT LIABILITIES (Cont.)

d. Commitments (Cont.)

e. In November 2004, within the framework of Ben Gurion 2000, the AA opened Terminal 3. The project includes a new passenger terminal-Terminal 3, aircraft parking areas and service-support areas to institute the services required to operate the location. The AA shut down the present Terminal 1 and will designate it for internal flights.

Until Terminal 3 was opened, all of the Company’s installations were adjacent to Terminal 1: offices, aircraft parking spaces, hangars, warehouses and various workshops. Following the transfer of the activity to Terminal 3, the Company was forced to relocate part of its activity to Terminal 3 and its new adjacent areas.

The agreement between the Company and the AA for use of the passenger lounge in Terminal 3 was signed during December 2006.

The agreement is in effect until November 2010, for total consideration of up to $1,750 thousand per annum, plus an option for a 3-year extension. Additionally, agreements were signed to give permission for other areas in Terminal 3 until November 2014, for consideration of $1,770 thousand per annum.

In April 2000, the Company signed a new agreement-in-principle for leasing 20 hectares in order to set up a maintenance center, a hangar and supporting facilities within the framework of Ben Gurion 2000. The AA council ratified the transaction but it is subject to the signing of a detailed agreement between the parties as well as the ratification by the Company’s Board of Directors.

4. Commitments for maintenance of engines and aircraft

The Company has several agreements with various entities for maintenance services to engines and planes. The agreements are long-term (up to 20 years). Some of the agreements are based on Time & Materials while others are based on cost per hour flown.

5. Regarding commitments to purchase aircraft subsequent to the balance sheet date – see Notes 26.2, 26.3 and 26.4.

C-64 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 18 - LIENS

a. The following is detail of the Company’s liabilities that are secured by liens:

December 31, 2007 (in thousand US dollars)

Short-term bank borrowings (excluding current maturities) 3,619 Long-term bank loans (including current maturities) 785,515 Accrued interest 10,209 799,343

Of which: Banks in Israel 468,348 Banks abroad 330,995 799,343

1. Fixed and specific first-tier pledge and lien in favor of banks in Israel on two 747-400 aircraft, three 777-200 aircraft (ECA, ECB and ECC), and five aircraft from the 737 fleet, five 767 aircraft (the entire 767 fleet, except for one plane designated EAA), and three 757 aircraft, designated EBS, EBT and EBV.

The pledges and liens cover all the engines, rights deriving from leasing or use of aircraft, or from contracts or insurance policies and also on rights for compensation or indemnification in connection with those aircraft.

In addition, a first-tier floating lien was registered on all the engines and auxiliary equipment installed on the abovementioned aircraft from time to time, as well as the insurance rights with respect to them.

No additional lien may be registered on those assets or the assets and not be transferred without the bank’s advance, written consent.

2. Fixed and specific first-tier pledge and lien in favor of a trustee for collateral (see Note 9.e.1) on all of the Company’s rights in a fourth 777-200 aircraft (ECD).

The pledge and lien include all the rights deriving from contracts connected to the plane, rights to indemnification or insurance proceeds for of the aircraft, engines, or any related to it and all rights under from the lease agreement for the aircraft.

In addition, the Company assigned by way of a pledge in favor of a foreign company (see Note 9.e.1) all of the existing and/or future rights arising from insurance policies for the fourth aircraft.

C-65 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 18 - LIENS

b. Details of assets pledged as security for the liabilities referred to above as of December 31, 2006:

3. Fixed and specific first-tier pledge and lien in favor of a trustee for collateral (see Note 9.e.2) on all of the Company’s rights in 2 additional 777-200 aircraft (ECE and ECF).

The pledge and lien include all the rights deriving from contracts connected to the plane, rights to indemnification or insurance proceeds for the aircraft, engines, or any related to it and all rights under the lease agreement for the aircraft. In addition, the Company assigned by way of a pledge in favor of a foreign company (see Note 9.e.2) all of the existing and/or future rights arising from insurance policies for these two aircraft.

4. A pledge in favor of a bank in Israel on two spare engines serving the 767 and 747-400 aircraft fleets.

5. In order to secure a long-term loan received from Leumi Leasing Ltd. for the purchase of an engine for the 777-200 fleet, the Company registered a first-tier lien on the engine, unlimited in amount (including the rights deriving from insurance as well as rights of compensation or indemnification).

6. In order to obtain financing from a foreign banking institution during 2006, as described in Note 14.d.8, the Company pledged all of the Company's rights in a 747-400 (ELA) aircraft in favor of that bank in a fixed first-tier lien, including 4 engines and all other components installed in the aircraft (including any engine of other part which will be installed in the aircraft from time to time), and assigned all of the existing and future insurance and compensatory rights with respect to the aircraft. No additional lien may be registered on those assets and the assets may not be transferred without the bank’s advance, written consent. Additionally, the Company was obligated to pledge an additional 747-400 aircraft (ELB), when additional financing will be received from that same foreign bank, as mentioned in Note 14.d.8.

7. In order to secure the Company’s liabilities for the utilization of credit lines provided to it by two banks in Israel (including the furnishing of bank guarantees), the Company pledged its revenues from three specific travel agencies in Israel by way of mortgaging and registering first- tier floating and perpetual liens and by way of assignment of rights in the form of a pledge.

8. A lien in favor of an Israeli bank on funds deposited or to be deposited from time to time, including income thereon, in the Company's accounts in the London branch of such bank.

9. A lien in favor of the Bank for the Encouragement of Industry in England-ECGD on a spare engine for the 777-200 fleet which had been acquired with a loan obtained from a foreign bank (as explained in Note 14d.6) to which ECGD had provided a guarantee. This pledge includes insurance, compensation and indemnification rights.

10. After several loans were paid in full during the current year, the following three aircraft were released from liens: one 747-400 aircraft (ELC), one 757 aircraft (EBU) and one cargo plane (AXM). Removal of the liens from the Corporate Registrar is not yet complete as of the approval date of the financial statements.

C-66 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 19 - SHARE CAPITAL

Following the publication of a prospectus in May 2003 (and amendments to the prospectus dated June 3 and 4, 2003) (hereafter: “the Prospectus”) for the issuance of shares and options to the public, together with a tender offer made by the Government, the Company’s securities were registered for trading on the Tel Aviv Stock Exchange in June 2003.

a. Tender offer and Prospectus

1. Based on the Prospectus, the Company issued to the public 17,000,000 ordinary shares of NIS 1.00 par value each (“OS”) registered to bearer, with total par-value of NIS 17,000,000, together with 100,000,000 options (Series 1) registered to bearer, with each option exercisable into one OS of NIS 1.00 par value at a cash exercise price of NIS 1.34 per option; starting December 12, 2004 and until June 5, 2007, together with a tender offer of 32,000,000 OS of NIS 1.00 par value registered to bearer, made by the State of Israel, with total par-value amount of NIS 32,000,000, together with 138,400,000 purchase options registered to bearer (Series A), with each option exercisable into one OS of NIS 1.00 par value, at a cash exercise price of NIS 1.30 per option, by June 5, 2004, and together with 157,600,000 purchase options registered to bearer (Series B), with each option exercisable into one OS of NIS 1.00 par value at a cash exercise price of NIS 1.32 per option, starting December 12, 2004 and through June 5, 2007. The cash exercise increment of the options is linked to the CPI of April 2003.

2. Pursuant to the Prospectus, the State of Israel offered eligible employees to purchase up to 34,685,642 OS of NIS 1.00 par value by way of a tender offer made by the State, at a discount of 30% from the share’s par value in alternative A of the issuance tender (NIS 0.91 per share). The shares were offered in trust and they were blocked until December 31, 2004. The employees will bear any tax resulting from the exercise of the offer.

The offer to the employees included a tender offer of 32,222 shares to former interested parties who were employed by the Company, at a discount and on the same terms granted to the other eligible employees, as defined in the offer to employees. Following the response by part of the eligible employees for the acquisition of 2,158,426 OS of NIS 1.00 par value, the Government allotted them the above number of shares in exchange for approximately $ 445 thousand.

In December 2005, the Company’s local employees working abroad received a grant from the Israeli government equaling 30% of the value of the shares to which a local employee working in Israel would have been entitled.

C-67 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 19 - SHARE CAPITAL (Cont.)

a. Tender offer (cont.)

3. On June 3, 2003, the State approved a written undertaking towards the employees’ representatives, according to which: a proposal to eligible employees without full response would enable the entity established on behalf of the employees to acquire the offered shares up to 34,685,642 OS of NIS 1.00 par value each (“the Remaining Shares”) at the end of one and one-half years from the publication date of the prospectus, at an exercise price equaling 30% of the shares’ average closing price on the stock exchange during the 90 trading days preceding the exercise date or NIS 1.3 per share – the lower of the two.

The purchasers of the Remaining Shares undertook to refrain from any transaction or action in the Remaining Shares during a 24-month period following the closing date.

4. On February 23, 2005, the employees established an entity (“Holdings in Trust of EL AL Employees Ltd.), which acquired the Remaining Shares, as noted in item 3 above, from the State i.e., 32,527,216 OS in accordance with the written undertaking granted by the State to the employees’ representatives, thus converting the employees’ entity into an interested party of the Company. As of December 31, 2007, the employees' entity holds 6.56% of the Company's issued and outstanding share capital.

b. Share capital of the Company as of December 31, 2007:

Authorized Issued and outstanding Special Ordinary Special Ordinary share shares share shares NIS 1.00 par value NIS

Balance – January 1, 2007 1 550,000,000 1 400,788,334 Exercise of options (Series 1) (see c below) - - - 94,930,801 Balance – December 31, 2007 1 550,000,000 1 495,719,135

c. In the period from January 2007 through June 5, 2007, the public exercised 94,930,801 options (Series 1) for the same number of OS, NIS 1 par value each, issued by the Company, in consideration for $31,820 thousand. These proceeds were deposited in the severance pay fund of eligible employees, except for NIS 28 million not yet deposited, as in Note 15.b.3.b.

d. On March 23, 2006, the General Meeting of the Company approved the increase of the Company’s authorized share capital by NIS 54,279,453, bringing the total to NIS 550,000,001 after such increase, divided into the State’s special share of NIS 1.00 par value and 550,000,000 ordinary shares registered to bearer of NIS 1.00 par value each.

C-68 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 19 - SHARE CAPITAL (Cont.)

e. Options and buy options

The following table presents the activity in options and purchase options:

Options Buy options Buy options (Series 1) (Series A) (Series B) (in thousand units)

Issued in June 2003 100,000 138,400 157,600 Exercised in 2003 - (6,134) -

Balance – December 31, 2003 100,000 132,266 157,600 Exercised in 2004 (2,416) (132,266) (74,256)

Balance – December 31, 2004 97,584 - 83,344 Exercised in 2005 (1,649) - (2,673) - Balance – December 31, 2005 95,935 - 80,671 Exercised in 2006 (1,003) - (2,249)

Balance – December 31, 2006 94,932 - 78,422

Exercised in 2007 (94,931 ) - (78,422 ) Expired (1) - - Balance – December 31, 2007 - - -

The proceeds from the exercise of the purchase options (Series A and B) were received by the Government of Israel and deposited in the severance-pay fund of eligible employees.

f. The rights accompanying the special State share –

On May 18, 2003 the Company allotted the government a special, non-sellable, non-transferable share designed to protect the State’s vital interests, in accordance with the following Government resolutions:

• Maintaining the Company as an Israeli company, subject to Israeli law; • Maintaining the operating capability and the flight capability of carrying passengers, and cargo, to not fall below a minimum established level; • Preventing any hostile interests from taking over the Company; • Maintaining security and safety arrangements as determined by state bodies on behalf of the State.

In addition, on October 12, 2004, the Knesset’s Finance Committee approved the issuance of an order under the Government Corporations Act requiring the Company to employ, at any time, Israeli crew members, and – in Israel – Israeli ground personnel, in a number not lower than that required for continuous and simultaneous operations in an emergency of all the aircraft fleets constituting the minimal flying capacity which the Company is required to maintain as stipulated by directives of the State’s special share. As of the approval date of the financial statements, the provisions of this order did not obligate the Company to make any changes in its method of operations or composition of employees.

C-69 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 19 - SHARE CAPITAL (Cont.)

g. Dividend-distribution policy -

In December 2005, the Company’s Board of Directors adopted a dividend-distribution policy, whereby the Company would strive to distribute dividends to its shareholders, as from year 2006 and henceforth, 20%-40% of its after-tax annual net earnings for the preceding year, resulting from the Company’s ordinary activities, excluding one-time profits not generated by operating activities and capital gains.

Implementation of this policy is subject to any relevant law provisions as well as the assessment of the Company's Board of Directors of the Company’s ability to meet its present as well as forecasted liabilities and taking into account its liquidity, and present as well as future business plans and activities. The adoption of this policy does not diminish the authority of the Board of Directors of the Company to decide upon a change, amendment and/or abolition of the currently established dividend policy and/or to approve any additional distributions that comply with the law and/or to decide on a reduction of actual distributions or to preclude them altogether should it be warranted by changes from time to time in the Company’s liquidity, operations and conditions.

On November 20, 2007, the Company's board of directors resolved to update the dividend distribution policy. Pursuant to the new dividend policy, the Company will distribute a dividend from time to time, at the discretion of the Board of Directors and subject to the Company's needs.

H. Dividend distribution

1. On October 7, 2007, the Company’s Board of Directors resolved to distribute a dividend totaling NIS 0.075 per ordinary share, NIS 1 par value. The dividend was actually distributed on October 29, 2007. The total dividend amount (based on the exchange rate on that date) was $9,313 thousand.

2. On December 30, 2007, the Company’s Board of Directors resolved to distribute a dividend totaling NIS 0.023 per ordinary share, NIS 1 par value. The total dividend amount (based on the exchange rate on that date) was $3,009 thousand. The dividend was actually distributed on January 21, 2008.

C-70 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 19 - SHARE CAPITAL (Cont.)

i. Executive option plan

1. On February 26, 2006, the Board of Directors of the Company resolved to adopt an option plan for employees and executives of the Company (hereafter: the 2006 options plan). On that date, the Board of Directors of the Company gave its approval that the quantity of options which would serve as a pool for allotment under the plan would stand at 17,092,129 options, exercisable into 17,092,129 ordinary shares of the Company with par value of NIS 1 each, subject to adjustments. The Board of Directors is permitted, from time to time, to add to this quantity of options. At the same time, the Company's Board of Directors approved an allotment of 17,092,129 options to approximately 50 offerees, of which approximately 10 were senior executives of the Company and approximately 40 other executives of the Company. The allotment of the options to the Company's executives was also ratified by the Audit Committee of the Company on February 26, 2006. The allotment of the options was conditional upon the approval of the General Meeting of the Company for the increase in the Company's registered capital. Such approval was obtained on March 23, 2006 and, on the same day, the allotment was executed.

The options will vest and become exercisable in equal parts over a 4-year period, beginning from January 1, 2007 (one quarter of the options will vest each year), conditional upon the offeree being employed by the Company, or rendering services to the Company, on the vesting date. All options granted but not exercised will expire and be cancelled at the end of 3 years from the date that each option became vested.

The theoretical exercise price of one option into one share will be NIS 2.9733. The exercise price is the theoretical price not paid by the employee. In the event that the option is exercised, the employee will be eligible for shares in a number equivalent to the difference between the price of the underlying share (the closing price on the Tel-Aviv Stock Exchange of one ordinary share of the Company at the end of the trading day on which the Company received the instruction to exercise) and the theoretical exercise price, multiplied by the number of options in his possession, divided by the price of the underlying shares.

The theoretical exercise price is subject to customary adjustments in the event of dividend distributions and changes in composition of the Company's capital. The share price for the purpose of the computation is the Company's share price at the close of trading on March 23, 2006 (NIS 3.837). The exercise price is 85% of the share price on February 26, 2006 – NIS 2.973.

2. On May 23, 2006, the Board of Directors of the Company resolved to increase the quantity of options in the options pool for allotment pursuant to the options plan for compensating Company executives and other employees by another 3,000,000 options. Such options will not be marketable and they will be exercisable into up to 3,000,000 ordinary shares of the Company with par value of NIS 1.

The Board of Directors appointed the Human Resources and Appointments Committee to manage the options program and authorized the Committee to allot these options to Company executives, in accordance with the criteria stipulated by the Board of Directors.

C-71 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 19 - SHARE CAPITAL (Cont.)

i. Executive option plan (cont.)

2. (cont.)

The theoretical exercise price of each option (as explained in Par. 1 above) will be 85% of the average closing price on the Tel-Aviv Stock Exchange of one ordinary share of the Company during the 30 trading days that preceded the decision of the manager of the program to make an allotment to each offeree, except for an offeree who served in the position of vice-president or division head in the Company on March 23, 2006, and who had not received options according to the allotment decision during the month of March 2006, as to which the theoretical exercise price was set at NIS 2.9733.

After the Human Resources and Appointments Committee decided on December 27, 2006 to allot options, 3,072,536 options were allotted on December 31, 2006 to 9 senior employees.

The options were divided into four equal installments which will vest over 3.5 years as follows: one quarter will vest on June 30 of each one of the years 2007 through 2010. The theoretical exercise price of one option into one share will be NIS 1.8894, subject to the adjustments made for dividend distributions and changes in the composition of the Company's capital.

The share price for the purpose of the computation is the price of the Company's share at the close of trading on December 31, 2006 (NIS 2.08). The exercise price is 85% of the average price during the 30 trading days that preceded the Board of Directors' resolution of December 27, 2006, i.e. NIS 1.89.

3. On November 20, 2007, the Company’s board of directors resolved to publish an additional outline for the purpose of allotting options that are located in the options pool available for allotment, in accordance with the option plan for compensation of executives and other employees of the Company, as discussed in Par. i.1 and i.2 above, the balance of which as at such date is 3,382,843 options. The options will be exercisable for up to 3,382,843 ordinary shares, NIS 1 par value of the Company. The board of directors approved the appointment of a Human Resources and Appointments Committee to continue serving as the option plan administrator, and empowered the committee to allot the above options to the Company’s managers, in accordance with the criteria provided by the Board of Directors. The theoretical exercise price of each option (as explained in Par. 1) will be 85% of the average closing price of an ordinary share of the Company on the Tel Aviv Stock Exchange during the 30 trading days that preceded the decision of the plan administrator for an allotment to each offeree i.e. NIS 2.01. The options will be distributed in four equal installments that will vest as follows: one- quarter will vest on July 1 of each of the years 2008 through 2011, inclusive. Within this framework, on December 26, 2007, 2,195,852 options were allotted to six additional executives.

C-72 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 19 - SHARE CAPITAL (Cont.)

i. Executive option plan (cont.)

4. None of the options in the three plans will be registered for trading on the stock exchange, although the underlying shares will be registered for trading on the stock exchange.

The options will be allotted to a trustee in conformity with the capital gains alternative under Section 102 of the Income Tax Ordinance.

5. According to the provisions of Accounting Standard No.24 (Stock-Based Payment) of the Israeli Accounting Standards Board, the Company will record expenses pertaining to the options grant based on their economic value. The computation is made on the date of the grant, for each batch separately, based on the Black & Scholes model. The expense will be recorded over the vesting period of each batch, with the extent of the expense being a function of the quantity of options granted and the economic value of each option.

The option’s value will be computed based on the plan’s terms and subject to the following assumptions:

• The expected life for the exercise of each installment has been computed as the average of the vesting period of each installment and the expiration date. • The standard deviation has been computed based on the daily yield of the price of the share on the stock exchange during a period equaling the expected period for exercise of each batch (as outlined above). The maximum standard deviation taken from the date of issuance of the Company for trading (while neutralizing the first trading day) for batches whose expected period for exercise is longer than the period during which the Company’s shares are traded on the stock exchange. • Discount rate–the rate of yield of unlinked debentures (“Shahar”) which conforms to the expected period of exercise of each batch. • The computation of the value of the benefit did not take into account the retirement of employees before the end of the vesting period.

C-73 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 19 - SHARE CAPITAL (Cont.)

i. Executive option plan (cont.)

5. (cont.) Presented below is a summary of the parameters used in the model:

Company Plan A Plan B Plan C

Share price in NIS 3.84 2.08 2.34 Exercise price in NIS 2.97 1.89 2.01 Expected fluctuation (in %) 27.95-36.65 32.94-36.84 32.57-42.77 Life of options (in years) 2.11-5.11 2-5 2-5 Risk-free interest rate (in %) 4.80-6.45 4.96-5.35 4.58-5.18 Average option value according to B&S (in NIS) 1.75 0.75 0.90

Expense recorded in year 2007 in NIS 6,484,670 1,244,948 -

Expense recorded in 2007 in dollar thousands 1,579 303 -

Projected expense in 2008 in NIS 4,163,754 637,818 1,065,440 Projected expense in 2009 in NIS 1,845,507 332,525 536,926 Projected expense in 2010 in NIS - 102,228 285,845 Projected expense in 2011 in NIS - - 91,588 6,009,261 1,072,570 1,979,798

Number of options Plan A Plan B Plan C

Outstanding as of January 1, 2007 14,892,696 3,072,536 2,195,852 Waived (1,255,946) - - Outstanding as of December 31, 2007 13,636,750 3,072,536 2,195,852

Exercisable as of December 31, 2007 3,409,188 768,134 -

C-74 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 20 - FINANCIAL INSTRUMENTS

a. Risk management goals and policies

The Company's operations expose it to risks connected with various financial instruments, principally: market risks (including currency risk, credit risk and liquidity risk) and cash flow risk due to interest rates. The overall risk management program focuses on actions intended to reduce the possible negative effects on the Company's financial performance to a minimum. The Company uses derivative financial instruments to hedge certain exposures to risks. The Company has a Market Risk Management Committee headed by the Chairman of the Financial, Budgetary and Balance Sheet Committee, which has the responsibility for determining the policies to cover existing exposures. The CFO is responsible for execution of the policies and to report to the Market Risk Management Committee. Below is information regarding risks connected to financial instruments to which the Company is exposed: 1. Market risks: Price risk The Risk Management Committee determines the extent of hedging future consumption of jet fuel. The significance of the financial hedging of jet fuel prices to assure the price range for purchasing jet fuel. In the event of a decrease in jet fuel prices which are assured past the range, the Company pays the difference. In the case of an increase in jet fuel prices, the Company receives the difference from the insuring entity (mostly foreign banks). The goal of hedging jet fuel prices is to protect against the Company's exposure to changes in global jet fuel prices. Accordingly, the hedging policies are: hedging jet fuel quantities up to 24 months ahead, so that for each quarter in that period, a minimum rate for hedging is determined for the entire forecasted consumption, and a maximum rate for hedging the entire forecasted consumption in a graduated and decreasing manner. Accordingly, the maximum hedging rate as of the beginning of the year 2008 was 80% and the minimum hedging rate as of the end of the year 2009 is 20%. The Company has exposure due to a change in the fair value of these financial instruments as a result of changes in their market prices.

Currency risk Most of the Company's revenues and expenses are in foreign currency (mainly the dollar), other than a number of expenses in NIS, primarily most salary expenses which are paid in Israel in NIS. Accordingly, a change in the dollar/shekel rate affects the Company's NIS expenses. In addition, in the case of a devaluation of the Euro in relation to the dollar, the excess of receipts over payments in Euro reduces the Company's revenues. The Company also has balance sheet exposure to a devaluation of the dollar vis-à-vis the NIS due to the excess of financial liabilities over financial assets denominated in a currency other than the dollar (mostly, the NIS). From time to time, the Company examines the need to invest in derivative financial instruments to reduce exposure to currency risks. It is the Company's policy for the dollar/shekel exchange rate to hedge half of the Company's shekel expenses for a period of up to one year forward. When it holds a derivative financial instrument, the Company is exposed to changes in the fair value of these financial instruments resulting from changes in their market value.

C-75 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 20 - FINANCIAL INSTRUMENTS (Cont.)

a. Risk management goals and policies (cont.)

1. Market risks (cont.):

Fair value risk due to interest rates

The Group companies have investments in financial instruments bearing fixed interest, and therefore, there is exposure to changes in the fair value of these financial instruments as the result of changes in the interest rate.

Since nearly all of the Company's loans are at variable interest, the Company has almost no exposure to changes in the fair value of financial liabilities, such as due to a change in the market interest rate.

The Company's policy regarding interest is approximately half of the Company's credit portfolio is at variable interest and about half is protected by means of financial instruments that convert variable interest into fixed interest over a period of 5 years. For this purpose, the Company carries out a number of financial transactions. The Company is exposed due to changes in the fair value of these financial instruments as a result of changes in the interest rate.

2. Credit risk:

a. The Company and its subsidiaries have cash, cash equivalents and long and short- term investments deposited mainly with large, highly rated financial institutions. The Company and its subsidiaries do not anticipate any losses resulting from credit risk.

b. Most of the revenues earned by the Company and its subsidiaries are derived from a large number of customers (mainly travel and cargo agents), characterized by their dispersal throughout several countries. Exposure to risk from the extension of credit to customers is limited because of their relatively large number and dispersal, as mentioned above. In Israel, there is insurance on credit (limited in amount) granted to travel and cargo agents. Overseas agents are covered by collateral to the extent that it is accepted in that country. The Company regularly examines customer compliance with credit terms and includes in its financial statements an appropriate allowance for doubtful accounts.

3. Liquidity risk:

The Company has no difficulty in obtaining credit in order to meet its obligations that relate to financial liabilities and long-term loans. Also, the Company has no liquidity risk which could arise as a result of its inability to quickly sell investments in financial assets at a consideration that approximates their fair value.

C-76 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 20 - FINANCIAL INSTRUMENTS (Cont.) a. Risk management goals and policies (cont.) 4. Cash flow risk due to interest rates Most of the long-term loans of the Company are at variable interest. The loans, which bear variable interest rates, expose the Company to cash flow risk due to changes in interest rates. As protection and in order to reduce the Company's exposure to future changes in the interest rate, the Company entered into a number of agreements with banks in Israel for hedging transactions to exchange the Libor variable interest rate component on the Company's loans with a fixed rate component, running parallel to the amortization schedules for these loans. In one agreement signed with two banks in Israel, the Libor was fixed for a five-year period, commencing in January 2004 with respect to an opening principal amount of approximately $ 270 million, at graduated interest rates, which declines in accordance with the loan amortization schedule. The agreement was extended by an additional year, until January 27, 2010. In the other agreement signed with a bank in Israel at a premium, the Libor rate was fixed for five years, starting September 2004, with respect to an opening principal amount of approximately $87 million, at graduated interest rates, which declines in accordance with the repayment schedule of the loan. The above financial instruments are not recognized as a hedge for accounting purposes. The fair value of these instruments amounted to $ 954 thousand as of December 31, 2007 ($2,904 thousand as of December 31, 2006) (see Note 2q). In two additional agreements recognized for accounting purposes as hedging transactions, executed with banks in Israel, the Libor variable interest rate was exchanged for a maximum fixed interest rate which hedges against a rise in the variable interest rate beyond that rate while establishing a minimum rate, so that should the variable interest rate decline below the minimum level the Company would waive this gain. These transactions were carried out as follows: the first for an opening principal amount of approximately $ 244 million, gradually declining based on a loan amortization schedule over a two-year period starting January 27, 2006; and the second, in accordance with a hedging policy for five years forward, on the balance of that same loan, the balance of which will stand at an opening principal amount of approximately $ 183 million, gradually declining based on a loan amortization schedule over a two-year year period starting January 27, 2010. In two additional agreements recognized for accounting purposes as hedging transactions, executed with banks in Israel, the Libor variable interest rate was exchanged for a fixed rate. These transactions were carried out as follows: the first with respect to an opening principal amount of approximately $ 138 million, gradually declining based on a loan amortization schedule over a period of five years and three months, gradually declining based on a loan amortization schedule over a period of five years and three months starting July 18, 2005; and the second, on an opening principal amount of approximately $ 40 million, gradually declining based on a loan amortization schedule over a five-and-a-half year period starting October 17, 2005.

C-77 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 20 - FINANCIAL INSTRUMENTS (Cont.)

a. Risk management goals and policies (cont.)

5. The table below presents the book value of groups of financial instruments that are exposed to fair value risk and/or cash flow risk due to interest rates, in accordance with their contractual repayment dates: As of December 31, 2007 Consolidated Sixth Effective Up to one Second Third Fourth Fifth year & interest Note year year year year year after Total rate-% Financial assets Cash and cash equivalents (*) 86,670 - - - - - 86,670 4.9-5.4 Short-term investments (*) 3 180,633 - - - - - 180,633 5.1 Long-term bank 2.4-2.8 2,207 2,207 - - - - - 7.א. (**) deposits

Financial liabilities Short-term bank credit (**) 11 (3,619) - - - - - (3,619) 6.0-8.0 Dollar bank loans (**) 14 (62,313) (64,396) (64,625) (132,685) (125,611) (335,885) (785,515) 4.7-5.6 Obligations for capital leases (*) 16 (384) (423) - - - - (807) 4.9 200,987 (64,819) (64,625) (132,685) (125,611) (333,678) (520,431)

As of December 31, 2006 Consolidated Sixth Effective Up to one Second Third Fourth Fifth year & interest Note year year year year year after Total rate-% Financial assets Cash and cash equivalents (*) 146,158 - - - - - 146,158 4.9-5.4 Short-term investments (*) 3 4,682 - - - - - 4,682 5.3 Long-term bank deposits (**) 7A - - - - - 1,836 1,836 2.4-3

Financial liabilities Short-term bank credit (**) 11 (4,287) - - - - - (4,287) 5.3-6.3 Dollar bank loans (**) 14 (98,505) (52,542) (54,040) (53,684) (121,127) (287,464) (667,362) 5.4-6.5 Other dollar loan (*) 16 (1,992) - - - - - (1,992) 4 Obligations for capital leases (*) 16 (316) (326) (404) - - - (1,046) 4.9-5.6 45,740 (52,868) (54,444) (53,684) (121,127) (285,628) (522,011) (*) These assets/liabilities carry a fixed interest rate. (**) These assets/liabilities carry a variable interest rate.

C-78 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 20 - FINANCIAL INSTRUMENTS (Cont.) b. Fair value 1. Fair value of financial instruments The financial instruments of the Company consist primarily of cash and cash equivalents, deposits, trade accounts receivable, other current assets, short-term bank borrowings, trade accounts payable, other current liabilities and long-term financial obligations. Due to the nature of the financial instruments, their fair value is usually identical to the value at which they are stated in the financial statements.

The fair value of the long-term loans is ordinarily based on the present value of future payments in accordance with the interest rates payable by the Company, as of the balance-sheet date, on loans with similar terms, and it is not materially different from their financial statement value. The fair value of derivative financial instruments is determined according to quotes from financial entities with which those transactions were executed. The fair value of marketable financial instruments was calculated according to quoted closing prices as of December 31, 2007. The fair value of non-marketable financial instruments is estimated by using accepted costing models such as present value of future cash flows that are discounted at interest rates which, in the Company's estimation, reflect the risk level incorporated in the financial instrument. The estimate of fair value is computed by means of an assessment of future cash flows and determination of a discount interest rate on the basis of rates proximate to the balance sheet date, among other things, and based on assumptions of Company management, and, therefore, for most of the financial instruments, the estimate of fair value is not necessarily an indication of realization value of the financial instrument as of the balance sheet date. Fair value was estimated, as aforementioned, according to discount rates close to the balance sheet date and did not take into account the variability of interest rates from the date of the calculation through the date that this report was issued. Under the assumption of other discount rates, fair values would be obtained which could be materially different from those estimated by the Company, principally in relation to financial instruments with fixed interest. In addition, in determining fair value, commissions which might be payable at the time the instrument is redeemed were not brought into account. The difference between the balances in the December 31, 2007 balance sheet and the fair value balances as estimated by the Company will not necessarily be realized, especially as regards a financial instrument held to maturity.

C-79 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 20 - FINANCIAL INSTRUMENTS (Cont.) b. Fair value (cont.) 1. Fair value of financial instruments The following table itemizes the book value and the fair value of groups of financial instruments that are presented in the financial statements at other than fair value:

As of December 31, 2007 As of December 31, 2006 Book value Fair value Book value Fair value Financial assets (in thousand US dollars) (in thousand US dollars) Derivative financial instruments to hedge interest (recognized for accounting purposes as hedging instruments) (1) - - - 6,238 Derivative financial instruments to hedge jet fuel (recognized for accounting purposes as hedging instruments) (1) - 29,450 - -

Financial liabilities

Long-term liabilities at fixed interest (2) (807) (798) (3,038 ) (3,003 ) Derivative financial instruments to hedge jet fuel (recognized for accounting purposes as hedging instruments) (1) - - - (4,844 )

Derivative financial instruments to hedge interest (recognized for accounting purposes as hedging instruments) (1) - (2,369) - - Total (807) 26,283 (3,038) (1,609)

(1) Fair value is based upon quoted prices in an active market as of the balance sheet date.

(2) The fair value of long-term loans bearing fixed interest is based on the calculation of the present value of cash flows according to the accepted rate of interest for a similar loan with similar characteristics as of December 31, 2007: 4.94% (6.3% as of December 31, 2006)

C-80 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 20 - FINANCIAL INSTRUMENTS (Cont.)

c. Linkage balance sheet

1. Linked balances – consolidated balance sheet – December 31, 2007 In, or In, or linked to, linked to, In, or other Non- the U.S. linked to, foreign monetary dollar In NIS the euro currency items Total (in thousand US dollars)

Assets Cash and cash equivalents 63,447 18,020 842 4,361 - 86,670 Short-term investments 172,000 8,633 - - - 180,633 Trade accounts receivable 99,917 422 20,653 22,625 - 143,617 Other current assets 6,291 7,561 4,235 1,844 32,022 51,953 Deferred taxes - - - - 19,569 19,569 Inventory - - - - 15,981 15,981 Long-term bank deposits and investment in another company 1,715 2,207 - - - 3,922 Investees 1,228 - - - 1,040 2,268 Fixed assets - - - - 1,286,421 1,286,421 Other assets - - - - 3,719 3,719 344,598 36,843 25,730 28,830 1,358,752 1,794,753

Liabilities Short-term bank borrowings and current maturities (65,017) (292 ) (1,007 ) - - (66,316 ) Trade accounts payable (98,059) (26,902 ) (27,645 ) (14,814 ) - (167,420 ) Other current liabilities (94,783) (118,398 ) (3,492 ) (2,418 ) (188,751 ) (407,842 ) Dividend proposed for payment - (3,009 ) - - - (3,009 ) Long-term loans from financial institutions (713,793) - - - - (713,793 ) Obligations for termination of employee-employer relationships, net (14,857) (45,704 ) (6,536 ) (3,839 ) - (70,936 ) Deferred taxes - - - - (72,510 ) (72,510 ) Other long-term liabilities (423) - - - - (423 ) Shareholders’ equity - - - - (292,504) (292,054) (986,932) (194,305) (38,680) (21,071) (553,765) (1,794,753)

Monetary assets, net of monetary liabilities (monetary liabilities net of monetary assets) (642,334) (157,462) (12,950) 7,759 804,987 -

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EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 20 - FINANCIAL INSTRUMENTS (Cont.)

c. Linkage balance sheet

2. Linked balances – Company balance sheet –

December 31, 2007 In, or linked In, or In, or linked to, Non- to, the U.S. linked to, other foreign monetary dollar In NIS the euro currency items Total (in thousand US dollars)

Assets Cash and cash equivalents 59,459 17,257 842 3,169 - 80,727 Short-term investments 172,000 7,435 - - - 179,435 Trade accounts receivable 97,642 - 20,199 22,435 - 140,276 Other current assets 10,977 7,140 1,162 2,355 31,781 53,415 Deferred taxes - - - - 19,169 19,169 Inventory - - - - 15,379 15,379 Long-term bank deposits and investment in another company 1,715 2,207 - - - 3,922 Investees 1,639 - - - 9,805 11,444 Fixed assets - - - - 1,284,371 1,284,371 Other assets - - - - 3,719 3,719

343,432 34,039 22,203 27,959 1,364,224 1,791,857

Liabilities Short-term bank borrowings and current maturities (65,017) (292 ) (1,007 ) - - (66,316 ) Trade accounts payable (102,317) (23,909 ) (27,645 ) (13,607 ) - (167,478 ) Other current liabilities (96,921) (113,475 ) (3,492 ) (3,213 ) (187,407 ) (404,508 ) Dividend proposed for payment - (3,009 ) - - - (3,009 ) Long-term loans from financial institutions (713,793) - - - - (713,793 ) Obligations for termination of employee-employer relationships, net (14,985) (45,838 ) (6,536 ) (3,839 ) - (71,198 ) Deferred taxes - - - - (72,796) (72,796 ) Other long-term liabilities (255) - - - - (255 ) Shareholders’ equity - - - - (292,504) (292,504) (993,288) (186,523) (38,680) (20,659) (552,707) (1,791,857)

Monetary assets, net of monetary liabilities (monetary liabilities net of monetary assets) (649,856) (152,484) (16,477) 7,300 811,517 -

C-82 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 20 - FINANCIAL INSTRUMENTS (Cont.)

c. Linkage balance sheet

3. Linked balances – consolidated balance sheet –

December 31, 2006 In, or In, or linked linked to, In, or to, other Non- the U.S. linked to, foreign monetary dollars In NIS the euro currency items Total (in thousand US dollars)

Assets Cash and cash equivalents 127,167 15,011 530 3,450 - 146,158 Short-term investments 4,000 682 - - - 4,682 Trade accounts receivable 102,052 109 11,872 18,511 - 132,544 Other current assets 13,431 5,227 857 2,867 24,960 47,342 Deferred taxes - - - - 30,645 30,645 Inventory - - - - 17,190 17,190 Long-term bank deposits - 1,836 - - - 1,836 Investment in another company 1,829 - - - - 1,829 Investees 1,228 - - - 1,052 2,280 Fixed assets - - - - *1,176,528 1,176,528 Other assets - - - - 3,455 3,455 249,707 22,865 13,259 24,828 1,253,830 1,564,489

Liabilities Short-term bank borrowings and current maturities (104,359) (126 ) (595 ) (20 ) - (105,100 ) Trade accounts payable (86,522) (22,964 ) (23,126 ) (12,378 ) - (144,990 ) Other current liabilities (88,630) (96,361 ) (2,830 ) (2,325 ) (142,345 ) (332,691 ) Long-term loans from financial institutions (566,104) - - - - (566,104 ) Obligations for termination of employee-employer relationships, net (19,783) (96,010 ) (6,420 ) (3,958 ) - (126,171 ) Deferred taxes - - - - *(74,603 ) (74,603 ) Other long-term liabilities (730) - - - - (730 ) Shareholders’ equity - - - - *(214,100) (214,100) (866,328) (215,461) (32,971) (18,681) (431,048) (1,564,489)

Monetary assets, net of monetary liabilities (monetary liabilities net of monetary assets) (616,621) (192,596) (19,712) 6,147 822,782 -

* Restated – see Note 2.z.

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EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 20 - FINANCIAL INSTRUMENTS (Cont.)

c. Linkage balance sheet

4. Linked balances – Company balance sheet –

December 31, 2006 In, or In, or linked linked to, In, or to, other Non- the U.S. linked to, foreign monetary dollar In NIS the Euro currency items Total (in thousand US dollars)

Assets Cash and cash equivalents 122,070 14,213 530 2,595 - 139,408 Short-term investments 4,000 - - - - 4,000 Trade accounts receivable 98,701 40 11,872 18,387 - 129,000 Other current assets 15,612 5,064 857 3,177 24,684 49,394 Deferred taxes - - - - 30,171 30,171 Inventory - - - - 16,464 16,464 Long-term bank deposits - 1,836 - - - 1,836 Investment in another company 1,879 - - - - 1,829 Investees 1,228 - - - 10,047 11,275 Fixed assets - - - - *1,174,355 1,174,355 Other assets - - - - 3,455 3,455 243,440 21,153 13,259 24,159 1,259,176 1,561,187

Liabilities Short-term bank borrowings and current maturities (104,359) (126 ) (595 ) (20 ) - (105,100 ) Trade accounts payable (89,333) (21,229 ) (23,126 ) (11,753 ) - (145,441 ) Other current liabilities (87,602) (94,226 ) (2,830 ) (2,471 ) (141,853 ) (328,982 ) Long-term loans from financial institutions (566,104) - - - - (566,104 ) Obligations for termination of employee-employer relationships, net (19,909) (96,125 ) (6,420 ) (3,958 ) - (126,412 ) Deferred taxes - - - - (74,506) (74,506 ) Other long-term liabilities (542) - - - - (542 ) Shareholders’ equity - - - - *(214,100) (214,100) (867,849) (211,706) (32,971) (18,202) (430,459) (1,561,187)

Monetary assets, net of monetary liabilities (monetary liabilities net of monetary assets) (624,409) (190,553) (19,712) 5,957 828,717 -

* Restated – see Note 2.z.

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EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 21 - STATEMENT-OF-OPERATIONS DETAILS

a. Operating revenues

Composition -

Year ended December 31, 2 0 0 7 2 0 06 2 0 0 5 (in thousand US dollars) Consolidated: Passengers 1,586,610 1,317,259 1,292,941 Less: discounts (39,105) (39,513) (33,168) 1,547,505 1,277,746 1,259,773 Cargo and mail 322,555 331,606 309,120 1,870,060 1,609,352 1,568,893 Aircraft leasing 1,900 5,073 5,154 Other 60,490 51,021 45,422 1,932,450 1,665,446 1,619,469

Company: Passengers 1,530,042 1,275,038 1,253,704 Less: discounts (39,105) (39,513) (33,168) 1,490,937 1,235,525 1,220,536 Cargo and mail 322,555 331,606 309,120 1,813,492 1,567,131 1,529,656 Aircraft leasing 47,264 40,307 37,797 Other 57,129 46,935 40,994 1,917,885 1,654,373 1,608,447

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EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 21 - STATEMENT-OF-OPERATIONS DETAILS (Cont.)

b. Operating expenses Year ended December 31 Composition - 2 0 0 7 2 0 06 2 0 0 5 (in thousand US dollars) Consolidated: Wages and social benefits 281,714 262,599 229,278 Fuel 556,274 465,912 388,028 Airport fees and services 175,504 169,717 175,009 Maintenance of aircraft , flight and ground equipment 90,779 *83,024 *67,438 Air navigation and flight communication 98,855 89,851 85,872 Depreciation 109,983 *111,084 *113,106 Insurance 8,421 9,909 11,680 Aircraft leasing fees 41,369 38,540 22,729 Meals and supplies 41,423 39,733 38,217 Air-crew expenses 48,166 45,811 40,755 Participation in security expenses (see 21c) 39,413 40,002 39,027 Cost of duty-free products 11,175 8,840 8,091 Other expenses 36,582 29,137 26,340 1,539,658 1,394,159 1,245,570 Company Wages and social benefits 270,743 252,361 219,057 Fuel 556,274 465,912 388,028 Airport fees and services 175,504 169,717 175,009 Maintenance of aircraft , flight and ground equipment 90,779 *83,024 *67,438 Air navigation and flight communication 98,855 89,851 85,872 Depreciation 109,688 *110,789 *112,733 Insurance 8,421 9,909 11,680 Aircraft leasing fees 41,369 38,540 22,729 Meals and supplies 56,586 54,298 52,673 Air-crew expenses 48,166 45,811 40,755 Participation in security expenses (see 21c) 39,413 40,002 39,027 Cost of duty-free products 11,175 8,840 8,091 Other expenses 22,988 19,947 18,144 1,529,961 1,389,001 1,241,236 * Restated – see Note 2.z.

c. Security expenses

The Company is obliged to maintain security arrangements which are determined by a State agency, and the Company has no control over these expenses.

The State bears part of the Company's government expenses incurred in protecting Company passengers, aircraft, employees, offices and other installations against acts of terror. Following a government resolution, the Company’s participation rate in these expenses decreased on January 1, 2003 to 50%. In addition to these expenses, the Company bears other, indirect security costs which also cause a loss of revenue due to in-flight security personnel. These additional costs are included in various operating items in the statement of operations. Regarding the change in the rate of the State's participation in security expenses as a result of a government decision made subsequent to the balance sheet date, see Note 26.1.

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NOTE 21 - SUPPLEMENTAL STATEMENT OF OPERATIONS DETAILS (Cont.)

d. Selling expenses

Composition: Year ended December 31, 2 0 0 7 2 0 06 2 0 0 5 (in thousand US dollars) Consolidated: Commissions to agents 154,940 116,232 125,793 Wages and social benefits 44,276 45,700 45,862 Advertising and public relations 10,219 9,907 9,734 Others 21,202 15,966 17,202 230,637 187,805 198,591 Company: Commissions to agents 154,940 116,232 125,714 Wages and social benefits 44,276 45,700 45,862 Advertising and public relations 9,844 9,473 9,505 Others 21,202 15,966 16,864 230,262 187,371 197,945

e. General and administrative expenses

Composition -

Consolidated: Wages and social benefits 59,724 60,626 59,192 Professional consultation 6,234 4,807 4,403 Telecommunications 4,969 5,062 5,331 Office rental and maintenance 9,696 9,445 7,200 Insurance 1,931 2,113 2,252 Other expenses 8,227 9,899 10,380 90,781 91,952 88,758 Company: Wages and social benefits 55,686 56,366 55,234 Professional consultation 5,883 4,446 4,227 Telecommunications 4,904 4,974 5,291 Office rental and maintenance 9,309 9,027 6,957 Insurance 1,730 1,929 2,088 Other expenses 7,801 9,593 9,552 85,313 86,335 83,349

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EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 21 - SUPPLEMENTAL STATEMENT-OF-OPERATIONS DETAILS (Cont.)

f. Financing expenses (income), net

Year ended December 31, Composition - 2 0 0 7 2 0 0 6 2 0 0 5 (in thousand US dollars) Consolidated: Financing expenses on long-term loans 45,100 38,673 31,069 Interest income on short-term deposits (10,826) (6,872 ) (6,024 ) Other financing expenses (income), net (including erosion of monetary items, net) (881 ) (2,309) (4,439) 33,393 29,492 20,606 Company: Financing expenses on long-term loans 45,100 38,673 31,069 Interest income on short-term deposits (10,826) (6,872 ) (6,024 ) Other financing expenses (income), net (including erosion of monetary items, net) (431) (2,069) (4,318) 33,843 29,732 20,727

g. Other expenses (income), net

1. Composition: Year ended December 31, 2 0 0 7 2 0 0 6 2 0 0 5 Note (in thousand US dollars) Consolidated: Expenses pertaining to retirement plans, net (see Note 15b.12) (2) 12,094 4,405 13,510 Damages received (3) (14,267) - - Gain from realizing investments in investees (4) - - (8,297 ) Gain from disposition of fixed assets (5) (245) *(1,641 ) (590 ) Other capital gains, net (5) - (104) (2,423) 2,764 4,519 Company: Expenses pertaining to retirement plans, net (see Note 15b.13) (2) 12,094 4,405 13,510 Damages received (3) (14,267) - - Gain from realizing investment in investees (4) - - (8,297 ) Gain from disposition of fixed assets (5) (245) * (1,659) (585) (2,418) 2,746 4,628

* Restated – see Note 2.z.

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EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 21 - SUPPLEMENTAL STATEMENT-OF-OPERATION DETAILS (Cont.)

g. Other expenses (income), net (cont.)

2. Expenses for retirement plans, net

The expenses for employee retirement plans during the reporting year mainly include the provision for two retirement plans for two additional groups of 22 and 28 employees (see Note 15.b.12.d), for which a provision was recorded totaling $7.3 million, as well as expenses for reappraisal of liabilities pertaining to early retirement programs following the revaluation of Israeli currency vis-à-vis the dollar.

The expenses for the employee retirement plans for the year ended December 31, 2006 derived mainly form the appreciation of the shekel against the dollar.

The expenses for employee retirement plans for the year ended December 31, 2005 mainly include expenses for two new retirement programs which jointly pertain to 100 employees, most of whom retired during the year 2006 and for which the Company recorded provisions totaling $ 16 million.

3. a. As a result of the discontinuation of operations of a company related to Boeing, with which the Company had an undertaking in the past to operate Internet systems on some of the Company's aircraft, the Company discontinued the providing of such service. In January 2007, an agreement was signed between the Company and Boeing, whereby the Company received damages from Boeing for its investments in the Internet system, and for the additional damages it sustained due to discontinuation of the system's operation. As a result of these damages, the Company recorded income in the reporting year of $4.4 million.

b. In July 2007, a clarification to an agreement between the Company and Boeing was signed, with respect to an overall accounting between the parties. Within this framework, there was agreement that the sum of $6.5 million of the cash flows, which were or are expected to be received by the Company from Boeing constitute damages for the loss of revenues sustained by the Company due to the discontinuation of two joint projects, including the project for broadband Internet in planes. c. In March 2007, the Company signed an agreement with the British Aviation Authority, whereby a property that had been used in Heathrow Airport in London was vacated, and accordingly, it received early vacancy fees from the above Aviation Authority. As a result of this agreement, the Company recorded net income (after taxes) of $3.4 million.

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EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 21 - SUPPLEMENTAL STATEMENT-OF-OPERATION DETAILS (Cont.)

g. Other expenses (income), net (cont.)

4. Gain from realization of investments in investees -

a. In April 2005, the Company signed agreements for the sale of its entire holding in Maman - Cargo and Handling Terminals Ltd (hereafter: "Maman"), which constituted 26% of the issued share capital of Maman, to two other Israeli companies, for a price of $ 12.8 million. Consequently, the Company recorded a pre-tax capital gain of approximately $ 8 million during 2005 (including $2 million derived from translation differences with respect to investees).

b. In November 2005, the Company concluded an agreement with another Israeli company for the sale of its entire holding in Unitel Tourism and Aviation Ltd. (“Unitel”), which constituted 13.7% of Unitel’s issued share capital, in exchange for approximately $ 856 thousand. Consequently, the Company recorded a pre-tax capital gain of approximately $ 294 thousand during 2005.

5. In July 2006, the Company sold a 747-200 cargo aircraft which was owned by it. Consequently, the Company recorded a capital gain in 2006 of approximately $1.4 million.

h. Company's equity in earnings of investees, net

Year ended December 31, Composition - 2 0 0 7 2 0 0 6 2 0 0 5 (in thousand US dollars) Consolidated: Maman - - 306 Other companies 332 417 327 332 417 633 Company: Maman - - 306 Superstar 35 (417) 170 Tamam (290) 207 108 Borenstein 26 162 281 Other companies 332 417 327 103 369 1,192

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EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 21 - SUPPLEMENTAL STATEMENT-OF-OPERATION DETAILS (Cont.)

i. Earnings per share

The calculation of basic and fully-diluted earnings per share allocated to the ordinary shareholders is based on the following data:

Consolidated Year ended December 31, 2 0 0 7 2 0 0 6 2 0 0 5 (in thousand US dollars)

Earnings (loss) used to compute basic earnings per share: 31,735 (33,912) 48,998

Earnings (loss) used to compute fully- diluted earnings per share: 31,735 (33,912) 48,998

(Thousand shares) Weighted average of number of ordinary shares used to compute basic earnings per share 476,289 400,680 399,633

Adjustments: Options 19,645 - 96,088 Weighted average of number of ordinary shares used to compute fully-diluted earnings per share 495,834 400,680 495,721

Weighted average of securities not included in the computation of fully- diluted earnings per share since they are anti-dilutive Options 6,021 95,039 -

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EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 22 - INCOME TAXES

a. Tax laws applicable to the Group companies

According to the Adjustments Law and the Income Tax Regulations (Rules Concerning the Maintenance of Accounting Records of Companies in Foreign Investments and of Certain Partnerships and the Determination of their Taxable Income), 1986 ("the Dollar Regulations"), the results of the Company and some of its subsidiaries for tax purposes are measured on the basis of adjustment to the exchange rate of the U.S. dollar.

The Company’s main subsidiaries operating in Israel are subject to the Income Tax Law (Inflationary Adjustments), 1985 ("the Adjustments Law"), which measures results in real terms on the basis of adjustment for changes in the CPI.

On February 26, 2008, the Knesset passed in the third reading the Income Tax Law (Inflationary Adjustments)(Amendment No. 20)(Limitation of Effective Period), 2008 ("the Amendment"), whereby the effective period of the Adjustments Law will end in the 2007 tax year, and as from the 2008 tax year, the provisions of the law will not apply, except for the transitional provisions, the purpose of which is to prevent distortions in the tax computations.

The Dollar Regulations will continue to apply to the Company even after the effective period of the Adjustments Law ends.

Some subsidiaries are assessed jointly with the Company. Foreign subsidiaries are subject to the tax laws applicable in the countries of residence.

The Company is deemed an industrial company under the Law for the Encouragement of Industry (Taxes), 1969 and, accordingly, is entitled to accelerated depreciation rates on aircraft and equipment as well as amortization of costs incurred in connection with the registration of shares for trading on a stock exchange.

Pursuant to the Income Tax Regulations - Depreciation, 1941, the Company is entitled to depreciate the cost of owned aircraft and spare engines at an annual rate of 30% and 40% of cost, respectively.

Most of the countries in which the Company operates representative offices are signatories to treaties or mutual arrangements for the prevention of double taxation, which exempt the Company from income taxes on their operations in these countries.

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NOTE 22 - INCOME TAXES (Cont.)

b. Effective tax rate

Reconciliation between the taxes computed on the pre-tax income at ordinary rates ("theoretical tax") and the provision included in the statement of operations is as follows:

Year ended December 31, 2 0 0 7 2* 0 0 6 2* 0 0 5 (in thousand US dollars) Consolidated: Statutory tax rate (in %) 29% 31% 34% Pre-tax income (loss) - per statement of operations 40,404 (40,726) 61,425

Theoretical tax (11,717 ) 12,625 (20,885 ) Change in tax burden in respect of: Differences in the computation of taxable income due to exchange rate differences 3,286 (6,018 ) 8,085 Non-deductible expenses and exempt income, net Tax (expenses) savings (570) (210) (260) (9,001) 6,397 (13,060) Company: Statutory tax rate (%) 29% 31% 34% Pre-tax income - per statement of operations 40,924 (40,812) 60,562

Theoretical tax (11,868 ) 12,652 (20,591 )

Differences in the computation of taxable income due to exchange rate differences 3,146 (5,911) 8,090 Non-deductible expenses and exempt income, net Tax (expenses) savings (570) (210) (255) (9,292) 6,531 (12,756) (*) Restated – see Note 2.z.

c. On July 25, 2005, the Israeli Knesset passed, in second and third reading, the Law for Amending the Income Tax Ordinance (No.147) 2005 ("the Amendment"), according to which the 34% corporate-tax rate is to be reduced gradually to 31% for the 2006 tax-year, 29% for the 2007 tax year, 27% for the 2008 tax year, 26% for the 2009 tax year and to 25% for the 2010 tax year.

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EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 22 - INCOME TAXES (Cont.)

d. Deferred income taxes Timing Carry- Depreciation differences- forward differences expenses losses Total (in thousand US dollars) 1. Consolidated: Balance – January 1, 2007* (240,800 ) 52,044 144,798 (43,958 ) Deferred income tax (expenses) savings 16,150 (6,900) (18,233) (8,983) Balance – December 31, 2007 (224,650) 45,144 126,565 (52,941)

2. Company: Balance – January 1, 2007* (240,800 ) 51,667 144,798 (44,335 ) Deferred income tax expenses 16,150 (6,846) (18,596) (9,292) Balance – December 31, 2007 (224,650) 44,821 126,202 (53,627)

3. Balance-sheet presentation: Consolidated Company December 31 December 31 2 0 0 7 2 0 0 6* 2 0 0 7 2 0 0 6* (in thousand US dollars)

In current assets 19,569 30,645 19,169 30,171 In long-term liabilities (72,510) (74,603) (72,796) (74,506) (52,941) (43,958) (53,627) (44,335)

e. Income tax expenses – composition – consolidated: Year ended December 31 2 0 0 7 2 0 0 6* 2 0 0 5* (in thousand US dollars)

Current-tax expenses 18 113 381 Deferred tax expense (income) 8,983 (6,510) 2,679 Total tax expense (benefit) 9,001 (6,397) 13,060

f. Income tax expenses – composition – Company: Year ended December 31 2 0 0 7 2 0 0 6* 2 0 0 5* (in thousand US dollars)

Deferred tax expense (income) 9,292 (6,531) 12,756 Total tax expense (benefit) 9,292 (6,531) 12,756 * Restated – see Note 2.z.

g. Final tax assessments On May 26, 2003, the Company signed an agreement with the income tax authorities, according to which it received final tax assessments up to, and including, the 2002 tax year. Within this framework, it was established that the balance of the carryforward tax losses to the year 2003, after the waiver of government debt (explained in Note 9d.2 above) would amount to NIS 2,219 million (based on the exchange rate in effect on December 31, 2007-$ 577 million).

The balance of the Company’s tax losses at the end of the 2007 tax-year (based on the Company's estimated tax return for the year 2007) amounted to approximately NIS 1,917 million.

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NOTE 23 - RELATED AND INTERESTED PARTIES

a. Balance-sheet items pertaining to related and interested parties:

Consolidated Company December 31, December 31, 2 0 0 7 2 0 0 6 2 0 0 7 2 0 0 6 (in thousand US dollars)

Trade accounts receivable 99 - 99 - The highest balance during the year 325 - 325 - Other current assets - - 1,658 2,621 The highest balance during the year - - 4,782 6,428 Loans granted to investees 1,228 1,228 1,639 1,228 The highest balance during the year 1,228 1,554 1,639 2,192 Trade accounts payable 1,330 13,582 6,798 18,148 Other current liabilities 1,845 1,627 2,543 1,600 Bank loan - 35,454 - 35,454

b. Transactions with related and interested parties:

Consolidated Company Year ended December 31 Year ended December 31 2 0 0 7 2 0 0 6 2 0 0 5 2 0 0 7 2 0 0 6 2 0 0 5 (in thousand US dollars)

Operating income 39,076 72,572 97,221 93,633 121,160 145,885

Operating expenses 90,106 280,784 249,697 116,884 305,109 273,964

Selling expenses 12,317 10,965 13,192 12,317 10,965 13,192

G & A expenses 3,694 1,751 3,637 3,694 1,751 3,637

Financing expenses 816 2,113 1,654 939 2,154 1,696

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NOTE 23 - RELATED AND INTERESTED PARTIES c. Benefits to interested parties: 2 0 0 7 2 0 0 6 2 0 0 5 (in thousand (in thousand (in thousand No. of people dollars) No. of people dollars) No. of people dollars) Non-employed directors 9 49 9 66 9 68 Employed interested Party - CEO 1 2,734 1 770 (*) 2 2,570

d. The Government of Israel and government institutions As of December 31, 2007, the Government owned only 1.13% of the Company’s shares, and is no longer an interested party in the Company, although until June 5, 2007, the Israeli Government was an interested party in the Company. The information included in this note relating to transactions that were executed between the Group and the Israeli Government and government institutions are only for the period from January 1, 2007 to June 5, 2007 (the holdings of the Israeli Government as of December 31, 2006: 20.97%). During the course of its business, the Company carries passengers and cargo for the State of Israel and its many agencies, including government ministries, companies that it owns, institutions and authorities. These transactions are carried out during the ordinary course of business activities under commercial terms, with each individual transaction, on its own, not being material from the Company’s point of view. Concurrently, in the course of its business, the Company acquires services from the State of Israel and its agencies, including government ministries, companies that it owns, institutions, authorities and, in particular, services at BGA, and the payment of usage fees for a complex on which Company installations are located and where it performs aircraft repair and maintenance work, etc. The Company is also provided services by government corporations in the ordinary course of business (such as electricity, telecom, etc). From the year 2005 and thereafter, in view of the amendment to the Securities Regulations (Preparation of Annual Financial Statements)(Amendment), 2005 (hereafter - "the Regulations"), we will provide a general description of the transactions, their nature and scope, in accordance with Regulation 64(3)(d)(2) to the Regulations: Operating revenues includes revenues from sale of tickets to various government entities during the year 2007 (Company and consolidated) totaled approximately $12 million ($25.9 million in 2006 and about $25.6 million in 2005), revenues from carrying cargo for various government entities (Company and consolidated) totaled approximately $13.6 million (about $38.4 million for the year 2006 and $18.9 million for 2005) and revenues from rendering maintenance services (Company and consolidated) in 2007 totaling approximately $ 2.4 million (about $4 million in 2006 about $2.3 million for the year 2005). Operating expenses during 2007 included those incurred by purchasing services from various government entities totaling approximately $ 50.2 million, consolidated, and $ 48.4 million, Company, (for the year 2006: approximately $127.3 million consolidated and $124.8 million, Company, for the year 2005: approximately $ 105.3 million, consolidated, and about $ 102.6 million, Company). Most of these expenses pertain to various fees and space rental from the AA, the government’s participation in security expenses (see Note 21c) and engine maintenance and repairs carried out by a government corporation. Operating expenses also include those incurred with related parties, electricity, telecom, infrastructure for gasoline delivery and ground transportation through government corporations. Financing expenses during 2007 include net financing expenses to a bank in which the Government of Israel is an interested party, totaling $0.9 million (in 2006: $2.2 million and in 2005: $1.7 million). C-96 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 23 - RELATED AND INTERESTED PARTIES

e. K’nafaim Holdings Ltd. and interested parties therein -

In June 2004, K’nafaim Holdings Ltd ("K'nafaim") became an interested party in the Company and in January 2005 it became the controlling party therein. As of December 31, 2007, K'nafaim holds approximately 39.33% of the Company's shares.

Commencing from the year 2005, following the abovementioned amendment to the Regulations, a general description of the transactions, their nature and volume, in accordance with Regulation 64(3)(d), is provided as follows:

Operating revenues for the year 2007 include revenues from companies in the K’nafaim Group and its controlling parties in a total amount of approximately $ 3.7 million, consolidated, and about $ 3.7 million, Company (2006: approximately $3.4 million, consolidated and $1.6 million, the Company; 2005: approximately $ 49 million, consolidated, and $ 48.3 million, Company). In 2007 most of such revenues derived from cargo transport services. In the years 2006 and 2005, the vast majority of such revenue derived from the sale of flight tickets to the Group’s travel agencies, and a small part from the rendering of maintenance, loading and cargo transport services.

Operating expenses for the year 2007 include transactions carried out with the K’nafaim Group and its controlling parties, amounting to approximately $40 million (Company and consolidated) (year 2006: $153.5 million, Company and consolidated; 2005: about $ 143.3 million, Company and consolidated pertaining to the purchase of jet fuel from a related company).

Selling expenses include agent commissions of approximately $ 15 thousand (2005-about $2.3 million) paid to the K’nafaim Group and its controlling shareholders (Company and consolidated). General and administrative expenses include approximately $ 0.9 million for management fees paid to K’nafaim and directors’ insurance in 2007 (2006 - $ 0.9 million and 2005: $ 1 million) (as for the management agreement and the group insurance agreement – see Notes 23.o and 23.r.2, respectively).

Other than the items detailed above, the other transactions with the K’nafaim Group and its controlling parties are negligible and they relate to the purchase of cleaning materials, lounge services for hosting airline passengers of foreign airlines, transportation to BGA, magazines for prestigious sections and entertainment brochures on flights, meals served in terminal 3 for delayed-flight passengers, children's accessories, hotel accommodation for outstanding employees and holiday vouchers.

Operating revenues of the Company include revenue of approximately $ 61.8 million (2006: $51.2 million; 2005: about $ 50.9 million) from investees for aircraft leasing to Sun D’Or and sale of flight tickets to Superstar and management fees from Borenstein. These items have been eliminated in the consolidated financial statements. It also includes (Company and consolidated) revenues from Sabre Israel, an investee, for software use. Additionally, operating income in 2007 includes additional revenues of $4 million and $6.5 million, Company and consolidated, respectively, from the sale of flight tickets to another interested party.

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NOTE 23 - RELATED AND INTERESTED PARTIES

f. Transactions with additional related parties: Operating expenses of the Company include approximately $28.8 million (2006: $ 26.8 million; 2005: about $ 28 million) of expenses incurred by investees for buying passenger meals from Tamam and Borenstein, as well as additional food services from Katit and materials-handling services from Maman up to April 2005 (when it was sold by the Company). The consolidated amount includes $ 1.2 million in the year 2005 for the purchase of material-handling services from Maman . Selling expenses include approximately $12.3 million in 2007 (approximately $ 11 million in 2006 and about $ 10.9 million in 2005) (Company and consolidated) for commissions and marketing fees paid to investees (Airtour, ACI and Sabre). General and administrative expenses include approximately $2.8 million (2006: $ 0.8 million; year 2005: about $ 2.6 million) (Company and consolidated) for directors’ fees and benefits to employed interested parties. g. Privatization of the Company- see Note 1b. h. Issuance of a special share – see Note 19f. i. State of Israel guarantees provided to fulfill Company obligations - see Note 15b.12. j. Agreement with the Government of Israel to acquire State-owned aircraft and arranging Company debt for the use of aircraft - see Note 9d. k. Financing the acquisition of aircraft by banks in which the State of Israel owns more than 25% - see Notes 14 and 18. l. Commitments with the AA – see Note 17d.5. m. Arrangement with the State of Israel to assure the raising of capital - see Note 15b.3.b. n. Sole supplier – Boeing Inc. is the Company’s sole supplier of aircraft – see Note 9b. o. Management fees: The Company’s General Meeting of Shareholders, which was held on May 10, 2005, approved a management agreement with the controlling party in the Company according to which the controlling party, through, Prof. Israel (Izzy) Borovich and a personal assistant would render services as active Chairman of the Board to the Company, for which the controlling party would receive monthly management fees of $60 thousand, in effect from January 9, 2005, over a three- year period. In addition, the Chairman of the Board and his family members will be entitled to receive free or discounted flight tickets.

C-98 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 23 - RELATED AND INTERESTED PARTIES (Cont.) p. Directors’ fees: The Company’s General Meeting of Shareholders, which was held on May 10, 2005, approved each director’s fee as compensation for participation in meetings of the Board of Directors and/or any of its committees, as well as entitlement to receive, as a benefit, free or discounted flight tickets for each director and members of his family. q. Agreement with CEO of the Company: 1. In February 2005, the Board of Directors appointed Mr. Haim Romano as the Company’s new CEO, based on an employment contract according to which he would be employed, commencing from March 1, 2005. The agreement entitles the CEO, inter alia, to: - Severance pay upon termination of employment equaling two monthly salaries for every year of employment with the Company; - An adaptation grant equaling six monthly salaries (18 months in case of dismissal); - An annual grant computed on the basis of the Company’s net income (as defined in the agreement and which includes adjustments of the income for various expenses - EIBTDA), ranging between 0.7% and 1% of net income after adjustments. The annual grant is not entitled to any social benefits; - Options program ("phantom") for a vesting period of up to three years, according to which the CEO will be entitled to a monetary grant computed on the basis of 3,258,210 ordinary ("phantom") shares at an exercise price of NIS 2.2098 per share. The gross value of the benefit of the phantom options upon commencement of employment, based on the computation rules of the Tel Aviv Stock Exchange, is estimated at approximately $ 1.5 million. During the month of October 2006, an understanding in principle was formulated between the Chairman of the Board of Directors of the Company and the CEO according to which the CEO would waive the balance of the phantom options that were granted to him under his employment contract, as aforementioned. The CEO announced this waiver to the Company's Board of Directors on March 21, 2007. 2. Pursuant to the request of the Company CEO, on March 29, 2006, the Company amended his employment contract so that $ 1.2 million of the grant to which he is eligible for the year 2005, based on the terms of the agreement described in item 1 above, would be postponed and payable in three equal installments in January 2007, January 2008 and January 2009. The entitlement to receive each installment is contingent upon continued employment of the CEO in that position at the time each installment is to be paid. On December 31, 2006, the Board of Directors of the Company resolved to amend the agreement with the CEO so that the date of payment of the second installment in the amount of $ 0.4 million would be advanced and paid together with the first installment during the month of January 2007. On August 15, 2007, the Company's Board of Directors resolved to adopt another amendment to the agreement with the CEO, so that the payment date of the third installment of $0.4 million would be paid earlier. This installment was paid in August 2007. 3. On August 16, 2006, the Audit Committee and the Board of Directors of the Company approved an amendment to the employment agreement between the CEO and the Company extending the term of employment of the CEO until December 31, 2010.

C-99 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 23 - RELATED AND INTERESTED PARTIES (Cont.)

r. Directors’ and officers’ insurance and indemnification:

The General Meeting of Shareholders of the Company, held on May 10, 2005 approved the following matters:

1. Making an advance commitment to indemnify present as well as future directors, and executives who are not directors, serving from time to time in the Company as long as control over the Company is not transferred from the present controlling parties, and to officers who are not directors, who are or will serve in the Company from time to time, until another resolution is adopted.

The amount of the indemnification will include any financial obligation imposed as well as reasonable legal expenses not exceeding the lesser of 25% of the Company’s shareholders’ equity at December 31, 2004 or 25% of its shareholders’ equity reported in the last financial statements just prior to the actual payment of the indemnification, in addition to any indemnification amounts received, from the Company’s officers’ insurance policy.

The indemnification certificate also entitles the officers to receive interim financing until the legal proceedings are concluded.

2. Acquiring professional-liability insurance for officers, according to which the officers, the Company and the controlling party in the Company will receive insurance coverage within the framework of group insurance obtained with an Israeli and/or foreign insurer, or, alternatively, self-insurance by the Company. The ceiling of joint liability would be a maximum of $ 100 million plus 20% for legal defense expenses.

The Company’s share in the group insurance fees amounts to 65% of the group insurance cost and, in any event, will not exceed $ 450 thousand per annum, with the addition of the run-off premiums as below.

In the event of self-insurance –the liability ceiling will not exceed $ 100 million per incident and, in total for any annual insurance period, plus 20% for legal defense expenses. The annual premium that will be paid by the Company for self-insurance plus the premiums for run-off insurance will not exceed $ 450 thousand. In addition, the General Meeting resolved to adopt a framework resolution for purchasing a run-off policy for officers acting within the scope of their duties until January 5, 2005. Liability will be limited to $ 30 million plus 20% for legal defense expenses. The premium-as itemized above.

s. Fees of officers who are not directors or the CEO

A Special Meeting of Shareholders of the Company, taking place on July 14, 2005, resolved to add Regulation 158a to the Company’s bylaws. The added regulation states, among other things, that the fees of officers (not including directors who are not Company employees, other than the CEO, a controlling party, a relative of a controlling party or an interested party in a controlling party), when the issue does not entail an irregular transaction, will be approved by the Human Resources and Appointments Committee of the Board of Directors.

C-100 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 24 - OPERATING SEGMENTS

a. Primary reporting - geographical segments

The Company’s activity is organized by flight routes, traffic rights and branches across the globe and, accordingly, the Company reports on geographical segments in a primary format. Most of the Company’s assets and liabilities are attributed to its various fleets of aircraft, which – by designation – are mobile by designation and thus are not identified with any given geographical segment.

The following is the reporting of geographical segments on a consolidated basis –

Far East & North Central Other America Europe Asia countries Total (in thousand US dollars)

2007: Revenues - Segment revenues 674,728 822,320 356,796 42,060 1,895,904 Non-segment revenues 36,546 Total consolidated revenues 1,932,450 Operating income - Operating income by segment 48,778 135,630 29,275 10,828 224,511 Overall segment expenses, net (153,137) Operating income, before financing expenses - consolidated 71,374

2006: Revenues - Segment revenues 582,268 699,158 315,237 36,735 1,633,398 Non-segment revenues 32,048 Total consolidated revenues 1,665,446 Operating income - Operating income by segment* 14,937 84,119 39,535 7,989 146,580 Overall segment expenses, net (155,050) Operating loss, before financing expenses - consolidated (8,470)

2005: Revenues - Segment revenues 569,188 706,407 280,093 34,820 1,590,508 Non-segment revenues 28,961 Total consolidated revenues 1,619,469 Operating income - Operating income by segment* 57,483 165,524 33,310 11,511 267,828 Overall segment expenses, net (181,278) Operating income, before financing expenses - consolidated 86,550

* Restated – see Note 2.z.

C-101 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 24 - OPERATING SEGMENTS (Cont.)

b. Secondary reporting – business segments

The Company’s activity is organized by fleets of aircrafts. Accordingly, the Company reports in a secondary format on its business segments, on the basis of a division by passenger and cargo aircraft.

The following is the reporting by business segments on a consolidated basis – Other and Passenger consolidation aircraft Cargo aircraft adjustments Total (in thousand US dollars) 2007: Revenues from : Passengers 1,547,505 - - 1,547,505 Cargo and mail 106,217 216,338 - 322,555 Other income 38,692 994 22,704 62,390 Total revenues 1,692,414 217,332 22,704 1,932,450 Net book value of fixed assets 1,196,726 42,467 47,228 1,286,421 Capital investments 225,130 13,751 9,677 248,558 Depreciation and amortization 90,198 18,074 11,529 119,801

2006: Revenues from : Passengers 1,277,746 - - 1,277,746 Cargo and mail** 98,696 232,910 - 331,606 Other income 34,426 965 20,703 56,094 Total revenues 1,410,868 233,875 20,703 1,665,446 Net book value of fixed assets* 1,070,258 57,100 49,170 1,176,528 Capital investments 99,869 13,100 15,925 128,894 Depreciation and amortization 79,224 20,428 11,634 111,286

2005: Revenues from : Passengers 1,259,773 - - 1,259,773 Cargo and mail** 98,815 210,305 - 309,120 Other income 33,254 839 16,483 50,576 Total revenues 1,391,842 211,144 16,483 1,619,469 Net book value of fixed assets* 1,075,676 66,708 45,597 1,187,981 Capital investments 83,601 8,200 8,921 100,722 Depreciation and amortization 80,976 16,411 10,182 107,569

* Restated – see Note 2.z. ** Data on revenues from cargo and mail of the years ended December 31, 2006 and 2005 were reclassified between passenger aircraft and cargo aircraft, in order to adjust them to the present manner of presentation in the financial statements for the year ended December 31, 2007.

C-102 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 25 - FINANCIAL INFORMATION ACCORDING TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

a. Overview

Following publication of Accounting Standard No. 29, "Adoption of International Financial Reporting Standards (IFRS)", in July 2006, the Company intends to adopt the IFRS commencing January 1, 2008.

Pursuant to the provisions of IFRS 1, which deals with the first-time adoption of IFRS Standards, and considering the date on which the Company chose to adopt these Standards for the first time, the first financial statements that the Group must prepare according to IFRS Standards are the consolidated financial statements as of December 31, 2008 and for the year then ended. The transition date for the Company's reporting according to IFRS Standards, as defined in IFRS 1, is January 1, 2007 (hereafter – "the transition date"), with the opening balance sheet being the balance sheet as of January 1, 2007 (hereafter – "the opening balance sheet"). The Company's interim financial statements for the year 2008 will also be prepared according to IFRS Standards, including comparative figures.

Within the framework of the opening balance sheet, the Company took the following actions: • Recognition of every asset or liability, the balance sheet recognition of which is required according to IFRS Standards. • Non-recognition of assets and liabilities which, according to IFRS Standards, are not to be recognized in the balance sheet. • Classification of asset, liability and shareholders' equity items according to IFRS Standards. • Measurement of all assets and liabilities recognized according to IFRS Standards.

IFRS 1 provides that IFRS Standards are to be applied in the opening balance sheet retroactively. However, IFRS 1 includes several exceptions, for which the retroactive application requirement does not apply. Regarding the exceptions applied by the Company, see Par. f below.

Changes in accounting policy applied by the Company retroactively in the opening balance sheet according to IFRS Standards, compared with the accounting policies according to Israeli GAAP, were recognized directly in retained earnings or in another shareholders' equity item, as applicable.

This note was prepared based on international financial reporting and accounting standards and their clarifications, as known presently, which were published and will take effect, or may be adopted early in the Group's first annual reporting date according to IFRS, December 31, 2008. Accordingly, the Company's management has made assumptions regarding the accounting policies that are expected to be applied when the first annual financial statements according to IFRS will be prepared for the year ended December 31, 2008.

IFRS Standards that will be in effect or may be adopted in the financial statements for the year ended December 31, 2008, are subject to changes and the publication of additional clarifications. Accordingly, the accounting policies that will be applied for the presented periods will be determined finally only when the first financial statements will be prepared according to IFRS as of December 31, 2008.

C-103 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 25 - FINANCIAL INFORMATION ACCORDING TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) (Cont.)

a. Overview (cont.)

Presented below are the consolidated balance sheets of the company as of January 1, 2007 and December 31, 2007, statements of operations for the year ended December 31, 2007 and total shareholders' equity of the Company prepared according to international accounting standards. Also presented are the material adjustments required for transition from Israeli GAAP to IFRS reporting.

Likewise, in June 2007, IFRIC, the body that issues interpretations of the International Standards on behalf of the IASB, published IFRIC 13, which discusses the accounting treatment of grant and benefit plans designed to win customer loyalty. The Company has a frequent-flyer plan (see Note 2.l), which is covered by this publication. According to this interpretation, the fair value of the proceeds received from the sale of flight tickets are to be separated into the element of the flight ticket and the element of the grant, which will be measured at fair value. This interpretation is to be applied in Israel for the annual financial statements for the period commencing January 1, 2009. However, it is permitted to adopt the interpretation in early application. The Company's management is studying the interpretation and has not yet decided whether to adopt it in early application. The information presented below on the effect of the transition to international financial reporting standards does not include the effect of the transition to IFRIC 13.

C-104 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 25 - FINANCIAL INFORMATION ACCORDING TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) (Cont.)

b. Consolidated balance sheets: December 31, 2007 December 31, 2006 Additional Israeli Adjust- IFRS Israeli Adjust- IFRS information GAAP ments Standards GAAP ments Standards (in thousand US dollars)

Cash and cash equivalents 86,670 - 86,670 146,158 - 146,158 Short-term investments 180,633 - 180,633 4,682 - 4,682 Trade accounts receivable 143,617 - 143,617 132,544 - 132,544 Receivables and other current 3 51,953 20,927 72,880 47,342 2,907 50,249 assets Deferred taxes 5 19,569 (19,569 ) - 30,645 (30,645 ) - Inventory 15,981 - 15,981 17,190 - 17,190 498,423 1,358 499,781 378,561 (27,738) 350,823

Investments Long-term investments 3 3,922 8,524 12,446 3,665 9,162 12,827 Investees 2,268 - 2,268 2,280 - 2,280 6,190 8,524 14,714 5,945 9,162 15,107

Fixed assets 1,286,421 - 1,286,421 1,176,528 - 1,176,528

Other assets 3,719 - 3,719 3,455 - 3,455

1,794,753 9,882 1,804,635 1,564,489 (18,576) 1,545,913

Current liabilities Short-term borrowings and current maturities 66,316 - 66,316 105,100 - 105,100 Trade accounts payable 167,420 - 167,420 144,990 - 144,990 Payables and other current 1,2 407,842 (2,143 ) 405,699 332,691 27,900 360,591 liabilities Dividend proposed for payment 3,009 - 3,009 - - - 644,587 (2,143) 642,444 582,781 27,900 610,681

Long-term liabilities Long-term loans from financial institutions 713,793 - 713,793 566,104 - 566,104 Accrued severance pay, net 1 70,936 (17,405) 53,531 126,171 (21,297 ) 104,874 Deferred income taxes 72,510 (7,406) 65,104 74,603 (24,918 ) 49,685 Other long-term liabilities 3 423 2,369 2,792 730 1,861 2,591 857,662 (22,442) 835,220 767,608 (44,354) 723,254

Shareholders' equity 292,504 34,467 326,971 214,100 (2,122) 211,978

1,794,753 9,882 1,804,635 1,564,489 (18,576) 1,545,913

C-105 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 25 - FINANCIAL INFORMATION ACCORDING TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) (Cont.) c. Consolidated statements of operations For the year ended December 31, 2007 Additional Israeli Adjust- IFRS information GAAP ments Standards (in thousand US dollars)

Operating revenues 1,932,450 - 1,932,450 Operating expenses 1,3 1,539,658 (554) 1,539,104

Gross profit 392,792 554 393,346

Selling expenses 1 230,637 249 230,886 General and administrative expenses 1,2 90,781 838 91,619 Other income net 7 - (2,423) (2,423)

Operating income before net financing income (expenses) 71,374 1,890 73,264

Financing expenses 3,4 (33,393 ) (27,676 ) (61,069 ) Financing income 6 - 20,239 20,239

Operating income after net financing income (expenses) 37,981 (5,547 ) 32,434

Other income, net 7 2,423 2,423 -

Pre-tax income 40,404 (7,970 ) 32,434

Income tax savings (expenses) (9,001) 2,240 (6,761)

Income after income taxes 31,403 (5,730 ) 25,673

Company's equity in earnings of affiliates, net 332 - 332

Net income for the year 31,735 (5,730) 26,005

Earnings (loss) per share (NIS 1 par value) – in dollars

Basic earnings per share 0.07 (0.02) 0.05

Fully-diluted earnings per share 0.06 (0.01) 0.05

Number of shares used in the computation of EPS (in thousands)

Basic earnings per share 476,289 - 476,289

Fully-diluted earnings per share 495,934 - 495,934

C-106 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 25 - FINANCIAL INFORMATION ACCORDING TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) (Cont.) d. Adjustment to capital Capital reserve from trans- Capital Benefit actions element of from with complex stock- former financial based Additional Share Premium controlling instru- transac- Retained information capital on shares party ments tions earnings Total (in thousand US dollars)

As of January 1, 2007

Israeli standard 131,536 904 218,498 - 2,582 (139,420 ) 214,100

Adjustment of accrued severance pay, net 1 - - - - - 16,501 16,501

Presentation of hedging instruments at fair value 3 - - - (1,977 ) - 3,181 1,204

Presentation of liability for options issued at fair value 4 - - - - - (19,930 ) (19,930 )

Presentation of liabilities for legal claims 2 - - - - - 103 103

According to IFRS Standards 131,536 904 218,498 (1,977) 2,582 (139,565) 211,978

As of December 31, 2007

Israeli standard 155,012 9,248 243,787 - 4,464 (120,007 ) 292,504

Adjustment of accrued severance pay, net 1 - - - - - 14,952 14,952

Presentation of hedging instruments at fair value 3 - - - 21,582 - (1,777 ) 19,805

Presentation of liability for options issued at fair value 4 - 18,759 - - - (18,759 ) -

Presentation of liabilities for legal claims 2 - - - - - (290) (290)

According to IFRS Standards 155,012 28,007 243,787 21,582 4,464 (125,881) 326,971

C-107 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 25 - FINANCIAL INFORMATION ACCORDING TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) (Cont.) e. Additional information

1. According to Israeli GAAP, accrued severance pay is recognized on the basis of the full liability, assuming that employees will be dismissed on the balance sheet date at terms that entitle him to full severance pay, without considering discount rates, the rates of future salary increases, and future resignations. According to IFRS Standards, all liabilities for employee retirement benefits and other long-term benefit plans are measured, inter alia, based on actuarial estimates and discounted amounts. Likewise, according to IFRS Standards, no severance pay is accrued when the benefit to the employee will be given only if the employer dismisses the employee.

Accrual for retirement plan – According to Israeli GAAP, accruals for retirement plans are recorded based on management's expectations for their realization. According to IFRS, recognition in the retirement plan will be recognized when there is a detailed, formal retirement plan that creates an irrevocable obligation for the Company.

Likewise, according to Israeli GAAP, the vacation accrual is recognized based on the full liability, assuming that employees will utilize all of the vacation days to which they are entitled, within the short-term. According to IFRS Standards, the liabilities for vacation are recorded based on expectations for utilization of vacation days and are measured based on actuarial estimates and discounted amounts.

To date, the Company has recorded an accrual for redemption of unused sick days upon retirement only for employees who attained the age of 45 and at non-discounted values (as in Note 15.b.4). According to IFRS Standards, this accrual is computed for all Company employees and at discounted values.

The said effect on the balance sheet is a reduction of the liabilities for employee benefit plans, net as of January 1, 2007 and December 31, 2007 of $22,001 thousand and $19,936 thousand, respectively. Likewise, concurrently, deferred tax assets as of January 1, 2007 and December 31, 2007 were reduced by $5,500 thousand and $4,984 thousand, respectively.

The discount rate used in the computation of the actuarial liabilities was determined by using the market yields on government bonds, because management believes there is no "deep market" for high-quality corporate bonds in Israel. The issue of the discount rate is being examined, and it is possible that eventually a decision will be reached that the appropriate discount rate in Israel is based on the market yields of corporate bonds. If such a decision is reached, the data computed and included in the note will be changed, since the use of a higher discount rate will reduce the actuarial liability on one hand, and increase current interest costs on the actuarial liabilities on the other hand.

C-108 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 25 - FINANCIAL INFORMATION ACCORDING TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) (Cont.) e. Additional information (cont.)

2. According to Israeli GAAP, the Company recognizes a provision for legal claims pending if it is probable that economic resources will be used to settle the obligation. According to IFRS, a provision is to be recognized if the chances for the existence of an obligation as of the balance sheet date is more likely than not. The level of the provision in IFRS Standards is determined according to the amount that the Company estimates it will be willing to pay in order to settle the claim.

Consequently, the provision for legal claims decreased by $138 thousand as of January 1, 2007 and increased by $388 thousand as of December 31, 2007. Likewise, at the same time, there was an increase in deferred tax liabilities as of January 1, 2007 of $35 thousand and an increase in deferred taxes receivable as of December 31, 2007 of $97 thousand.

3. Differing from Israeli GAAP, according to IAS 39, all derivative financial instruments are recognized as assets or liabilities at their fair value. The changes in fair value will be charged to gain/loss (in speculative instruments that do not meet the requirements for recognition as a hedging instrument) or to a capital reserve (in instruments designated for a hedge of projected cash flows). To date, it has not been the Company's practice to give balance sheet expression to the fair value of the hedge transactions for jet fuel. With the transition to IFRS, jet-fuel hedging transactions will be stated in the opening balance sheet at their fair value, against a capital reserve. The change in the fair value of jet-fuel hedge transactions in subsequent periods will be charged to a capital reserve, regarding the "effective" part of the hedging instrument and to operating results in the statement of operations for the part that is not "effective".

Regarding foreign currency and interest hedges, according to Israeli GAAP, the Company included in the balance sheet only the fair value of the interest and foreign-currency hedge transactions that were not recognized as hedges for accounting purposes, in other current assets or liabilities, as applicable. According to IAS 39, all interest and foreign-currency hedge transactions (whether or not recognized for accounting purposes) will be stated in the consolidated balance sheet at their fair value.

The Company's management decided that within the framework of IFRS Standards, foreign- currency and interest hedges will be treated as though they are not designated for hedging. Therefore, any fair value change in subsequent periods of the interest and foreign currency hedges will be charged to the financing item in the statement of operations.

As a result of the fair value presentation of every hedging instrument, changes occurred in the appropriate balance sheet items as of January 1, 2007 and December 31, 2007 in other current assets, other current liabilities, long-term investments and long-term liabilities, and concurrently, deferred tax balances were modified for these changes. Retained earnings as of January 1, 2007 increased by $3,182 thousand and as of December 31, 2007 decreased by $1,777 thousand. Likewise, for jet-fuel hedge transactions, a debit-capital reserve was created in the opening balance sheet as of January 1, 2007 of $1,977 thousand and as of December 31, 2007, the capital reserve balance is $21,582 thousand credit.

C-109 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 25 - FINANCIAL INFORMATION ACCORDING TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) (Cont.) e. Additional information (cont.)

4. Options (Series 1) that were issued by the Company in the past, and which have a CPI-linked exercise price, and is not in the Company's functional currency, constitute a financial liability because their exercise price is not a fixed amount. According to IAS 32, the liability for these options is to be recorded in the opening balance sheet in other short-term liabilities (since their exercise date is in 2007) at their fair value. The changes in fair value during the subsequent periods are charged to the statement of operations periodically. When the options are exercised the above liability is added to the premium, such that the underlying shares will be recorded at their fair value. These options were exercised by June 2007.

Consequently, other current liabilities increased (against a decrease in retained earnings) as of January 1, 2007 by $19,930. As of December 31, 2007, the options had already been exercised and as a result, the premium item increased (against a decrease in retained earnings) by $18,759 thousand.

5. According to Israeli GAAP, deferred tax assets and provisions were classified as current or non-current assets or current or non-current liabilities, based on the classification of the assets or liabilities for which they were created. According to IAS 1, deferred tax assets and provisions (as applicable) are classified as non- current assets or provisions, net, even if their exercise date is expected to be in the short-term.

Consequently, $32,013 thousand and $20,161 thousand were classified as of January 1, 2007 and December 31, 2007, respectively from deferred taxes receivable in current assets to deferred taxes in non-current liabilities.

6. According to Israeli GAAP, financing income and expense are included in the statement of operations as a single amount. According to international standards, financing expenses and financing income are to be stated separately.

Consequently, financing expenses of $61,069 thousand and financing income of $20,329 thousand were presented separately for the year ended December 31, 2007.

7. According to international standards, other income and expenses will no longer be included as a separate item after financing income and expenses, as had been the presentation according to Israeli GAAP, but will be included in operating income. Accordingly, in the year ended December 31, 2007, other income, net, of $2,423 thousand was classified in operating income.

C-110 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 25 - FINANCIAL INFORMATION ACCORDING TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) (Cont.) f. Exceptions from retroactive application of IFRS Standards adopted by the Company:

IFRS 1 includes several exceptions, for which the retroactive application requirement does not apply. Presented below are those exceptions selected by the Company for application in its opening IFRS balance sheet as of January 1 (hereafter - "the opening balance sheet").

1. Employee benefits – The Company applies the "corridor" approach for recognition of actuarial gains and losses, in accordance with the provisions of IAS 19. The Company elected to recognize all actuarial gains and losses that accrued until January 1, 2007 in retained earnings.

2. Hedge accounting – Jet-fuel hedge transactions, which constitute a cash flows hedge, and which fulfill the hedging requirements of IAS 39, but do not fulfill the requirements of specific designation and documentation, were classified on the transition date as hedge transactions. This is after the Company met the specific designation and documentation of the hedge relationship of these instruments, by the transition date.

NOTE 26 - SUBSEQUENT EVENTS

1. On January 27, 2008, the Government reached a decision, the highlights of which are:

A. Increasing the State's rate of participation in the burden of security expenses of Israeli airlines to 80% of total direct expenses of operation of existing and future international routes (compared with the present rate of 50%).

B. Amendment of the decision by the Ministerial Committee for Social and Economic Matters from May 19, 2003 regarding the aviation policy of the State of Israel on scheduled routes. The previous decision stipulated that the Company would continue to serve as the designated carrier on all routes on which it had served as designated carrier immediately prior to publication of the Company's prospectus in 2003. The prior decision also included conditions and considerations allowing the Minister of Transport to revoke the Company's status as designated carrier on a certain route and/or to grant the right as additional Israeli designated carrier on a certain route, and stipulated that the policy would consider whether and when the volume of inbound and outbound passenger air traffic exceeds 10.7 million in a year.

The Government's decision reached on January 27, 2008 provided that the guiding considerations would be revoked, and instead, it was stipulated that the Minister of Transport, within the scope of his considerations with respect to aviation policy, according to his authorities by law, will consider whether to grant the rights of additional designated carrier on scheduled air routes, and will consider whether to revoke the Company's status as designated carrier on a specific route.

The Company's board of directors resolved that the Government's decision is acceptable to it, in view of the increase in the rate of the State's participation in the security expenses burden of Israeli airlines, and based on the declaration included in the Government's decision regarding the trend to enable Israeli airlines to contend, to the extent possible, in fair and equal competition against foreign airlines, while recognizing the need for the existence of strong Israeli aviation.

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EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 26 - SUBSEQUENT EVENTS (Cont.)

2. On March 16, 2008, an agreement was signed between the Company and the aircraft manufacturer "Boeing", whereby the Company would purchase four new model 777-200 ER planes from Boeing.

These planes, which will be equipped with "Rolls Royce" engines, are expected to join the Company's passenger fleet for intermediate and long-range flights, and will have the format of 279 seats. The planes will be supplied to the Company in January 2012, April 2012, November 2012 and January 2013.

The total purchase cost of the four planes, including spare parts and installations needed to tailor them to the Company's needs, is $540 million.

According to the agreement with Boeing, the payments for each plane will be in only two years before the planes are supplied to the Company. At this stage, the Company has not reached a final decision on the way to finance the transaction, and the Company is evaluating different possibilities.

Pursuant to the agreement, the Company was given the option to convert the purchase to new 777- 300 ER aircraft (which will be equipped with General Electric engines), having the format of 348 seats. The exercise of the option is subject to the Company's decision, which will be reached by December 31, 2008. Exercise of the option involves changing terms of the agreement, although the dates of supply of the planes will remain unchanged.

Likewise, the agreement contains an additional option granted to the Company to purchase two additional planes of this model, to be supplied to the Company in the years 2014-2015, according to the terms stipulated in the agreement.

The agreement is subject to the ratification of the Company's board of directors, which pursuant to the agreement, must be reached not later than May 1, 2008.

The Company is examining its existing fleet and the adaptations needed, in view of the purchase agreement, additional agreements to purchase planes (as reported by the Company) and according to the Company's business strategy of "El Al 2010".

C-112 Free Translation of the Hebrew Language 2007 Annual Report - Hebrew Wording Binding

EL AL ISRAEL AIRLINES LTD. NOTES TO THE FINANCIAL STATEMENTS

NOTE 26 - SUBSEQUENT EVENTS (Cont.)

3. On December 4, 2007, the Company's board of directors approved the purchase of new Boeing 737-800 planes.

Subsequent to the balance sheet date, on February 18, 2008, a memorandum of understanding was signed between the Company and a Spanish airline, whereby at this stage, 3 new planes of this model will be purchased. The planes are expected to be received during 2009. An estimate of the total investment for the purchase of these three planes, including the investments needed by the Company to integrate them, is estimated at $145 million. Internal financing resources are expected to be 15% of the price of the planes, and the balance will be financed by loans.

This purchase conforms to the Company's business strategy to gradually refresh its aircraft fleet, in accordance with the principles of the "El Al 2010" business strategy.

The purchase of planes is subject to conditions including the completion of negotiations and signing of a contract with the holder of the rights to the planes, and is contingent on receiving adequate financing from financial institutions.

4. On January 10, 2008, the Company signed an agreement to purchase a 747-400 aircraft. The plane, manufactured in 1994, will be supplied to the Company not later than December 2008.

The consideration that the Company will pay for the plane's purchase and for the investments in its integration in the Company, and the cost of additions and installations that will be made in the plane to customize it to the Company's needs, totals $50 million. The proceeds will be paid upon receipt of the aircraft.

The independent financing resources are estimated at $10 million, with the balance to be financed through loans pursuant to a long-term credit agreement with a foreign bank.

The purchase of the plane conforms to the Company's business strategy, "El Al 2010", pursuant to which the Company continues to evaluate its equipment needs.

C-113 Translation of the Hebrew Language financial statements

EL AL ISRAEL AIRLINES LTD. APPENDIX A TO THE FINANCIAL STATEMENTS

DETAILS CONCERNING MAJOR ACTIVE INVESTEES AS OF DECEMBER 31, 2007

Control and ownership as of the balance-sheet date Company Business activity (%)

Subsidiaries

Bornstein Caterers Inc. (USA) Production and supply of airline meals 100.0

Tamam Aircraft Food Industries (Ben-Gurion Airport) Ltd. Production and supply of airline meals 100.0

Sun D'Or International Airlines Ltd. Operation of charter flights 100.0

Superstar Holidays Ltd.(Britain) Marketing of tour packages 100.0

Katit Ltd. Supplying meals to employees 100.0

Affiliates

Sabre Israel Travel Technologies Ltd. Management of flight ticket orders 49.0

Kavei Chufsha. Ltd. Marketing of tourism services 20.0

Other investees

Airtour Israel Ltd. Grouping flight tickets - (1)

Air Consolitours Israel Ltd. (ACI) Grouping cargo - (2)

Notes:

(1) The shares held by the Company grant it the right to participate and vote in its company's General Meetings (at the rate of 50%) and to appoint half of the directors, without the right to receive any profits.

(2) The ordinary shares held by the Company grant it the right to participate and vote in the company’s General Meetings and appoint half of the directors, without the right to receive any profits.

C-114