Significant breakthrough in Germany in 2005

Voluntary change in accounting policy. In 2005, revenues were USD 99.0 million compared to USD 107.7 in 2004. Revenues from the telemedicine services segment amounted to USD 58.4 million (2004: USD 59.4 million), while revenues from the medical services segment declined to USD 40.6 million (2004: USD 48.3 million) due to the impact of the divesture of Bikurofe and the
weak performance of the medical imaging centers in the US.

Revenues from international markets comprise 76 % of total revenues compared to 71 % in the previous year. The gross profit of SHL amounted to USD 44.6 million compared to USD 48.8 million in 2004 representing a gross margin of 45.1% and 45.3% in 2005 and
2004, respectively.

EBITDA for the year amounted to USD 3.4 million, 3.4 % of revenues compared to USD 7.4 million and 6.9 % of revenues in 2004. LBIT amounted to USD 4.1 million, compared to an EBIT of USD 1.7 million in 2004. The decrease in operating profit resulted from the impact of the divesture of Bikurofe and the first time inclusion of the results in Germany coupled with the weak performance of the medical imaging services operations in the US.

As a result of the sale in July, of Bikurofe Ltd., for USD 14.7 million and a further USD 4.3 million in previously announced dividends and other debts SHL recorded a capital gain of USD 8.8 million.
Loss before taxes for the year amounted to USD 0.1 million compared to USD 2.3 million for 2004. The disappointing medical imaging services operations in the US contributed USD 2.8 million to SHL’s pre-tax loss. Tax expenses for the year increased to USD 7.4 million from USD 1.6 million in 2004 due mainly to the write off of the deferred tax asset related to its US carryforward tax losses in the amount of USD 4.8 million. Net loss totaled USD 7.5 million compared to USD 4.0 million in 2004. Loss per share attributable to the shareholders’ of SHL amounted to USD 0.87 compared to USD 0.50 in 2004.

Voluntary change in accounting policy
These results were recorded after SHL implemented a voluntary change in its accounting policy for revenue recognition on sales of medical devices. Until the change, revenues were recognized at the time of the sale of devices while revenues from services provided were recognized ratably over the term of the subscribers’ contracts. The change in policy is based on the premise that the sale and service
components of SHL’s service offerings have become inseparable and should be considered a single transaction. Accordingly, revenues from the sale of devices will now be recognized over the estimated term of subscribers’ contracts together with the revenues derived from services.

This accounting policy better reflects the economic consequences of the transactions and enables better conformity and comparison between the different service offerings and product lines.

The change in accounting policy is being applied as of January 1, 2005. Previous years’ revenues from sales of devices and the effects thereon have been retrospectively adjusted. The effect of these timing differences stemming from the deferment in the recognition of revenues resulted at December 31, 2005 in a decrease in post dated
notes and prepaid commissions relating to the sale of the devices of USD 39.6 million that will no longer appear in SHL’s balance sheet and an increase in fixed and deferred tax assets and capital of USD 8.6 million. The net amount of USD 31.0 million will be offset against the equity of SHL. The amount of the deferred revenues making up these
post dated notes and net income resulting there from will be recognized in future years in line with the revenues from the service offerings.

Operating cash flow
During 2005 SHL’s operating cash flow was about breakeven. At year end SHL had USD 25.3 million in cash, cash equivalents, marketable securities and deposits compared to USD 26.9 million in 2004.

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