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 For Immediate Release                 31st March 2009

NANETTE REAL ESTATE GROUP N.V

(the 'GROUP') or ('Nanette') or (the 'Company')

Results for the year ended 31 December 2008

Nanette, the Central and Eastern European residential property development group (AIM:NAT), with real estate projects in Poland, Hungary, Romania, Croatia and Ukraine is very pleased to announce its results for the year ending 31 December 2008.

Financial Highlights

Operational Highlights

 

 

Oscar Kazanelson, Chief Executive Officer, commented:

'The past year has been extremely challenging for all property developers including us, although we continued to progress in the markets we operate. This year we have increased our land bank by almost 40%, mainly through expansion in the Hungarian market, where our group is well known and has a solid reputation, exploiting beneficially the funds raised in our recent bond issues.

Shaul Lotan, Chairman, commented:

'This year's results demonstrate to our investors and the market that Nanette continues to be a strong and solid company, despite of all the market turmoil and financial crisis. During this year we included an additional investment group as a strategic partner - the AI group and our existing partners, Lehman Brothers Real Estate Partners ('LBREP') and Rothschild, have extended their commitment to the joint venture by injecting more funds and increased their participating share with us.

Despite the challenging market conditions we have proven our capabilities to obtain an excellent level of project finance. 

2009 will not be an easy year to the financial markets and for real estate developers in particular, however we, at Nanette, have the confidence that our projects are secured and we can continue to progress as we planned'.  

Nanette's management will be discussing their financial results and can be available for questions in a conference call on Wednesday, 12.00, UK time, via UK access number:

0-800-404-9501, using access code: 2131#.

 

Enquiries:

Nanette Real Estate Group
Shaul Lotan, Chairman	+ 31 20 778 4141
Eyal Keltsh	+48 606141201
KBC Peel Hunt	+44 (020) 7418 8900
Capel Irwin
Nicholas Marren
Global Equity IR	+44-(0)7956 206 270
Amira Bardichev

 

Chairman's Statement 

I hereby present to you this year's results. It was a challenging year for us and for most real estate developers, however we managed to complete the year with positive results and to secure sufficient means to allow Nanette not only to pass this period but also to be prepared for its future opportunities. We started the year with the completion of the reorganization process in Poland and a few months later we managed to conclude a bond fundraisings in Israel, which has and will enable the Group to take advantage of the growth opportunities that exist in Central and East Europe (CEE).

The Group was admitted to AIM in June 2006 with plots secured in Warsaw, Poland and Budapest, Hungary. These locations have given the Group a solid base and will continue to offer good opportunities. During 2008 we expanded our operations in Hungary, Poland, Romania and Ukraine; we entered into Ukraine by taking a 30% stake in a project done jointly with Olimpia Euro Construction.

Our partners in the projects, LBREP, Rothschild and our new partner AI group from the US, continue to be supportive and all the projects funding needs have been secured in full and on a timely manner.  

The Group raised bonds on the Tel Aviv stock exchange in the amount of € 24.5 million; we now have access to significant funds to accelerate the growth of the Group.

2008

The year has seen a significant increase in activity with approximately 776 completions (2007: 593). The completions were divided into 412 units in Poland and 364 units in Hungary. We pride ourselves on providing a good quality product in prime locations - as has been the case in both Warsaw and Budapest. Warsaw, in particular, has a strong demand for good quality housing and provides opportunities for us to make reasonable returns. The global market has become tougher during the year and with the economic crisis around the world and in our local region , sales have been down throughout the markets as, people are more careful and very selective in choosing their apartment purchase. Our well known reputation in Hungary and Poland is a major factor in our success, although competition in the market has also intensified over the last year. Budapest is a more mature market, but continues to provide opportunities for us as we represent one of the major developers in the city. 

At the end of 2006 we had 16 plots in 2 countries and by the end of 2007 we had increased that number to 27 in 5 countries. The land-bank typically consists of sites with varying planning consents and some will be held for several while planning is approved or amended in order to provide the Group with the best possible development.

The profit for the year is €6.3m (2007: €22.6m). The Group ended the year with €22m of net cash.

Dividend

During 2008 Nanette distributed to its shareholders €11m of dividends, Nanette has a dividend policy of distribution 30% of the annual net profit, the management and the board agreed not to distribute any dividends this year in order to maintain sufficient reserve of cash in the company. 

    

Board

The Board of Directors was established in its current form following the admission to AIM. I would like to thank the Executive team together with their colleagues for the progress that has been made in 2008. I also appreciate the time and commitment that the Non Executive Directors have provided to the Group in what has proven to be a busy period. Mr. Oskar Kazanelson continues to identify exciting opportunities and I would like to thank him especially for the growth that has been achieved.

Due to market condition our board had unanimously agreed on a 10% salary cut for all board members and position holders in the company.

This year, our board expanded with an additional non executive board member, Mr. David Dekel with major background in economics and marketing.

Outlook

The world's financial crisis is far from being over, we believe that the region will perform better than other markets and will provide considerable growth opportunity even in these harsh times, due to the continued projected economic growth and further economic liberalisation of the new EU members and candidates. 

Whilst we will continue to develop sites in the cities in which we commenced operations - in Poland: Warsaw, Gdansk, Wroclaw; in Hungary: Budapest; in Romania: Bucharest and Timisuara; in Croatia: Zagreb; and in Ukraine: Kiev. Our desire and appetite for growth has been implemented in our expansion. We will maintain our light footed approach and consider other projects in the countries we operate in the region if the project fits our requirements and investment parameters. In addition, we may see opportunities to sell parcels of land which we will do so if the available returns are sufficient.

The funds available to the Group are significant and together with our partners, in specific sites, we are confident that the region provides exciting opportunities to progress the Group.

The results announcement for the year ended 31 December 2008 is audited. The financial information contained in this announcement does not constitute statutory accounts for the year ended 31 December 2008. The statutory accounts for the year ended 31 December 2008 will be finalized on the basis of the financial information presented by the directors in the announcement and will be delivered to the Registrar of Companies following the company's Annual General Meeting.

Shaul Lotan, Chairman of the Board

CONSOLIDATED BALANCE SHEETS

Euro in thousands

				December 31,
		Note		2008		2007
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		3		22,056		70,905
Deposits		4		22,657		15,051
Trade and other receivables		5		7,351		13,336
Inventory of land and housing units		6		24,330		85,868
				76,394		185,160
NON-CURRENT ASSETS:
Land		6		43,130		16,634
Investment property		7		17,036		18,402
Investment in associates		8		52,114		-
Furniture and equipment, net				170		162
Other financial assets		10		16,746		35,298
Goodwill		11		455		2,302
Deferred tax asset		13c		357		708
				130,008		73,506
Total assets				206,402		258,666

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED BALANCE SHEETS

Euro in thousands

				December 31,
		Note		2008		2007
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Interest-bearing loans and borrowings		12		32,929		29,844
Trade and other payables		14		6,302		22,598
Customer advances		6		9,484		22,194
				48,715		74,636
NON-CURRENT LIABILITIES:
Interest-bearing loans and borrowings		12		75,206		91,546
Other liabilities		18		2,482		715
Deferred tax liability		13c		96		2,874
				77,784		95,135
Total liabilities				126,499		169,771
EQUITY:
Equity attributable to equity holders of the parent:
Share capital		17		3,449		3,435
Share premium				67,473		67,415
Treasury shares				(527)		-
Other reserves		17		486		(58)
Retained earnings				8,906		17,535
				79,787		88,327
Minority interests				116		568
Total equity				79,903		88,895
Total liabilities and equity				206,402		258,666

The accompanying notes are an integral part of the consolidated financial statements.

March 30, 2009
Date of approval of		Shaul Lotan		Oscar Katzenelson		Ran Jacobs
financial statements		Chairman of the  Board of Directors		Director and CEO		Director and CFO

CONSOLIDATED INCOME STATEMENTS 

Euro in thousands (except per share data)

				Year ended December 31,
		Note		2008		2007		2006
Revenues				26,529		33,174		31,869
Cost of revenues				20,921		25,936		25,520
Gross profit				5,608		7,238		6,349
Fair value adjustment of investment property, net		7		1,969		5,122		-
				7,577		12,360		6,349
Marketing, general and administrative expenses		20		6,351		5,966		3,358
Operating profit				1,226		6,394		2,991
Finance costs		21		(27,685)		(16,034)		(3,602)
Finance income		21		25,272		23,654		5,835
Share in profit of associates		8		1,180		-		-
Other income		22		6,330		8,621		4,216
Profit before taxes on income				6,323		22,635		9,440
Taxes on income		13		701		2,555		1,079
Profit for the year				5,622		20,080		8,361
Attributable to:
Equity holders of the parent				5,529		19,270		7,031
Minority interests				93		810		1,330
				5,622		20,080		8,361
Earnings per share attributable to equity holders of the parent (in Euro):		23
Basic and diluted				0.03		0.12		0.06

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY 

Euro in thousands

		Attributable to equity holders of the parent
		Share		Share		Treasury		Other		Retained				Minority		Total
		capital		premium		shares		reserves		earnings		Total		interests		equity
Balance at January 1, 2006		2,400		8,422		-		2,498		(1,194)		12,126		841		12,967
Currency translation differences		-		-		-		(1,246)		-		(1,246)		73		(1,173)
Profit for the year		-		-		-		-		7,031		7,031		1,330		8,361
Total recognized profit for 2006		-		-		-		(1,246)		7,031		5,785		1,403		7,188
Share-based compensation				275		-		-		-		275		-		275
Transfer of revaluation reserve upon disposal of inventory		-		-		-		(493)		493		-		-		-
Issue of share capital		260		11,827		-		-		-		12,087		-		12,087
Dividend to minority interest		-		-		-		-		-		-		(12)		(12)
Disposal of subsidiary		-		-		-		-		-		-		32		32
Acquisition of subsidiary		-		-		-		-		-		-		4		4
Acquisition of minority interest		-		-		-		-		-		-		(368)		(368)
		260		12,102		-		(493)		493		12,362		(344)		12,018
Balance at December 31, 2006		2,660		20,524		-		759		6,330		30,273		1,900		32,173
Currency translation differences		-		-		-		(4,735)		-		(4,735)		183		(4,552)
Reclassification upon sale of shares of subsidiaries *)		-		-		-		(110)		-		(110)		-		(110)
Profit for the year		-		-		-		-		19,270		19,270		810		20,080
Total recognized profit for 2007		-		-		-		(4,845)		19,270		14,425		993		15,418
Share-based compensation		-		47		-		-		-		47		-		47
Transfer of revaluation reserve upon disposal of inventory		-		-		-		(160)		160		-		-		-
Issue of share capital, net		775		46,844				-		-		47,619		-		47,619
Dividend paid		-		-		-		-		(4,037)		(4,037)		-		(4,037)
Dividend to minority interest		-		-		-		-		-		-		(576)		(576)
Sale of shares of subsidiaries		-		-		-		-		-		-		(161)		(161)
Acquisition of minority interest		-		-		-		-		-		-		(1,588)		(1,588)
Reclassification according to statutory requirements		-		-		-		4,188		(4,188)		-		-		-
		775		46,891		-		4,028		(8,065)		43,629		(2,325)		41,304
Balance at December 31, 2007		3,435		67,415		-		(58)		17,535		88,327		568		88,895
Currency translation differences		-		-		-		(2,211)		-		(2,211)		29		(2,182)
Reclassification upon sale of shares of subsidiaries		-		-		-		(408)		-		(408)		-		(408)
Profit for the year		-		-		-		-		5,529		5,529		93		5,622
Total recognized profit for 2008		-		-		-		(2,619)		5,529		2,910		122		3,032
Exercise of options		14		58		-		-		-		72		-		72
Treasury shares		-		-		(527)		-		-		(527)		-		(527)
Dividend paid		-		-		-		-		(10,995)		(10,995)		-		(10,995)
Dividend to minority interest		-		-		-		-		-		-		(159)		(159)
Acquisition of minority interest		-		-		-		-		-		-		(415)		(415)
Reclassification according to statutory requirements		-		-		-		3,163		(3,163)		-		-		-
		14		58		(527)		3,163		(14,158)		(11,450)		(574)		(12,024)
Balance at December 31, 2008		3,449		67,473		(527)		486		8,906		79,787		116		79,903

*)    Reclassified.

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED CASH FLOWS STATEMENTS

Euro in thousands

		Year ended December 31,
		2008		2007		2006
Cash flows from operating activities:
Profit for the year		5,622		20,080		8,361
Adjustments for:
Non-cash:
Depreciation		40		87		44
Finance costs		27,685		16,034		3,602
Finance income		(25,272)		(23,654)		(5,835)
Share-based compensation		-		47		275
Taxes on income		701		2,555		1,079
Other non-cash expenses		370		-		-
Gain on sale of interest in joint ventures and subsidiaries  (Note 22)		(6,527)		(8,314)		(4,183)
Share in profit of associates		(1,180)		-		-
Fair value adjustment of investment property (Note 7)		(1,969)		(5,122)		-
		(6,152)		(18,367)		(5,018)
Working capital adjustments:
Increase in trade and other receivables		(1,114)		(8,670)		(3,009)
Increase in inventory of land and housing units		(29,310)		(43,733)		(20,768)
Increase (decrease) in trade and other payables		(4,014)		9,504		12,934
Increase (decrease) in customer advances		2,462		12,012		(183)
		(31,976)		(30,887)		(11,026)
Interest paid		(9,294)		(4,607)		(2,121)
Interest received		8,973		9,686		242
Income tax paid		(958)		(2,500)		(725)
		(1,279)		2,579		(2,604)
Net cash used in operating activities		(33,785)		(26,595)		(10,287)
Cash flows from investing activities:
Acquisition of subsidiaries, net of cash acquired (a)		(29,855)		(1,277)		(1,091)
Proceeds from disposal of interest in subsidiary, net (b)		-		(72)		2,739
Proceeds from sale of interest in subsidiary to minority shareholders		-		-		11
Proceeds (reduction in cash) upon sale of interest in jointly controlled entity		-		8,564		(1)
Deconsolidation of proportionately consolidated company (c)		(4,624)		-		-
Acquisition of additional interest in proportionately consolidated company		-		(825)		(2,072)
Company proportionately consolidated for the first time (formerly an associate)		-		-		(2,654)
Initially proportionately consolidated company (formerly a subsidiary) (d)		24,152		-		-
Acquisition of minority interest in subsidiaries		-		(5,497)		(2,306)
Exercise of option granted to minority (Note 7(2))		(582)		-		-
Loans granted, net		(5,862)		(2,609)		(2,627)
Restricted bank deposits, net		(12,735)		9,788		(13,492)
Purchase of land held as investment property		-		(5,744)		(12,474)
Purchases of furniture and equipment		(74)		(131)		(62)
Net cash used in investing activities		(29,580)		2,197		(34,029)

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED CASH FLOWS STATEMENTS

Euro in thousands

		Year ended December 31,
		2008		2007		2006
Cash flows from financing activities:
Short-term loans, net		2,995		7,076		(726)
Issue of share capital, net of issue costs		-		47,619		12,087
Dividends paid to minority interest		-		(457)		-
Issue of debentures, net of issue costs (Note 12d.3)		24,402		38,376		9,809
Repayments of debentures		(18,025)		(5,552)		-
Receipt of long-term loans		32,363		51,600		33,216
Repayments of long-term loans		(14,584)		(42,186)		(12,072)
Dividend paid (Note 16)		(10,995)		(4,037)		-
Exercise of options		72		-		-
Purchase of treasury shares		(527)		-		-
Net cash provided by financing activities		15,701		92,439		42,314
Effect of exchange rate changes on cash and cash equivalents		(1,185)		(2,647)		11
Increase (decrease) in cash and cash equivalents		(48,849)		65,394		(1,991)
Cash and cash equivalents at beginning of year		70,905		5,511		7,502
Cash and cash equivalents at end of year		22,056		70,905		5,511

Supplementary information on investing and financing activities not involving cash flows:

1.    As of December 31, 2008, subsidiaries had current liabilities of € 83, in respect of a dividend, which had been declared but had not yet been paid to the minority interests (2007 - € 119, 2006 - € 12). 

2.    Acquisition of minority interest in subsidiary through investment in equity of the subsidiary (dilution of minority interest). 

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED CASH FLOWS STATEMENTS

Euro in thousands

			Year ended December 31,
			2008		2007		2006
(a)	Acquisition of subsidiaries, net of cash acquired
	Assets and liabilities at date of acquisition:
	Working capital (excluding cash and cash equivalents)		3,713		(1,277)		(1,080)
	Land		-		-		(1,202)
	Investment property		(33,568)		-		-
	Long-term liabilities		-		-		161
	Long-term receivables		-		-		1,034
	Minority interests		-		-		(4)
			(29,855)		(1,277)		(1,091)
(b)	Proceeds from disposal of interest in subsidiary
	Assets and liabilities at date of sale:
	Working capital (excluding cash and cash equivalents)		-		14,102		12,601
	Investment properties		-		-		6,503
	Long-term receivables		-		(15,030)		(11,014)
	Fixed assets		-		-		5
	Goodwill		-		121		70
	Long-term liabilities		-		(657)		(9,501)
	Minority interest		-		(161)		32
	Investment in associate		-		-		947
	Currency translation adjustment		-		110		-
	Gain on disposal		-		1,443		3,096
			-		(72)		2,739
(c)	Deconsolidation of proportionately consolidated company
	Assets and liabilities at date of deconsolidation  (see Note 8e):
	Working capital (excluding cash and cash equivalents)		49,336		-		-
	Furniture and equipment		26		-		-
	Investment property		10,515		-		-
	Goodwill		1,085		-		-
	Deferred taxes		(1,900)		-		-
	Long-term receivables		(11,848)		-		-
	Long-term liabilities		(39,205)		-		-
	Investment in associate		(12,633)		-		-
			(4,624)		-		-

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED CASH FLOWS STATEMENTS

Euro in thousands

			Year ended December 31,
			2008		2007		2006
(d)	Initially proportionately consolidated company (former subsidiary)
	Assets and liabilities at date of sale:
	Working capital (excluding cash and cash equivalents)		(2,227)		-		-
	Investment properties		26,812		-		-
	Long-term receivables		(6,113)		-		-
	Long-term liabilities		5,026		-		-
	Deferred taxes		(207)		-		-
	Currency translation adjustment		(407)		-		-
	Gain on disposal		1,268		-		-
			24,152		-		-

The accompanying notes are an integral part of the consolidated financial statements.

NOTE 1:-    GENERAL

       a.    Corporation information:

The consolidated financial statements of Nanette Real Estate Group N.V. ('the Company') for the year ended December 31, 2008, were authorized for issue in accordance with a resolution of the directors on March 30, 2009. 

The Company is a limited liability company incorporated and domiciled in the Netherlands. The address of its registered office is Rapenburgerstraat 204, 1011 Mn Amsterdam, the Netherlands. The Company's shares are publicly traded on the AIM in London. In addition, the Company has debentures outstanding which are registered for trading on the Tel-Aviv Stock Exchange.

The Company and its investee companies ('the Group') are engaged in the development, construction and sale of real estate housing projects in Hungary, Poland, Romania, Croatia and Ukraine (see Note 25, for information on the Group's operating segments). 

Regarding the reorganization of the Company's operations in Poland in April 2008, see Note 8e.

b.    Impact of financial market crisis:

The ongoing crisis in the financial markets and the related worldwide recession could have an impact on property markets and property prices although its effects have not been uniform across all markets. As the global recession takes hold, its impacts on the various European and Global property markets will vary depending on many factors. These will include the size of the underlying markets, the extent of excessive capital growth in the past, diversification of tenant mix, general shape of the overall economy, reliance on the credit markets and investor mentality. These global factors contribute to instability and inactivity in real estate markets and could possibly have future negative consequences for the value of real estate assets and the results of the Company due to: declines in selling prices of residential units; write downs of inventories of land and housing units; potential increases of real estate yields and therefore decreases in value of investment properties; impairment of investments in associated companies and other assets.

The Company works in partnership with Lehman Brothers Real Estate Partners, ('LBREP') a series of distinct and segregated private equity funds, funded by multiple partners and not part of the Chapter 11 proceedings affecting Lehman Brothers. As of the date the financial statements were approved, all LBREP's funding obligations to the joint projects have been met.

The Company believes that its current resources and the funds to be generated from its operations will be sufficient to repay its obligations as they come due in the coming year.

NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES

a.    Basis of preparation:

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS(, on the historical cost basis, except for investment properties and derivative financial instruments that have been measured at fair value. The consolidated financial statements are presented in Euro and values are rounded to the nearest thousand (€000), except when otherwise indicated.

        b.    Basis of consolidation:

1.    The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at December 31 each year. The financial statements of subsidiaries, jointly controlled entities and associates are prepared for the same reporting year as the parent company, using consistent accounting policies.

2.    Subsidiaries are entities over which the Group has control. Subsidiaries are fully consolidated from the date on which the Group obtains control (see also l. below) and they continue to be consolidated until the date that control ceases. 

All intercompany balances and transactions between Group companies included in the consolidated financial statements have been eliminated.

3.    Minority interests represent the portion of profit or loss and net assets that is not held by the Group and are presented separately in the consolidated income statement and within equity in the consolidated balance sheet, separately form parent shareholders' equity. Sales to minority interests result in a gain or loss that is recognized in the income statement. Acquisition of minority shares at a cost which exceeds the carrying amount of the acquired net assets results in goodwill. 

4.    The Group's interests in jointly controlled entities are accounted for by proportionate consolidation. The Group combines its share of the joint ventures' individual income and expenses, assets and liabilities and cash flows on a line-by-line basis with similar items in the Group's financial statements. 

c.    Changes in accounting policy and disclosures:

The accounting policies adopted are consistent with those of the previous financial year except as follows:

The Group has adopted the following new IFRIC interpretation as of January 1, 2008:

IFRIC 11/IFRS2 - Group and Treasury Share Transactions

The Group has adopted IFRIC Interpretation 11 insofar as it applies to consolidated financial statements. This interpretation requires arrangements whereby an employee is granted rights to an entity's equity instruments to be accounted for as an equity-settled scheme, even if the entity buys the instruments from another party, or the shareholders provide the equity instruments needed. The Group amended its accounting policy accordingly. Adoption of this interpretation did not have any effect on the financial performance or position of the Group.

d.    Significant estimates and assumptions:

The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Investment properties

Investment properties are presented at fair value as at the balance sheet date. Any changes in the fair value are included in the income statement. Fair value is determined by independent real estate valuation experts in accordance with recognised valuation techniques. The fair values are determined based on recent real estate transactions with similar characteristics and location to those of the Company's assets. See additional information in Note 7. 

Certain market conditions prevalent at the valuation date, such as reduced liquidity available to purchasers, coupled with an increase in the cost of financing, a scarcity of comparable transactions in certain countries, and an overall lack of market place activity, significantly increases subjectivity of the valuation process.

Impairment of goodwill 

The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make key assumptions in respect of the expected future cash flows from the cash-generating unit and an appropriate discount rate in order to calculate the present values of those cash flows. See additional information in Note 11.

Fair value of financial instruments

Where the fair value of financial assets and financial liabilities recorded in the balance sheet cannot be derived from active markets, they are determined using valuation techniques including the discounted cash flows model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments.

       e.    Functional currency:

Items included in the financial statements of each of the Group entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). Until December 31, 2007, the functional currency of the Company was the U.S. dollar. At the end of 2007, the Company re-evaluated the factors used in determining its functional currency, including the currency in which the Company's revenues and its costs are denominated and settled. Based on this revaluation, the Company concluded that the Euro better reflects the primary economic environment in which the Company is now operating, and therefore, the Euro is the Company's functional currency commencing in 2008. In accordance with IAS 21, The Effects of Change in Foreign Exchange Rates, the change in functional currency from the U.S. dollar to the Euro was accounted for prospectively.

Foreign currency transactions are translated into the functional currency using exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement.

        f.    Presentation currency:

The consolidated financial statements are presented in Euro.

The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a different functional currency from the presentation currency are translated into the presentation currency as follows:

a)    Assets and liabilities for each balance sheet presented are translated at the closing rate at that balance sheet date;

b)    Income and expenses for each income statement are translated at weighted average exchange rates; and

c)    All resulting exchange differences are recognized as a separate component of equity.

When an entity is disposed of, such exchange differences are recognized in the income statement as part of the gain or loss on sale.

        g.    Cash and cash equivalents:

Cash equivalents include cash in hand and deposits with banks and other short-term highly liquid investments with original maturities of three months or less.

        h.    Furniture and equipment:

Furniture and equipment are stated at cost, less accumulated depreciation and accumulated impairment losses. These assets are depreciated by the straight-line method over their estimated useful life (mainly three years).

i.    Investment in associates:

The Group's investment in associates is accounted for using the equity method of accounting. An associate is an entity in which the Group has significant influence and which is neither a subsidiary nor a joint venture. 

Under the equity method, the investment in the associate is carried in the balance sheet at cost plus post acquisition changes in the Group's share of net assets of the associate. Goodwill relating to the associate is included in the carrying amount of the investment and is not amortized. The statement of income reflects the share of the results of operations of the associate. Where there has been a change recognized directly in the equity of the associate, the Group recognizes its share of any changes and discloses this, when applicable, in the statement of changes in equity. Profits and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate.

The financial statements of the associate are prepared for the same reporting period as the parent company. Where necessary, adjustments are made to bring the accounting policies in line with those of the Group.

j.    Impairment of associates:

After application of the equity method, the Group determines whether it is necessary to recognize an additional impairment loss of the Group's investment in its associates. The Group determines at each balance sheet date whether there is any objective evidence that the investment in an associate is impaired. If this is the case, the Group calculates the amount of impairment as being the difference between the recoverable amount of the associate and the carrying amount of the investment and recognizes the amount in the statement of income.

        k.    Impairment of non-financial assets:

The Group assesses at each reporting date whether events or changes in circumstances indicate that an asset may be impaired. An impairment loss is recognized if the amount by which an asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and its value in use. In assessing value in use, the estimated future cash flows are discounted using a pre-tax discount rate that reflects current market assessments specific to the asset. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows.

       l.    Business combinations and goodwill:

Business combinations are accounted for using the purchase method. 

The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date irrespective of the extent of any minority interest.

When the Group acquires a business, embedded derivatives separated from the host contract by the acquiree are not reassessed on acquisition unless the business combination results in a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required under the contract.

In a business combination achieved in stages, the increase in the fair value of the identifiable net assets relating to the interest held prior to the business combination is recognized as an asset revaluation surplus in equity.

Goodwill is initially measured at cost being the excess of the cost of the business combination over the Group's share in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities. 

Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.

The Group assesses whether there are any indicators that goodwill is impaired at each reporting date. Goodwill is tested for impairment, annually and when circumstances indicate that the carrying value may be impaired.

Impairment is determined for goodwill by assessing the recoverable amount of the cash-generating units, to which the goodwill relates. Where the recoverable amount of the cash-generating units is less than their carrying amount an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods. The Group performs its annual impairment test of goodwill in the last quarter of the year.

       m.    Inventories:

Inventories of housing units under construction are stated at the lower of cost and net realizable value. The cost of inventories includes the cost of the land, construction costs and capitalized borrowing costs.

The Company measures its operating cycle based on the average construction time of the construction projects. The operating cycle for purposes of classification of inventories is two to three years.

       n.    Investment properties:

Investment properties are measured initially at cost, including transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met; and excludes the costs of day to day servicing of an investment property. Subsequent to initial recognition, investment properties are stated at fair value, which reflects market conditions at the balance sheet date. Gains or losses arising from changes in the fair values of investment properties are included in the income statement in the year in which they arise.

Investment properties are derecognized when either they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognized in the income statement in the year of retirement or disposal. 

                   o.    Derecognition of financial assets and liabilities:

Financial assets

A financial asset is derecognised when:

• the rights to receive cash flows from the asset have expired;

•     the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass through arrangement; and

• the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Group has transferred its rights to receive cash flows from the asset and has neither transferred nor retained substantially all the risks and rewards of the asset, but retains control, the asset is recognised to the extent of the Group's continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

Where continuing involvement takes the form of a written and/or purchased option on the transferred asset, the extent of the Group's continuing involvement is the amount of the transferred asset that the Group may repurchase, except that in the case of a written put option on an asset measured at fair value, the extent of the Group's continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price.

Financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the income statement.

       p.    Interest-bearing loans and borrowings:

All loans and borrowings are initially recognized at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the effective interest method. Gains and losses are recognized in the income statement when the liabilities are derecognized as well as through the amortization process.

       q.    Borrowing costs:

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of these assets, until such time as the assets are substantially ready for their intended use or sale.

Borrowing costs include exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

       r.    Loans and receivables:

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. 

Loans and receivables are recognized initially at fair value and subsequently measured at amortized cost less any allowance for impairment. An allowance for impairment is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of loans and receivables.

s.    Offsetting of financial instruments:

Financial assets and financial liabilities are offset and the net amount reported in the consolidated balance sheet if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously.

t.    Fair value of financial instruments:

The fair value of financial instruments that are actively traded in organized financial markets is determined by reference to quoted market bid prices at the close of business on the balance sheet date. For financial instruments where there is no active market, fair value is determined using valuation techniques. Such techniques may include using recent arm's length market transactions; reference to the current fair value of another instrument that is substantially the same; discounted cash flow analysis or other valuation models. 

u.    Amortized cost of financial instruments:

Amortized cost is computed using the effective interest method less any allowance for impairment and principal repayment or reduction. The calculation takes into account any premium or discount on acquisition and includes transaction costs and fees that are an integral part of the effective interest rate.

v.    Impairment of financial assets: 

The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred 'loss event') and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

       w.    Income tax:

Current income tax

Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date.

Deferred income tax

Deferred income tax is provided using the liability method on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither the accounting nor taxable profit, it is not accounted for.

Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized, or the deferred income tax liability is settled.

Deferred income tax assets are recognized to the extent that it is probable that future taxable profit will be available against which carryforward losses and deductible temporary differences can be utilized.

Deferred income tax liabilities are not recognized for taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets and deferred tax liabilities are offset only if they relate to the same taxable entity and that entity has a legally enforceable right to offset those assets against the liabilities.

        x.    Revenue recognition:

1.    Sale of housing units:

Revenue from sales of housing units is recognized when the significant risks and rewards of ownership have been passed to the buyer, it is probable that the economic benefits associated with the transaction will flow to the Group and provided that the Group has no further substantial obligations under the contract.

The significant risks and rewards are considered to be transferred to the buyer when the housing units have been constructed, accepted by the customer and the consideration was paid by the buyer. Until such time, any unsold or uncompleted residential units are accounted for under inventories.

2.    Interest income:

Interest income is recognized as interest accrues using the effective interest method.

y.    Treasury shares:

Own equity instruments which are reacquired (treasury shares) are recognised at cost and are presented in the balance sheet as a deduction from shareholders' equity. No gain or loss is recognized in the income statement on the sales, issuance, or cancellation of treasury shares.

Consideration received is presented in the financial statements as a change in shareholders' equity.

Shares of the parent company purchased by subsidiaries are accounted for as treasury shares.

        z.    Share-based payment transactions:

The Company applies the provisions of IFRS 2, Share-Based Payment. IFRS 2 requires an expense to be recognized where the Group buys goods or services in exchange for shares or rights over shares ('equity-settled transactions'), or in exchange for other assets equivalent in value to a given number of shares of rights over shares ('cash-settled transactions'). The main impact of IFRS 2 on the Group is the expensing of employees' and directors' share options (equity-settled transactions).

The cost of equity-settled transactions with employees is measured by reference to the fair value at the date on which they are granted. The fair value is determined by using the Black-Scholes option-pricing model taking into account the terms and conditions upon which the instruments were granted. The fair values of Ordinary shares for the purpose of calculating the fair values of options and warrants were determined by management based on a number of factors, including external valuations.

The cost of equity-settled transactions is recognized, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award ('the vesting date'). The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Company's best estimate of the number of equity instruments that will ultimately vest.

aa.    Derivative financial instruments:

The Group uses derivative financial instruments such as interest rate swaps. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Any gains or losses arising from changes in fair value on derivatives are taken directly to profit or loss.

The fair value of interest rate swap contracts is determined by reference to market values for similar instruments.

The Group considers whether a contract contains an embedded derivative when the entity first becomes a party to it. The embedded derivatives are separated from the host contract, which is not measured at fair value through profit or loss, when the analysis shows that the economic characteristics and risks of embedded derivatives are not closely related to those of the host contract. Embedded derivatives are recognized at fair value when any change in fair value is taken directly to profit or loss.

bb.    Standards issued but not yet effective:

IFRS 3R Business Combinations and IAS 27R Consolidated and Separate Financial Statements

The revised standards were issued in January 2008 and become effective for financial years beginning on or after July 1, 2009. IFRS 3R introduces a number of changes in the accounting for business combinations occurring after this date that will impact the amount of goodwill recognized, the reported results in the period that an acquisition occurs, and future reported results. IAS 27R requires that a change in the ownership interest of a subsidiary (without loss of control) is accounted for as an equity transaction. Therefore, such transactions will no longer give rise to goodwill, nor will it give rise to a gain or loss. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. Other consequential amendments were made to IAS 7 Statement of Cash Flows, IAS 12 Income Taxes, IAS 21 The Effects of Changes in Foreign Exchange Rates, IAS 2 Investment in Associates and IAS 31 Interests in Joint Ventures. The changes by IFRS 3R and IAS 27R will affect future acquisitions or loss of control and transactions with minority interests. The standards may be early applied. However, the Group does not intend to take advantage of this possibility.

IAS 1 Revised Presentation of Financial Statements

The revised Standard was issued in September 2007 and becomes effective for financial years beginning on or after January 1, 2009. The Standard separates owner and non-owner changes in equity. The statement of changes in equity will include only details of transactions with owners, with non-owner changes in equity presented as a single line. In addition, the Standard introduces the statement of comprehensive income: it presents all items of recognized income and expense, either in one single statement, or in two linked statements. The Group is still evaluating whether it will have one or two statements.

IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial statements - Puttable Financial Instruments and Obligations Arising on liquidation

These amendments to IAS 32 and IAS 1 were issued in February 2008 and become effective for financial years beginning on or after January 1, 2009. The revisions provide limited scope exception for puttable instruments to be classified as equity if they fulfill a number of specified features. The amendment to the standards will have no impact on the financial position or performance of the Group, as the Group has not issued such instruments.

IAS 39 Financial Instruments: Recognition and Measurement - Eligible Hedged Items

These amendments to IAS 39 were issued in August 2008 and become effective for financial years beginning on or after July 1, 2009. The amendment addresses the designation of a one-sided risk in a hedged item, and the designation of inflation as a hedged risk or portion in particular situations. It clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as hedged item. The Group has concluded that the amendment will have no impact on the financial position or performance of the Group, as the Group has not entered into any such hedges.

Improvements to IFRSs

The Group has not yet adopted the following amendments and anticipates that these changes will have no material effect on the financial statements. 

1.    IFRS 7 Financial Instruments: Disclosures: 

Removal of the reference to 'total interest income' as a component of finance costs.

2.    IAS 8 Accounting Policies, Change in Accounting Estimates and Errors:

Clarification that only implementation guidance that is an integral part of an IFRS is mandatory when selecting accounting policies.

3.    IAS 10 Events after the Reporting Period:

Clarification that dividends declared after the end of the reporting period are not obligations.

4.    IAS 16 Property, Plant and Equipment:

Items of property, plant and equipment held for rental that are routinely sold in the ordinary course of business after rental, are transferred to inventory when rental ceases and they are held for sale.

5.    IAS 18 Revenues:

Replacement of the term 'direct costs' with 'transaction costs' as defined in IAS 39.

6.    IAS 19 Employee Benefits:

Revised the definition of 'past service costs' return on plan assets' and 'short-term' and 'other long-term' employee benefits. Amendments to plans that result in a reduction in benefits related to future services are accounted for as curtailment. Deleted the reference to the recognition of contingent liabilities to ensure consistency with IAS 37.

7.    IAS 20 Accounting for Government Grants and Disclosures of Government Assistance:    

    Loans granted in the future with no or low interest rates will not be exempt from the requirement to impute interest. The difference between the amount received and the discounted amount is accounted for as government grant. Also, revised various terms used to be consistent with other IFRS.

8.    IAS 27 Consolidated and Separate Financial Statements:

When a parent entity accounts for a subsidiary at fair value in accordance with IAS 39 in its separate financial statements, this treatment continues when the subsidiary is subsequently classified as held for sale.

9.    IAS 29 Financial Reporting in Hyperinflationary Economies:

Revised the reference to the exception to measure assets and liabilities at historical cost, such that it notes property, plant and equipment as being an example, rather than implying that it is a definitive list. Also, revised various terms used to be consistent with other IFRS.

10.    IAS 34 Interim Reporting:

Earnings per share are disclosed in interim financial reports if an entity is within the scope of IAS 33.

11.    IAS 39 Financial Instruments: Recognition and Measurement:

Changes in circumstances relating to derivatives are not reclassifications and therefore may be either removed from, or included in, the 'fair value through profit or loss' classification after initial recognition. Removed the reference in IAS 39 to a 'segment' when determining whether an instrument qualifies as a hedge. Requires the use of the revised effective interest rate when remeasuring a debt instrument on the cessation of fair value hedge accounting.

12.    IAS 40 Investment Property:

Revision of the scope such that property under construction or development for future use as an investment property is classified as investment property. If fair value can not be reliably determined, the investment under construction will be measured at cost until such time as fair value can be determined or construction is complete. Also, revised the conditions for a voluntary change in accounting policy to be consistent with IAS 8 and clarified that the carrying amount of investment property held under lease is the valuation obtained increased by any recognized liability.

IFRIC 15 Agreement for the Construction of Real Estate

IFRIC 15 was issued in July 2008 and becomes effective for financial years beginning on or after January 1, 2009. The interpretation is to be applied retrospectively. It clarifies when and how revenue and related expenses from the sale of a real estate unit should be recognized if an agreement between a developer and a buyer is reached before the construction of the real estate is completed. Furthermore, the interpretation provides guidance on how to determine whether an agreement is within the scope of IAS 11 or IAS 18. The Group has concluded that the interpretation will have no impact on the consolidated financial statements as the Group already applies the guidance.

IFRIC 16 Hedges of a Net Investment in a Foreign Operation

IFRIC 16 was issued in July 2008 and becomes effective for financial years beginning on or after October 1, 2008. The interpretation is to be applied prospectively. IFRIC 16 provides guidance on the accounting for a hedge of a net investment. As such it provides guidance on identifying the foreign currency risks that qualify for hedge of a net investment, where within the Group the hedging instruments can be held in the hedge of a net investment and how an entity should determine the amount of foreign currency gain or loss, relating to both the net investment and the hedging instrument, to be recycled on disposal of the net investment. The Group is currently assessing which accounting policy to adopt for the recycling on disposal of the net investment.

NOTE 3:-    CASH AND CASH EQUIVALENTS

				December 31,
				2008		2007
Cash at banks and in-hand				6,825		37,650
Short-term deposits				15,231		33,255
				22,056		70,905

The short-term deposits may be classified by currency, linkage terms and interest rates, as follows:

		Weighted average effective interest
		December 31,		December 31,
		2008		2008		2007
		%
U.S. dollars		-		-		1,482
Euro		3.79		6,502		10,429
Polish Zloty		6.84		8,317		21,344
Ron		12.00		412		-
				15,231		33,255

NOTE 4:-    DEPOSITS

		Weighted average effective interest
		December 31,		December 31,
		2008		2008		2007
		%
In Euro (1)		1.6		1,605		441
In Hungarian Forint (2)		10.61		21,052		9,985
In Polish Zloty				-		4,625
				22,657		15,051

(1)    The deposit is pledged to secure a cross currency swap (see Note 19(2)). Interest in respect of these deposits for the year ended December 31, 2008 is 1.6%.

(2)    The deposits are pledged to secure credit facilities granted to the Group and construction cost financing of the Group. Interest in respect of these deposits for the year ended December 31, 2008 is based on BUBOR per month with a margin of 0.5%-0.65%. The rate of the BUBOR as of December 31, 2008 is 10%.

NOTE 5:-    TRADE AND OTHER RECEIVABLES 

				December 31,
				2008		2007
Trade receivables				276		1,537
Prepaid expenses				368		745
Related parties (Note 24b)				898		-
Government authorities (principally VAT)				5,356		8,337
Payment on account of purchase of land				-		1,750
Advances to suppliers				354		818
Other				99		149
				7,351		13,336

NOTE 6:-    INVENTORY OF LAND AND HOUSING UNITS 

				December 31,
				2008		2007

a.    Composition:

Land and construction costs				64,628		97,756
Capitalized borrowing costs				2,832		4,746
				67,460		102,502

b.    Presentation:

Current				24,330		85,868
Non-current (*)				43,130		16,634
				67,460		102,502

(*)    Land on which construction is not intended to begin before the end of the Company's current operating cycle.

c.    The movement during the year:    

		December 31,
		2008		2007
Opening balance at January 1,		102,502		76,573
Additional costs incurred during the year		52,765		70,734
Disposal of subsidiaries (Note 8e)		(63,067)		(27,330)
Acquisition of subsidiaries		-		5,533
Transfer to the income statement upon disposal		(20,921)		(25,936)
Currency translation differences		(3,819)		2,928
Closing balance at December 31,		67,460		102,502

d.    The main projects included in the inventories are as follows:

Country		Project		Costs		Details
Hungry		Paty Plot		17,308		Residential project in Budapest
Hungary		Real prop		4,083		Residential project in Budapest
Hungary		Foodex		3,183		Residential project in Budapest
Hungary		Thokoly		8,158		Residential project in Budapest
Romania		Nanette City Gate		4,236		Residential project in Timisoara
Romania		Nanette Bucharest		4,110		Residential project in Bucharest
Romania		Savinesti		4,416		Residential project in Bucharest
Romania		Nanette Heights		1,284		Residential project in Timisoara
Poland		Gilianki		4,246		Residential project in Warsaw
Croatia		Nanette Borovje		13,365		Residential project in Zagreb

As of December 31, 2008, advances from customers amounted to € 9,484 (2007 - € 22,194). The advances are presented as short-term, since they will be utilized during the Company's operating cycle.

e.    As for pledges, see Note 15b.

NOTE 7:-    INVESTMENT PROPERTY

		December 31,
		2008		2007
Opening balance at January 1,		18,402		6,749
Additions:
Land and other costs (2)		33,568		5,744
Decrease in the Group's share in proportionately consolidated entity (2)		(26,812)		-
Fair value adjustment		1,969		5,122
Currency translation differences		424		787
Deconsolidation of proportionately consolidated company (Note 8e)		(10,515)		-
Closing balance at December 31,		17,036		18,402

(1)    The balance as of December 31, 2008 is comprised of two properties (primarily vacant land) located in Budapest, Hungary. Investment properties are stated at fair value, which has been determined based on valuations preformed by King Sturge Ltd., an independent external valuator who has expertise in valuing these types of properties.

In determining the fair value of the investment properties, the valuator relied on comparable arm's length market transactions for similar properties.

(2)    In April 2008, the Company acquired 90% of the issued and outstanding share capital, including loans, of Taltoring, for a consideration of approximately € 30,000. Taltoring is a Hungarian company, which owns a 153,000 sq.m. plot of land in Budapest, Hungary. The Company also signed an agreement with the municipality, the owner of the remaining 10% interest in Taltoring, according to which the municipality has an option (put) to sell to the Company its entire interest in Taltoring upon the approval of a new zoning plan for the plot, for a consideration of approximately € 2,200. The agreement also provides the Company with a (call) option to buy the municipality's interest at the same price. The put option may be exercised at any time during a three-year period beginning upon the completion of the first stage of the change in zoning. The call option may be exercised at any time during the period ending in April 2011. The Company recorded a liability for the full amount of the consideration of € 2,200.

In June 2008, the Company signed an agreement to sell to AI Property Holdings LP (Hungary) 50% of its interest (90%) in Taltoring (including the put/call options discussed above) for a consideration of € 16,950, of which € 12,000 is for outstanding loans and the balance is for the shares. The sale was subject to a right of first refusal by the municipality. In July 2008, the municipality notified the Company that it did not intend to exercise its right of first refusal. 

Following this transaction, the Company assigned its share (45%) in the issued and outstanding share capital of Taltoring and shareholders loans (including its share in the call option) to a wholly-owned subsidiary, EDR Construction Brasov B.V. ('EDR').

During the second quarter of 2008, following the above transaction, the Company signed an agreement to sell to Rothschild Group Unit E&R Real Estate 45% of its interest in EDR for € 7,500, of which € 7,160 is for outstanding loans and the balance is for the shares. 

In the third quarter of 2008, the above sales were completed and in the fourth quarter the option discussed above was exercised by the Municipality, the Company presently owns, indirectly through a jointly-controlled company, 27.5% of Taltoring. As a result of the sales, the Company recorded a gain of € 1,200.

NOTE 8:-    INVESTMENT IN ASSOCIATES

a.    Composition:

		December 31,
		2008		2007
Investment in associates		11,101		-
Loans to associates (f)		41,013		-
		52,114		-

  

b.    Share in the associates' balance sheets:

		December 31,
		2008		2007
Current assets		67,281		-
Non-current assets		38,568		-
Current liabilities		(18,774)		-
Non-current liabilities		(75,974)		-
Net assets		11,101		-

c.    Share in the associates' revenues and profits:

		Year ended December 31,
		2008		2007
Revenues		20,512		-
Profit		1,180		-

d.    During the first quarter of 2008, the Company acquired through a wholly-owned subsidiary 15% (of which 11% was acquired from a related party) of the issued and outstanding share capital of Osnova-C LLC ('Osnova-C'), for a nominal consideration of € 1. Osnova-C is a Ukrainian company that is the owner of a plot of land in Kiev, Ukraine. The Company also granted loans to Osnova-C in the total amount of $ 6,000 thousand (approximately € 4,000), at an annual interest rate of LIBOR with a margin of 5%. The repayment dates of the loans have not yet been determined. The investment in the Company is accounted for under the equity method. 

Subsequent to the balance sheet date, the Company acquired an additional 15% of Osnova-C (see Note 26b).

e.    In October 2007, the Company signed a memorandum of understandings with Lehman Brothers Real Estate Partners L.P. ('Lehman') to reorganize the holdings of the jointly-controlled Polish companies of the Company and of Lehman. The Company accounted for its investment in these Polish companies under the proportionate consolidation method. This reorganization was subject to court approval in Poland.

    In April 2008, the court approved the reorganization plan. Accordingly, the Company and Lehman each contributed their interests in all jointly-controlled Polish companies to a holding company (Robyg S.A.) established for this purpose. In consideration of the contribution, the Company and Lehman received an equal number of shares of Robyg S.A., thus retaining (indirectly) the joint ownership of the Polish companies. In addition, the collaboration agreement between the Company and Lehman was amended such that the Company and Lehman do not have joint control of Robyg S.A. Accordingly, commencing from the second quarter of 2008, the Company includes the accounts of Robyg S.A. under the equity method and, consequently, the Polish companies are no longer proportionately consolidated.

f.    Terms and conditions of loans to associates:

    

		Weighted average interest rate		December 31, 2008
		%
In Euros (1)		4.99 - 5.93		5,398
In U.S. dollars (2)		6.25		5,395
In Polish Zloty (3)		7.22 - 8.86		30,220
				41,013

    (1)    Interest in respect of these loans for the year ended December 31, 2008, is based on EURIBOR with a margin of 3% - 4%. The rate of EURIBOR as of December 31, 2008 is 2.89%.

    (2)    Interest in respect of these loans for the year ended December 31, 2008, is based on LIBOR with a margin of 3% - 5%. The rate of LIBOR as of December 31, 2008 is 1.42%.

    (3)    Interest in respect of these loans for the year ended December 31, 2008, is based on WIBOR with a margin of 1.5% - 3%. The rate of WIBOR as of December 31, 2008 is 5.88%.

    The repayment dates of these loans have not yet been determined.

NOTE 9:-    INTEREST IN PROPORTIONATELY CONSOLIDATED ENTITIES 

The Group's share in the assets, liabilities, income and expenses of the proportionately consolidated entities (see Appendix) at December 31, 2008 and 2007 and for the years then ended, which are included in the consolidated financial statements are as follows.

		December 31,
		2008		2007
Balance sheets:
Current assets		30,142		64,669
Non-current assets		19,585		25,965
		49,727		90,634
Current liabilities		(19,809)		(33,678)
Non-current liabilities		(14,890)		(27,811)
		(34,699)		(61,489)
		15,028		29,145

		Year ended December 31,
		2008		2007		2006
Income statements:
Revenues		12,832		7,570		8,216
Cost of revenues		(9,601)		(5,634)		(6,002)
Fair value adjustment of investment property		1,969		5,122		-
Marketing, general and administrative expenses		(779)		(763)		(288)
Finance costs		(5,649)		(2,645)		(634)
Finance income		3,416		1,063		753
Other expenses		(194)		-		-
Taxes on income		659		2,376		607
Net profit		1,335		2,337		1,438

NOTE 10:-     OTHER FINANCIAL ASSETS (NON-CURRENT)

		December 31,
		2008		2007
Loans to related parties (1)		16,615		35,298
Cross currency swap (2)		131		-
		16,746		35,298

(1)    For terms and conditions relating to loans to related parties, see Note 24.

(2)    See Note 19a.2.

NOTE 11:-    GOODWILL

a.    Cost:

		Total
At January 1, 2007		1,141
Acquisition of minority interests (Note 24a)		1,268
Disposal of interest in subsidiary		(121)
Currency translation differences		14
At December 31, 2007		2,302
Disposal of business activities of subsidiaries		(783)
Deconsolidation of proportionately consolidated company (ROBYG Development)		(1,085)
Currency translation differences		21
At December 31, 2008		455

b.    Impairment testing of goodwill:

Goodwill acquired through the acquisition of minority interest has been allocated to individual cash-generating units, for impairment testing:

Carrying amount of goodwill allocated to each of the cash-generating units:

		Carrying amount of goodwill
		2008		2007
ROBYG Development Sp.Z.o.o.		-		1,089
ROBYG Park Sp.Z.o.o.		-		130
Immo Prop. Kft.		-		223
Thokoly Udvar Kft.		289		279
Foodex 2003 Kft.		-		406
Real Prop House Kft.		166		175
		455		2,302

The recoverable amount of the cash-generating units has been determined based on a value in use calculation using cash flow projections from budgets approved by senior management. The budgets are based on past experience and cover periods of up to four years and does not include any growth after the budget period. The pre-tax discount rate applied to cash flow projections is 15%.

NOTE 12:-    INTEREST-BEARING LOANS AND BORROWINGS

a.    Current: 

				December 31,
		Note		2008		2007
Short-term loans:
Related parties (in Euro)		24		5,517		3,849
Bank (in Euro)				4,239		1,612
				9,756		5,461
Current maturities of long-term loans from:
Banks				21,750		9,322
Global Europe Investment ('the Fund')				-		2,223
Related parties		24		-		7,128
Debentures		d		1,423		5,431
Others				-		279
				23,173		24,383
				32,929		29,844

b.    Non-current:

				December 31,
		Note		2008		2007
Banks				34,323		50,321
Global Europe Investment ('the Fund')				-		2,223
Related parties		24		-		10,603
Shareholders in proportionately consolidated entities				7,280		-
Others				-		775
Debentures		d		56,776		52,007
				98,379		115,929
Less - current maturities				23,173		24,383
				75,206		91,546

        c.    Repayment dates subsequent to the balance sheet date:

2009 First year - current maturities		23,173
2010 Second year		13,792
2011 Third year		11,301
2012 Fourth year		13,668
2013 Fifth year		13,668
2014 Sixth year and thereafter		22,777
		98,379

               d.    Additional details:

1.    On August 15, 2006, the Company issued to institutional investors debentures (series A) with a par value in NIS equivalent in amount to $ 12,478,997 (€ 9,846 on the date of issue). This issue is an extension of series A which the Company issued in July 2005 and is under the same conditions as the original issue. The debentures were issued at a discount of € 98.

2.    In June 2007, the Company issued to institutional investors debentures (series B) with a par value in NIS of approximately NIS 214 million (€ 38,000). Directly attributable transaction costs amounted to € 290. The debentures bear interest at an annual rate of 5.5% and are linked (principal and interest) to the Israeli Consumer Price Index. In June 2008, the Company registered those debentures for trading on the Tel-Aviv Stock Exchange. The annual interest rate decreased by 0.65% to 4.85% on the date of registration.

The interest on the debentures is payable every six months, commencing in December 2007, and the principal will be paid in four equal annual installments commencing in June 2012.

During 2008, the debentures were rated by Maalot, an Israeli rating agency which is affiliated with Standard and Poor's, at a local rating of BBB/NEGATIVE. An Israeli affiliate of Moody's, Midrug Ltd., rated the debentures as at A2. See also Note 26.

3.    In June 2008, the Company issued on the Tel-Aviv Stock Exchange debentures (series C), with a par value of approximately NIS 130 million (€ 25,095). Directly attributable transaction costs amounted to approximately € 693. The debentures bear interest at an annual rate of 8% and are linked (principal and interest) to the Israeli Consumer Price Index. The debentures mature in four equal annual installments commencing in June 2011 and ending in June 2014. The interest on the debentures is payable every nine months. 

During 2008, the debentures were rated by Midrug Ltd., an Israeli rating agency which is affiliated with Moody's, at a local rating of at A2. 

4.    During the fourth quarter of 2008, the Company purchased debentures (series B and C) on the Tel-Aviv Stock Exchange, at a par value of NIS 62,500 thousand (€ 11,500), for a total consideration of NIS 22,000 thousand (€ 4,000). The excess of the carrying amount of the debentures acquired over the consideration paid in the amount of € 7,937 was recorded as a gain in finance income. 

5.    The Company has made various undertakings to the trustee of the debentures ('the trustee'), including a commitment to comply with the following covenants:

a)    In the event of the delisting of the debentures, in accordance with the Stock Exchange's capital maintenance rules, the holders of the debentures shall be entitled to early redemption at the par value of the debentures with the addition of linkage differences and interest on the principal. 

b)        In the event of a dividend distribution, the Company shall be obligated to make a purchase offer for the redemption of the outstanding debentures (series A), up to an amount equal to the amount of the dividend distribution, such that the value of the remaining outstanding debentures at such date shall not be less than NIS 3,2000 thousand (€ 588).

Following the dividend distribution on Augsut 18, 2008 (see Note 16), purchase offers were made and the Company received acceptance notices through October 6, 2008, for the carrying amount of NIS 47,600 thousand (€ 9,530).

c)    The trustee shall be entitled to call for the immediate redemption of all the unpaid balance of the debentures in the event that the Company's equity falls below € 4,800, according to the most recent audited or reviewed financial statements of the Company, unless the Company and/or the shareholders supplement or exceed said amount within 60 days of the trustee's notification of his intention to call for the immediate redemption of the debentures. 

6.    The long-term borrowings, excluding debentures, may be classified by currency of repayment, linkage terms and interest rates, as follows:

		Weighted average effective interest
		December 31,		December 31,
		2008		2008		2007
		%
Hungarian Forint (1)		8.08		29,006		21,714
Euro (2)		5.14		11,450		11,311
Polish Zloty (3)		7.38		1,147		28,674
U.S. dollars				-		2,223
				41,603		63,922

(1)    Interest in respect of these loans is based on BUBOR with a margin of 3% or linked to the 3-month average yields of the government bonds with a margin of 1.5-1.65% (2007 - fixed at 1.6% or linked to the 3-months average yield of the government bonds with a margin of 1.5% - 1.65%). The rate of the BUBOR as of December 31, 2008 is 10% (2007 - 7.5%). 

(2)    Interest in respect of these loans is based on EURIBOR with a margin of 2.2%-2.5% (2007 - EURIBOR with a margin of 1.5% - 3.5%). The rate of the EURIBOR as of December 31, 2008 is 2.89% (2007 - 4.29%). 

(3)    Interest in respect of these loans is based on WIBOR with a margin of 1.5%. The rate of the WIBOR as of December 31, 2008 is 5.88% (2007 - 5.1%).

7.    As for collateral, see Note 15b.

NOTE 13:-    TAXES ON INCOME

a.    Tax rates applicable to income:

The Company and its subsidiary in the Netherlands are assessed for tax purposes under Dutch tax laws and are liable to corporate income tax at the rate of 25.5% (2007 - 25.5%, 2006 - 29.6%).

Subsidiaries that are incorporated outside the Netherlands are assessed for tax purposes under the tax laws in their countries of residence. The principal tax rates applicable to subsidiaries outside the Netherlands are as follows: 

Poland - corporate income tax rate of 19% (2007 and 2006 - 19%).

Hungary - corporate income tax rate of 16% (2007 and 2006 - 16%). In 2006, the law in Hungary was changed such that from September 1, 2006, companies are subject to a special tax at the rate of 4% of the profit for financial reporting purposes, adjusted for dividends received and contributions made. Commencing in 2007, capital gains can be income tax exempt provided that certain criteria are fulfilled.

Romania - corporate income tax rate of 16%.

       b.    Losses for tax purposes carried forward to future years:

Carryforward tax losses, for which no deferred tax asset has not been recognized, amounted to € 7,555 at December 31, 2008 (2007 - € 9,861). 

Deferred income tax assets are recognized for carryforward tax losses to the extent that the realization of the related tax benefit through future taxable profits is probable. The Group did not recognize deferred income tax assets of € 1.814 (2007 - € 2,515) in respect of losses and other temporary differences that can be carried forward against future taxable income. 

       c.    Deferred income tax:

1.    Composition:

				December 31,
				2008		2007
Deferred tax liability				(96)		(2,874)
Deferred tax assets				357		708
				261		(2,166)

2.    The movement in deferred tax assets and (liabilities) during the year is as follows:

		Inventory of land and housing units		Foreign exchange differences on loans		Investment property		Tax  losses		Other		Total
Balance at January 1, 2006		(137)		(99)		-		200		129		93
Credited (charged) to the income statement		(789)		(219)		-		81		(29)		(956)
Disposal of subsidiaries		-		103		-		(64)		(73)		(34)
Increase to jointly controlled entity		(1,289)		(9)		-		-		(193)		(1,491)
Acquisition of subsidiary		(116)		-		-		-		-		(116)
Exchange differences		38		28		-		(56)		(35)		(25)
Balance at December 31, 2006		(2,293)		(196)		-		161		(201)		(2,529)
Credited (charged) to the income statement		1,257		(22)		(934)		335		(13)		623
Disposal of subsidiaries		-		76		-		(42)		2		36
Acquisition of additional interest in jointly controlled entity		(195)		-		-		4		-		(191)
Exchange differences		(34)		(51)		(42)		10		12		(105)
Balance at December 31, 2007		(1,265)		(193)		(976)		468		(200)		(2,166)
Credited (charged) to the income statement		328		25		(315)		467		114		619
Deconsolidation of proportionately consolidated company		794		147		1,221		(227)		172		2,107
Exchange differences		76		5		(243)		(144)		7		(299)
Balance at December 31, 2008		(67)		(16)		(313)		564		93		261

           d.    Taxes on income included in the income statements:

		Year ended December 31,
		2008		2007		2006
Current		1,320		3,178		123
Deferred		(619)		(623)		956
		701		2,555		1,079

        e.    Theoretical tax reconciliation:

Following is a reconciliation of the theoretical tax expense, assuming all income is taxed at the regular tax rate (see a. above) and the actual tax expense:

		Year ended December 31,
		2008		2007		2006
Profit before income taxes		6,323		22,635		9,440
Theoretical tax expense in respect of the profit - at 25.5% (2007 - 25.5%, 2006 - 29.6%)		1,612		5,772		2,794
Increase (decrease) in taxes resulting from:
Share in profit of associates taxed at the associates' level		(301)		-		-
Current year tax losses for which no deferred tax asset was recognized		412		1,496		210
Different tax rates applicable to foreign subsidiaries		(387)		(508)		(595)
Non-deductible expenses		1,029		364		43
Non-taxable income		(1,664)		(4,649)		(1,327)
Other		-		80		(46)
Income tax expense		701		2,555		1,079

        f.    Tax assessments:

The Company has not been assessed for tax purposes since incorporation. 

NOTE 14:-    TRADE AND OTHER PAYABLES

		December 31,
		2008		2007
Trade		2,292		12,832
Interest payable		454		702
Government authorities		1,017		1,224
Related parties (Note 24b)		345		96
Accrued expenses		409		922
Deferred income *)		-		5,018
Dividend payable to minority shareholders		460		119
Other		1,325		1,685
		6,302		22,598

*)    In November 2007, the Company sold its wholly-owned subsidiary, Piekarniza Sp.z.o.o., to a jointly controlled company, Robyg Morena Sp.z.o.o. The consideration in respect of this sale was recorded as a long-term loan in the accounts of the Company. Since the collection of the loan was dependent upon future funds to be received in connection with vacant land held by Piekarniza Sp.z.o.o., the Company deferred the recognition of the gain on the sale until the loan was collected in 2008 (see Note 22b).

NOTE 15:-    COMMITMENTS, CONTINGENT LIABILITIES AND PLEDGES

a.    As of December 31, 2008, the Group has purchase commitments in respect of Group companies and construction projects amounting to approximately € 9,460.

b.    Contingent liabilities, guarantees and pledges:

1.    The balances of the secured liabilities and guarantees of the Group are as follows:

		December 31,
		2008		2007
Liabilities:
Long-term loans and other liabilities (including current maturities) *)		34,323		52,646
Guarantees **)		24,629		27,324

*)        The Group companies have made an undertaking to the banks not to repay shareholders' loans until the loans to the banks have been repaid. 

**)    The Company guaranteed the bank loan of an associate and received guarantees from another investor regarding its share of the loan.

2.    To secure the aforementioned liabilities and guarantees, the Company and the subsidiaries registered fixed charges on lands, share capital in subsidiaries and the Company's share capital, as well as floating charges on the assets. 

3.    The registration of the transfer of ownership in certain lands has yet to be completed. 

4.    In 2007, a subcontractor of a Hungarian subsidiary's chief subcontractor filed a claim against the subsidiary, alleging that the payment for commodities and services supplied was not received. The estimated payout is € 940, should the claim be successful.

The Company has been advised by its legal counsel that it is not probable that the action will succeed and, accordingly, no provision for any liability has been made in these financial statements.

5.    Collaboration agreements with Lehman: 

In October 2006, a collaboration agreement was signed with Lehman Brothers Real Estate Partners L.P. ('Lehman'), which is based on a memorandum signed at the end of 2005. The agreement provides for the right of Lehman to participate in any of the Company's real estate projects in Poland, Hungary and Romania and includes a mechanism for distribution of earnings, according to which the Company is entitled to receive earnings exceeding its interest in the projects if the yield on the investment in the project exceeds an internal rate of return of 20%. 

In October 2007, the Company signed a memorandum of understandings with Lehman to reorganize the ownership and operations of jointly controlled entities in Poland. In April 2008, the court approved the reorganization plan. Accordingly, the Company and Lehman each contributed their interests in all jointly-controlled Polish companies to a holding company (Robyg S.A.) established for this purpose. In consideration of the contribution, the Company and Lehman received an equal number of shares of Robyg S.A., thus retaining (indirectly) the joint ownership of the Polish companies. In addition, the collaboration agreement between the Company and Lehman was amended such that the Company and Lehman do not have joint control of Robyg S.A. 

In addition, Lehman has agreed to purchase from the Company for a consideration of € 26,000, the Company's right to receive earnings in excess of its interest in projects with Lehman. The purchase is conditional on the floatation of ROBYG S.A. on the Warsaw Stock Exchange by August 2008 at a valuation of at least a certain amount. The consideration will be paid to the Company in the form of ROBYG S.A shares equivalent to € 26,000 (see also Note 24).

6.    In November 2006, the Company acquired a subsidiary which holds 50% of a company established jointly with a local municipality in Budapest ('the Municipality') for a consideration of up to 840 million Hungarian Forint (approximately € 3,175).

According to the agreement between the subsidiary and the Municipality, the Municipality shall transfer to the jointly owned company land with a total area of about 154 thousand sq.m., the subsidiary has undertaken to provide financing in the amount of approximately 1,323 million Hungarian Forint (approximately € 5,000) for the development of a residential building project. The financing will be made available as the land is transferred to the jointly owned company. As of the balance sheet date, the Municipality had transferred to the jointly owned company land comprising about 27 thousand sq.m., and the Company had paid a consideration of € 720 and had provided financing of approximately € 920 for development of the land. 

NOTE 16:-    DIVIDENDS PAID AND PROPOSED

		Year ended December 31,
		2008		2007		2006
Dividends on Ordinary shares declared and paid		10,995		4,037		-
Dividend per share		0.06		0.02		-

NOTE 17:-    SHARE CAPITAL AND PREMIUM

a.    Composition:

		Number of shares		Share capital		Share premium		Treasury shares
Balance at January 1, 2006		12,000,000		2,400		8,422		-
Split of shares (1)		108,000,000		-		-		-
Share-based compensation (2)		-		-		275		-
Proceeds from shares issued (3)		12,987,013		260		11,827		-
Balance at December 31, 2006		132,987,013		2,660		20,524		-
Share-based compensation (2)		-		-		47		-
Proceeds from shares issued (4)		13,000,000		260		15,761		-
Proceeds from shares issued (5)		25,762,414		515		31,083		-
Balance at December 31, 2007		171,749,427		3,435		67,415		-
Purchase of treasury shares (6)		(650,000)		-		-		(527)
Exercise of options		700,000		14		58		-
Balance at December 31, 2008		171,799,427		3,449		67,473		(527)

(1)        On May 30, 2006, the issued share capital which was composed of 12,000,000 Ordinary shares of € 0.2 par value each was split into 120,000,000 Ordinary shares of € 0.02 par value each. All share and per share amounts in these financial statements have been restated to reflect this split.

(2)    During 2006, 2,500,000 options were granted to senior employees and directors of the Company and of related companies. Each option may be exercised to purchase one Ordinary share of the Company at an exercise price of $ 0.192. 

The options vest in six equal portions over an eighteen-month period, commencing three months after the date of grant. Any options not exercised within nine years from date of grant will expire, unless extended by the Board of Directors.

The fair value of the options granted determined using the Black-Scholes option valuation model was approximately $ 427 thousand (€ 352). The significant inputs in the model were share price - $ 0.34, exercise price - $ 0.192, standard volatility - 61%, expected option life - two years, annual risk-free interest rate - 4.5%, and expected dividend yield - zero. 

The Company recorded in the financial statements an expense in general and administrative expenses amounting to approximately € 47 in 2007 and € 275 in 2006, and a corresponding increase in shareholders' equity.

During 2008, 700,000 options were exercised for approximately € 12. At December 31, 2008, 1,800,000 options are outstanding and exercisable.

(3)    On June 27, 2006, the Company issued 12,987,013 Ordinary shares on the AIM in London in consideration of € 14,493 (£ 10 million). The issue expenses amounted to € 2,406 and the net proceeds after issue expenses amounted to € 12,087. The shareholders of the Company that held shares prior to this issue acquired 1,143,000 Ordinary shares as part of the issue for a total consideration of € 1,275 (£ 880 thousand). 

(4)    On January 23, 2007, the Company issued to investors 13 million Ordinary shares at £ 0.85 per share (€ 1.3 per share). The total proceeds from the issue amounted to approximately £ 11 million (€ 16,700). The issue expenses of approximately € 600 were offset against the share premium.

(5)    On March 6, 2007, an investment agreement with an associate of Lehman, LBREP II Neptune S.a.r.l (LBREP), was signed. According to the agreement, the Company issued to LBREP 25,762,414 Ordinary shares at £ 0.85 per share (€ 1.25 per share). The proceeds from this issue amounted to approximately £ 21,900 thousand (€ 32,100). As a result of the issue, LBREP acquired 15% of the Company's issued and outstanding share capital. The issue expenses of € 500 were offset against the share premium.

(6)    In April 2008, the Company made market purchases for 650,000 Ordinary shares of the Company, representing approximately 0.38% of the issued share capital of the Company, at an average price of 65 pence per share. 

b.    Other reserves:

		Inventory revaluation		Currency translation adjustment		Acquisition  of minority interest		Statutory reserve (*)		Total
Balance at January 1, 2006		1,743		690		65		-		2,498
Transfer of revaluation reserve upon disposal of inventory		(493)		-		-		-		(493)
Currency translation differences		-		(1,246)		-		-		(1,246)
Balance at December 31, 2006		1,250		(556)		65		-		759
Transfer of revaluation reserve upon disposal of inventory		(160)		-		-		-		(160)
Sale of shares of subsidiary		-		(110)		-		-		(110)
Currency translation differences		-		(4,735)		-		-		(4,735)
Reclassification according to statutory requirements		-		-		-		4,188		4,188
	-
Balance at December 31, 2007		1,090		(5,401)		65		4,188		(58)
Reclassification upon sale of shares of subsidiaries		-		(408)		-		-		(408)
Currency translation differences		-		(2,211)		-		-		(2,211)
Reclassification according to statutory requirements		-		-		-		3,163		3,163
Balance at December 31, 2008		1,090		(8,020)		65		7,351		486

(*)    In accordance with the Dutch law, profit from fair value adjustment of investment property unrealized and undistributed profits of investees that are not subsidiaries, are restricted for distribution.

NOTE 18:-    OTHER LIABILITIES

California Group S.R.L ('California'), a Romanian subsidiary of the Company, entered into an agreement to purchase an additional plot of land ('the New Plot') located next to California's existing plot of vacant land. This purchase was contingent upon the purchase of a third plot of land ('the Third Plot') which is located next to the New Plot.

In May 2008, an agreement for the purchase of the two plots of land by California was signed. California intends to construct a residential housing project on the total land area of approximately 9,200 sq.m.

According to the above agreement, in consideration for the New Plot, the sellers are entitled to receive 17% of the revenues from the sale of units in the entire project. 

At the date of acquisition for the New Plot, the Company recorded a liability to the sellers of the New Plot according to the fair value of the land, based on an independent appraisal. After initial recognition, the liability is subsequently measured at fair value (based on projected discounted cash flows). Gains or losses arising from changes in the fair value of the liability are recognized in the statement of income.

In respect of the Third Plot, the sellers are entitled to receive 49% of the net profit from the entire project less an amount of € 450. The agreement provides for joint control with the sellers of the Third Plot. Accordingly, the investment in the subsidiary is accounted for by the proportionate consolidation method.

NOTE 19:-    FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Group's principal financial instruments comprise bank loans and overdrafts, and debentures. The main purpose of these financial instruments is to raise finance for the Group's operations. The Group has various financial assets such as trade receivables, cash and cash equivalents and short-term deposits, which arise directly from its operations, and also has granted loans for affiliated companies.

The main risks arising from the Group's financial instruments are cash flow interest rate risk, foreign currency risk and credit risk. The Board of Directors reviews and agrees on policies for managing each of these risks which are recognized below.

a.    Foreign exchange risk:

1.    The Group operates in Hungary, Poland, Romania and Croatia and therefore is exposed to foreign exchange risk arising from various currency exposures. However, most of the receivables and the payables of each entity in the Group are denominated in the entity's functional currency, and therefore, the Group is mainly exposed in respect of loans received and granted that are denominated in currency other than each entity's functional currency.

2.    In order to reduce exposure to currency risk of the debentures (series C) , as described in Note 12d.3, the Company entered into a cross currency swap, according to which the Company receives interest in NIS, linked to the CPI, bearing annual interest of 8% (identical to the terms of the debentures), and pays an amount in Euro linked to the six-month Euribor plus a margin of 6.6%.

In addition, the Company fixed the exchange rate of the Euro/NIS at the rate of 5.48. This derivative does not qualify as a hedge under IFRS and, consequently, all changes in the fair value are recorded directly in the income statement. 

The following table demonstrates the pre-tax impact of a 10% change in the currency rates with the most significant exposure, with all other variables held constant:

		December 31,
		2008				2007
		Increase		Decrease		Increase		Decrease
U.S. dollar		569		(569)		(4,797)		4,797
Euro		2,464		(2,464)		842		(842)
Polish Zloty		4,097		(4,097)		1,458		(1,458)
Hungarian Forint		3,504		(3,504)		111		(111)
New Israeli Shekel		(4,158)		4,158		(3,268)		3,268
Croatian Kuna		10		(10)		19		(19)
Ron		497		(497)		-		-

b.    Interest rate risk:

The Group's exposure to the risk of changes in market interest rates relates primarily to the Groups long-term debt obligations and other financial assets with floating interest rates. Loans obtained and granted at variable rates expose the Group to cash flow interest risk, which could have adverse effects on the Group's net income or financial position. Changes in interest rates cause variations in interest income and expenses on interest-bearing assets and liabilities.

Financial instruments with fixed interest rates expose the Group to fair value interest risk.

The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group's profit before tax. There is no impact on the Group's equity.

		Increase in 100 basis points		Decrease in 100 basis points
2008:
U.S. dollar		56		(56)
Euro		(50)		50
Polish Zloty		311		(311)
Hungarian Forint		(241)		241
Ron		-		-
New Israeli Shekel		(15)		15
2007:
U.S. dollar		101		(101)
Euro		101		(101)
Polish Zloty		(83)		83
Hungarian Forint		(77)		77
Ron		-		-
New Israeli Shekel		194		(194)

c.    Credit risk:

Receivables are monitored on an ongoing basis, resulting in the Group's exposure to bad debts being immaterial.

With respect to credit risk arising from the other financial assets of the Group, which comprise cash and cash equivalents and deposits, the Group's exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments.

d.    Liquidity risk:

The Group's objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts, bank loans and debentures. 

The table below summarizes the maturity profile of the Group's financial liabilities at December 31, 2008 based on contractual undiscounted payments.

		Year ended December 31, 2008
		On demand		Less than 12 months		1-5 years		More than 5 years		Total
Interest-bearing loans and borrowings		-		39,976		64,738		23,825		128,539
Trade and other payables		-		4,700		-		-		4,700
Other financial liabilities		-		-		2,971		1,393		4,364

		Year ended December 31, 2007
		On demand		Less than 12 months		1-5 years		More than 5 years		Total
Interest-bearing loans and borrowings		-		33,499		76,071		30,647		140,217
Trade and other payables		-		16,021		-		-		16,021
Other financial liabilities		-		781		-		-		781

e.    Political risk:

The Group has significant business in Central and Eastern Europe. Certain CEE countries are considered as emerging markets. Political and economic changes in these regions can have consequences for the Group's activities there, as well as an impact on the results and financial positions of the Group. By close monitoring of these businesses the board of management intends to limit the risks of those changes.

       f.    Capital management:

The primary objective of the Group's capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximise shareholder value.

The Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. No changes were made in the objectives, policies or processes during the years ended December 31, 2008 and 2007.

The Group monitors capital using a gearing ratio, which is net financial debt divided by total equity plus net debt. The Group's policy is to keep the gearing lower than 55%. The Group includes within net financial debt, interest-bearing loans and borrowings, less cash and cash equivalents, and short-term deposits. 

		2008		2007
Interest-bearing loans and borrowings		108,135		121,390
Less - cash and short-term deposits		(44,713)		(85,956)
Net financial debt		63,422		35,434
Total equity		79,903		88,895
Capital and net debt		143,325		124,329
Gearing ratio		44%		29%

g.    Fair value of financial instruments:

Set out below is a comparison by category of carrying amounts and fair values of all of the Group's financial instruments:

		Carrying amount				Fair value
		2008		2007		2008		2007
Financial assets
Cash		22,056		70,905		22,056		70,905
Deposits		22,657		15,051		22,657		15,051
Loan notes		16,746		35,298		16,641		35,028
Loans to associates		41,012		-		40,557		-
Financial liabilities
Interest-bearing loans and borrowings:
Floating rate borrowings		50,230		56,303		50,050		56,303
Fixed rate borrowings		57,905		65,087		21,258		62,813
Other liabilities		2,482		715		2,482		715

Interest on financial instruments classified as floating rate is repriced at intervals of less than six months. Interest on financial instruments classified as fixed rate is fixed until the maturity of the instrument. The other financial instruments of the Group that are not included in the above tables are non-interest bearing and are therefore not subject to interest rate risk.

NOTE 20:-    MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES

		Year ended December 31,
		2008		2007		2006
Professional fees		1,462		1,122		605
Management fees		396		71		295
Rent and office maintenance		620		320		200
Marketing		514		814		490
Salaries (including director's fees (1))		2,260		2,643		907
Share-based compensation		-		47		275
Travel expenses		284		356		113
Other		815		593		473
		6,351		5,966		3,358

(1)    Director's fees:

		2008		2007		2006
Director's fees *)		1,113		989		545
Directors insurance		45		45		22
Bonuses		26		646		54
		1,184		1,680		621

*)    The executive director's and non executive fees (including bonuses) for the year 2008 are as follows:

			2008
			Outstanding amount of options		Fees in thousands		Bonus in thousands		Share based compensation in thousands		Total for  the year
	Executive directors
1.	O.Katzenelson, CEO		-		485		-		-		485
2.	Shaul Lotan, Chairman		-		181		-		-		181
3.	Ran Yaakobs, CFO *)		500,000		190		16		-		206
	Total		500,000		856		16		-		872
	Non-executive directors
1.	Yosef Zimer *)		500,000		55		10		-		65
2.	Ron Hadasi		-		24		-		-		24
3.	Gilly Jacoby		-		29		-		-		29
4.	Karl Ferenc		-		30		-		-		30
5.	Eyal Keltsh		-		77		-		-		77
6.	Gerald Parkes		-		24		-		-		24
7.	David Dekel		-		18		-		-		18
	Total		500,000		257		10		-		267
	Total		1,000,000		1,113		26		-		1,139

*)    All the options were granted in 2006; in 2008 no new options were granted or exercised.

			2007
			Outstanding amount of options		Fees in thousands		Bonus in thousands		Share based compensation in thousands		Total for  the year
	Executive members
1.	O.Katzenelson, CEO		-		447		420		-		867
2.	Shaul Lotan, Chairman		-		179		103		-		282
3.	Ran Yaakobs, CFO *)		500,000		144		88		10		242
	Total		500,000		770		611		10		1,391
	Non-executive members
1.	Yosef Zimer *)		500,000		51		35		9		95
2.	Shimon Katzenelson		-		21		-		-		21
3.	Ron Hadasi		-		9		-		-		9
4.	Gilly Jacoby		-		23		-		-		23
5.	Karl Ferenc		-		25		-		-		25
6.	Eyal Keltsh		-		72		-		-		72
7.	Gerald Parkes		-		18		-		-		18
	Total		-		219		35		9		263
	Total		1,000,000		989		646		19		1,654

*)    All the options were granted in 2006; in 2007, no new options were granted or exercised.

			2006
			Outstanding amount of options		Fees in thousands		Bonus in thousands		Share based compensation in thousands		Total for the year
	Executive members
1.	O.Katzenelson, CEO		-		241		-		-		241
2.	Shaul Lotan, Chairman		-		135		-		-		135
3.	Ran Yaakobs, CFO		500,000		75		32		55		162
	Total		500,000		451		32		55		538
	Non-executive members
1.	Yosef Zimer		500,000		26		22		55		103
2.	Shimon Katzenelson		-		9		-		-		9
3.	Jon Kempster		-		18		-		-		18
4.	Gilly Jacoby		-		13		-		-		13
5.	Karl Ferenc		-		13		-		-		13
6.	Eyal Keltsh		-		15		-		-		15
	Total		500,000		94		22		55		171
	Total		1,00,000		545		54		110		709

NOTE 21:-     FINANCE INCOME (COSTS)

		Year ended December 31,
		2008		2007		2006

a.    Finance costs:

Interest expense		(10,476)		(4,983)		(3,217)
Exchange differences		(19,109)		(11,564)		(1,940)
Bank charges and other, net		(1,163)		(1,015)		(498)
		(30,748)		(17,562)		(5,655)
Capitalized borrowing costs		3,063		1,528		2,053
		(27,685)		(16,034)		(3,602)

            b.    Finance income:

Financial assets at fair value through profit and loss		131		-		-
Gain on early repayment of debentures		7,937		-		-
Interest income		10,505		7,259		915
Exchange differences		6,699		16,395		4,920
		25,272		23,654		5,835

NOTE 22:- OTHER INCOME AND OTHER EXPENSES

         a.    Other income:

		Year ended December 31,
		2008		2007		2006
Gain on sale of interests in subsidiaries and joint ventures		6,527		8,314		4,183
Other		(197)		307		33
		6,330		8,621		4,216

b.    Year ended December 31, 2008:

As described in Note 14, the Company sold its wholly-owned subsidiary to a jointly controlled company and deferred the recognition of the gain on the sale until the loan, which was recorded in respect of this sale, was collected.

During the third quarter, the Company collected the loan and recognized the gain in the amount of approximately € 5,300.

NOTE 23:-    EARNINGS PER SHARE

Earnings per share are calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of Ordinary shares in issue after giving effect to the split:

		Year ended December 31,
		2008		2007		2006
Profit attributable to equity holders of the parent		5,529		19,270		7,031
Weighted average number of Ordinary shares outstanding (thousands)		171,693		166,342		126,495
Effect of dilution:
Share options		910		1,811		1,621
Adjusted weighted average number of Ordinary shares for diluted earnings per share		172,603		168,153		128,116
Profit per share (basic and diluted) (€ per share)		0.03		0.12		0.06

NOTE 24:-    RELATED PARTY DISCLOSURES

The financial statements include the financial statements of Nanette Real Estate Group N.V. and the subsidiaries listed in the Appendix to the consolidated financial statements.

a.    Transactions with related parties:

1.    Composition:

		Year ended December 31,
		2008		2007		2006
General and administrative expenses:
Key management personnel of the  Group (including directors' fees *)		1,139		1,654		709
Shareholders		288		244		377
		1,427		1,898		1,086
Finance income:
Proportionately consolidated entities		1,606		1,510		405
Finance costs:
Shareholders		914		705		2

*)    Compensation of key management personnel composed as follows:

		2008		2007		2006
Short-term benefits		1,139		1,635		599
Share-based compensation		-		19		110
		1,139		1,654		709

2.    Management fees in the amount of € 272 to a company controlled by key management personnel were capitalized to inventory cost in 2008 (2007 - € 379).

3.    Agreements with Lehman (a shareholder), see Note 15b(5).

b.    Balances with related parties:

			December 31,
			2008		2007
Accounts receivable - other			898		-
Highest balance during the year			898		-
Other financial assets:
Proportionately consolidated entity (1)			16,615		28,093
Shareholder			-		835
Other			-		6,370
			16,615		35,298
Loans to associates (2)			41,012		-
Short-term loans from shareholder (3)			5,517		3,849
Long-term loans before deducting current maturities from shareholder			-		10,603
Liabilities - other:
Shareholder			345		96

(1)    Terms and conditions of loans to proportionately consolidated entity:

		Weighted average interest rate (*)		December 31, 2008
		%
In Euros		5.12		6,990
In U.S. dollars		-		1,142
In Hungarian Forint		13		8,483
				16,615

(*)    Fixed interest rate as of December 31, 2008.

The replacement dates of these loans have not yet been determined.

       (2)    For terms and conditions (see Note 8f).

(3)    Terms and conditions of loans from shareholders: 

		Weighted average interest rate		December 31, 2008
		%
In Euros (1)		5.89%		3,850
In Hungarian Forint (2)		10.50%		1,667
				5,517

(1)    Interest in respect of these loans is based on EURIBOR, with a margin of 3% and capped at 7%.

(2)    Interest in respect of these loans is based on BUBOR, with a margin of 0.50%.

The replacement dates of these loans have not yet been determined.

NOTE 25:-    SEGMENT INFORMATION

a.    General:

The Group operates internationally and its organizational structure is based on geographical areas. Accordingly, the division of operations in this manner represents the basis according to which the Group reports data for management purposes. The segments are determined according to the countries from which the Group's revenues are generated. The Company has two reportable segments: Hungary and Poland.

b.    Operating segment data:

As of December 31, 2008 and for the year then ended:

		Hungary		Poland *)		Other		Consolidated
Income statement data:
Revenues		18,322		8,047		160		26,529
Segment results - operating profit		3,806		2,811		(355)		6,262
Unallocated general corporate expenses								3,856
Operating profit								2,406
Finance costs								(27,685)
Finance income								25,272
Other income								6,330
Profit before taxes on income								6,323

As of December 31, 2007 and for the year then ended:

		Hungary		Poland		Other		Consolidated
Income statement data:
Revenues		18,101		15,007		66		33,174
Segment results - operating profit		3,602		6,974		(288)		10,288
Unallocated general corporate expenses								3,894
Operating profit								6,394
Finance costs								(16,034)
Finance income								23,654
Other income								8,621
Profit before taxes on income								22,635

*)    In the second quarter of 2008, jointly controlled Polish companies that were proportionately consolidated in previous periods were transferred to a holding company in which the Company accounts for its interest using the equity method (see Note 8e). Accordingly, commencing from the second quarter of 2008, segment revenues for Poland no longer include the revenues and results of these Polish companies. Segment results include the share in profit of the holding company (associate).

As of December 31, 2006 and for the year then ended:

		Hungary		Poland		Consolidated
Income statement data:
Revenues		21,203		10,666		31,869
Segment results - operating profit		2,500		2,448		4,948
Unallocated general corporate expenses						1,957
Operating profit						2,991
Finance costs						(3,602)
Finance income						5,835
Other income						4,216
Profit before taxes on income						9,440

NOTE 26:-    EVENTS SUBSEQUENT TO BALANCE SHEET DATE

a.    Subsequent to the balance sheet date, the Company purchased its own debentures (series B and series C) on the Tel-Aviv Stock Exchange, at par value of NIS 2,416,577 and NIS 10.1 million, respectively (approximately € 2.4 million), for a total consideration of NIS 0.8 million and NIS 5.2 million (approximately € 1.1 million), respectively. The profit from these purchases was recognized in the income statement in the first quarter of 2009.

b.    During February 2009, the Company (through a wholly-owned subsidiary) completed the purchase of an additional 15% of the issued and outstanding share capital of Osnova-C (see Note 8d), for a nominal consideration of approximately $ 1 (€ 1). The Company also granted loans to Osnova-C, in the total amount of $ 6,350 thousand (€ 4,536) includes $ 350 which were required by the Osnova-C as an additional Investment from the Shareholders, at an annual interest rate of LIBOR, with a margin of 5%. Subsequent to this purchase, the Company holds 30% of the share capital of Osnova-C. 

c.    On March 25, 2009, Midrug Ltd. downgraded credit rating of the debentures (series B and C) to local rating of Baa1.

LIST OF SUBSIDIARIES, PROPORTIONATELY CONSOLIDATED COMPANIES

AND ASSOCIATES 

				Shareholding and control
				December 31,
Name of company		Country		2008		2007		2006
				%
Subsidiaries:
Robyg Investment Sp.z.o.o.		Poland		70.10		70.10		70.10
Thokoly Udvar Kft.		Hungary		100.00		100.00		89.33
Zold Park Haz Kft.		Hungary		77.50		77.50		77.50
Foodex 2003 Kft.		Hungary		100.00		100.00		57.50
Karolina Udvar Kft.		Hungary		100.00		100.00		57.50
MZM Properties Sp.z.o.o.		Poland		-		-		90.00
Robyg B.V.		Netherlands		100.00		100.00		89.33
Robyg Orgod Sp.z.o.o.		Poland		100.00		100.00		46.00
Robyg Galicia Sp.z.o.o.		Poland		100.00		80.00		80.00
Robyg Morena Sp.z.o.o.		Poland		-		-		80.00
IMMO Prop. Kft.		Hungary		100.00		100.00		57.00
Kamaraerdo Kft.		Hungary		100.00		100.00		100.00
Nanette Construction Kft.		Hungary		100.00		100.00		100.00
Star Development Sp.z.o.o.		Poland		100.00		100.00		-
Nanette Real Estate Development Srl.		Romania		100.00		100.00		-
Nanette North Star Properties Srl.		Romania		100.00		100.00		-
California Group Srl.		Romania		100.00		100.00		-
Nanette Borovje D.O.O.		Croatia		100.00		100.00		-
Etgar Financial Services Ltd.		Israel		100.00		-		-
Albert Ingatian		Hungary		100.00		-		-
Paty Plots		Hungary		100.00		-		-
Nanette Holdings (Ukraine) Ltd.		Cyprus		100.00		-		-
Laniste D.O.O.		Croatia		100.00		-		-
Nanette Nekretnine D.O.O.		Croatia		100.00		-		-
Nanette Construction rom		Romania		100.00		-		-
Proportionately consolidated companies:
Robyg Palacowa Sp.z.o.o.		Poland		-		50.00		50.00
OK Investment Sp.z.o.o.		Poland		50.00		50.00		50.00
Robyg Wilanow II Sp.z.o.o.		Poland		-		42.50		32.50
Gondola HAZ K.f.t.		Hungary		50.00		50.00		50.00
Real Prop House K.f.t.		Hungary		50.01		50.01		50.01
MZM Properties Sp.z.o.o.		Poland		-		45.00		-
Robyg Morena Sp.z.o.o.		Poland		-		40.00		-
Robyg City Apartments Sp.z.o.o.		Poland		-		37.50		-
Nanette Pipera Properties Srl.		Romania		50.00		50.00		-
Nanette City Gate Timisoara Srl.		Romania		50.00		50.00		-
Nanette Heights Timisoara Srl.		Romania		50.00		50.00		-
Nanette Bucharest Properties		Romania		50.00		50.00		-
EDR Construction Brasov B.V.		Holland		55.00		-		-
UKRA Real Estate B.V.		Holland		50.00		-		-
Subsidiary of UKRA Real Estate B.V.:
PP Plots		Hungary		100.00		-		-
Proportionately consolidated company of EDR Construction Brasov B.V.:
Taltoring		Hungary		50.00		-		-
Proportionately consolidated companies of Robyg B.V.:
Robyg Development Sp.z.o.o.		Poland		-		50.00		50.00

				Shareholding and control
				December 31,
Name of company		Country		2008		2007		2006
				%
Subsidiary of MZM Properties Sp.z.o.o. -
Robyg Park Sp.z.o.o.		Poland		99.00		70.00		70.00
Subsidiary of Robyg Morena Sp.z.o.o.:
Piekarnicza Sp.z.o.o.		Poland		100.00		100.00		-
Proportionately consolidated company of Kamaraerdo K.f.t.:
Kamara-Projekt K.f.t.		Hungary		50.00		50.00		50.00
Associated companies of Nanette Holdings (Ukraine) Ltd.:
Olimpia Real Estate LLC		Ukraine		15.00		-		-
Osanova C.		Ukraine		15.00		-		-
Associated company:
Robyg S.A.		Poland		48.18		-		-
Subsidiaries of Robyg S.A.
MZM Properties		Poland		100.00		-		-
Robyg Morena Sp.z.o.o.		Poland		100.00		-		-
Robyg Palacowa Sp.z.o.o.		Poland		100.00		-		-
Robyg Wilanow II Sp.z.o.o.		Poland		85.00		-		-
Robyg city Apartments Sp.z.o.o.		Poland		75		-		-
Robyg Development SP.z.o.o.		Poland		100.00		-		-
Jagondo Estates		Poland		100.00		-		-
Robyg Marina Tower		Poland		100.00		-		-
Robyg Wroclaw I		Poland		100.00		-		-
Robyg Wroclaw II		Poland		100.00		-		-
Robyg Zarzadzanie Zp.z.o.o.		Poland		100.00		-		-

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