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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 20-F

                Annual Report pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934

                   For the fiscal year ended December 31, 2005

                          Commission file number 1-9178

                              KOOR INDUSTRIES LTD.
 ------------------------------------------------------------------------------
    (Exact name of Registrant as specified in its charter and translation of
                         Registrant's name into English)

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                                     Israel
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                 (Jurisdiction of incorporation or organization)

                 14 Hamelacha Street, Rosh Ha'ayin 48091, Israel
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                    (Address of principal executive offices)

               Securities registered or to be registered pursuant
                          to Section 12(b) of the Act:

                                                       Name of Each Exchange
        Title of Each Class                             On Which Registered
-------------------------------                 -------------------------------

                                                      New York Stock Exchange
        American Depositary Shares, Each
           Representing 0.20 Ordinary
      Shares, Par Value NIS 0.001 Per Share

               Securities registered or to be registered pursuant
                          to Section 12(g) of the Act:

                                      None
 -----------------------------------------------------------------------------
                                (Title of Class)


              Securities for which there is a reporting obligation
                     pursuant to Section 15(d) of the Act:

                                      None
 ------------------------------------------------------------------------------
                                (Title of Class)


Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:              16,162,467 Ordinary Shares, Par Value NIS 0.001 Per Share
                     ---------------------------------------------------------


Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.

         Yes   X           No
            -------          --------

If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.

         Yes               No   X
            ---------        -------

Note--checking the box above will not relieve any registrant required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
from their obligations under those sections.


<PAGE>

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:


         Yes   X           No
            -------          --------

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):

Large Accelerated Filer  X    Accelerated Filer       Non-accelerated filer
                       -----                   -----                       -----

Indicate by check mark which financial statements the registrant has elected to
follow:


         Item 17   X       Item 18
                -------           --------

If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).


         Yes               No   X
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<PAGE>



                               PRELIMINARY NOTE

         This annual report contains historical information and forward-looking
statements within the meaning of The Private Securities Litigation Reform Act of
1995 with respect to Koor's business, financial condition and results of
operations. The words "anticipate," "believe," "estimate," "expect," "intend,"
"may," "plan," "project" and "should" and similar expressions, as they relate to
Koor or its management, are intended to identify forward-looking statements.
Such statements reflect the current views and assumptions of Koor with respect
to future events and are subject to risks and uncertainties. Many factors could
cause the actual results, performance or achievements of Koor to be materially
different from any future results, performance or achievements that may be
expressed or implied by such forward-looking statements, including, among
others, changes in general economic and business conditions, changes in currency
exchange rates and interest rates, inability to meet efficiency and cost
reduction objectives, changes in business strategy and various other factors,
both referenced and not referenced in this annual report. These risks are more
fully described under Item 3, "Key Information - Risk Factors" of this annual
report. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected, intended, planned or projected. Koor does not intend or assume any
obligation to update these forward-looking statements.

         In this annual report, unless otherwise specified or unless the context
otherwise requires, all references to "Koor," "we," "us," or "our" are to Koor
Industries Ltd., a company organized under the laws of the State of Israel, and
its consolidated subsidiaries.

         In this annual report, unless otherwise specified or unless the context
otherwise requires, all references to "$" or "dollars" are to U.S. dollars and
all references to "NIS" are to New Israeli Shekels. Unless otherwise stated,
certain amounts reported in adjusted NIS on Koor's consolidated financial
statements for the year ended December 31, 2005 have been translated into U.S.
dollars for the convenience of the reader at the exchange rate of the dollar on
December 31, 2005 (NIS 4.603 = $1.00), as published by the Bank of Israel (see
Note 1C to our consolidated financial statements included elsewhere in this
annual report). Therefore, it is possible to compute the dollar equivalent of
any of the figures in adjusted NIS by dividing such NIS by the rate of exchange
at December 31, 2005.

         In this document, all references to Koor's percentage of equity
ownership in its subsidiaries are prior to having taken into account the
possible dilution that may be caused by the exercise of options granted to
executive officers of certain subsidiaries or of other convertible securities.

         During 2005, Koor sold part of its investments in Makhteshim-Agan
Industries Ltd. and Telrad Networks Ltd. As a result, Koor ceased to control
these companies, which resulted in their deconsolidation during 2005. These
companies are now included in Koor's consolidated financial statements according
to the equity method. As a result of the deconsolidation of these companies and
to reflect the nature of the Koor's activities as a holding company, we have
classified our statement of operations in a single-stage format. Total revenues
and earnings, including Koor's equity in the results of affiliates, are
presented within revenues. The

                                       i


comparative figures have been reclassified on a consistent basis. As a result,
Koor's results of operations for the year ended December 31, 2005 are not
comparable, on a line by line basis, to previous years; however, net earnings
is comparable to the prior periods.

<PAGE>


                                TABLE OF CONTENTS

                                     PART I

Item 1.     Identity of Directors, Senior Management and Advisers..............1
Item 2.     Offer Statistics and Expected Timetable............................1
Item 3.     Key Information....................................................1
Item 4.     Information on the Company........................................13
Item 4A.    Unresolved Staff Comments.........................................40
Item 5.     Operating and Financial Review and Prospects......................41
Item 6.     Directors, Senior Management and Employees........................65
Item 7.     Major Shareholders and Related Party Transactions.................77
Item 8.     Financial Information.............................................80
Item 9.     The Offer and Listing.............................................84
Item 10.    Additional Information............................................86
Item 11.    Quantitative and Qualitative Disclosures About Market Risk.......103
Item 12.    Description of Securities Other than Equity Securities...........106

                                    PART II

Item 13.    Defaults, Dividend Arrearages and Delinquencies..................107
Item 14.    Material Modifications to the Rights of Security Holders
            and Use of Proceeds..............................................107
Item 15.    Controls and Procedures..........................................107
Item 16A.   Audit Committee Financial Expert.................................107
Item 16B.   Code of Ethics...................................................107
Item 16C.   Principal Accountant Fees and Services...........................108
Item 16D.   Exemptions from the Listing Standards for Audit Committees.......109
Item 16E.   Purchases of Equity Securities by the Issuer and Affiliated
            Purchasers.......................................................109

                                    PART III

Item 17.    Financial Statements.............................................110
Item 18.    Financial Statements.............................................110
Item 19.    Exhibits.........................................................110

Index to Consolidated Financial Statements...................................F-1

Index to Consolidated Financial Statements of Makhteshim-Agan
Industries Ltd.............................................................F-147

Index to Consolidated Financial Statements of ECI Telecom Ltd..............F-238


                                      ii

<PAGE>

                                     PART I

Item 1.  Identity of Directors, Senior Management and Advisers.
         -----------------------------------------------------

         Not Applicable.

Item 2.  Offer Statistics and Expected Timetable.
         ---------------------------------------

         Not Applicable.

Item 3.  Key Information.
         ---------------

Selected Financial Data

         The following selected consolidated financial data as of December 31,
2004 and 2005 and for the years ended December 31, 2003, 2004 and 2005 have been
derived from our audited consolidated financial statements included in this
annual report. These financial statements have been prepared in accordance with
generally accepted accounting principles in Israel, or Israeli GAAP, which
differ in certain significant respects from U.S. GAAP (see Note 29 to our
consolidated financial statements included elsewhere in this annual report), and
audited by KPMG Somekh Chaikin, independent registered public accountants. The
consolidated selected financial data as of December 31, 2001, 2002 and 2003 and
for the years ended December 31, 2001 and 2002 have been derived from other
audited consolidated financial statements not included in this annual report.
The selected consolidated financial data set forth below should be read in
conjunction with and are qualified by reference to "Item 5, Operating and
Financial Review and Prospects" and the consolidated financial statements and
notes thereto and other financial information included elsewhere in this annual
report.

         The financial data amounts are expressed in NIS or in dollars. For the
convenience of the reader, the 2005 data contain translations of NIS into
dollars. No representation is made that NIS amounts have been, could have been
or can be converted into dollars at the prevailing rate on December 31, 2005, or
at any other rate. In accordance with amendments to Israeli GAAP published in
October 2001 and December 2002, our financial statements for the years ended
December 31, 2004 and 2005 are no longer adjusted to reflect the effects of
inflation. For all financial reporting periods until December 31, 2003, Israeli
GAAP required that our consolidated financial statements recognize the effects
of inflation. Consequently, all figures for prior periods have been adjusted to
reflect the increase in the Israeli Consumer Price Index, or CPI, and are
accordingly all expressed in terms of the purchasing power as of December 31,
2003, and not in the figures as originally reported.


                                       1

<PAGE>
<TABLE>
<CAPTION>

                                                                        Year Ended December, 31
                                        ----------------------------------------------------------------------------------------
                                           2001            2002            2003           2004           2005            2005
                                        -----------    -----------      -----------    -----------     -----------   -----------
                                                            (In thousands, except share and per share data)
                                           Adjusted NIS as of December 31, 2003                    NIS                US Dollars
                                        -------------------------------------------    ---------------------------   -----------
<S>                                     <C>            <C>               <C>           <C>             <C>           <C>
Operating Data:
Israeli GAAP:
Revenue and earnings
  Revenue from sales and services...      5,913,651       5,752,475       6,338,626      8,007,613         988,382       214,726
  Group's equity in the operating
   results of investee companies,
   net (1)(2).......................    (1,894,525)       (251,961)       (116,729)       (35,060)         363,535        78,978
  Other income, net.................              -               -               -              -         223,205        48,491
                                        -----------    -----------      -----------    -----------     -----------   -----------
                                          4,019,126       5,500,514       6,221,897      7,972,553       1,575,122       342,195
                                          6,602,236       6,096,321
Costs and losses(3).................    (2,583,110)       (595,806)       5,879,485      7,148,500       1,237,724       268,895
Earnings before income tax..........                                        342,412        824,053         337,398        73,300

Minority interest in consolidated
  companies' results, net...........          5,991        (65,014)        (207,006)     (430,921)           9,135         1,985
Net earnings (loss) from continuing
  operations........................    (2,604,997)       (800,452)          41,553        120,802         265,832        57,752
Net earnings from discontinued
  operations(4).....................       (47,083)          33,483           4,809         24,188          50,381        10,945
Cumulative effect as of the
  beginning of the year of change in
  accounting method(5)..............              -               -               -              -         (3,054)         (663)
Net earnings (loss) for the year....    (2,650,927)       (766,969)          46,362        144,990         313,159        68,034

Basic earnings (loss) per share.....       (174.54)         (50.55)            2.95           8.85           18.92         4.11
Weighted average number of shares
  used in computing basic earnings
  (loss) per share..................     15,188,463      15,173,291      15,716,725     16,381,279      16,555,143
Diluted earnings (loss) per share...       (174.54)         (50.55)            2.95           8.85           18.92         4.11
Weighted average number of shares
  used in computing diluted earnings
  (loss) per share..................     15,188,463      15,173,291      15,716,725     16,381,279      16,555,143

U.S. GAAP:
Net earnings (loss).................    (2,599,987)       (762,511)       (108,924)        111,572         351,459       76,354
Basic earnings (loss) per ordinary
  share.............................       (171.17)         (50.25)          (7.04)           7.05           21.85         4.75
Basic earnings (loss) per ADS.......        (34.23)         (10.05)          (1.41)           1.41            4.37         0.95
Diluted earnings (loss) per ordinary
  share.............................       (171.17)         (50.65)          (7.82)           4.89           19.77         4.30
Diluted earnings (loss) per ADS.....        (34.23)         (11.75)          (1.56)           0.98            3.95         0.86

Balance Sheet Data:
Israeli GAAP:
Working capital.....................      1,644,637         710,281         790,086        765,493         543,383       118,050
Total assets (1)(2).................     13,514,082      13,432,798      11,869,757     13,129,354       5,292,436     1,149,780
Short-term debt.....................      1,741,014       2,224,771       1,527,942      1,657,200         272,127        59,119
Long-term debt......................      4,625,272       3,941,847       3,119,606      2,259,211       1,609,296       349,619
Shareholder's equity................      2,195,834       1,727,169       1,740,393      1,876,467       2,482,607       539,346

U.S. GAAP:
Total assets (1)(2).................     13,818,527      13,788,604      12,012,241      6,342,023       5,346,120    1,161,443
Shareholder's equity................      2,065,672       1,626,469       1,582,122      1,767,850       2,483,112      539,455

Number of shares outstanding........     15,168,884      15,173,377      15,741,160     15,824,185      16,146,668
</TABLE>

                                       2

<PAGE>

(1) As a result of the sale of a portion of our interest in MA Industries in
February 2005, as described elsewhere in this annual report, we discontinued the
consolidation of MA Industries' results effective as of January 1, 2005.
Accordingly, MA Industries' financial statements are not consolidated in our
consolidated financial statements as of and for the year ended December 31,
2005, but rather are recognized according to the equity method. See Note 3B(2)
to our consolidated financial statements included elsewhere in this annual
report.

(2) As a result of the sale of a portion of our interest in Telrad Networks to
Fortissimo in two stages, one in November 2004 and the other in June 2005, as
described elsewhere in this annual report, we proportionally consolidated Telrad
Networks' results from October 1, 2004 through June 30, 2005 and we discontinued
the consolidation of Telrad Networks' results effective as of July 1, 2005.
Accordingly, Telrad Networks' financial statements are not consolidated in our
consolidated financial statements as of and for the six month period ended
December 31, 2005, but rather are recognized according to the equity method. See
Note 3C(1) to our consolidated financial statements included elsewhere in this
annual report.

(3) Costs and losses includes cost of sales and services, selling and marketing
expenses, general and administrative expenses, other expenses, net and financing
expenses, net.

(4) The financial statements have been reclassified in respect of Elisra
Electronic Industries Ltd. and Koor Trade Ltd. that have been presented as
discontinued operations. See also Note 24 to our consolidated financial
statements included elsewhere in this annual report.

 (5) Israel Accounting Standards Board (IASB) Accounting Standard No. 19 on
"Taxes on Income" (published July 2004) became effective for periods beginning
on January 1, 2005. We adopted this standard as a cumulative effect of a change
in accounting method. The transition to this standard resulted in a one-time
effect of a net decrease in net earnings of NIS 3 million derived mainly from an
increase in liabilities for deferred taxes relating to property. See Note 2(S)
to our consolidated financial statements included elsewhere in this annual
report.

                                       3
<PAGE>


Exchange Rate Information

         The following table shows, for each of the months indicated the high
and low exchange rates between New Israeli Shekels and U.S. dollars, expressed
as shekels per U.S. dollar and based upon the daily representative rate of
exchange as reported by the Bank of Israel:

Month                                          High (NIS)          Low (NIS)
------------------                           ---------------     ---------------
January 2006...............................      4.658               4.577
February 2006..............................      4.664               4.725
March 2006.................................      4.658               4.717
April 2006.................................      4.503               4.671
May 2006...................................      4.522               4.428
June 2006..................................      4.524               4.436

         The following table shows, for periods indicated, the average exchange
rate between New Israeli Shekels and U.S. dollars, expressed as shekels per U.S.
dollar, calculated based on the average of the exchange rates on the last day of
each month during the relevant period as reported by the Bank of Israel:

Year                                                            Average (NIS)
--------------                                               -------------------
2001.......................................................         4.203
2002.......................................................         4.738
2003.......................................................         4.530
2004.......................................................         4.482
2005.......................................................         4.488


         On June 30, 2006, the exchange rate between New Israeli Shekels and
U.S. dollars, as reported by the Bank of Israel, was NIS 4.440 to U.S.$1.00.

         The effect of exchange rate fluctuations on our business and operations
is discussed in "Item 5. Operating and Financial Review and Prospects."

Dividends

         In determining whether to declare a dividend, our Board of Directors
may take into consideration, among other things, our profits, business and
financial condition, economic circumstances and other conditions, as deemed
appropriate by our Board of Directors.

         We did not pay or declare any dividend for 2005, 2004, 2003, 2002 or
2001.

                                       4

<PAGE>


Risk Factors

         Risks Related to Koor

We depend on our subsidiaries and affiliates for distributions and management
fees.

         We conduct our business primarily through our wholly and partially
owned subsidiaries and affiliates, and are partially dependent upon management
fees and cash distributions from our subsidiaries and affiliates as a source of
cash flow for funding our corporate level activities. We received management
fees in the amount of NIS 20 million and NIS 22 million in 2005 and 2004,
respectively, pursuant to management agreements between us and several of our
subsidiaries and affiliates. In addition, in 2004 we received NIS 135 million in
distributions from subsidiaries and affiliates, of which NIS 68 million was
received from Makhteshim-Agan Industries Ltd., or MA Industries and NIS 67
million was received as an initial liquidating distribution in respect of our
wholly owned subsidiary, Tadiran Ltd., or Tadiran. In 2005, we received NIS 114
million in distributions from subsidiaries and affiliates, of which NIS 82
million was received from MA Industries and NIS 14 million was received as a
final liquidating distribution in respect of Tadiran.

         In recommending dividends and approving management fees, the directors
and applicable committees of each of our subsidiaries must take into
consideration the legal, tax, and financial effects of such dividends and
management fees, as well as the best interests of each such subsidiary. In
addition, several of our subsidiaries and affiliates are subject to dividend
payment restrictions derived from their organizational documents, credit
agreements and tax considerations. If we were to experience a substantial
reduction in the level of payments of dividends and management fees, there can
be no assurance that alternative sources of cash flow, including bank loans and
asset sales, would be available for us to carry out our investment plans, pay
dividends on our capital stock and service our debt.

         In addition, all of our unsecured indebtedness is effectively
subordinated to all liabilities, including trade payables of our subsidiaries
and affiliates. Any right we have to receive assets of our subsidiaries and
affiliates upon their liquidation or reorganization (and the consequent right of
the holders of our indebtedness to participate in those assets) will be
effectively subordinated to the claims of that subsidiary's or affiliate's
creditors (including trade creditors), except to the extent that we are
recognized as a creditor of such subsidiary or affiliate, in which case our
claims would still be subordinate to any security interests in the assets of
such subsidiary or affiliate and any indebtedness of such subsidiary or
affiliate senior to that held by us. Under Israeli law, certain indebtedness of
a company under liquidation, including certain indebtedness resulting from an
employment relationship or tenancy, and certain indebtedness resulting from
governmental and municipal tax liabilities, may rank senior to other unsecured
indebtedness.

If the sectors of the telecommunication equipment market targeted by our
affiliated company do not continue to grow, that affiliated company's results of
operations, and consequently, our net earnings, may be materially adversely
affected.

         For the years ended December 31, 2005 and 2004, our equity in the
results of our affiliated company ECI Telecom Ltd. or ECI, accounted for
approximately 18% and -10%,

                                       5

<PAGE>


respectively, of our consolidated net earnings. As of December 31, 2005 and
2004 our investment in ECI accounted for 32% and 36%, respectively, of our
total shareholders' equity.

         ECI has targeted the optical networks and broadband sectors of the
telecommunication equipment market, which have expanded in recent years. The
optical networks market is being driven by the significant increase in cellular
subscription in emerging markets and the building of "third generation" networks
in more developed countries. The broadband market has benefited from a
substantial expansion in broadband subscription, particularly in Europe and the
range of services being offered, including the recent introduction of "triple
play" applications (voice, data and video - in particular IP television - has
increased. Furthermore, in June 2005, ECI purchased Laurel Networks Inc. for $88
million, and Laurel became ECI's data networking division, one of ECI's core
businesses.

         If either the optical networks market or the broadband market fail to
continue to grow, or if ECI is unable to respond adequately and take full
advantage of the growth, or if ECI is unable to increase sales of data
networking products sufficiently, ECI's business and results of operations may
be materially adversely affected and consequently, our net earnings may be
materially adversely affected.

Our affiliated companies need to develop and introduce new products and
penetrate new markets in the telecommunication equipment and agrochemical
businesses in order to remain competitive in those industries. These affiliated
companies are also partially dependent on licensed technology.

         For the years ended December 31, 2005 and 2004, our affiliated
companies, ECI and Telrad Networks Ltd., or Telrad, which operate in the
telecommunication equipment business, and MA Industries Ltd., or MA Industries,
which operates in the agrochemical business, together accounted for
approximately 103% and 81%, respectively, of our consolidated net earnings. In
addition, as of December 31, 2005 and 2004, our investments in ECI, Telrad and
MA Industries together accounted for approximately 102% and 122%, respectively,
of our total shareholders' equity. The business and market in these segments are
characterized by rapid technological and product development. Consequently, the
ability to anticipate changes in technology and to develop and introduce new and
enhanced products on a timely basis will be significant factors in the ability
of these businesses to grow and remain competitive. We cannot assure you that
our affiliated companies will be able to develop new products and technologies
on a timely basis in order to remain competitive in the telecommunication
equipment and agrochemical industries.

The telecommunications equipment market is very competitive and our affiliated
companies that are active in this market face intense price pressure,
particularly from Chinese competitors. Such competition and price pressure could
materially adversely affect these affiliated companies' results of operations,
and consequently, our net earnings.

         ECI and Telrad, two of our affiliated companies, operate in the
telecommunications equipment market. As of December 31, 2005 and 2004 our
investments in ECI and Telrad accounted for approximately 34% and 44%,
respectively, of our total shareholders' equity.

                                       6

<PAGE>

         The telecommunications market is very competitive and competition may
increase in the future. Current competitors in this market include Alcatel,
Huawei, Lucent, Marconi (recently acquired by Ericsson), Nortel, Siemens and
others. All of these are larger than our affiliates and may have greater name
recognition, broader product lines, larger customer bases, and more extensive
relationships with customers. They may also have greater resources than those
currently available to our affiliates. In addition, our affiliates may face
particularly intensive price pressure as a result of competition from Chinese
vendors.

         Increased competition and pricing pressure could have a material
adverse effect on our business, financial condition and operating results and
may result in lower margins, loss of market share and other adverse factors.

Telrad, one of our significant affiliates, depends on one key customer.

         Telrad, one of our significant affiliates, is substantially dependent
upon its relationship with Nortel as a key supplier of technology and as a key
customer of Telrad's products. For the years ended December 31, 2005 and 2004,
approximately 34% and 62%, respectively, of Telrad's sales were derived from
sales to Nortel. Accordingly, Telrad's sales volume is directly influenced by
Nortel's sales forecasts and actual purchases. Although we and Telrad believe
that the relationship with Nortel is generally good, if such relationship was to
be terminated or diminished for any reason, it could have a material adverse
affect on Telrad's business, financial condition or results of operation, which
may have an adverse effect on our net earnings.

Economic instability in the emerging markets of South America and Central and
Eastern Europe poses a risk to the agrochemicals business of MA Industries, one
of our significant affiliates.

         The activity of MA Industries in South America (mainly Brazil) and in
countries in Central and Eastern Europe, is exposed to risk resulting from the
possibility of economic instability in these countries such as exchange rate
fluctuations (customer accounts receivable are in local currency), high
inflation and interest rates, and changes in economic legislation. A portion of
the above mentioned risks are hedged by means of various instruments. The
relative share of our agrochemicals activities in these markets is decreasing
over the years due to MA Industries' strategy to expand its activities in
economically-stable markets.

                                       7

<PAGE>

Disruption in the supply of raw materials and/or disruption in transportation
services could have a negative impact on MA Industries' agrochemicals business.

         MA Industries imports raw materials to its manufacturing facilities in
Israel, and exports products to its non-Israeli subsidiaries for manufacturing,
formulation and distribution through three Israeli ports. In the event that one
of these ports will be disrupted for an extended period of time, such as during
an employee strike, MA Industries may have significant difficulty obtaining raw
materials required for manufacture of its products, or obtaining them at
economically viable prices. Similarly, MA Industries may be unable to transport
its products to its non-Israeli subsidiaries for manufacturing, formulation and
distribution, or to transport them at reasonable costs. Therefore, extensive
disruptions at one of these ports could have a negative effect on MA Industries'
agrochemicals business.

Concentration of manufacturing in a limited number of manufacturing facilities
could pose a risk for MA Industries' agrochemicals business.

         A significant part of the manufacturing activities of MA Industries
takes place in a limited number of facilities. Significant damage to any of
these facilities due to natural disaster or other causes could have a
significant negative impact on MA Industries' agrochemicals business.

MA Industries' operations are exposed to stricter environmental, health and
safety regulations and standards

         Companies in the plant protection products industry, such as several of
MA Industries' subsidiaries, purchase, manufacture, sell and distribute
materials that can be hazardous to the environment. Consequently, their
activities are subject to comprehensive regulation concerning the storage,
handling, manufacture, conveying, use and disposal of those products, their
components and their byproducts. Specifically, MA Industries' subsidiaries'
manufacturing and formulation facilities in Israel, Brazil, Colombia, Greece and
Spain operate, in each of those countries, in accordance with environmental
standards for air pollution, removal of effluents, the use and handling of
hazardous materials, methods for the removal of waste and the cleaning up of
existing environmental pollution. Over the years, these standards have become
steadily stricter in their environmental requirements and their enforcement in
each of these countries, and the cost of compliance has risen in parallel.

         In addition to the current costs of compliance, MA Industries'
subsidiaries are required to bear a one-time expense for compliance. Since the
subsidiaries are unable to assess environmental issues with any certainty, the
funds they allocate or will allocate for projects for environmental improvement
can turn out to be insufficient. Both ongoing costs deriving from compliance
with these requirements and the one-time expenses can have an adverse effect on
their business, on their financial situation and on the results of their
operations. The subsidiaries are working to a master plan (for implementation in
2005-2008) for investments in improving the handling of effluents and
purification of the air, which is expected to require about $60 million.

         MA Industries' subsidiaries hold various permits on environment-related
issues, which define the conditions for operating its various manufacturing
facilities. Expansion of production

                                       8

<PAGE>


in its plants requires new or additional permits. The terms of the permits can
change or can be disqualified by the relevant regulator. Stricter terms,
disqualification or changes in permits or their terms could have an adverse
effect on the financial condition of MA Industries and the results of its
operations. For details about legal proceedings see Item 8 included elsewhere
in this annual report.

MA Industries' agrochemicals business may be negatively impacted in the event of
significant product liability claims that exceed our insurance coverage.

         The activities of MA Industries are exposed to risk relating to product
liability claims. MA Industries has insurance coverage for third party liability
and defective products of up to $300 million per annum. In the event that MA
Industries would be found liable in a lawsuit concerning product liability, its
insurance coverage may not be sufficient to cover the damages, and this may have
a significant negative impact on our agrochemicals business. Furthermore,
publication of the existence of such a claim could have a negative impact on the
reputation of MA Industries, and this could have a negative impact on its
business.

Our investments in hi-tech companies involve a high degree of risk.

         Our investment in hi-tech companies is conducted through Koor Corporate
Venture Capital, or Koor CVC. As at December 31, 2005 our Koor CVC hi-tech
portfolio comprised of 6 active companies, a limited partnership in Pitango
venture capital fund and a 23% interest in Scopus Network Technologies Ltd.
(18.2% on a fully diluted basis), with a total book value of NIS 166 million
(approximately $36 million).

         Our investment in hi-tech and venture capital companies carries with it
a high level of risk. The main risk factors are:

         o    The uncertainty involved in advanced technological developments
              in the fields of internet and telecommunications, and the lack of
              certainty that a product will actually be developed or, if and
              when it is developed, that a market will be found for it, as well
              as the high marketing costs and intense competition in these
              fields;

         o    The uncertainty existing on the date of commencement of projects
              as to the total investment required for developing a product and
              the lack of certainty that funding will be found for the
              continued development and marketing of products, if developed;

         o    The rapid technological changes that characterize the industries
              of the companies in which we have invested could reduce or cancel
              demand for products developed by such companies;

         o    The dependence of start-up companies, including those in which we
              have invested, on their founders or on key personnel, especially
              in the areas of management and development;

         o    The lack of certainty regarding the ability of the companies in
              which we have invested to recruit appropriate personnel, in
              particular when faced with increasing competition for quality
              personnel;

                                       9

<PAGE>

         o    The lack of intellectual property protection for internet
              products and increased competition in this area; and

         o    The lack of ability to control and manage a company in which we
              hold a minority stake.

         Several of our affiliates are exposed to fluctuations in prices of raw
materials and commodities.

         Several of our affiliates, primarily those in the agrochemical
industry, have exposure to risks stemming from fluctuations in prices of raw
materials and agricultural commodities. An increase in raw material prices or a
decrease in commodity prices (which could lower the selling prices of our
products) could lower the profitability of our business.

Risks Related to Israel

Exchange rate fluctuations and inflation in Israel impact our business.

         A significant portion of the sales of our major subsidiaries and
affiliates are made outside Israel in dollars or other non-Israeli currencies
while these companies incur significant portions of their expenses in NIS.
Alternatively, some subsidiaries and affiliates whose sales are principally in
NIS incur expenses in dollars or in other non-Israeli currencies. For example, a
significant portion of the sales of our telecommunication equipment, defense
electronics and the agrochemicals businesses are in dollars, whereas a
significant portion of these businesses expenses are incurred in NIS and are
partially linked to the Israeli CPI. In addition, certain borrowings are linked
to the dollar or other non-Israeli currencies or to the CPI. During the calendar
years 2003, 2004 and 2005, the annual rate of inflation was approximately -1.9%,
1.2% and 2.4%, respectively, while the NIS appreciated against the dollar by
approximately 7.6% and 1.6% in 2003 and 2004, respectively, and depreciated
against the dollar by approximately 6.8% in 2005. Consequently, during the
calendar years 2003, 2004 and 2005, the annual rate of inflation as adjusted for
devaluation was approximately 6.2%, 2.8% and -4.1%, respectively. Continued
delay in or lack of any devaluation of the NIS in relation to the dollar or
other currencies may have a material adverse effect on our results of operations
and financial condition.

         To compensate for inflation in Israel and changes in the relative value
of Israeli currency compared to the dollar and other currencies, we have adopted
financial strategies, including entering into foreign currency transactions with
respect to certain specific commitments and general hedging transactions with
respect to monetary assets and liabilities denominated in non-Israeli currencies
(including Brazilian currency). There can be no assurance, however, that such
activities, or others that we may undertake from time to time, will eliminate
the negative financial impact of such fluctuations.

Conditions in Israel may affect our operations.

         We and our principal subsidiaries and affiliates are incorporated under
the laws of the State of Israel, where our principal offices and a substantial
portion of our operations are located. We are directly influenced by the
political, economic and military conditions affecting Israel.

                                      10

<PAGE>

Accordingly, any major hostilities involving Israel, the interruption or
curtailment of trade between Israel and its present trading partners, a
significant increase in inflation or a significant downturn in the economic or
financial condition of Israel could have a material adverse effect on our
business, our results of operations and our financial condition. In addition,
there are a number of countries, particularly in the Middle East, which
restrict business with Israel or Israeli companies. There can be no assurance
that restrictive laws or policies directed toward Israel or Israeli businesses
will not have an adverse impact on the expansion of our business.

Hostilities in the West Bank and Gaza Strip may affect tourism and other
businesses.

         In September 2000, there was an escalation of violence in the West Bank
and Gaza Strip and increased terrorist activities within Israel, causing a sharp
decrease in tourism to Israel in the years 2000-2003 and a further deceleration
in all aspects of the Israeli economy. The areas of tourism and aviation were
most affected by the increased hostilities, and the recession in the Israeli
real estate market has become more entrenched.

         Since the second half of 2003, there has been a gradual improvement in
inbound and domestic tourism. In addition, there are initial indications of a
positive improvement in the real estate market as seen through increased project
initiations and real estate prices.

         However, we are unable to predict the duration of this trend or the
extent of any impact that it may have on our revenues or results of operations.
Any return to a prolonged and substantial political turmoil will likely have an
adverse impact, which may be material, on our business, financial condition and
results of operations. In addition, market perception that these conditions
could have an impact upon us may harm the trading price of our ordinary shares,
whether or not our business or results of operations are actually affected.

Many of our directors, officers and employees are obligated to perform military
reserve duty in Israel.

         Most able-bodied male adult citizens and permanent residents of Israel,
including some of our directors, officers and employees, are obligated to
perform annual military reserve duty, which could accumulate annually from
several days to up to two months in special cases and circumstances. The length
of this reserve duty depends, among other factors, on an individual's age and
position in the military. Additionally, these residents may be called to active
duty at any time under emergency circumstances. Reserve duty may be increased as
a result of an increased level of violence with the Palestinians or military
conflict in the region. We have operated effectively under these requirements
since we began operations. No assessment can be made, however, as to the full
impact of these requirements on our workforce or business if conditions should
change and we cannot predict the effect on us of any expansion or reduction of
these obligations.

Israel's economy may be destabilized.

         Israel's economy has been subject to a number of destabilizing factors.
These include a period of severe inflation in the early to mid-1980s, low
foreign exchange reserves, fluctuations in world commodity prices, military
conflicts and civil unrest. For these and other reasons, the Government of
Israel has intervened in different sectors of the economy. Such intervention has

                                      11

<PAGE>

included employing fiscal and monetary policies, import duties, foreign currency
restrictions and controls of wages, prices and foreign currency exchange rates.
The Israeli government has periodically changed its policies in all of these
areas. Changes in these policies may make it more difficult for us to operate
our business as we have in the past.

Service and enforcement of legal process on us and our directors and officers
may be difficult to obtain.

         Service of process upon our directors and officers and the Israeli
experts named herein, all of whom reside outside the United States, may be
difficult to obtain within the United States. Furthermore, since substantially
all of our assets, all of our directors and officers and the Israeli experts
named in this prospectus, are located outside the United States, any judgment
obtained in the United States against us or these individuals or entities may
not be collectible within the United States.

         There is doubt as to the enforceability of civil liabilities under the
Securities Act of 1933, as amended, or Securities Act, and the Securities
Exchange Act of 1934, as amended, or the Exchange Act, in original actions
instituted in Israel. However, subject to certain time limitations and other
conditions, Israeli courts may enforce final judgments of United States courts
for liquidated amounts in civil matters, including judgments based upon the
civil liability provisions of the Securities Act and the Exchange Act.

Risks Related to Our Ordinary Shares

Our share price may be volatile and may decline.

         Numerous factors, some of which are beyond our control, may cause the
market price of our ADSs or ordinary shares to fluctuate significantly. These
factors include, among other things, announcements of technological innovations,
earnings releases by us or our competitors, market conditions in the industry
and the general state of the securities markets (in particular the technology
and Israeli sectors of the securities markets).

Our operating results in one or more future periods may fluctuate significantly
and may cause our share price to be volatile.

         Our quarterly operating results may be subject to significant
fluctuations due to various factors, including divestitures of companies,
competitive pressures and general economic conditions. Because a significant
portion of our overhead consists of fixed costs, our quarterly results may be
adversely impacted if sales fall below management's expectations. As a result,
our results of operations for any quarter may not be indicative of results for
any future period. Due to all of the foregoing factors, in some future quarters
our sales or operating results may not meet the expectations of public market
analysis or investors. In such event, the market price of our ADSs and ordinary
shares would likely be materially adversely affected.

                                      12

<PAGE>

Item 4.  Information on the Company.
         --------------------------

         We are a company limited by shares organized and existing under the
laws of the State of Israel. We were initially incorporated in 1944 and our full
legal and commercial name is Koor Industries Ltd.

         The address of our registered office is 14 Hamelacha Street, Rosh
Ha'ayin 48091, Israel, and our telephone number is +972-3-900-8333. The address
of our Internet website is: www.koor.com. Our ADSs are listed on the New York
Stock Exchange and our ordinary shares are listed on the Tel-Aviv Stock
Exchange, both under the ticker symbol KOR.

General

         We are a diversified investment holding company. We are engaged,
through our direct and indirect, wholly and partially owned subsidiaries and
affiliates, in the following core businesses: telecommunication equipment,
defense electronics, agrochemicals, tourism and aviation, technology as well as
in other businesses.

         Following the sale in 2005 of part of our investments in MA Industries,
an agrochemical producer, and in Telrad, a telecommunication solutions provider,
we ceased to control these companies and deconsolidated them during 2005. The
companies are now included in our consolidated financial statements according to
the equity method. As a result, our results of operations for the year ended
December 31, 2005 are not comparable, on a line by line basis, to previous
years; however, net earnings is comparable to the prior periods.

         For the year ended December 31, 2005, we reported consolidated earnings
before income tax of approximately NIS 337 million ($73 million) and
consolidated net earnings of approximately NIS 313 million ($68 million).

Business Overview

         Major Shareholders

         In October 1997, as a result of several transactions, the Claridge
Group (comprised of Claridge Israel Ltd. and affiliated entities) became our
largest shareholder. During January 1999, Claridge Israel Ltd. transferred its
holdings to Claridge Israel L.L.C. which, during December 2003, transferred half
of its holdings to Esarbee Investments Limited. As of June 30, 2006, Claridge
Israel L.L.C., Esarbee Investments Limited and affiliated entities (which now
comprise the Claridge Group) together held approximately 30.3% of our
outstanding ordinary shares.

         On May 1, 2006, Discount Investments Corp. Ltd., a subsidiary of IDB
Development Corporation Ltd., signed an agreement to acquire from the Claridge
Group, as well as from Anfield Ltd. (a company registered in Israel and owned by
Jonathan B. Kolber, our Chief Executive Officer) and another company related to
the family of Jonathan B. Kolber, all of our shares held by those entities
totaling 5,753,207 shares, or approximately 34.9% of our outstanding shares, for
$445.8 million. All approvals, to which the transaction was subject, including
Israel's anti-trust commissioner, have been granted. On July 3, 2006, this
transaction closed and 5,081,033 of our shares, or approximately 30.9% of our
outstanding shares, were

                                      13

<PAGE>

transferred to Discount Investments Corp. for approximately $394 million, and a
put option, exercisable during December 2006, was granted to Anfield Ltd. in
respect of the remaining 672,174 shares. Subsequent to the transfer of shares,
seven of our current directors resigned from our Board of Directors, namely Mr.
Charles R. Bronfman, Mr. Andrew Hauptman, Adv. Roni Feinstein, Mr. Chemi Peres,
Mr. Dan Propper, Mr. David Rubner and Prof. Gabriela Shalev. The following five
new directors were nominated - Mr. Nochi Dankner, Mr. Avi Fischer, Mr. Zvi
Livnat, Mr. Yitzhak Manor and Mr. Ami Erel. The final composition of the Board
of Directors will be determined within the next few weeks. Furthermore, we
expect that changes in the composition of our management will occur. Discount
Investments is held 74.2% by IDB Development, which also directly holds 10% of
our outstanding ordinary shares.

         Strategy

         Beginning in July 1998, we initiated an extensive corporate
restructuring program, designed to transform Koor into a diversified investment
holding company with controlling stakes in leading high-growth, export-oriented
Israeli companies. Based on these criteria, we have made the strategic decision
to focus on three businesses: telecommunication equipment, defense electronics
and agrochemicals.

         We have implemented key elements of our strategy to date, including a
substantial capital reallocation process, in which proceeds from the sale of low
growth domestic businesses have been re-invested to increase our stakes in our
core businesses. In this regard during the years 1999 through 2001 we divested
ourselves of our non-core holdings, including our interests in Koor Insurance
Agency, Koor Finance, Contahal, Merhav, the Switching Division of Tadiran
Telecommunications, Tekem, Tadiran Information Systems, Koor Metals, Phoenicia,
Yonah, Tadiran Com, Tadiran Telematics, Mashav, Merkavim Metal Works Ltd.,
Middle East Tube Co. Ltd. and the Q Group PLC. We also sold real estate assets
of Koor Properties for approximately NIS 47 million in 2001 and real estate
assets of Tadiran for approximately NIS 273 million in March 2002.

         During 2005, we continued to work closely with our portfolio companies
to take active measures to create value. These measures include identifying new
market opportunities; focusing on core competencies, while divesting non-core
assets; bringing in new strategic partners; and streamlining group operations.
In 2005 we completed Israel's largest private sector defense transaction. The
transaction, initiated in the second part of 2004 included the sale of our
entire 70% shareholding in the Elisra Defense group, an electronic warfare
manufacturer, and our entire 32% shareholding in Tadiran Communications, a
communications solutions provider, to Elbit Systems, a defense solutions
provider.

         During 2005 we acquired, from the Federmann Group, 7.7% of the
outstanding ordinary shares of Elbit Systems.

         In July 2005, we received, as a dividend in kind, 70% of Dekolink
Wireless Ltd., from the Elisra Defense group. Dekolink Wireless offers solutions
for expanded cellular coverage outdoors and in buildings.

                                      14

<PAGE>

         During 2005, we took advantage of our increased financial strength,
positive trend in the capital markets and the low interest rates in Israel and
sought to refinance our bank debt. On April 10, 2005, as part of a private
placement to Israeli institutional investors, we issued NIS 400 million par
value in debentures, as well as 800,000 options for NIS 400 million in cash. The
debentures bear annual interest of 3.75%, linked to the CPI, which is paid on
April 30 and October 31 of each year. The debentures are linked to the CPI and
will be repaid in a balloon payment on April 30, 2010. The issue proceeds were
allocated to the components of the package according to the fair value of the
securities issued. Accordingly, the discount in respect of the debentures
amounted to approximately NIS 22 million which will be amortized as finance
expenses over the life of the debentures. During 2005, we also refinanced an
additional NIS 944 million of our bank debt for an additional 5 years, through
to 2010, at lower interest rates than the previous debt. In 2006, we continued
with the refinancing measures and refinanced an additional NIS 343 million of
bank debt for repayment in 3 years.

         On April 15, 2005, we sold all the ordinary shares we held in treasury
(193,229 shares) to an overseas institutional investor for approximately NIS 50
million.

         On January 29, 2006, we signed an agreement to acquire 50% of Epsilon
Investment House, or Epsilon, for NIS 106 million. Epsilon is one of Israel's
fastest growing boutique money management firms. Through the acquisition we
sought to take advantage of the evolving local capital market following the
Bachar committee reforms. On April 11, 2006 we completed the transaction after
all the necessary approvals were received including that of Israel's Capital
Markets commissioner.

         On April 25, 2006, we signed an agreement for the sale of our entire
holding in Koor Trade to a group of managers, including one of our senior
executives, for $8.3 million. The transaction was completed on May 28, 2006, and
the entire cash proceeds of $8.3 million were received.

         Our Telecommunication Equipment Business

         Our affiliated companies, ECI and Telrad, operate in the
telecommunication equipment business and ECtel Ltd., in which we owned 14.8%
interest as of December 31, 2005, also operates in the telecommunication
equipment business.

         As of December 31, 2005, our principal affiliated and other companies
in the telecommunication equipment business were:

<TABLE>
<CAPTION>

                                                    Percentage
                                                    Of Equity
                                                    Ownership       Principal Products and Services
                                                   -------------   -------------------------------------------------
<S>                                                <C>             <C>
ECI Telecom Ltd.                                      29.7%         Telecommunication equipment and systems
ECtel Ltd. (1)                                        14.8%         Fraud management and revenue protection software
Telrad Networks Ltd.                                  61.0%         Telecommunication equipment and systems
</TABLE>

(1)  As a result of the distribution of ECtel shares by ECI to its shareholders
     on June 29, 2006, as described below, our interest in ECtel Ltd. increased
     to 19.2%.

                                      15

<PAGE>

         ECI Telecom Ltd. (ECI)

         ECI is a provider of network, routing and access solutions for optical
and digital communications networks. ECI designs, develops, manufactures,
markets and supports telecommunications solutions for evolving services,
including voice, data video and multimedia, and building next generation
converged networks. ECI's products and platforms are designed to create and
manage bandwidth, maximize revenues for network operators, reduce its customers'
operating expenses, expand network capacity, improve network performance and
enable new revenue-producing services. ECI markets its products globally to over
300 wireline and wireless service providers.

         ECI operates primarily through the following three divisions, although
it has certain other operations and interests:

         o    The Broadband Access Division which develops, manufactures,
              markets and sells innovative access products that enable
              telecommunications service providers to mass deploy broadband
              networks and offer a variety of new advanced services. The
              division's solutions enable telecommunications service providers
              to enhance their existing local loop usage performance and
              efficiency, increase line capacity and facilitate advanced
              services on existing infrastructure. These solutions also enable
              providers to introduce fiber to the curb, node and premises
              (FTTx) as well as similar solutions, such as addressing the use
              of copper telephone wire and fiber to provide voice, data, and
              video services at multi-megabits and gigabits per-second speeds,
              with even higher capacity and support the entire range of
              broadband technologies, including various types of DSL. The
              division's primary product is the Hi-FOCuS(R) 5, a multi-service
              access gateway, or MSAG, Which offers high functionality and
              feature-rich broadband access including video and interactive
              television. The full service access gateway also fits seamlessly
              into any network topology with a wide choice of network interface
              types. The division's customers are principally incumbent local
              exchange carriers and large operators and include Deutsche
              Telekom AG and France Telecom.

         o    The Optical Networks Division which provides telecommunications
              service providers with intelligent and flexible high-density,
              data-aware optical solutions for the metro access, metro-core and
              regional networks. The division's product line enables end-to-end
              transport of voice and data circuits from the user's premises to
              high-capacity optical backbones, supports the process of
              streamlining the use of optical networks and allows
              telecommunications service providers to offer additional services
              with greater efficiency. These optical network systems are used
              by wireline operators, cellular operators and carriers of
              carriers. Its primary product is the XDM(R), a multi-service
              provisioning platform, or MSPP. The XDM integrates, within a
              single shelf, the functions of dense wavelength division
              multiplexing, or DWDM, a method of multiplexing signals by
              transmitting them at different wavelengths through the same optic
              fiber, intelligent optical networking multiplexer, broadband,
              narrowband, wideband and digital cross connects, IP, L2 switching
              and

                                      16

<PAGE>

              asynchronous transport mode, or ATM, switching as well as
              streaming support and synchronous digital hierarchy, or SDH,
              add-drop multiplexers. This all-in-one optical platform provides
              operators with a flexible, cost-effective implementation that
              scales economically.

         o    The Data Networking Division which was established following
              ECI's acquisition of Laurel Networks, Inc. in June 2005 (see
              below), develops, manufactures, markets and sells
              high-performance broadband routers that enable telecommunications
              carriers and service providers to deliver IP-based data, voice,
              and video services. The division's technology allows carriers to
              transition from Internet-only service delivery models to advanced
              "triple-play" networks. Designed to meet carriers' scalability
              needs, the division's broadband edge routers allow new services
              and capabilities to be added to carrier networks - without
              incremental cost - as the subscriber base grows.

         In addition, ECI operates in the areas of next generation telephony
solutions via its minority interests in Veraz Networks Inc., or Veraz, a private
company in which ECI holds a 41.5% interest. Veraz is a global provider of voice
over IP, or VoIP, softswitches, media gateways and digital compression products
to wireline, broadband and wireless service providers. Its holding in Veraz
enables ECI to maintain a foothold in an important strategic market, while at
the same time focusing internal resources on ECI's core businesses. In addition
to its packet telephony products, Veraz also operates in the DCME market of
bandwidth optimization solutions. DCME systems simultaneously compress toll
quality voice, fax, voice band data, native data, and signaling. The system
improves transmission media efficiency and helps achieve maximum bandwidth
utilization and guaranteed QoS provision of traffic payloads. Veraz was formed
in December 2002, by the combination of the principal activities of ECI's NGTS
operations with those of NexVerse Networks, Inc.

         ECI's other operations include the remaining activities of its NGTS
unit, following the transfer of the principal NGTS operations to Veraz, which
primarily focuses on the supply of DCME systems to Veraz, which has exclusive,
world-wide distribution rights for these systems.

         In April 2005, ECI acquired the optical activities and technology of
Eastern Communications Co. Inc. of China, for approximately $8.5 million, which
broadened its multi-service provisional platform product line. The acquired unit
was merged with the operations of ECI's partly-owned Chinese subsidiary,
Hangzhou ECI Telecommunications Co., or HETC, which is part of the Optical
Networks Division. As a result of the transaction, ECI's interest in HETC
increased to approximately 72.4%.

         In April 2005, ECI completed the sale to ABN Amro Bank N.V of Notes and
convertible warrants that had been issued to us in connection with debt owed to
ECI by Global Village Telecom Ltda., a Brazilian company. The consideration for
the transaction was the sum of $96.2 million paid to ECI in cash, plus a further
potential amount of approximately $3.3 million, based upon the occurrence of
certain contingencies. The transaction resulted in the recognition by ECI of a
net gain from recovery of doubtful debt of approximately $10.4 million,
excluding the contingent amount.

                                      17

<PAGE>

         In June 2005, ECI completed its purchase of 100% of the outstanding
common shares of Laurel Networks, Inc., for the sum of $88 million, paid in
cash. Following the transaction, Laurel Networks became the Data Networking
Division (see above).

         Under U.S. GAAP, for the year ended December 31, 2005, ECI reported
revenues of $630 million, gross profit of $262 million, income from continuing
operations of $40.6 million and net income of $39.9 million. Under Israeli GAAP,
ECI's net income for the year ended December 31, 2005 was $56.2 million. ECI is
included in our financial statements on an equity basis only. As of December 31,
2005, our equity interest in ECI was approximately 29.7%.

         For a discussion of material legal proceedings relating to ECI, please
see "Item 8, Financial Information - Legal Proceedings."

         ECtel Ltd.

         ECtel Ltd., or ECtel, is a leading global provider of Integrated
Revenue Management (IRM) solutions for wireline, wireless, converged and
next-generation operators. ECtel offers carrier-grade products that address
rapidly evolving telecom business and technological needs. ECtel leverages its
dedicated IRM focus, financial stability, and blue-chip customer base to provide
a comprehensive array of flexible, proven solutions with rapid return on
investment.

         ECtel offers telecom operators the very best in Integrated Revenue
Management. As the world-leading provider of real-time fraud prevention
solutions, ECtel is an expert in proactively monitoring networks and operations
support systems (OSSs) to minimize revenue leakage and maximize visibility of
all revenue streams.

         Through ECtel's integrated modular offerings, operators enjoy the
benefits of lower hardware, integration and operating costs.

         Founded in 1990, ECtel is a premier developer of real-time detection
and prevention technologies for triple-play applications. Underscored by its
deployment of the world's first 3G and VoIP fraud prevention systems, ECtel
delivers solutions that support state-of-the-art networks for both prepaid and
postpaid services. A flexible architecture for all of the Company's products
assures operators a safe investment and smooth migration into the next
generation.

         Our investment in ECtel is presented in our consolidated financial
statements by the cost method for Israeli GAAP purposes, and is classified as
available-for-sale under FAS 115 for U.S. GAAP purposes, therefore ECtel's
results are not included in our results of operations.

         On June 29, 2006, ECI distributed all of its remaining shares in ECtel
(approximately 15.9%) to ECI's shareholders of record. The distribution ratio
was approximately 0.025 ECtel shares for each share of ECI. Koor received
815,660 ECtel shares in this distribution, as a result of which Koor now holds a
19.2% interest in ECtel.

         Telrad Networks Ltd.

         On June 22, 2005, we completed the second stage of the sale of shares
of Telrad, thereby completing the sale of 39% of Telrad's shares. Under the
original agreement, mutual agreement of the Koor group and another shareholder,
Fortissimo GP Capital Fund L.P., or Fortissimo, is

                                      18

<PAGE>

required on significant matters relating to Telrad's ordinary course of
business. However, two additional shareholders joined Fortissimo and together
purchased 19.5% of Telrad shares for $6.25 million to complete stage two of the
sale. These additional shareholders are not party to the rights that require
mutual agreement and therefore, the proportionate consolidation of Telrad was
discontinued as of June 30, 2005, and as of that date our investment in Telrad
is presented according to the equity method.

         Telrad is an innovative developer and marketer of telecom products and
end-to-end solutions. Telrad has over 50 years of experience in both legacy
switching and next generation networking, and has a long-standing partnership
with Nortel Networks. Telrad provides reliable networking solutions to many
countries in Latin America, Africa, Eastern Europe and Asia Pacific and is
selling its products in West Europe and North America through channels like
Alcatel and Alvarion.

         Telrad's operations are divided into the following four divisions:

         Optical Solutions Division

         Telrad's Optical Solutions Division provides solutions for Next
Generation metro optical networks via Direct, OEM and ODM channels. This
division was created in 2005 from the former ODM division (original development
manufacturer).

         System Integration Division

         Telrad's System Integration Division, formerly PNI, provides end-to-end
solutions for telecom and service providers. The System Integration Division
specializes in integrating cutting-edge, best of breed components including
Telrad's' own innovative IP/NGN products. The System Integration Division
delivers full and efficient transition into profitable triple play and IPTV
networks. The solutions consider the operator's needs, technology,
infrastructure and financial model, fitting an end to end best of breed solution
to client needs.

         IP/NGN Division

         Telrad's IP/NGN Division designs and develops key innovative IP/NGN
solutions portfolio, positioning Telrad as a leading power in the global
telecommunications market. The products enable Cable TV Operators, wireless and
wireline telecom carriers and ISPs to easily and cost effectively offer
feature-rich telephony services over Wireline, Wireless, Cable and other
broadband IP infrastructures.

         As the pioneer and leading provider of Last Mile Voice and Media over
IP solutions, the IP/NGN Division is committed to apply Telrad vast market
experience and development expertise to continue to meet operators' evolving
needs.

         Global Operations Division

         Telrad's Global Operations Division provides advanced operations
solutions and services, including new product introduction management, system
house services and complete supply chain management for Telrad's own
manufacturing needs and for other companies.

                                      19

<PAGE>

         New Products Development Division

         In May 2006, Telrad's management announced an organizational change
whereby it established one New Products Development Division that combines the
Optical Products and the IP/NGN divisions. All sustained work was transitioned
to the Global Operations Division to enable the new division to focus on
developing new products for the company.

                  Telrad Reorganization Plan

         In 2004, Telrad's board of directors approved a reorganization plan
that included employee layoffs. For the years ended December 31, 2004 and 2005,
we recorded expenses in the amount of NIS 38 million and NIS 29 million,
respectively, under the item "other expenses" in our statement of operations.

         Telrad Subsidiaries

         comMATCH Ltd., a wholly-owned subsidiary of Telrad, is a leading
provider of Last-Mile over IP solutions for telecommunications operators,
creator of DUET Carrier Grade VoIP (Voice over Internet Protocol, Gateways
portfolio. comMATCH is a spin-off of Telrad Networks. The company's mission is
to deliver carrier class VoIP and Media over IP solutions enabling Multi-Service
Operators and alternative carriers to deliver reliable, high-quality and
feature-rich telephony services over IP and TDM networks. The DUET family of
products enables customers to seamlessly bridge Legacy Public Switched Telephone
Network, or PSTN, and IP networks via various alternative infrastructures, like
Cable TV, xDSL, fixed broadband wireless, Gigabit Passive Optical Networks
(GPON) and more. The company's technology provides connectivity and
interoperability for Next Generation Access and Public Networks. comMATCH's
sales in 2004 and 2003 totaled $3.9 million and $1.8 million, respectively.

         At the beginning of 2006 all the activities of comMATCH were merged
into Telrad's IP/NGN division.

         Telrad Connegy Communications Inc. (Connegy)

         Telrad held 52% of its U.S. based subsidiary, Connegy, whose main
products consist of the UNITe Family of Business Systems and IP and LAN
telephony solutions, including the advanced i.Picasso 6000 IP telephone and the
CNS 3200 Enhanced Hosted Communications Platform. Connegy provides enterprise
customers, carriers and others with a comprehensive family of digital and VoIP
telecommunication solutions and applications

         In November 2005 the Board of Directors of Telrad decided to sell
Connegy. In February 2006 Telrad sold Connegy to a third party.

         Telrad Ukraine limited

         During 2005 Telrad established a fully owned subsidiary in Ukraine. The
subsidiary is serving as a low cost development center serving Telrad's
development needs across all Telrad's divisions, Optical Solutions, IP/NGN and
Global Operations.

                                      20

<PAGE>

         Telrad's Relationship with Nortel

         On April 23, 2002, Nortel and Telrad signed license and distribution
agreements, allowing Telrad to sell products based on Nortel know-how and
technology to a defined list of carriers in countries in which Nortel does not
intend to conduct business and/or in which its activities are limited. During
2003, a number of distribution and license agreements were signed by the parties
covering three of the major areas of operation of Nortel. In February 2005,
Telrad and Nortel entered into a master reseller agreement, which unified the
parties' obligations under their previous distribution and license agreements.

         Other Telecommunication Equipment Business

         In addition to ECI and Telrad, a small portion of our telecommunication
equipment business is conducted by Microwave Networks Inc., or MNI, in the
United States and Dekolink Wireless Ltd., or Dekolink, in Israel. Dekolink
Wireless offers solutions for expanded cellular coverage outdoors and in
buildings. For the years ended December 31, 2005 and 2004, MNI and Dekolink had
sales of approximately NIS 275 million ($60 million) and NIS 176 million ($38
million), respectively.

         As described above, we also have direct ownership of approximately
14.8% in ECtel, following the distribution by ECI, on May 10, 2004, of 7.6
million of its shares in ECtel to its shareholders, including us, and additional
360 thousand shares purchased from Telrad on December 10, 2005. As a result of
the distribution of ECtel shares by ECI on June 29, 2006, as described above,
our shareholding in ECtel increased to 19.2%.


         Our Defense Electronics Business

         Elbit Systems Ltd, in which we owned a 7.7% interest as of December 31,
2005, operates in the defense electronics business and is the controlling
shareholder of Elisra Defense Group (70%) and Tadiran Communications (43%),
which also operate in the defense electronics business.

         As of December 31, 2005, our principal investment in the defense
electronics business was:

                         Percentage
                         Of Equity
                         Ownership          Principal Products and Services
                         -----------------  ---------------------------------

Elbit Systems            7.7%               Holding Company; Command, control,
                                            communications and intelligence
                                            systems for defense applications
                                            and Electronic warfare, equipment
                                            and systems


         On December 27, 2004, we entered into a series of agreements with Elbit
Systems Ltd., or Elbit, and with Federmann Enterprises Ltd., or Federmann. Under
the terms of the agreements, we would sell our entire holdings in Tadiran
Communications to Elbit for $146

                                      21

<PAGE>

million. Concurrently, we would acquire 9.8% of Elbit's share capital from
Federmann for $99 million. According to the shareholders' agreement, Federmann
has undertaken to support the appointment and vote for the election of
directors to Elbit's Board who are nominated by us, in a number equal to the
greater of (a) two directors or (b) 20% of the number of Elbit's directors, and
we have undertaken to vote for the election of all the candidates nominated by
Federmann for the offices of the other directors of Elbit. Furthermore, we have
undertaken to vote, in every matter and proposed resolution submitted for
approval to a general shareholders' meeting of Elbit's shareholders, in
accordance with instructions given to us by Federmann, subject to certain
exceptions.

         The sale of the shares of Tadiran Communications and the purchase of
the Elbit shares would be executed in two stages, as follows:

         In the first stage, which was completed on April 18, 2005, we sold to
Elbit 13.8% of the shares of Tadiran Communications to Elbit for $63 million and
concurrently we acquired 5.3% of the shares of Elbit from Federmann for $53
million. After the closing of the first stage, we were entitled to appoint one
director of Elbit's board, and Elbit was entitled to appoint three of the
members of Tadiran Communications' board of directors.

         Pursuant to the original series of agreements, in the second stage, we
were, inter alia, to have realized the balance of our holdings in Tadiran
Communications and in Elisra Electronic Systems Ltd., or Elisra, in which we had
a holding of 70%.

         On July 6, 2005, the original agreements between us and Federmann and
between us and Elbit were amended, whereby Amended Stage 2 and Amended Stage 3
were stipulated. According to Amended Stage 2, we acquired 2.45% of the shares
of Elbit from Federmann for $24.7 million. We announced that as long as we hold
Elbit shares we will not invoke our right to appoint 20% of the Elbit directors
and therefore our investment in Elbit is stated by the cost method.

         Additionally, we sold to Elbit 5% of the shares of Tadiran
Communications for $23 million and recognized a gain in the amount of NIS 11
million. After execution of this transaction, we and Elbit acted by virtue of
the joint holdings, so that half of the directors in Tadiran Communications
(other than the external directors) were appointed by us and half by Elbit.

         According to Amended Stage 3 between us and Elbit, it was stipulated
that we would sell to Elbit 13.2% of the shares in Tadiran Communications for
$60 million, as well as all of its holdings in Elisra (70%) for $70 million and
for additional consideration contingent on future insurance receipts in respect
of a fire that occurred in the plants of Elisra's subsidiaries in 2001.

         On November 30, 2005, after all the requisite approvals for closing the
sale were received, Stage 3 was closed. The said sale generated a capital gain
to us of NIS 148 million in respect of the sale of Elisra, which was recorded in
the statement of operations in the fourth quarter of 2005. Moreover, as a result
of the sale, the financial statements were reclassified, such that the operating
results of Elisra and the capital gains generated from its sale were reported as
discontinued operations.

                                      22

<PAGE>

         Following the sale, we hold approximately 7.7% of Elbit Systems, which
in turn holds 70% of the Elisra Defense Group and 43% of Tadiran Communications.


         Elbit Systems

         Elbit Systems Ltd., or Elbit, develops, manufactures and integrates
advanced, high-performance defense electronic and electro-optic systems for
customers throughout the world. Its major activities include command, control,
communication, computer and intelligence (C(4)I) systems and intelligence
surveillance and reconnaissance (ISR) systems for defense and homeland security
applications. Elbit also performs upgrade programs for airborne, ground and
naval defense platforms, often as a prime contractor, and supply advanced
turnkey Unmanned Airborne Vehicle (UAV) systems.

         Elbit is one of the few companies upgrading both Western and former
Eastern bloc defense platforms. In addition, Elbit is one of only a few upgrade
contractors in the world who also integrate, develop and manufacture electronic
and electro-optic systems and products.

         In 2000, Elbit Systems merged with Elop Electro-Optics Industries Ltd.
(El-Op). Following the merger, El-Op became a wholly-owned subsidiary of Elbit.
The merger enhanced Elbit's position as the largest non-government owned defense
company in Israel.

         Elbit tailors and adapts its technologies, integration skills, market
knowledge and battle-proven systems to each customer's individual requirements
in both existing and new platforms. By upgrading existing platforms with
advanced electronic and electro-optic technologies, Elbit provides customers
with cost-effective solutions, and the customers are able to improve their
technological and operational capabilities within limited defense budgets.

         The recent military operations around the world and ongoing terrorist
threats have caused a shift in the defense priorities for many of Elbit's major
customers. While Elbit continues to perform platform upgrades, more emphasis is
being placed on ISR, including information systems, intelligence gathering,
border and perimeter security, UAVs, space and satellite-based defense
capabilities and homeland security issues. Elbit believes that its existing
systems, products and capabilities position us to meet emerging customer
requirements in many of these areas.

         Elbit Systems' shares are traded on the NASDAQ under the symbol "ESLT"
and on the Tel-Aviv Stock Exchange (TASE).

         Our investment in Elbit is presented in our consolidated financial
statements by the cost method for Israeli GAAP purposes, and is classified as
available-for-sale under FAS 115 for U.S. GAAP purposes, therefore Elbit's
results are not included in our results of operations.



         Our Agrochemicals Business

         Our affiliated company, Makhteshim-Agan Industries Ltd., or MA
Industries, operates in the agrochemicals business through its direct and
indirect subsidiaries.

                                      23

<PAGE>

         As of December 31, 2005, our principal affiliated companies in the
agrochemicals business were:

<TABLE>
<CAPTION>
                                                   Percentage
                                                   Of Equity
                                                   Ownership      Principal Products and Services
                                                   ------------   -------------------------------------------------
<S>                                                 <C>           <C>
Makhteshim-Agan Industries Ltd.                     31.5(1)(2)    Holding Company
Makhteshim Chemical Works Ltd.                     100.0(3)       Insecticides and fungicides and other chemicals
Agan Chemical Manufacturers Ltd.                   100.0(3)       Herbicides and synthetic aroma chemicals
Milenia Agro Ciensias S.A.                         100.0(3)       Formulation and distribution of crop
                                                                  protection chemicals
Lycored - Natural Products Industries Ltd.         100.0(3)(4)    Natural Products and Food Additives
</TABLE>

________________

(1)  The ordinary shares of MA Industries are traded on the Tel Aviv Stock
     Exchange, or TASE.
(2)  After the balance sheet date, we acquired a total of 6,920,565 shares of MA
     Industries, and MA Industries acquired 24,875,703 of its own shares, which,
     upon the conversion of convertible debentures and the exercise of stock
     options including employee stock options, increased our interest in MA
     Industries to approximately 33.7% as of June 30, 2006 (approximately 32.5%
     on a fully diluted basis taking into consideration the exercise of
     outstanding stock options and the conversion of outstanding convertible
     debentures).
(3)  Indicates the percentage of direct ownership by MA Industries.
(4)  In 2005 Lycored granted stock options to employees, which, if exercised,
     will dilute MA Industries direct ownership in Lycored to approximately
     91.84%.

         MA Industries is the world's leading generic manufacturer of crop
protection products. After a long period of coordination and cooperation as
separate publicly-traded entities, Makhteshim and Agan formally merged in May
1998. The new MA Industries replaced its predecessors on the Tel Aviv Stock
Exchange and now has several wholly-owned subsidiaries which include Makhteshim
Chemical Works Ltd., or Makhteshim, Agan Chemical Manufacturers Ltd., or Agan,
and Milenia Agro Ciensias S.A., or Milenia, all of which are collectively
referred to as "the MA Group." These companies are leading international
suppliers of generic crop protection products. The MA Group produces a full
range of crop protection chemicals, including acaricides, insecticides,
fungicides, herbicides as well as plant growth regulators. The company is also
engaged in the development, production and marketing of fine chemicals,
intermediates, specialty aroma chemicals, industrial chemicals, antioxidants and
nutraceuticals.

         The Agrochemicals Business Environment in 2005

         After several years in which the agrochemicals market underwent
significant structural changes, recovery in the past three years has been
indicated by increased demand for plant protection chemicals and improved
business results of most companies. In 2005, the agrochemical market increased
by 1.9%, reaching 31.3 billion dollars, compared with 30.7 billion dollars in
2004.

         The agrochemicals market has become more concentrated since the recent
years' trend of mergers of the multinational companies. At present, six large
companies hold approximately 71% of the conventional agrochemicals market. This
process of consolidation has led to large gaps between the two leading companies
- Syngenta and Bayer - and the rest of the companies.


                                      24

<PAGE>

In the short-to-medium term, the process has stabilized the market by reducing
the number of competitors and has tempered the falling prices.

         Crop Protection

         Generic agrochemicals offer an alternative source for widely utilized
chemicals previously manufactured under patents by larger research-based
chemical manufacturers. Research-based chemical manufacturers often focus their
resources on developing new agrochemicals and supply of additional chemicals by
generic manufacturers, such as MA Industries, to supplement their capacity. In
the next few years, as a result of decreased resources committed to research and
development of new agrochemicals products and the expiration of existing
patents, a significant number of widely used agrochemicals are expected to lose
patent protection in many geographic regions (primarily South America),
substantially increasing the available market for sales by generic
manufacturers. The off patent component of the agrochemical industry grew in
recent years to approximately 69% as of December 31, 2005 and is expected to
exceed 70% of the agrochemical market by 2007. In addition, the modernization of
the agricultural industries of Eastern Europe and other developing countries
offers increasing sales opportunities for both research-based and generic
agrochemical manufacturers.

         The major competitors in the international market for agrochemicals are
major international research-based chemical producers. These major international
chemical producers have significant influence on the prices of most of MA
Industries' products. In the Israeli market, MA Industries competes with
importers with respect to most of its products, and competes with both importers
and Israeli producers with respect to non-pesticide products.

         The development of new generic products requires significant investment
for research, registration, establishment of production and marketing
facilities. The MA Group typically focuses on products that require a high
degree of sophistication in process development and production, and are,
therefore, less susceptible to extensive competition. Their prices, therefore,
tend to be relatively higher than sectors where competition is more prevalent.
For many of these products, the MA Group is the world's second largest
manufacturer, with the original research-based chemical company maintaining the
majority share. We believe that the MA Group's ability to compete with major
international research-based chemical companies and other generic chemical
manufacturers is based upon their flexible manufacturing facilities, advanced
research and development capabilities, fulfillment of stringent registration and
licensing requirements of various countries, compliance with environmental
regulations, material purity and worldwide marketing and cooperation with
certain multinational companies with respect to the production and marketing of
numerous products. An essential component of the MA Group's ability to maintain
its market share on the worldwide market is the successful introduction of new
generic products immediately after the expiration of the patents validity. In
1998, an amendment was passed to Israeli Patents Law 1967, which has certain
beneficial ramifications for the Israeli agrochemical industry. Under this
amendment, (i) subject to certain conditions, research activities on a patent
during the patent period for the purposes of production deployment after the
patent expiration will not constitute misuse of an invention, and (ii) the
period of patents in the agrochemical industry cannot be extended. These changes
should facilitate the introduction of new products by the MA Group.

                                      25

<PAGE>

         The MA Group plans to develop, over the next several years additional
agrochemical products, including fungicides, insecticides and herbicides, based
primarily on a substantial number of patents held by other parties expiring
within the next few years. The MA Group purchased the right to manufacture and
market several agrochemical products from the developers of such products.

         New research and developments in the field of trans-genetic plant
species that can tolerate insects and in plant species that are resistant to
fungal diseases may have an adverse impact on the demand for the MA Group
products during the next few years, depending upon the success of such
developments.

         The MA Group markets its crop protection chemicals primarily to
national distributors and foreign manufacturers, who use such chemicals in the
formulation of a wide range of products and sell the formulations to
distributors and end users. The MA Group manufactures over 80 different active
ingredients, which are sold as technical grade materials and "ready"
formulations. These technical grade materials are used in the formulation of a
wide range of herbicides, insecticides, fungicides and plant growth regulators.
The "ready" formulations are sold to distributors. Agan sells its synthetic
aroma chemicals principally to the detergent, soap and cosmetics industries. No
single product manufactured and sold by the MA Group accounted for more than 10%
of MA Industries' total sales in 2005 and 2004.

         Foreign Activities

         As part of MA Industries' strategy to focus on its core businesses and
increase market penetration in the agrochemicals industry, it has continued to
expand its agrochemicals business abroad.

         In October 2001, MA Industries and several of its subsidiaries entered
into a securitization transaction, pursuant to which the subsidiaries agreed to
sell all their accounts receivable to several foreign companies which were
established for this purpose, but which are not owned or controlled by MA
Industries or its subsidiaries. The acquisition of the accounts receivable by
these companies was financed by a United States affiliate of the Bank of America
Group. On September 28, 2004, MA Industries and certain subsidiaries signed an
agreement with Bank of America to terminate the securitization undertaking. On
that same date, they entered into a new agreement with Rabobank International
for the sale of trade receivables in a securitization transaction to replace the
previous agreement with Bank of America. The new agreement is similar in
principle to the prior agreement with several changes, including, among others,
that in the new agreement additional MA Industries subsidiaries are included in
the transaction. The volume expected to be at the disposal of the companies
purchasing the accounts receivable is approximately $250 million (compared with
$150 million in the previous securitization agreement), on a current basis, so
that the considerations received from the customers whose debts were sold will
be used to purchase new debts. Under the terms of the securitization agreements,
MA Industries will handle collection of the sold debts for these companies in
consideration of a fee, which is to be determined in accordance with such
agreements. The period in which the companies will sell their trade receivables
will be one year from the closing date of the transaction. This period may be
extended, with the consent of all the parties, for additional one-year periods,
up to a maximum of four extensions. Under the terms of the agreement, MA
Industries undertook to meet certain financial covenants, mainly a ratio of

                                      26

<PAGE>

liabilities to capital and profitability ratios, and as of December 31, 2005 and
March 31, 2006, MA Industries was in compliance with these covenants. As of
December 31, 2005, MA Industries received cash proceeds of approximately $146.5
million from this securitization transaction, as of March 31, 2006, the MA
Industries received cash proceeds of $202.1 million.

         In April 2004, MA Industries, through a wholly-owned subsidiary, signed
agreements to acquire ownership and control in a group of three companies,
Vegetation Management LLC, Farm Saver.com LLC and Nation Ag II LLC, which are
engaged in the registration, import and marketing of agrochemicals in the U.S.
The total purchase price amounted to approximately NIS 303 million.

         In June 2004, MA Industries, through a wholly owned subsidiary, signed
an agreement for acquisition of approximately 45% of the rights in Control
Solutions Inc., or CSI, a U.S. company engaged in the marketing of pesticides to
the non-agricultural market in the United States. In addition, the subsidiary
was granted an option, which may be exercised at any time during the next three
years, to increase its share in CSI to 60%, in exchange for a payment ranging
between NIS 6.8 million and NIS 47.8 million, based on CSI's earnings in
2004-2006. In addition, commencing in 2009, the subsidiary and the remaining
shareholders of CSI have the right to require the subsidiary to acquire from the
remaining shareholders of CSI the balance of their shares in CSI in
consideration for an amount to be determined based on the earnings of CSI for
the three years preceding the acquisition date. In October 2005 the wholly owned
subsidiary exercised its option to increase its share in CSI, and thus increased
its holdings to 60%. Accordingly the company was fully consolidated as from
October 2005.

         In July 2004, MA Industries, through a wholly owned subsidiary, signed
an agreement for acquisition of all the shares and rights of Farmoz PTY Limited,
an Australian company engaged in the marketing and distribution of pesticides in
Australia.

         In August 2004, MA Industries, through a subsidiary, signed an
agreement for acquisition of 50.1% of the rights in RiceCo LLC, a U.S. company
engaged in the development and marketing of herbicides for rice.

         The total purchase price paid for CSI, Farmoz and RiceCo amounted to
approximately NIS 186 million.

         In January 2005, MA Industries, through a wholly owned and fully
controlled subsidiary, completed the acquisition of 49% of the shares of
Makhteshim Agan Benelux & Nordic B.V. (hereinafter - Mabeno), which acts as the
exclusive distributor of plant protection products in the Benelux area and
Scandinavia. Pursuant to the agreement, the consideration was paid in 693
thousand of MA Industries' shares held by the subsidiary. The subsidiary was
granted an option, exercisable at any time, to increase its share in Mabeno to
55%.

         In April 2005, MA Industries, through wholly owned and fully controlled
subsidiaries, acquired 70% of the shares of Biomark Tradinghouse Co.
(hereinafter - Biomark), which engages in the marketing of plant protection
materials in Hungary. MA Industries received an option to purchase the balance
of the shares of the company in the future, and thereby to increase its holdings
to 100%.

                                      27

<PAGE>

         The cost of acquiring the 49% in Mabeno and 70% in Biomark, including
the cost of exercising the option to increase the rate of holding in CSI
amounted to $ 12.6 million.

         On February, 2005, MA Industries', through a wholly owned subsidiary,
signed a long term joint supply agreement with Bayer CropScience LP for the
marketing of Tebuconazole in the USA (product sold under the name "Orius" which
is the brand name under which MA Industries sells Tebuconazole in many other
parts of the world). Tebuconazole ("Orius") is a fungicide which is intended to
treat a wide variety of diseases in a large number of economically important
crops such as cereals, grapes, peanuts, fruit trees and vegetables. But it is
important mainly due to its being a leading product, proven to be particularly
effective in treating Asian wheat rust in soy plants, which has spread
throughout South America. Initial signs of the disease were discovered last
season in nine US states. The US EPA has recently approved Tebuconazole for use
on soy against Asian wheat rust, in particularly speedy proceedings (section
18), in view of the possibility that there might be an outbreak of the disease
in the coming season in the USA.

         On April, 2005, MA Industries, through a wholly owned subsidiary,
signed a long term strategic supply agreement with the multinational
agrochemical firm Bayer CropScience ("Bayer"). The agreement relates to the
insecticide called Imidacloprid, which is protected in most countries around the
world by patents owned by Bayer. Under the agreement, Bayer is to provide MA
Industries' subsidiary with Imidacloprid in order for the subsidiary and other
companies in the MA Group to sell it to the MA Group's customers around the
world, in the area of agrochemicals and in other areas. The agreement affords MA
Industries' the right to rely on the licensing files of Imidacloprid, owned by
Bayer, in various countries. The date of access to Bayer's licensing data is
different in each country: in some countries access can already be allowed now,
while in other countries, it will be available in the future. Imidacloprid is an
insecticide with a broad range of uses on more than 140 different crops, and is
one of the most important insecticides currently sold around the world. The
product is sold in more than 100 countries. MA Industries is unable, at this
stage, to anticipate the international market share for the product that it may
grab, or the expected profits from such, but it estimates that if it is
successful in marketing the product, the product might have a substantial effect
on its operations. The execution of this agreement is another step in
realization of MA Industries' strategy of expanding its basket of products, and
strengthening its ties with leading multi-national companies in the field of
crop protection products.

         Recent Developments

         On November 14, 2005, MA Industries Board of Directors decided to adopt
a policy according to which the MA Industries will act to buy back its own
shares in the amount of $150 million. The decision of the Board of Directors
provides different parameters for acquisition of the shares including, among
others, acquisition in response to supply without creation of demand,
limitations on the scope of daily acquisitions, price criteria and execution of
off-market transactions. The shares acquired will become dormant shares as long
as they are held by MA Industries. As at the balance sheet date, MA Industries
holds 12,018,603 of its own shares,

                                      28

<PAGE>

constituting approximately 2.6% of its total issued and paid-up share capital
in the amount of $65.6 million. As at June 30, 2006, MA Industries holds
24,875,703 of its own shares.

         On April 23, 2001, MA Industries' Board of Directors resolved to adopt
a dividend policy at rates of between 15% and 30% of annual net income,
beginning from 2001. In accordance with this policy, an interim quarterly
dividend will be distributed. The amount of the dividend will be calculated
according to the net income for the quarter and will be within the limits
specified above. This interim dividend will be considered as an advance on
account of the annual dividend. Application of policy is subject to there being
sufficient income for distribution on the relevant dates, to the provisions of
any law regarding dividend distribution, to specific decisions of MA Industries'
Board of Directors in respect of each distribution and to any other decision the
Board of Directors is permitted to make at any time, including regarding a
different designation of MA Industries' earnings and a change in this policy. On
March 8, 2006, MA Industries' Board of Directors decided to make a change
regarding the dividend distribution policy, such that commencing with the fourth
quarter of 2005, a dividend will be distributed at the rate of 50% of the net
earnings for the period. In March 2005, MA Industries' Board of Directors
decided to distribute a dividend in respect of the earnings of 2004, in the
amount of $12,700 thousand. During 2005, MA Industries' Board of Directors
decided to make four interim dividend distributions, in the total amount of US$
60,200 thousand. Subsequent to the balance sheet date, MA Industries' Board of
Directors resolved to distribute a dividend in respect of the earnings of the
fourth quarter of 2005, in the amount of $23,500 thousand.


Our Venture Capital Business

         In January 2000, we and a wholly-owned subsidiary established a
registered partnership called "Koor Corporate Venture Capital," or Koor CVC,
within which we concentrated our investment activities in venture capital funds
and in high-tech start up companies with growth potential. The action was taken
to implement our strategic decision to increase our investments in those areas.
Within this context, since January 2000, Koor CVC signed investment agreements
with various start-up companies.

         In 2000, Koor CVC, as a limited partner, also committed to invest up to
a total of $73 million in a number of external venture capital funds. As a
result of the reduction in the size of one of the funds, this commitment
declined to approximately $68 million in 2002.

         In March 2001, Koor's board of directors elected to limit Koor CVC's
future investments only to its current portfolio companies and not to seek new
investments from that point onwards.

         In June 2003, Koor CVC sold most of its commitment to its portfolio of
external venture capital funds to a secondary venture capital fund. As a result
of this sale, Koor CVC's future commitment to invest in these venture capital
funds was reduced to $14 million.

         In December 2005, Scopus Video Networks ("Scopus") a portfolio company
of Koor CVC issued its shares to the public on NASDAQ based on a post-IPO
company value of $92 million. Following the IPO Koor CVC holds 23% on an as -
converted basis, and 18% on a fully

                                      29

<PAGE>

diluted basis. As a result of the IPO, Koor CVC recorded a capital gain to the
amount of $7 million in the fourth quarter of 2005.

         In addition, in the fourth quarter of 2005, Koor CVC signed a series of
agreements, executed in 2006, for the sale of its stake in portfolio company
Mysticom to Transwitch Corporation.

         As of December 31, 2005, Koor CVC's future commitment to invest in its
venture capital fund (Pitango) totaled approximately $2.3 million. This amount
may be drawn upon by the fund at any time over the next 1-3 years, based upon
their needs.

         During 2005, Koor CVC recorded total provisions of $15 million, net of
the $7 million capital gain following the Initial Public Offering of Scopus.
These provisions were as a result of impairment in value for some of the Koor
CVC portfolio companies and portfolio fund.

         During 2005, Koor CVC transferred approximately NIS 15 million ($3.3
million) in follow-on investments in its portfolio start-up companies and its
portfolio venture capital funds.

         As of December 31, 2005, the book value of Koor CVC's investments in
its start-up companies, a venture capital fund and Scopus Network Technologies,
totaled approximately NIS 166 million ($36 million).

Our Other Businesses

         We have an interest in several service industries, mainly tourism, real
estate, aviation and trading. In previous years, our "other businesses" segment
also included construction and infrastructures, electrical appliances, software,
food, consumer products and metal products, as well as the production of
batteries.

         As of December 31, 2005, the principal companies in our other
businesses segment were:

                                  Percentage
                                  Of Equity
                                  Ownership      Principal Products and Services
                                  ------------   -------------------------------
Sheraton Moriah (Israel) Ltd.     55.0           Hotel chain
Knafaim-Arkia Holdings Ltd.       9.2(1)         Aviation and tourism services
Koor Properties Ltd.              100.0          Real estate
Koor Trade Ltd. (2)               100.0          International trade


(1)  Not consolidated in our financial statements and not included in our
     business data.  The ordinary shares of Knafaim are traded on the TASE.

(2)  As described below, on May 28, 2006, we sold our entire interest in Koor
     Trade Ltd.

         Tourism

         Our interests in Israel's tourism industry include ownership and
management of hotels and resorts, and other tourism-related services,
such as airlines. For the years ended December

                                      30

<PAGE>

31, 2005 and 2004, our tourism business had sales of NIS 526 million ($114
million) and NIS 430 million ($93 million), respectively.

         Sheraton Moriah (Israel) Ltd. (Sheraton Moriah)

         The Sheraton Moriah hotel network consists of 2,201 rooms (1,724 under
100% ownership) in 8 owned or leased hotels in major tourist destinations in
Israel, operating under the following brand names: Sheraton (six hotels), Luxury
Collection (one hotel) and Four Points (one hotel).

         Following the continuous crisis due the escalation of violence in
Israel since October 2000, since April 2003, a positive trend has developed in
the incoming tourism market. Tourist entries are still 30% less than 2000, but
the improvement is consistent. As a result of the environment, Sheraton Moriah's
management has continued its strict control on expenses while emphasizing
revenue enhancement, including focusing on direct sales via a local central
reservations office, hard-sale local web-site, and leverage of its international
brand to increase the market share in both the domestic tourism and incoming
tourism markets.

         Recent developments

         During the first quarter of 2006, Sheraton completed the purchase of
the remaining 50% of the shares of Yehuda Hotels Ltd., for consideration of NIS
55 million.

         Knafaim-Arkia Holdings Ltd. (Knafaim)

         On September 29, 2004 we signed two agreements to sell 16% of the
shares of Knafaim for approximately NIS 121 million, and a third agreement for
the sale of an additional 3% of the shares of Knafaim for approximately NIS 23
million. As a result of these sales, our shareholding in Knafaim decreased from
approximately 28.3% to approximately 9.2%. Accordingly, for Israeli GAAP
purposes, the investment in Knafaim is stated by the cost method, beginning from
the date of the sale, and is classified as available-for-sale under FAS 115 for
U.S. GAAP purposes. In the statement of operations for 2004, we recorded a gain
of NIS 51 million. Since we intend to sell the remainder of the shares in
Knafaim, the investment is presented within current assets.

         Knafaim was incorporated in 1980. Knafaim owns a variety of businesses
in the travel and tourism industry, primarily 39.5% of El-Al Israel Airlines
Ltd., Israel's international airline. Knafaim also holds other companies that
supply various tourism services, both domestically and internationally and
companies that purchase and lease back aircraft.

         Real Estate

         Tadiran's Real Estate

         In March 2002, Tadiran's real estate was transferred to us as a
liquidating dividend. In 2003, we sold most of the real estate assets to a group
of investors headed by Denisra International Ltd. and Ranitech Ltd for
consideration of approximately NIS 273 million, and we recognized a capital gain
of approximately NIS 29 million. As a result of the sale of this real

                                      31

<PAGE>

estate, we realized a tax reserve of approximately NIS 44 million, created in
respect of those assets, and we paid taxes of approximately NIS 40 million.

         The remaining balance of the real estate assets we received from
Tadiran, amounts to approximately NIS 42 million as at December 31, 2005.

         Koor Properties Ltd. (Koor Properties)

         Koor Properties, our wholly-owned subsidiary, owns and develops
directly and indirectly real estate in Israel. As of December 31, 2005, Koor
Properties owned directly and indirectly an aggregate of approximately 52
thousand square meters of real property in different stages of development. Most
of the land is commercially developed.

         Trade

         Koor Trade Ltd. (Koor Trade)

         Koor Trade, our wholly-owned subsidiary, imports, exports and
distributes a broad range of industrial, agricultural and consumer products
through its worldwide network of offices, including offices in Europe, Asia,
Latin America and Australia. For the years ended December 31, 2005 and 2004,
Koor Trade had sales of NIS 157 million and NIS 112 million, respectively. Koor
Trade owns a 49% equity interest in Balton C.P limited (Balton), an English
international trading company, which is engaged in trading activities in seven
countries in Africa relating to agricultural, telecommunications,
electromechanical and air-conditioning equipment, construction and other
projects.

         During August 2005, a valuation was conducted in respect of Balton, in
order to examine the necessity of writing down the value of Balton in the
financial statements of Koor Trade. The valuation was performed by an
independent external expert and as a result, Koor Trade included loss from
impairment in value of approximately NIS 44 million in 2005.

         In 2005, our Board of Directors granted our management the authority to
sell our entire holding in Koor Trade. Therefore the activities of Koor Trade
were classified in our financial statements for the year ended December 31, 2005
as discontinued operations. We recorded a provision in the amount of
approximately NIS 20 million for impairment in value of its investment in Koor
Trade, based on indicators relating to the fair value of the investment,
including a valuation by an external valuation expert. See Note 24(2) to the
consolidated financial statements included elsewhere in this annual report.

         On April 25, 2006 we signed an agreement for the sale of our entire
holding in Koor Trade to a group of managers, including one of our senior
executives, for $8.3 million. The transaction was completed on May 28, 2006, and
the entire cash proceeds of $8.3 million were received.

Suppliers

         The companies engaged in our businesses purchase the materials and
components used in their products from numerous independent suppliers. These
materials and components are not

                                      32
<PAGE>

normally purchased under long-term contracts. Most of the items purchased by
these businesses are obtainable from a variety of suppliers, and such
businesses normally maintain alternative sources for major items. In some cases
these companies have annual purchasing agreements with their major suppliers,
which establish prices, quality thresholds and delivery schedules.

         To date, our businesses have not experienced any significant difficulty
in obtaining timely delivery of supplies, and management believes these
businesses maintain adequate inventories of certain significant imported
components. However, with respect to certain components, there may be a lengthy
period of preparation for production and adaptation for our businesses'
requirements. Accordingly, short-term shortages may arise in the event that
these companies were required to change suppliers without advance planning. The
unavailability of such components during such change-over period could result in
production delays, which might adversely affect our business.

Research and Development

         As of December 31, 2005, most of our research and development
activities are conducted by our affiliated companies in our telecommunication
equipment, venture capital investment and agrochemicals businesses, and research
and development activities at our subsidiaries are minor. These affiliated
companies are actively engaged in research and development programs intended to
develop new products, manufacturing processes, systems and technologies and to
enhance existing products and processes. Research and development is funded by a
combination of our own resources and grants from the Israeli Government. We
believe our research and development effort has been an important factor in
establishing and maintaining our affiliates' competitive position.

         Our affiliates' updated research and development efforts have resulted
in an increase in the sales of internally designed products. We believe that
research and development in high technology areas, such as our
telecommunications equipment and agrochemicals businesses, is important to our
future growth, particularly with respect to products targeted for export
markets. Accordingly, we anticipate that these businesses will account for a
majority of our research and development efforts in the future. As part of their
research and development programs, our affiliates not only seek to develop new
products, but also to apply newly developed technologies to improve existing
products.

         In each of the last three fiscal years, our affiliates received grants
from the Government of Israel through the Office of the Chief Scientist, or OCS,
for the development of certain products. Our affiliates generally receive from
the OCS 20% to 66% of certain research and development expenditures for
particular projects. Under the terms of the Israeli Government participation, a
royalty of 2% to 5% of the net sales of products developed from a project funded
by the OCS is generally required to be paid, beginning with the commencement of
sales of products developed with grant funds and ending when 100% to 150% of the
grant is repaid. Our affiliates have paid in the past, and currently pay,
royalties on sales of such products. The terms of the Israeli Government
participation also require that the research and development be conducted by the
applicant for the grant as specified in the grant application and that the
manufacturing of products developed with government grants be performed in
Israel, unless a special approval has been granted. Separate Israeli Government
consent is required to transfer to

                                      33

<PAGE>

third parties technologies developed through projects in which the government
participates. Such restrictions, however, do not apply to exports from Israel
of products developed with such technologies. From time to time the Government
of Israel has revised its policies regarding the availability of grants and
participation, and there can be no assurance that the Government's support of
research and development will continue in the future. In addition, in order to
be eligible for the governmental grants, programs and tax benefits, our
affiliates must continue to meet certain additional conditions, including
making specified investments in fixed assets. Should our affiliates fail to
meet such conditions in the future, they could be required to refund grants or
tax benefits, together with interest and inflation adjustments.

Competition

         In 2005, the majority of our sales from telecommunications equipment,
defense electronics and agrochemicals businesses were derived from international
sales. The companies comprising these businesses are focusing on developing new
markets to increase international sales. The worldwide marketing of products in
each of these businesses is highly competitive and certain competitors are
substantially larger and have substantially greater financial, production and
research and development resources, more extensive marketing and selling
organizations, greater name recognition and longer selling experience than us.
Some of our competitors are also able to provide their customers with more
direct financing or greater access to long-term, relatively low-cost government
loans to finance equipment purchases.

Patents and Intellectual Property

         Several of our subsidiaries and affiliates own and control a
substantial number of patents, trade secrets, confidential information,
trademarks, trade names and copyrights which, in the aggregate, are of material
importance to our business. We are of the opinion that our business, as a whole,
is not materially dependent upon any one of these assets or any related group of
assets. We are also licensed to use certain patents and technology owned and
controlled by others, and other companies are likewise licensed to use certain
patents and technology owned and controlled by us.

         In certain limited circumstances, certain of our customers, including
the United States Government, may retain certain rights to technologies and
inventions resulting from our performance as a prime contractor or subcontractor
under certain contracts and may disclose such information to third parties, who
may be our competitors. When in certain limited circumstances, certain of our
customers, fund research and development, they usually acquire rights to data
and title to inventions and we may retain a non-exclusive license for such
inventions. In certain circumstances, some of our customers are entitled to
receive royalties in connection with the sale of products, the development of
which was financed by those entities. However, if one of our customers purchases
only the end product, we normally retain the principal rights to the technology.

                                      34

<PAGE>

Regulation

         Our diverse businesses are subject to significant statutory and
administrative regulation in the various jurisdictions in which we operate
throughout the world. Among the regulations to which we are subject are those
described below.

         Monopoly and Pricing Regulations

         We and our subsidiaries or affiliates may be declared monopolies or
otherwise be subject to certain legal obligations and restrictions established
by the Controller or by the Restrictive Business Practices Court, or the Court,
in the event that our market share, or the market share of our subsidiaries or
affiliates, exceeds certain prescribed limits.

         Environmental, Health and Safety Matters

         General

         We are subject to laws and regulations concerning environmental
conditions, product safety, health and safety matters and the regulation of
chemicals in countries where the MA Group manufactures and sells its products.
These requirements include regulation of the handling, manufacturing,
transporting and use and disposal of certain materials, as well as regulation
concerning the discharge of pollutants into the environment. In the normal
course of its businesses, the MA Group is exposed to risks relating to the
possible release of hazardous substances into the environment, which may cause
environmental or property damage or personal injuries. In Israel, where the MA
Group maintains its principal production facilities, losses and damages relating
to continuous environmental pollution are currently uninsurable.

         It is the MA Group's policy to comply with environmental, health,
product safety and other safety requirements, and to provide workplaces for its
employees that are safe and environmentally sound, and that will not adversely
affect the health or environment of the communities in which it operates. From
time to time, the MA Group's facilities may be subject to environmental
compliance actions and the resolution of such matters has in the past involved
the establishment of certain compliance programs. Israeli legislation enacted in
1997 amended certain environmental laws by authorizing the relevant
administrative and regulatory agencies to impose sanctions on non-complying
parties, including issuing an order against any person that violates
environmental laws to remove the environmental hazard. In addition, these laws
impose criminal liability on the officers and directors of a corporation that
violates environmental-related laws, and increases the monetary sanctions that
such officers, directors and corporations may be ordered to pay as a result of
such violations. The MA Group has established worker safety programs and
procedures in our plants, which the MA Group believes are reasonable under the
circumstances. The MA Group believes that its experience relating to worker
accidents is generally consistent with industry-wide experience. Furthermore,
the MA Group believes that it is not currently subject to material liabilities
for non-compliance with applicable environmental, health and safety laws,
although there is a risk that legislation enacted in the future could create
liabilities for past activities undertaken in compliance with then-current laws
or regulations. In addition, the MA Group may be held liable for environmental
damage of which it is not presently aware.

                                      35

<PAGE>

         In addition to the specific matters described below, at a number of
locations at which certain of the MA Group's businesses have conducted
manufacturing operations for many years, it is possible that contamination may
exist as a result of on-site waste disposal, spills, use of wastewater treatment
ponds, or other historical practices. While in recent years, industrial solid
wastes generally have been disposed of at a central State-authorized disposal
facility in Ramat Hovav, this central facility was not available to Israeli
industry during earlier periods of the MA Group's operations. It is unclear
whether any existing conditions on any property owned by the MA Group will
require significant redemption or cleanup in the future, and the MA Group cannot
speculate about the timing or potential costs associated with any such cleanup.
It is possible, however, that material expenditures could be required with
respect to these past practices.

         In recent years, the operations of the MA Group's businesses have
become subject to increasingly stringent legislation and regulation related to
occupational safety and health, product registration and environmental
protection. Such legislation and regulations are complex and constantly
changing, and there can be no assurance that such regulatory changes in the
future will not require the MA Group to make significant capital expenditures to
modify, supplement or replace equipment, or to change methods of disposal or
discharge, or the manner in which the MA Group manufactures products or operates
its businesses. In Israel, in particular, the MA Group anticipates that
increasingly stringent requirements will result in substantial expenditures,
particularly for improvements of environmental controls at older facilities. We
have generally adopted, or intend to adopt in our newer facilities,
environmental control standards comparable to those set by the German Technische
Anleitung Luft air emission regulations. These regulations set forth strict
controls on air emissions from industrial facilities. The Israeli government has
looked to these standards as a basis for upgrading its air pollution
requirements and has applied the standards to some, but not all, facilities in
Israel.

         We regularly incur capital expenditures and operating costs to comply
with various environmental, health and safety laws and regulations. The costs
related to environmental matters may increase significantly in the future if the
implementation of new environmental standards in Israel is more rapid or
stringent than currently anticipated by us, or if contemplated pollution control
measures do not achieve the desired results.

         Agrochemical Industry

         The distribution and use of agricultural chemical products, including
crop protection chemicals such as those produced by the agrochemicals business,
are regulated in most parts of the world, and require extensive testing, quality
control and compliance with registration procedures. The strictest standards are
applied in the United States, where the Environmental Protection Agency, or EPA,
is the leading regulator, and in Japan and Western Europe. The granting of a
registration involves consideration of health, safety and environmental issues,
as well as the performance and benefits of the product. The registration for an
agricultural chemical product in the U.S. and in Western Europe is often subject
to data call-in or process. Usually, updating the registration necessitates the
submission of additional data by the MA Group, our agrochemical division.
Re-registrations, which permit the continued sales of pesticides for an
additional period, are frequently granted as a matter of course, subject to
compliance during the term of the registration period. While the MA Group is not
aware of any immediate intent to

                                      36

<PAGE>

cancel any of its registrations, there can be no assurance that the MA Group
will not face a revocation process or encounter difficulties in renewing the
registrations for its products for additional periods.

         From time to time, some of the MA Group's agrochemical products are
subject to legislative or other initiatives to curtail or regulate their use due
to environmental, health or safety concerns.

         Registration expenses (according to US GAAP) for the MA Group in 2005
were $37 million compared to $17 million in 2004, $12 million in 2003 and $33
million in 2002. The MA Group believes that its registration expenditures in the
future will increase, based on the stricter standards that are expected to be
applied in countries where the MA Group sells its products and the likelihood
that MA Group will purchase additional products from competitors on the
agrochemical industry. As a result of the foregoing developments and
obligations, virtually all of the MA Group's businesses in recent years have
spent significant amounts on operation and maintenance, as well as under capital
programs to address increasingly stringent requirements with respect to
environmental, safety, and health protection concerns.

         Most of the manufacturing activities of the MA Group take place at the
two production facilities in Israel. The board of directors of MA Industries
appointed an Ecology Committee to receive regular reports from all the
subsidiaries where manufacturing takes place (Israel, Brazil, Colombia, Greece
and Spain). The subsidiaries control the environmental issues pertinent to their
particular products, which differ from site to site and from country to country.
The investment in meeting environmental standards amounted to about $19 million
in 2002, $23 million in 2003, $24 million in 2004 and $29 million in 2005, and
it is estimated that the annual investment in the coming years will exceed those
of the prior years, including expenditures as described below.

         One of MA Industries' plants is located in the Ramat Hovav industrial
zone. The Ramat Hovav Industrial Council has been required to take intensive
action to prevent odor nuisances, the source of which is the evaporation ponds
in the Ramat Hovav industrial zone.

         The industrial wastes of the plants, after pre-treatment at the plants,
are transferred to the responsibility of and for further treatment by the
industrial council. This arrangement has been in effect since the industrial
zone in Ramat Hovav was built at the end of the 1970s. In 1998-99 the council
erected and operated a biological installation for industrial wastes, to reduce
the biological load of industrial wastes before piping them to the evaporation
ponds.

         The industrial council was directed by the Ministry of Environmental
Protection to make arrangements to end the piping of the industrial wastes to
the evaporation ponds, no later than June 30, 2006. In addition, the Ministry of
Environmental Protection stated that on that date, the quality of the wastes
must meet a minimum level of Total Organic Carbons, Carbon Oxygen Demand and
Biological Oxygen Demand, or TOC, COD and BOD, respectively. The industrial
council adopted a significant resolution in principle to change its operations
so that each plant in the industrial zone is required to treat its own wastes in
order to reduce the biological load and attain new required standards.
Furthermore, the plants are required to reduce the plant BOD levels by June 30,
2006.

                                      37

<PAGE>

         Each of MA Industries' plants in Ramat Hovav makes preparations to
treat its own wastes. In order to comply with the TOC, COD and BOD standards, a
biological treatment installation will have to be built, as well as additional
upstream pre-treatment installations. MA Industries has hired the professional
services of entities of proven experience in the chemicals industry in Germany
and Switzerland, and believes it can achieve the correct technological solutions
for an amount of between $30 million and $35 million. The short-term
requirements for BOD are currently being clarified and the options discussed,
between the plant, the industrial council and the Ministry for Environmental
Protection.

         During recent years, the MA Group has invested consistently and
regularly in all its plants, in Israel and abroad, to improve standards relating
to the quality of the environment, and its plants have been awarded the
President's Prize as well as commendations from the Ministry for Environmental
Protection in the last few years. MA Industries is in compliance with ISO-9001
and ISOP-14,001 (environment) and with OHSAS 18,000 (safety). The production
sites at Ramat Hovav and Ashdod in Israel have been operating in compliance with
ISO 14.001 since that standard was approved by the Israel Institute of Standards
in 1997. Compliance with the standard requires the senior management to
formulate an environment policy and develop a program for its implementation. In
addition, in 1998 the MA Group also adopted the German standard Ta Luft (air
pollution) at its Ramat Hovav and Ashdod sites.

         Over the past several years various tests have been performed by
different agencies to test the ground contamination in the Ramat Hovav area as
well as the area surrounding the subsidiary's premises in Be'er Sheva. As of
December 31, 2005, MA Industries' management did not expect a significant impact
with respect to MA Industries from implementation of the report's
recommendations, and, therefore, no provision has been included in the financial
statements.

         In May 2004, a subsidiary of MA Industries owning plants at the Ramat
Hovav site, received notice of a change in the terms of its business license,
pursuant to which the plants were required to change the method used to treat
sewage from the existing treatment, and to do so independently through the
implementation of vaporization processes. These terms include demands that,
within a short period of time, the plants conduct research and development for
the purpose of customizing the process to the composition of each plant's
sewage, and later, to build a suitable facility. Additionally, formulation
processes are to be implemented, whereby the plants must present the Ministry of
Environmental Protection with a research and development program for the purpose
of implementing the process with respect to the sewage. At the same time, the
Ministry of Environmental Protection set January 1, 2008 as the date by which
the plants must treat the sewage in the requisite format and to stop the flow of
sewage into the Ramat Hovav Industrial Council's vaporization pools and
treatment facilities. On November 28, 2004, based on these terms, the Israeli
government reached a decision approving a plan to reduce air and water pollution
deriving from the Ramat Hovav industrial area. The plan calls for, among other
things, (i) more restrictive rules regarding the treatment of sewage by the
plants in the area (derived from the additional business license conditions that
are the subject of the administrative appeal described above) to be complied
with in two stages, the first by June 30, 2006 and the second by December 31,
2007; (ii) the drying and rehabilitation of the vaporization pools in the area
by the Ramat Hovav Industrial Council, to be completed no later than December
31, 2012; and (iii) the formulation and implementation by the Ministry of
Environmental Protection of a

                                      38

<PAGE>

plan to prevent exceptional emission of hazardous materials into the air from
the Ramat Hovav industrial area.

         On October 10, 2004, a subsidiary of MA Industries, together with the
Israel Manufacturers Association and other companies, filed an administrative
petition with the Beer Sheba District Court against the Ministry of
Environmental Protection. The subject of the petition is the additional
conditions for obtaining a business license described above. In the petition,
the District Court was asked to issue an order declaring that the additional
terms are nullified. In March 2005 the Court approved the mutual agreement of
the parties to try to end the dispute by way of meditation.

         In the estimation of MA Industries' management, based on advice of its
legal counsel, in view of the current stage of the process, it is probable that
the process will succeed and as a result the additional conditions to the
business license will be modified and reasonable to implement. On June 15, 2006
the parties to the mediation agreed, principally, on a solution to the
controversy aforementioned. According to that understanding, the Ministry of
Environment is supposed to publish, in the near future, new terms to the
business license to industries in the Ramat Hovav area that will replace the
existing conditions. However, in case the mediation fails and the petition is
dismissed, it will have a material effect on the activities of the plant in
Ramat Hovav and/or will require investments of amounts that MA Industries'
management is unable to estimate at this time.

         In November 2004, the Board of Directors of MA Industries approved a
master plan for investments in environmental matters as they relate to the
manufacturing sites in Israel. This included approval of investments of
approximately $60 million during the period from 2005 through 2008, the
implementation of which will depend on numerous factors, such as environmental
conditions and technology feasibility studies for the sites), some of which are
beyond MA Industries' control and there is therefore no certainty that they will
take place.

         In August 2003, a criminal complaint was filed against MA Industries
and one of its officers by the Man, Nature and Law Foundation. The complaint
alleges that in several instances from 1999 to 2003, there were measurements at
MA Industries' Ramat Hovav plant of stack emissions of materials exceeding the
permitted concentrations, and that such emissions created strong air pollution.
MA Industries believes the charges in the complaint are without merit and
intends to defend itself against such charges. In the opinion of MA Industries'
management, based on advice from its legal counsel, due to the early stage of
the proceedings, it is not possible to estimate the outcome of the complaint
and/or the resultant exposure. Therefore, the financial statements do not
include a provision in respect of the proceedings.

Organizational Structure

         The following is a list of all of our significant subsidiaries,
affiliates and other companies in which we have invested as of December 31,
2005, including the name, country of incorporation or residence, proportion of
ownership interest and, if different, proportion of voting power held.

                                      39

<PAGE>
<TABLE>
<CAPTION>

                                         Country of         Percentage      Percentage of voting
                                      Incorporation or     of ownership     power (if different
  Name of Subsidiary/Affiliate            residence          interest         from ownership)
-------------------------------       -----------------    ------------     ---------------------
<S>                                   <C>                  <C>              <C>
Koor Corporate Venture Capital              Israel              100%                N/A

Makhteshim-Agan Industries Ltd.             Israel            31.5%(1)              N/A

ECI Telecom Ltd.                            Israel             29.7%                N/A
Telrad Networks Ltd.                        Israel             61.0%                N/A
ECtel Ltd. (2)                              Israel             14.8%                N/A
Sheraton Moriah (Israel) Ltd.               Israel             55.0%                N/A
Knafaim-Arkia Holdings Ltd.                 Israel              9.2%                N/A
Koor Trade Ltd. (3)                         Israel              100%                N/A
</TABLE>

_____________________

(1)  After the balance sheet date, we acquired a total of 6,920,565 shares of MA
     Industries, and MA Industries acquired 24,875,703 of its own shares, which,
     upon the conversion of convertible debentures and the exercise of stock
     options including employee stock options, increased our interest in MA
     Industries to approximately 33.7% as of June 30, 2006 (approximately 32.5%
     on a fully diluted basis taking into consideration the exercise of
     outstanding stock options and the conversion of outstanding convertible
     debentures).

(2)  As a result of the distribution of ECtel shares by ECI to its shareholders
     on June 29, 2006, as described above, our interest in ECtel Ltd. increased
     to 19.2%.

(3)  As described above, on May 28, 2006, we sold our entire interest in Koor
     Trade Ltd.


Property, Plants and Equipment

         Our headquarters are located in 2,785 square feet of leased office
space on the top floor of the Telrad building at 14 Hamelacha Street, Rosh
Ha'ayin, Israel.

         We own an aggregate of 18,000 square feet of office space in the
Platinum Building in Tel Aviv, where our headquarters were previously located.
We purchased this facility in 1998 and since January 1, 2004, this property has
been sublet in its entirety.

         The manufacturing facilities of our subsidiaries and affiliates are
located throughout Israel. Major concentrations are in the Be'er Sheva/Ramat
Hovav area in the south of Israel and the Tel Aviv-Petach Tikva-Lod-Ashdod area
in the central part of Israel. We own our major manufacturing plants,
facilities, machinery and equipment. In addition, we lease certain manufacturing
and office facilities.

         Most of the industrial land utilized by us is under 49-year leases from
the Israel Lands Authority with options for an additional 49 years in a
significant number of cases. Land rent on uncapitalized leases is generally
equal to 4% of the value of the land per annum and is subject to revaluation
every seven years.


Item 4A.  Unresolved Staff Comments
          -------------------------

         Not applicable.

                                      40

<PAGE>

Item 5.  Operating and Financial Review and Prospects.
         --------------------------------------------

         The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and
related notes included elsewhere in this annual report. Our financial statements
have been prepared in accordance with Israeli GAAP, which differ in significant
respects from U.S. GAAP. See Note 29 to our consolidated financial statements,
included elsewhere in this annual report, for a description of the principal
differences between Israeli GAAP and U.S. GAAP as they relate to us.

         In accordance with amendments to Israeli GAAP published in October 2001
and December 2002, our financial statements for the years ended December 31,
2004 and 2005 are no longer adjusted to reflect the effects of inflation. For
all financial reporting periods until December 31, 2003, Israeli GAAP required
that our consolidated financial statements recognize the effects of inflation.
Consequently, financial data for all periods until December 31, 2003 in our
consolidated financial statements and throughout this annual report, except as
otherwise noted, have been adjusted to reflect changes in the Israel consumer
price index, or CPI, and have been restated in NIS in terms of the purchasing
power as of December 31, 2003. The functional currency of certain of our
subsidiaries and affiliated companies (mainly MA Industries and ECI) is the US
dollar and their financial statements are prepared in US dollars, and are
translated into NIS using the exchange rate prevailing at the end of the period
for balance sheet items and the exchange rate prevailing on the transaction date
for income and expense items. See Notes 2B and 2D to our consolidated financial
statements included elsewhere in this annual report.

         Transactions among our subsidiaries and affiliates and transactions
between our company and our subsidiaries and affiliates are entered into on an
arm's-length basis and, in management's opinion, generally on terms no less
favorable than those available from third parties.

         The following discussion may contain forward-looking statements that
involve risks and uncertainties. Our actual results may differ significantly
from those projected in the forward-looking statements. Factors that might cause
future results to differ significantly from those projected in the
forward-looking statements include, but are not limited to, those discussed
below and elsewhere in this annual report, particularly those described above
under Item 3, "Key Information - Risk Factors."

Critical Accounting Policies

         Our consolidated financial statements included elsewhere in this annual
report have been prepared in accordance with Israeli GAAP, which differ in
significant respects from U.S. GAAP. See Note 29 to our consolidated financial
statements, included elsewhere in this annual report, for a description of the
principal differences between Israeli GAAP and U.S. GAAP as they relate to us.

         Pursuant to our application of Israeli GAAP, we have identified below
accounting policies critical to understanding the overall financial reporting of
Koor. A more complete discussion of the significant accounting policies which we
follow in preparing our financial

                                      41

<PAGE>

statements is set forth in Note 2 to our consolidated financial statements
included elsewhere in this annual report.

         In addition, the preparation of our consolidated financial statements
requires us to make estimates, judgments and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. On a regular basis, we
evaluate and may revise our estimates. We base our estimates on historical
experience and various other assumptions that we believe to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities, that are not readily
apparent. Some of those judgments can be complex, and consequently, actual
results may differ from those estimates. For any given individual estimate,
judgment or assumption made by us, there may be alternative estimates, judgments
or assumptions, which are also reasonable. The following discussion of our
critical accounting policies includes references to several critical accounting
policies that are impacted significantly by judgments, assumptions and estimates
used in the preparation of our consolidated financial statements.

Revenue Recognition

         Our revenue recognition policy is significant because our revenue is a
key component of our results of operations. We follow very specific and detailed
guidelines, several of which are discussed below, in measuring revenue. However,
such guidelines may require the exercise of certain judgments, estimates and
assumptions.

         Revenues from product sales and services rendered are recognized upon
delivery of the products and/or when the economic risk of loss passes to the
customer, or upon performance of the services. In special contracts, revenues
from product sales are recognized after performing the work and passing
acceptance tests, as provided in the applicable product delivery contract.

         Revenues and costs from work in progress under long-term contracts are
recognized by the "percentage of completion" method, if the following conditions
are met:

         o    the revenues are known or can be reliably estimated;

         o    the collection of revenues is expected;

         o    the costs involved in carrying out the project are known or can
              be reliably estimated;

         o    there is no material uncertainty as to the ability to complete
              the project and to meet the terms of the contract with the
              customer; and

         o    the percentage of completion may be reliably estimated.

         If any of these conditions are not met, revenues are recognized at an
amount equal to the costs incurred and the recovery of which is expected.

         The percentage of completion is determined based on the cost (actual
cost vs. projected total cost) or based on the delivery of products, depending
on the nature of the agreement.

                                      42

<PAGE>

         Revenues and costs from government contracts, which are based on cost
plus a fixed margin, are recognized on an accrual basis.

         In the event that we anticipate a loss on a particular contract, such
anticipated loss is provided for in full.

         Projected earnings or losses from long-term contracts could change as a
result of changes in estimates, between the actual performance and the original
estimate. Such changes in estimates are charged to the statement of operations
as they arise.

Inventories

         Inventories are stated at the lower of cost or market value. Cost for
raw materials, auxiliary materials and spare parts is determined at average cost
or by the "first-in, first-out" method. Cost for finished goods and goods in
process is determined primarily on the basis of direct manufacturing costs and,
in part, on the basis of average manufacturing costs with the addition of
indirect manufacturing costs. Cost for merchandise is determined by the
"first-in, first-out" method or by the "moving average method." In determining
inventory value, we make assumptions as to the market value of inventory. If
there is a sudden and significant decrease in demand for our products or there
is a higher risk of inventory obsolescence because of a rapidly changing
technology and customer requirements, we may be required to increase our
inventory allowances and our gross margin could be adversely affected.

Investments in Affiliates

         Our investments in our affiliates are presented using the equity
method. Since January 1, 2004 we have applied Israel Accounting Standards Board,
or IASB, Accounting Standard No. 20, "Goodwill amortization," according to which
goodwill arising from the acquisition of equity in an affiliate is generally
amortized at equal annual rates over a period of 10 to 20 years commencing from
acquisition date. See also "Intangible Assets and Deferred Expenses" and
"Recently Issued Accounting Pronouncements in Israel" regarding discontinuation
of the amortization of goodwill from 2006, below.

         From time to time we review our investments in our affiliates to
identify whether there has been a decrease in the value of such investments
which is not of a temporary nature. We would conduct such reviews when there are
signs that the value of permanent investments has been harmed, including a drop
in stock market prices, the affiliate's sequential losses, the segment in which
the affiliate operates, the value of the goodwill aggregated in the investment
and other parameters. Following management's assessment of all the relevant
factors that are not of a temporary nature, we make provisions, if appropriate,
for the adjustment of the value of these investments, which would be reflected
in our consolidated statement of operations.

         Since January 1, 2003, we have applied IASB Accounting Standard No. 15,
"Impairment In value of Assets," or Standard No. 15, to ensure that our assets
in the consolidated balance sheet are not stated at an amount exceeding their
recoverable value, which is the higher of the net sales price and the usage
value, which is the present value of the estimated future cash flows expected to
derive from the use and realization of the asset. Standard No. 15, which is
based on

                                      43

<PAGE>

International Accounting Standard No. 36, applies to all of our assets
in the consolidated balance sheet, except for tax assets and monetary assets.
Likewise, Standard No.15 prescribes the presentation and disclosure principles
for assets that have declined in value. When the carrying value of an asset in
the consolidated balance sheet exceeds its recoverable amount, we recognize an
impairment loss equal to the difference between the book value of the asset and
its recoverable value. A loss in recognized in this manner will be reversed only
if changes have occurred in the estimates used in determining the recoverable
value of the asset, from the date on which the last impairment loss was
recognized.

Intangible Assets and Deferred Expenses

         Intangible assets are amortized over the estimated period of the
economic benefit provided by the particular asset. We assess the recoverability
of these intangible assets periodically by determining whether unamortized
capitalized costs do not exceed the net realizable value of the particular
asset. Licensing of products and acquisition of know-how are stated at cost and
are mostly amortized over 8 years. Marketing rights are stated at cost and
amortized over periods of 5 to 10 years. Intangible assets in the purchase of
products are stated at cost and are mainly amortized over 20 years. Since
January 1, 2004 we have applied IASB Accounting Standard No. 20, "Goodwill
amortization," according to which goodwill deriving from acquisitions or
investments is amortized over the period of economic benefit at equal annual
rates over a period of 10 to 20 years commencing from the acquisition date. See
also "Recently Issued Accounting Pronouncements in Israel" regarding
discontinuation of the amortization of goodwill from 2006, below.

         Non-compete and confidentiality agreements are mostly amortized over 5
years.

         Deferred expenses relating to debenture issuance costs are amortized
using the straight-line method over the life of the debentures, which is usually
six years.

Recently Issued Accounting Pronouncements in Israel

         In July 2005, the IASB published Accounting Standard No. 22,
"Financial Instruments: Disclosure and Presentation," or Standard No. 22.
Standard No. 22 provides rules for financial statement presentation of
financial instruments and specifies the proper disclosure required in respect
thereto. Furthermore, Standard No. 22 provides the method for classifying
financial instruments as financial liabilities and as shareholders' equity, for
classifying the interest, dividends, losses and gains related to them and the
circumstances for offsetting financial assets and financial liabilities.
Standard No. 22 applies to financial statements for periods beginning on or
after January 1, 2006. Standard No. 22 will be adopted by us on a prospective
basis. Furthermore, a provision for loss that is included in the financial
statements as at December 31, 2005, in respect of an anticipated loss from a
decline in our holdings that is due to the potential exercise of options or the
conversion of convertible liabilities in subsidiaries and affiliates, will be
reversed on the date Standard No. 22 comes into effect under the item of a
cumulative effect of change in accounting policy. The comparative data
presented in the financial statements for periods beginning on the effective
date of Standard No. 22 will not be restated. The transition to Standard No. 22
resulted in an increase in shareholders' equity as at January 1, 2006 in the

                                      44

<PAGE>

amount of NIS 63 million due to the reversal of provisions for losses in
respect of convertible securities in subsidiaries and affiliates.

         In September 2005, the IASB published Accounting Standard No. 24,
"Share- Based Payments," or Standard No. 24. Standard No. 24 requires that
share-based payment transactions, including transactions with employees or
other parties that are to be settled by equity instruments, cash or other
assets, be recognized in the financial statements. In accordance with Standard
No. 24, share-based payment transactions in which goods or services are
received will be recognized at their fair value. Furthermore, Standard No. 24
provides various disclosure requirements regarding the nature and extent of the
share-based payment arrangements that existed during the period, and regarding
the method by which the fair value of such arrangements was determined.
Standard No. 24 will apply to financial statements for periods beginning as
from January 1, 2006. Standard No. 24's provisions will be applied to each
share-based payment transaction executed after March 15, 2005 that has not
vested by the effective date of Standard No. 24. Furthermore, it is required
that comparative data relating to periods after March 15, 2005 be restated.
With respect to share-based payments classified as liabilities (such as phantom
plans) that exist on the effective date of Standard No. 24, Standard No. 24 is
to be implemented retroactively and the comparative data is to be restated.
Changes in the terms of a share-based payment transaction being settled by
means of equity instruments and executed after March 15, 2005 are to be treated
in accordance with the provisions of Standard No. 24.

         The implementation of Standard No. 24 has not had a material effect on
our results of operations and financial position.

         In January 2006, the IASB published Accounting Standard No. 21,
"Earnings per Share," or Standard No. 21. Standard No. 21 provides that an
entity calculate basic earnings per share with respect to the earnings or loss
attributable to the ordinary shareholders of the reporting entity and that the
entity calculate basic earnings per share with respect to the earnings or loss
from continuing operations attributable to the ordinary shareholders of the
reporting entity if such earnings or loss is presented. The basic earnings per
share will be calculated by dividing the earnings or loss attributable to the
ordinary shareholders of the reporting entity (the numerator) by the weighted
average number of ordinary shares outstanding during the period (the
denominator). In order to calculate the diluted earnings per share, an entity
will adjust the earnings or loss attributable to the ordinary shareholders of
the reporting entity, and the weighted average number of outstanding ordinary
shares, for the effects of all the dilutive potential ordinary shares. Standard
No. 21 will apply to financial statements for periods beginning on or after
January 1, 2006. The provisions of Standard No. 21 are to be implemented
retroactively for comparative earnings per share data for prior periods.

         In January 2006, the IASB published Accounting Standard No. 25,
"Revenues," or Standard No. 25. Standard No. 25 provides the required accounting
treatment (recognition, measurement, presentation and disclosure principles) for
revenues deriving from the selling of goods, the rendering of services, and the
use of the entity's assets by others, which generates interest, royalties and
dividends. Standard No. 25 prescribes that the entity will measure its revenues
based on the fair value of the proceeds received and/or the proceeds that the
entity is entitled to receive. Standard No. 25 will apply to financial
statements for periods beginning on or after January 1, 2006. An entity that in
the past did not present its revenues according to the

45

<PAGE>

requirements of the Standard regarding the reporting of gross or net revenues,
will implement the requirements of the Standard retroactively with respect to
its revenues for all the periods reported from the effective date of Standard
No. 25. Assets and liabilities that are included in the financial statements as
at December 31, 2005 will be adjusted as at January 1, 2006 to the amounts that
would have been recognized according to the provisions of Standard No. 25. The
effect of adjusting the asset and liability amounts as at January 1, 2006, will
be recognized as a cumulative effect of change in accounting method. We believe
that the initial implementation of Standard No. 25 will not have an impact on
our financial statements.

         In January 2006, the IASB published an amendment to Accounting Standard
No. 20, "The Accounting Treatment of Goodwill and Intangible Assets when
Purchasing an Investee," or Standard No. 20. In accordance with Standard No. 20,
goodwill and intangible assets with an unlimited useful life, which were
identified at the time of purchasing an investee, including a subsidiary or an
affiliated company, will not be amortized. Instead, an examination of impairment
in value is performed once a year, or more frequently if events or changes in
circumstances indicate that there may have been impairment in the value of
goodwill or of an intangible asset with an unlimited useful life. Standard No.
20 will apply to financial statements for periods beginning on or after January
1, 2006. The transition date for discontinuing the amortization of goodwill is
January 1, 2006 according to Standard No. 20. On the day after the transition
date, the entity will examine the impairment in value of goodwill in accordance
with IASB Accounting Standard No. 15. The financial statements for periods in
which Standard No. 20 was not implemented will not be restated.

Impact of Devaluation on Results of Operations and on Monetary Assets and
Liabilities

         The following table sets forth, for the periods indicated, certain
information with respect to the rate of inflation in Israel, the rate of
devaluation of the NIS in relation to the dollar and the rate of inflation in
Israel adjusted for the NIS-dollar devaluation:

<TABLE>
<CAPTION>
                                                                                                  Annual
                       Israeli           Israeli           Closing               Annual         Inflation
 Year Ended           Consumer          Inflation       Exchange Rate          Devaluation     Adjusted for
December 31,       Price Index (1)     Price Rate(2)   of the Dollar (3)         Rate (4)     Devaluation (5)
-------------     ----------------    --------------  ------------------      -------------  ----------------
<C>                   <C>                  <C>                <C>                  <C>           <C>
2001                  170.91               1.4            NIS 4.416                9.3           (7.2)
2002                  182.01               6.5            NIS 4.737                7.3           (0.7)
2003                  178.58              (1.9)           NIS 4.379              (7.6)             6.2
2004                  180.74               1.2            NIS 4.308              (1.6)             2.8
2005                  185.05               2.4            NIS 4.603                6.8           (4.2)
</TABLE>

____________________

(1)  For purposes of this table, the CPI figures use 1993 as the base equal to
     100. These figures are based on reports of the Israel Central Statistics
     Bureau.
(2)  Annual inflation is the percentage change in the CPI in Israel between
     December of the year indicated and December of the preceding year.
(3)  Closing exchange rate is the rate of exchange between the NIS and the
     dollar as of December 31 of the year indicated, as reported by the Bank of
     Israel.
(4)  Annual devaluation is the percentage increase in the value of the dollar in
     relation to the NIS during the year indicated.
(5)  Annual inflation adjusted for devaluation is obtained by dividing the
     Israeli inflation rate (column 2 plus 1) by the annual devaluation rate
     (column 4 plus 1), minus 1.

                                      46

<PAGE>

         Since most of our operations are based in Israel, we incur significant
expenses in NIS, which expenses are usually linked, wholly or partially, to
changes in the CPI.

         The relationship between our monetary assets and liabilities, and the
extent to which these are linked to a particular currency or price index,
affects our financial results. In the event of a devaluation of the NIS in
relation to the dollar, we would report a financial expense to the extent that
our dollar-denominated or dollar-linked monetary liabilities exceed our
dollar-denominated or dollar-linked monetary assets or, conversely, we would
report financial income if our dollar-denominated or dollar-linked monetary
assets exceeded our dollar-denominated or dollar-linked monetary liabilities. On
December 31, 2005, the excess of our foreign currency denominated or linked
monetary liabilities over our foreign currency denominated or linked monetary
assets was NIS 35 million (the majority of which was dollar-denominated or
dollar-linked).

         In addition, we and certain of our subsidiaries and affiliates have
entered into financial agreements with major Israeli banks and other financial
institutions in order to reduce the overall exposure of assets and liabilities
denominated in foreign currencies, and commitments for the purchase of raw
materials and the sale of goods in currencies other than the dollar arising from
foreign currency exchange rates. Such agreements include forward sales, purchase
contracts, sale options and swap transactions. For more details regarding the
balance of our hedging agreements as of December 31, 2005, see Note 21 to our
consolidated financial statements included elsewhere in this annual report. The
caption "Financing expenses, net" in our consolidated financial statements
includes the impact of these factors on monetary assets and liabilities, as well
as regular interest expense.

                                      47
<PAGE>

Results of Operations

The following tables summarize certain recent financial information relating to
each of our businesses. The tables are prepared on the same basis as that
utilized in our consolidated financial statements included elsewhere in this
annual report.

<TABLE>
<CAPTION>
                                                                   2004/2003                           Translation   2005/2004
                                                                    Changes                               into        Changes
                                       NIS                                                NIS           Dollars
                   ---------------------------------------------   ----------    -------------------   -----------   ----------
                     2003          %          2004         %           %           2005         %         2005           %
                   ---------    --------    ---------    -------    ---------    ---------    ------   -----------   ----------
                      (In                      (In                                  (In                    (In
                   thousands)               thousands)                           thousands)             thousands)
<S>                <C>          <C>         <C>          <C>        <C>          <C>          <C>      <C>           <C>
REVENUES FROM
SALES AND
SERVICES


Telecommunications  827,001       13.05      671,531       8.39       (18.80)     452,433     45.77       98,291      (32.63)
Agro-chemicals    5,191,913       81.91      6,895,238    86.11        32.81            -         -            -     (100.00)

Tourism             309,264        4.88       430,280      5.37        39.13      526,194     53.24      114,315       22.29
Others               10,448        0.16        10,564      0.13         1.11        9,755      0.99        2,119       (7.66)
                  ----------    --------   ----------    -------    ---------    ---------   -------    ----------    ---------

Total             6,338,626      100.00    8,007,613     100.00        26.33      988,382    100.00      214,725      (87.66)
                  ==========    ========   ==========    =======    =========    =========   =======    ==========    =========
EQUITY IN THE
RESULTS OF
INVESTEE
COMPANIES, NET
Telecommunications (101,795)     (87.21)     (15,919)    (45.40)      (84.36)      29,954      8.24        6,507         N/A
Defense
electronics               -           -      (20,000)    (57.05)     (100.00)     (23,288)    (6.40)      (5,059)      16.44
Agro-chemicals            -           -            -          -            -      360,469     99.16       78,312      100.00
Venture capital
investments            (329)      (0.28)        (329)     (0.94)           -         (755)    (0.21)        (164)     129.48
Tourism             (12,407)     (10.63)      (1,148)     (3.27)      (90.75)      (1,769)    (0.49)        (384)      54.09
Others               (2,198)      (1.88)       2,336       6.66          N/A       (1,076)    (0.30)        (234)        N/A
                  ----------    --------   ----------    -------    ---------    ---------   -------    ----------    ---------

Total              (116,729)    (100.00)     (35,060)   (100.00)      (69.96)      363,535   100.00       78,978         N/A

EARNINGS BEFORE
INCOME TAX

Telecommunications  (56,638)      (9.16)    (110,617)     (9.85)       95.31      (30,613)    (5.41)      (6,651)     (72.33)
Defense
electronics               -           -      (20,000)     (1.78)           -       56,180      9.93       12,205         N/A
Agro-chemicals      789,213      127.61    1,263,541     112.53        60.10      559,093     98.81      121,464      (55.75)
Venture capital
investments         (71,499)     (11.56)     (43,327)     (3.86)      (39.40)     (41,472)    (7.33)      (9,010)      (4.28)
Tourism             (45,024)      (7.28)      36,651       3.26          N/A       27,646      4.89        6,006      (24.57)
Others                2,433        0.39       (3,414)     (0.30)         N/A       (5,006)    (0.89)      (1,088)      46.63
                  ----------    --------   ----------    -------    ---------    ---------   -------    ----------    ---------


Total               618,485      100.00    1,122,834     100.00        81.54      565,828    100.00      122,926      (49.61)

Joint general
expenses            (39,585)                 (26,697)                 (32.55)     (45,473)                (9,879)      70.33
Financing
Expenses, net      (236,488)                (272,084)                15.05       (182,957)               (39,747)     (32.76)
                  ----------               ----------               ---------    ---------              ----------    ---------
Earnings before
income tax          342,412                  824,053                  140.66      337,398                 73,300      (59.06)
                  ==========               ==========               =========    =========              ==========    =========
CAPITAL
EXPENDITURES

Telecommunications    7,449        2.56       21,825       2.56       192.99        7,529     28.00        1,636      (65.50)
Agro-chemicals      277,195       95.44      816,287      95.92       194.48            -         -            -     (100.00)
Tourism               4,722        1.63       12,735       1.50       169.70       19,125     71.11        4,155       50.18
Other                 1,061        0.37          148        0.02      (86.05)         239      0.89           52       61.49
                  ----------    --------   ----------    -------    ---------    ---------   -------    ----------    ---------

Total               290,427      100.00      850,995     100.00       193.02       26,893    100.00        5,843      (96.84)

CORPORATE ASSETS        392                      423                    7.91          177                     38      (58.16)
                  ----------               ----------               ---------    ---------              ----------    ---------
                    290,819                  851,418                  192.77       27,070                  5,881      (96.82)
                  ==========               ==========               =========    =========              ==========    =========
</TABLE>

                                      48

<PAGE>
<TABLE>
<CAPTION>

REVENUES FROM
SALES AND
SERVICES BY
DESTINATION (1)

<S>               <C>             <C>      <C>            <C>          <C>        <C>         <C>        <C>          <C>
North America     1,032,421       16.29    1,443,596      18.03        39.83      517,875     52.40      112,508      (64.13)
Europe            2,357,259       37.19    3,062,793      38.25        29.93      109,872     11.12       23,870      (96.41)
South America     1,565,019       24.69    1,946,416      24.31        24.37       11,950      1.21        2,596      (99.39)
Asia and
Australia           614,054        9.69      566,494       7.07        (7.75)      17,527      1.77        3,808      (96.91)
Africa              285,559        4.51      216,853       2.71       (24.06)      15,269      1.54        3,317      (92.96)
Israel              484,314        7.64      771,461       9.63        59.29      315,889     31.96       68,627      (59.05)
                  ----------    --------   ----------    -------    ---------    ---------   -------    ----------    ---------

Total             6,338,626      100.00    8,007,613     100.00        26.33      988,382    100.00      214,726      (87.66)
                  ==========    ========   ==========    =======    =========    =========   =======    ==========    =========
</TABLE>

 (1) Destination to which shipment is made.



Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

         During 2005, we sold part of our investments in MA Industries and
Telrad. As a result, we ceased to control these companies, which has resulted in
their deconsolidation during 2005. These companies are now included in our
consolidated financial statements according to the equity method. As a result of
the deconsolidation of these companies and to reflect the nature of our
activities as a holding company, we have classified our statement of operations
in a single-stage format. Total revenues and income, including our equity in the
results of affiliates, are presented within revenues. The comparative figures
have been reclassified on a consistent basis. As a result, our results of
operations for the year ended December 31, 2005 are not comparable, on a line by
line basis, to previous years; however, net earnings is comparable to the prior
periods.

         The following is an analysis of our consolidated results of operations,
followed by an analysis of the results of operations of each of our businesses.

         Revenues from sales and services. Revenues from sales and services
decreased 87.7% to NIS 988 million in 2005 compared to NIS 8,008 million in
2004. Revenues for 2004 included NIS 6,895 million in respect of MA Industries,
which was not consolidated in 2005, and NIS 195 million for the second half of
2004 in respect of Telrad, which was not consolidated during the second half of
2005. Our other subsidiaries showed increased revenues, mainly an increase of
NIS 63 million in Dekolink's revenues and an increase of NIS 96 million in the
revenues of our tourism businesses, Sheraton Moriah and Isram Wholesale Tours
and Travel, Ltd, or Isram.

         Export and international operations, representing 68% of our revenues
from sales and services in 2005, decreased 91% in 2005 compared to 2004, of
which NIS 6,583 million was related to the impact of the deconsolidation of MA
Industries and Telrad in 2005.

         Group's equity in the operating results of affiliates, net. Our equity
in the operating results of affiliates, net in 2005 was a profit of NIS 364
million compared to a loss of NIS 35 million in 2004. Our equity in the
operating results of affiliates, net for 2005 included profit of NIS 360 million
in respect of MA Industries, which was consolidated in 2004, and loss of NIS 26
million for the second half of 2005 in respect of Telrad, which was consolidated
during the same period in 2004. Also included in this item in 2005 are our
equity share in the net profit of

                                      49

<PAGE>


ECI in the amount of NIS 56 million and our equity share in the net loss of
Tadiran Communications in the amount of NIS 23 million. In 2004, our equity
share in the net loss of ECI was NIS 15 million and our equity share in the net
loss of Tadiran Communications was NIS 20 million, which was primarily due to
the writeoff of part of the purchase price of Tadiran Communications allocated
to in-process research and development.

         Other income (expenses), net. Other income, net, amounted to NIS 223
million in 2005 compared to other expenses, net of NIS 72 million in 2004. Other
income, net, in 2005 included:

         o    Capital gains of NIS 308 million from sale of investments, mainly
              the sale of approximately 10% of our equity interest in MA
              Industries and the sale of our equity interest in Tadiran
              Communication (33%). In 2004, we recorded capital gains of NIS
              223 million from the sale of investments, mainly from the sale of
              7% of our equity interest in MA Industries, and the sale of 19%
              of our equity interest in Knafaim;

         o    Impairment in the value of investments and assets of Koor CVC in
              the amount of NIS 69 million. In 2004, we recorded an impairment
              in the value of investments and assets of NIS 73 million,
              including a NIS 58 million impairment of Koor CVC's investments;

         o    Provision for severance compensation of NIS 39 million at Telrad,
              compared to NIS 45 million in 2004;

         o    Management services to affiliated companies of NIS 14 million,
              primarily to MA Industries; and

         o    Goodwill amortization and write-off of NIS 0.5 million, compared
              to NIS 132 million in 2004, of which NIS 131 million was at MA
              Industries.

         Cost of sales and services. Cost of sales and services decreased 84.8%
to NIS 802 million in 2005 compared to NIS 5,278 million in 2004. Cost of sales
and services for 2004 included NIS 4,331 million in respect of MA Industries,
which was not consolidated in 2005, and NIS 204 million for the second half of
2004 in respect of Telrad, which was not consolidated during the second half of
2005. Our other subsidiaries' cost of sales and services increased 23%, mainly
due to an increase of NIS 38 million in Dekolink's cost of sales and services
and an increase of NIS 67 million in the cost of sales and services of our
tourism businesses, Sheraton Moriah and Isram.

         Selling and marketing expenses. Selling and marketing expenses
decreased 91.7% to NIS 89 million in 2005 compared to NIS 1,066 million in 2004.
Selling and marketing expenses for 2004 included NIS 965 million in respect of
MA Industries, which was not consolidated in 2005, and NIS 19 million for the
second half of 2004 in respect of Telrad, which was not consolidated during the
second half of 2005. Other subsidiaries' selling and marketing expenses
increased 37%, mainly due to an increase of NIS 13 million in Dekolink's selling
and marketing expenses.

         General and administrative expenses. General and administrative
expenses decreased 64.4% to NIS 164 million in 2005 compared to NIS 460 million
in 2004. General and

                                      50

<PAGE>

administrative expenses for 2004 included NIS 299 million in respect of MA
Industries, which was not consolidated in 2005, and NIS 21 million for the
second half of 2004 in respect of Telrad, which was not consolidated during the
second half of 2005. Excluding the impact of the deconsolidation of MA
Industries and Telrad in 2005, general and administrative expenses increased
34%, mainly due to an increase of NIS 12 million in compensation expenses and
professional fees at the corporate level, and an increase NIS 6 million in the
general and administrative expenses of our tourism businesses, Sheraton Moriah
and Isram.

         Financing expenses, net. Financing expenses, net were NIS 183 million
in 2005 compared to NIS 272 million in 2004, a decrease of 32.7%. Financing
expenses, net for 2004 included NIS 134 million in respect of MA Industries,
which was not consolidated in 2005, and NIS 0.6 million for the second half of
2004 in respect of Telrad, which was not consolidated during the second half of
2005. Financing expenses, net in respect of companies that were consolidated
both in 2004 and 2005, increased 30% in 2005, mainly due to an increase of NIS
16 million at Sheraton Moriah and an increase of NIS 34 million at the parent
company level. Despite the decrease in our net debt at the parent company level,
financing expenses increased in 2005 compared to 2004 due to the impact of the
increase in the CPI on our CPI-linked long-term loans (2.4% in 2005 compared to
1.2% in 2004), and due to the impact of the changes in the US dollar exchange
rate on our dollar-linked loans (an increase of 6.8% in 2005 compared to a
decrease of 1.6% in 2004).

         Income tax. Income tax recorded in 2005 amounted to NIS 81 million
compared to NIS 272 million in 2004. Income tax for 2004 included NIS 234
million in respect of MA Industries, which was not consolidated in 2005, and NIS
49 million for the second half of 2004 in respect of Telrad, which was not
consolidated during the second half of 2005. Excluding the impact of the
deconsolidation of MA Industries and Telrad, income tax in 2004 amounted to
income of NIS 11 million. Tax expenses at the parent company level increased by
NIS 96 million, mainly due to the realization of a deferred tax asset, created
in 2004, in connection with the sale of shares of MA Industries in 2005. Taxes
on income as a percentage of revenues in 2005 and 2004 were 8.2% and 3.4%,
respectively.

         Minority interest in consolidated companies' results, net. Minority
interest in consolidated companies' results, net amounted to income of NIS 9
million in 2005 compared to expenses of NIS 431 million in 2004. Minority
interest in consolidated companies' results, net for 2004 included NIS 447
million in respect of MA Industries, which was not consolidated in 2005.
Minority interest in consolidated companies' results, excluding MA Industries,
in 2004 amounted to income of NIS 19 million. The decrease in 2005 compared to
2004 was mainly due to the decrease in the minority interest in the losses of
Sheraton Moriah, due to the improvement in Sheraton Moriah's results of
operations.

         Net earnings (loss). For the reasons mentioned above, we reported net
earnings of NIS 313 million in 2005, compared to NIS 145 million in 2004.

                                      51

<PAGE>
<TABLE>
<CAPTION>

         Telecommunications Equipment Business

                                               Year Ended December 31,
                                         -------------------------------------------------------
                                              2004                2005                2005
                                         ---------------   ------------------  -----------------
                                                 (NIS in thousands)            ($ in thousands)

<S>                                           <C>               <C>                 <C>
Revenues from sales and services........      671,531           452,433             98,291
Losses before financing expenses........     (110,617)          (30,613)            (6,651)
</TABLE>


         Revenues from sales and services from our telecommunication equipment
business decreased 32.6% in 2005 to NIS 452 million from NIS 672 million in
2004. The decrease was primarily due to the deconsolidation of Telrad during the
second half of 2005, partially offset by an increase of NIS 63 million in sales
of Dekolink, due to the introduction of new products and expansion of Dekolink's
customer base.

         Telecommunication equipment business exports amounted to NIS 427
million in 2005 compared to NIS 570 million in 2004.

         Losses before financing expenses from our telecommunication equipment
business were NIS 31 million in 2005 compared to NIS 111 million in 2004. The
decrease was primarily due to the increase of NIS 71 million in our equity share
in ECI's earnings.

<TABLE>
<CAPTION>
         Defense Electronics Business

                                                         Year Ended December 31,
                                         -------------------------------------------------------
                                              2004                2005                2005
                                         ---------------   ------------------  -----------------
                                                 (NIS in thousands)            ($ in thousands)

<S>                                          <C>                 <C>                <C>
Revenues from sales and services.........          -                   -                  -
Earnings (losses) before financing
 expenses................................    (20,000)             56,180             12,205
</TABLE>


         Earnings before financing expenses from our defense electronics
business amounted to NIS 56 million compared to loss before financing expenses
of NIS 20 million in 2004. The loss in 2004 resulted primarily from the writeoff
of NIS 20 million of the purchase price of Tadiran Communications allocated to
in-process research and development. Earnings before financing expenses from our
defense electronics business include capital gains of NIS 72 million from the
sale of Tadiran Communications in November 2005. See Note 3D to the consolidated
financial statements included elsewhere in this annual report.

         Our defense electronics business Elisra was reclassified as a
discontinued operation as a result of the sale in November 2005, as described
above. See Note 24(1) to the consolidated financial statements included
elsewhere in this annual report. Elisra's revenues from sales and services
decreased 12.6% to NIS 969 million in 2005 compared to NIS 1,109 million in 2004
as a result of the continued reduction in new orders and further reduction in
the Israeli defense

                                      52

<PAGE>

budget. The earnings before financing expenses of the discontinued defense
electronics operation amounted to NIS 75 million in 2005, compared to NIS 16
million in 2004. Earnings before financing expenses of the discontinued defense
electronics operation included capital gains of NIS 148 million from the sale
of Elisra in November 2005. See Note 3D to the consolidated financial
statements included elsewhere in this annual report.

<TABLE>
<CAPTION>
         Agrochemicals Business

                                                           Year Ended December 31,
                                           -------------------------------------------------------
                                                2004                2005                2005
                                           ---------------   ------------------  -----------------
                                                   (NIS in thousands)            ($ in thousands)
<S>                                          <C>                   <C>                <C>
Revenues from sales and services.........    6,895,238                   -                  -
Earnings before financing expenses.......    1,263,541             559,093            121,462
Net earnings                                   271,820             357,415             77,648
</TABLE>


         As of January 1, 2005, MA Industries ceased to be consolidated in our
financial statements, and is accounted for according to the equity method. See
Note 3B(2) to the consolidated financial statements included elsewhere in this
annual report.

         Earnings before financing expenses from our agrochemicals business were
NIS 559 million compared to NIS 1,264 million in 2004. The decrease was
primarily due to the deconsolidation of MA Industries as of January 1, 2005.
Earnings before financing expenses from our agrochemicals business for 2005 and
2004 include NIS 199 million in capital gains from the sale of shares in MA
Industries in February 2005 and NIS 159 million in capital gains from the sale
of shares in MA Industries in January 2004, respectively.

         Net earnings from our agrochemicals business, excluding the
abovementioned capital gains, were NIS 357 million in 2005 compared to NIS 272
million in 2004. The increase in MA Industries' revenues was due to the increase
in the global agrochemicals market generally, and particularly in North America
and Europe, due to increased sales related to subsidiaries acquired in 2004 and
2005, as well as the introduction of new products. Furthermore, MA Industries
gross and operating margins increased in 2005 compared to 2004, due to the
abovementioned increase in sales, the impact of the newly-acquired subsidiaries
and the strengthening of the primary trading currencies.

<TABLE>
<CAPTION>
         Venture Capital Business

                                                        Year Ended December 31,
                                        -------------------------------------------------------
                                             2004                2005                2005
                                        ---------------   ------------------  -----------------
                                                (NIS in thousands)            ($ in thousands)
<S>                                         <C>                 <C>                 <C>
Revenues from sales and services.....            --                  --                 --
Losses before financing expenses.....       (43,327)            (41,472)            (9,010)
</TABLE>


         This segment was established for the first time in 2000, when we
established the Koor Corporate Venture Capital Partnership, or Koor CVC. As of
December 31, 2005, the book value of Koor CVC's investments totaled
approximately NIS 166 million ($36 million). These

                                      53

<PAGE>

investments include publicly traded Scopus Video Networks, or Scopus, in which
Koor CVC holds an 18% interest on a fully-diluted basis. During 2005, Koor CVC
recorded NIS 69 million of provisions for the decline in value of several of
its portfolio companies. Furthermore, in 2005 Koor CVC recorded $7 million (NIS
31 million) capital gain following the initial public offering of portfolio
company Scopus. The net result of the above was recorded in our consolidated
financial statements under the caption "Other income (expenses), net".

         In 2004, Koor CVC recorded NIS 58 million of provisions for the decline
in value of several of its portfolio companies, net of a $4 million (NIS 17
million) capital gain following the sale of its entire holdings in its portfolio
companies Riverhead Networks and Envara under the caption "Other income
(expenses), net".

<TABLE>
<CAPTION>
         Tourism

                                                            Year Ended December 31,
                                            -------------------------------------------------------
                                                 2004                2005                2005
                                            ---------------   ------------------  -----------------
                                                    (NIS in thousands)            ($ in thousands)
<S>                                            <C>                 <C>                 <C>
Revenues from sales and services..........      430,280             526,194            114,315
Earnings before financing expenses........       36,651              27,646              6,006
</TABLE>

         Revenues from sales and services from our tourism business increased
22.3% to NIS 526 million in 2005 from NIS 430 million in 2004. This increase was
primarily attributable to the increase in sales of Sheraton Moriah as a result
of the increase in tourism to Israel, as well as the increase in the sales of
Isram, which benefited from the increase in worldwide tourism in general and the
increase in incoming tourism to Israel, in particular.

         Earnings before financing expenses from tourism business were NIS 27
million in 2005, compared to NIS 37 million in 2004. Earnings before financing
expenses for 2004 include a capital gain of NIS 51 million from the sale of 19%
of Knafaim.

<TABLE>
<CAPTION>
         Other Businesses

                                                         Year Ended December 31,
                                         -------------------------------------------------------
                                              2004                2005                2005
                                         ---------------   ------------------  -----------------
                                                 (NIS in thousands)            ($ in thousands)
<S>                                            <C>                <C>                 <C>
Revenues from sales and services.........     10,564               9,755              2,119
Losses before financing expenses.........     (3,414)             (5,006)            (1,088)
</TABLE>

         Our other business, Koor Trade, was reclassified as a discontinued
operation, as described above. See Note 24(2) to the consolidated financial
statements included elsewhere in this annual report. Koor Trade's revenues from
sales and services increased 40.9% to NIS 157 million in 2005 compared to NIS
112 million in 2004. Losses before financing expenses of Koor Trade amounted to
NIS 45 million in 2005 compared to earnings before financing expenses of NIS 24
million in 2005. The loss in 2005 was primarily due to the impairment in value
recorded

                                      54

<PAGE>

in respect of Koor Trade. See Note 3G and Note 24(2) to the consolidated
financial statements included elsewhere in this annual report.

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

         The following is an analysis of our consolidated results of operations,
followed by an analysis of the results of operations of each of our businesses.

         Revenues from sales and services. Revenues from sales and services
increased 26.3% to NIS 8,008 million in 2004 compared to NIS 6,339 million in
2003. The increase was mainly due to an increase of NIS 1,703 million in MA
Industries' revenues and a slight increase in the revenues of Sheraton Moriah
and Isram (NIS 121 million), partially offset by decrease in the revenues of
Telrad (NIS 186 million).

         Export and international operations, representing 90% of our revenues
from sales and services in 2004, increased 23.6% in 2004 compared to 2003,
primarily as a result of a NIS 1,620 million increase in MA Industries' exports,
partially offset by decreases in the exports of Telrad (NIS 171 million).

         Group's equity in the operating results of affiliates, net. Our equity
in the operating results of affiliates, net in 2004 was a loss of NIS 35 million
compared to a loss of NIS 117 million in 2003. This item mainly included the
write-off of NIS 20 million of the purchase price of Tadiran Communications
allocated to in-process research and development, and our equity share in the
net loss of ECI in the amount of NIS 15 million, compared with NIS 101 million
in 2003. In 2004, our equity share in the earnings of Knafaim was negligible,
compared to a loss of NIS 11 million in 2003.

         Cost of sales and services. Cost of sales and services increased 24.8%
to NIS 5,278 million in 2004 compared to NIS 4,229 million in 2003. The increase
in cost of sales and services was mainly due to an increase in the cost of sales
and services of MA Industries (NIS 1,023 million), partially offset by a
decrease in Telrad's cost of sales and services. Cost of sales and services as a
percentage of revenue from sales and services was 65.3% in 2004 compared to
66.7% in 2003.

         Selling and marketing expenses. Selling and marketing expenses
increased 27.7% to NIS 1,066 million in 2004 compared to NIS 835 million in
2003. The increase in selling and marketing expenses was mainly due to an
increase in the selling and marketing expenses of MA Industries (NIS 255
million), partially offset by a decrease in Telrad's selling and marketing
expenses . Selling and marketing expenses as a percentage of revenue from sales
and services was 13.3% in 2004 compared to 13.2% in 2003.

         General and administrative expenses. General and administrative
expenses increased 19.8% to NIS 460 million in 2004 compared to NIS 384 million
in 2003. The increase in general and administrative expenses was mainly due to
an increase in the general and administrative expenses of MA Industries (NIS 62
million). General and administrative expenses as a percentage of revenue from
sales and services was 5.7% in 2004 compared to 6.1% in 2003.

                                      55

<PAGE>

         Other income (expenses), net. Other expenses, net, amounted to NIS 72
million in 2004 compared to NIS 194 million in 2003. Other expenses, net, in
2004 included:

         o    Capital gains of NIS 223 million from sale of investments, mainly
              the sale of 7% of our equity interest in MA Industries and the
              sale of 19% of our equity interest in Knafaim. In 2003, we
              recorded capital gains of NIS 22 million from the sale of
              investments, mainly from the sale by Telrad of certain
              investments, and our sale of 2.6% of our equity interest in MA
              Industries;

         o    Impairment in the value of investments and assets of NIS 73
              million, including a NIS 58 million impairment of Koor CVC's
              investments. In 2003, we recorded an impairment in the value of
              investments and assets of NIS 107 million, including a NIS 72
              million impairment of Koor CVC's investments;

         o    Provision for severance compensation of NIS 45 million, primarily
              at MA Industries (NIS 22 million) and Telrad (NIS 24 million),
              compared to income of NIS 8 million in 2003; and

         o    Goodwill amortization and write-off of NIS 132 million, primarily
              at MA Industries (NIS 131 million), compared to NIS 114 million
              in 2003.

         Financing expenses, net. Financing expenses, net were NIS 272 million
in 2004 compared to NIS 236 million in 2003. Despite the decrease in our
consolidated net debt, financing expenses increased in 2004 compared to 2003 due
to the impact of the increase in the CPI on our CPI-linked long-term loans
following the discontinuation of the adjustment of our financial statements for
inflation as of January 1, 2004.

         Income tax. Income tax recorded in 2004 amounted to NIS 272 million
compared to NIS 94 million in 2003. The increase was mainly due to increases of
NIS 84 million in the tax expenses of MA Industries, as well as an increase of
NIS 42 million in the tax expense of Telrad, mainly as the result of the
impairment of a deferred tax asset. In addition, tax income at the parent
company level decreased by NIS 37 million, mainly due to the realization of a
deferred tax asset, created in 2003, in connection with the sale of shares of MA
Industries in 2004. Taxes on income as a percentage of revenues in 2004 and 2003
were 3.4% and 1.5%, respectively.

         Minority interest in consolidated companies' results, net. Minority
interest in consolidated companies' results, net amounted to earnings of NIS 431
million in 2004 compared to earnings of NIS 207 million in 2003. The increase
was mainly due to MA Industries (NIS 191 million) and Telrad (NIS 26 million).

                                      56

<PAGE>

         Net earnings (loss). For the reasons mentioned above, we reported net
earnings of NIS 145 million in 2004, compared to NIS 46 million in 2003.

<TABLE>
<CAPTION>
         Telecommunications Equipment Business

                                                              Year Ended December 31,
                                              -------------------------------------------------------
                                                   2003                2004                2004
                                              ---------------   ------------------  -----------------
                                                      (NIS in thousands)            ($ in thousands)
<S>                                               <C>                <C>                 <C>
Revenues from sales and services.........         827,001             671,531            145,890
Losses before financing expenses.........         (56,638)           (110,617)           (24,032)
</TABLE>


         Revenues from sales and services from our telecommunication business
decreased 18.8% in 2004 to NIS 672 million from NIS 827 million in 2003. The
decrease was primarily due to a decrease of NIS 186 million in sales of Telrad,
continuing the decline in orders for new telecommunications equipment that
Telrad has experienced over the past few years. Telrad's decrease in sales was
partially offset by an increase of NIS 18 million in sales of Microwave Networks
Inc., a U.S. subsidiary.

         Telecommunication business exports amounted to NIS 570 million in 2004
compared to NIS 722 million in 2003. The decrease in export sales resulted from
Telrad.

         Losses before financing expenses from our telecommunication equipment
business were NIS 111 million in 2004 compared to NIS 57 million in 2003. The
increase in losses before financing expenses in 2004 resulted from the decrease
in Telrad's sales.

<TABLE>
<CAPTION>
         Defense Electronics Business

                                                            Year Ended December 31,
                                            -------------------------------------------------------
                                                 2003                2004                2004
                                            ---------------   ------------------  -----------------
                                                    (NIS in thousands)            ($ in thousands)
<S>                                                  <C>              <C>                 <C>
Revenues from sales and services........              -                   -                  -
Losses before financing expenses........              -             (20,000)            (4,345)
</TABLE>

         Losses before financing expenses from our defense electronics business
in 2004 resulted from the writeoff of NIS 20 million of the purchase price of
Tadiran Communications allocated to in-process research and development.

         Our defense electronics business Elisra was reclassified as a
discontinued operation as a result of the sale in November 2005, as described
above. See Note 24(1) to the consolidated financial statements included
elsewhere in this annual report. Elisra's revenues from sales and services
decreased 11.6% to NIS 1,109 million in 2004 compared to NIS 1,255 million in
2003, primarily as a result of a major reduction in the Israeli defense budget,
as well as a lag in new orders and delays by subcontractors. The earnings before
financing expenses of the discontinued defense electronics operation were NIS 16
million in 2004, compared to losses before financing expenses of NIS 29 million
in 2003, primarily as a result of the reduction of costs due to implementation
of efficiency measures in 2003.

                                      57

<PAGE>
<TABLE>
<CAPTION>

         Agrochemicals Business

                                                              Year Ended December 31,
                                            -------------------------------------------------------
                                                 2003                2004                2004
                                            ---------------   ------------------  ----------------
                                                    (NIS in thousands)            ($ in thousands)
<S>                                           <C>              <C>                 <C>
Revenues from sales and services........      5,191,913           6,895,238          1,497,988
Earnings before financing expenses......        789,213           1,263,541            274,504
</TABLE>

         Revenues from sales and services from our agrochemicals business
increased 32.8% to NIS 6,895 million in 2004 from NIS 5,192 million in 2003, as
a result of increased sales of the MA group (see below). Approximately 93.3% and
92.7% of the sales in 2004 and 2003, respectively, were made outside of Israel.

         The increase in the MA group's sales was primarily attributable to the
consolidation of newly acquired subsidiaries, sales of new products, increased
sales of existing products (mainly in Brazil), as well as the strengthening of
the Euro against the dollar.

         Earnings before financing expenses from our agrochemicals business
increased 60.1% to NIS 1,263 million in 2004 from NIS 789 million in 2003 as a
result of increased sales and, to a lesser extent, as a result of the
strengthening of primary trading currencies against the dollar, partially offset
by an increase in raw material costs. Earnings before financing expenses from
our agrochemicals business include NIS 159 million in capital gains from the
sale of shares in MA Industries in January 2004.

<TABLE>
<CAPTION>
         Venture Capital Business

                                                             Year Ended December 31,
                                             -------------------------------------------------------
                                                  2003                2004                2004
                                             ---------------   ------------------  -----------------
                                                     (NIS in thousands)            ($ in thousands)
<S>                                               <C>              <C>                 <C>
Revenues from sales and services..........            --                  --                 --
Losses before financing expenses..........       (71,499)            (43,327)            (9,413)
</TABLE>

         As of December 31, 2004, the book value of Koor CVC's investments in
its start-up companies, a venture capital fund and Scopus Network Technologies
(now called Scopus Video Networks), in which Koor CVC held a 27% interest on a
fully-diluted basis, totaled approximately NIS 181 million. During 2004, Koor
CVC recorded NIS 58 million of provisions for the decline in value of several of
its portfolio companies. This expense was recorded in our consolidated financial
statements under the caption "Other income (expenses), net".

         In 2004, Koor CVC received approximately $8.8 million in proceeds from
the sale of its holdings in its portfolio companies Riverhead Networks and
Envara. The gain to Koor CVC was NIS 17 million which was recorded in our
consolidated financial statements under the caption "Other income (expenses),
net".

                                      58

<PAGE>
<TABLE>
<CAPTION>
         Tourism

                                                              Year Ended December 31,
                                              -------------------------------------------------------
                                                   2003                2004                2004
                                              ---------------   ------------------  -----------------
                                                      (NIS in thousands)            ($ in thousands)
<S>                                              <C>                 <C>                 <C>
Revenues from sales and services.........         309,264             430,280             93,478
Earnings (losses) before financing
  expenses...............................         (45,024)             36,651              7,962
</TABLE>

         Revenues and earnings from our tourism business increased 39.1% to NIS
430 million in 2004 from NIS 309 million in 2003. This increase was primarily
attributable to the increase in sales of Sheraton Moriah as a result of the
increase in tourism to Israel, as well as the increase in the sales of Isram.

         Earnings before financing expenses from our tourism business were NIS
37 million in 2004, compared to losses before financing expenses of NIS 45
million in 2003, mainly as earnings before financing expenses for 2004 include a
capital gain of NIS 50 million from the sale of 19% of Knafaim.

<TABLE>
<CAPTION>

         Other Businesses

                                                              Year Ended December 31,
                                              -------------------------------------------------------
                                                   2003                2004                2004
                                              ---------------   ------------------  -----------------
                                                      (NIS in thousands)            ($ in thousands)
<S>                                             <C>              <C>                 <C>
Revenues from sales and services...........        10,448              10,564              2,295
Earnings (losses) before financing
  expenses.................................         2,433              (3,414)              (742)
</TABLE>

         Our other business, Koor Trade, was reclassified as a discontinued
operation, as described above. See Note 24(2) to the consolidated financial
statements included elsewhere in this annual report. Koor Trade's revenues from
sales and services increased 15.8% to NIS 112 million in 2004 compared to NIS 96
million in 2003. Earnings before financing expenses of Koor Trade amounted to
NIS 24 million in 2004 compared to NIS 13 million in 2003.

Quarterly Results

         The following table presents unaudited quarterly financial information
for each of the four quarters of the year ended December 31, 2005. Such
information has been prepared on the same basis as our consolidated financial
statements.

                                      59

<PAGE>
<TABLE>
<CAPTION>

                                                         Quarter Ended                          Year Ended
                                    ------------------------------------------------------     ------------
                                        March         June        September       December        December
                                      31, 2005      30, 2005       30, 2005       31, 2005        31, 2005
                                    -----------   -----------    -----------     ---------     ------------
                                                            (in millions of NIS)
<S>                                      <C>          <C>            <C>            <C>            <C>
Revenues and earnings............        484          495            297            299            1,575
Earnings before income tax.......        173          110             27             27              337
Net earnings from continuing
operations.......................        105           98             30             33              266
Net earnings from discontinued
operations ......................          7          (31)            (6)            80               50
Net earnings.....................        109           67             24            113              313
</TABLE>

         Our operating results may be subject to significant fluctuations in
future periods. Our operating results for any particular quarter are not
necessarily indicative of any future results. Our quarterly operating results
may be subject to significant fluctuations due to various factors, including
changes in our investment portfolio and factors affecting our various segments
such as the length of the sale cycles, the timing and size of orders and
shipments to customers, variations in distribution channels, mix of products,
new product introductions, competitive pressures and general economic
conditions.

Recent Developments

         During the first six months of 2006, we purchased an additional
6,920,565 shares of M-A Industries. Our holding in the voting rights of M-A
Industries at June 30, 2006 is 33.7%.

         In January 2006, we signed an agreement for the acquisition of 50% of
the issued and paid share capital, of Epsilon Investment House Ltd. ("Epsilon").
Epsilon is engaged in providing a wide range of financial services including
portfolio management, mutual funds' management, underwriting, provident fund
management and consulting in mergers and acquisitions. The transaction was
completed on April 11, 2006 after receipt of approvals under all applicable
laws, including the approval of the Israeli capital market commissioner.
According to the agreement, we were allocated new shares, and also purchased
shares from certain of the existing shareholders of Epsilon, for total
consideration of NIS 106 million.

         On May 1, 2006, Discount Investment Corp. Ltd., a member of the IDB
Group, announced that it had entered into an agreement for the acquisition of
approximately 35.4% of our issued share capital. Completion of the transaction
is subject to certain conditions, including the approval of the Israeli
Anti-Trust Commissioner. The closing of the transaction is to take place by July
30, 2006, but may be extended by an additional 90 days under certain
circumstances. IDB Group is an interested party of ours and holds approximately
10% of our shares prior to the abovementioned transaction.

Effective Corporate Tax Rate

         We do not file a consolidated tax return with our subsidiaries, and we
are taxed only on our own income. Most of our subsidiaries file their own tax
returns, based on their own taxable income. Our income tax obligations and our
Israeli subsidiaries' income tax obligations are based on profits determined in
nominal NIS for Israeli statutory purposes, adjusted for tax

                                      60

<PAGE>


purposes, in terms of end-of-year Israeli currency, in accordance with changes
in the CPI. The tax provision in our financial statements does not directly
relate to income shown on such statements. See Note 16H (2) to our consolidated
financial statements included elsewhere in this annual report for the
reconciliation between the theoretical and actual tax expense. Non-Israeli
subsidiaries are taxed based upon tax laws in their respective countries of
residence. The effective corporate tax rate is affected mainly by tax benefits
arising from reduced tax rates applied to approved enterprises, utilization of
tax loss carry forwards for which no deferred taxes were recorded, the effect
of the Inflationary Adjustment Law on Israeli companies, whose functional
currency is the dollar, and the disallowance of provisions for anticipated
losses from the sale of assets. In 2005, we had a profit before taxes of NIS
337 million. See Note 16H to our consolidated financial statements included
elsewhere in this annual report.

Liquidity and Capital Resources

         We finance our corporate level activities principally through the
proceeds from divestitures, management fees and dividends we receive from our
subsidiaries and affiliates and through debt financing. In 2005 and 2004, we
received management fees in the amount of NIS 20 million and NIS 22 million,
respectively. In addition, in 2005 and 2004 we received NIS 114 million and NIS
135 million, respectively, in distributions from subsidiaries and affiliates, of
which NIS 82 million and NIS 68 million, respectively, was received from
Makhteshim-Agan Industries Ltd., or MA Industries. Of the NIS 249 million in
distributions we received in 2004 and 2005, NIS 81 million was received as a
liquidating distribution in respect of our wholly-owned subsidiary, Tadiran Ltd.

         Our shareholders' equity at December 31, 2005 increased 32.4% to NIS
2,483 million, compared to NIS 1,876 million at December 31, 2004. The increase
in 2005 was primarily due to the increase in our net earnings and in the
cumulative foreign currency translation adjustments.

         Working capital at December 31, 2005 was NIS 543 million compared to
NIS 765 million at December 31, 2004. The impact of the deconsolidation of MA
Industries and Telrad resulted in a NIS 1,304 million decrease in working
capital in 2005, which was partially offset by an increase of NIS 787 million in
working capital at the parent company, as well as an increase of NIS 299 million
in working capital at Sheraton-Moriah.

         Long-term debt totaled NIS 2,000 million at December 31, 2005, or 37.8%
of total assets on that date, compared to NIS 3,071 million at December 31,
2004, or 23.4% of total assets on that date.

         Total debt at December 31, 2005 was NIS 2,272 million, or 42.9% of
total assets, compared to NIS 4,728 million, or 36.0% of total assets, at
December 31, 2004.

         In accordance with several of our financing agreements, we and several
of our subsidiaries and affiliates undertook to maintain certain financial
covenants, including minimum shareholders' equity and debt capital, ratio of
shareholders' equity to debt capital, and a ban on creating pledges without the
advance consent of the banks providing the financing. We also undertook to use
the proceeds from the sale of certain assets to repay a portion of our existing

                                      61

<PAGE>

debt. As of December 31, 2005 and June 30, 2006, we and our relevant
subsidiaries and affiliates are in compliance with the above covenants.

Summary of our Contractual Obligations and Commercial Commitments

         For purposes of presenting the approximate cash flows that will be
required to meet our material contractual obligations, the following table
presents a summary of those obligations, as of December 31, 2005:

<TABLE>
<CAPTION>
                                                                    Payments Due by Period
                                           -------------------------------------------------------------------------
                                                                     (in millions of NIS)

                                                               Less Than        2-3          4-5           After
         Contractual Obligations                Total           1 Year         Years        Years         5 Years
----------------------------------------   -------------     -------------   --------    ----------    -------------
<S>                                           <C>                <C>         <C>         <C>              <C>
Debt to Banks(1)........................         2,371              360         413         1,185            413
Debentures(1)...........................           458               22          22           413              -
Operating Lease Obligations.............            18               12           6             -              -
Other Obligations(2)....................            59                1          22             4             32
Total Contractual Cash Obligations......         2,906              396         463         1,603            445
</TABLE>

(1)      Includes future interest payments in accordance with applicable
         interest rates and linkage bases detailed in Note 15 to our financial
         statements included elsewhere in this annual report..The Israeli CPI is
         assumed to increase 2% per annum, LIBOR interest rate and Prime
         interest rate published by the Israeli central bank are assumed to be
         5% and 6.25%, respectively and dollar exchange rate is assumed to
         remain as at December 31, 2005.

(2)      Includes mainly loans from shareholders in subsidiaries and receipts
         from time-sharing units at Sheraton-Moriah.


         For purposes of presenting the approximate cash flows that will be
required to meet our other commercial commitments, the following table presents
a summary of those commitments, as of December 31, 2005:

<TABLE>
<CAPTION>
                                                         Amount of Commitment Expiration Per Period
                                         ---------------------------------------------------------------------------
                                                                    (in millions of NIS)
                                               Total          Less Than         2-3           4-5          After
     Other Commercial Commitments           Commitment          1 Year         Years         Years        5 Years
--------------------------------------   --------------      -----------      -------      --------      -----------
<S>                                          <C>              <C>             <C>          <C>           <C>
Guarantees(1).........................          274               50             29            --           195
Commitments for investment
in Venture Capital Funds(3)...........           11                8              3            --            --
Total Commercial
Commitments...........................          285               58             32            --           195
</TABLE>

(1)  Includes: (i) a guarantee Bezeq (Israeli telecommunications company)
     received from Koor in the amount of NIS 132 million; and
     (ii) guarantees by us for affiliates and other non-consolidated companies
     in the amount of

                                      62

<PAGE>

     approximately NIS 142 million. See Note 22E to our
     consolidated financial statements included elsewhere in this annual report.

(2)  This amount represents Koor CVC's remaining obligation for investment in
     its portfolio funds, which may be drawn upon by the funds over the next 1-3
     years, based on their needs.


Cash Flows

         Cash and cash equivalents increased by NIS 27 million in 2005 compared
to 2004.

         Cash flows used in operating activities in 2005 were NIS 175 million,
compared to cash flows generated by operating activities of NIS 894 million in
2004. The decrease in cash flows from operating activities stems mainly from
minority interest in losses of subsidiaries of NIS 9 million in 2005 compared to
minority interest in earnings of subsidiaries of NIS 431 million in 2004;
depreciation and amortization of NIS 43 million in 2005 compared to NIS 431
million in 2004; equity in operating results of affiliates of NIS (269) million
in 2005 compared to NIS 36 million in 2004, investments in formerly consolidated
subsidiaries of 205 million in 2005 compared to negligible amount in 2004, and
investments in affiliated companies of NIS 77 million in 2005, compared to NIS
227 million in 2004.

         Cash flows generated by investing activities in 2005 were NIS 419
million, compared to cash used in investing activities of NIS 723 million in
2004. Cash used for the acquisition of subsidiaries (mainly by MA Industries)
and affiliates (mainly the acquisition of Tadiran Communications) was zero in
2005, compared to NIS 940 million in 2004. Proceeds from sales of subsidiaries
and affiliated companies and others (mainly the sale of shares of MA Industries
and Tadiran Communications) were NIS 645 million, compared to NIS 636 million in
2004. The investment in fixed assets, net after deduction of investment grants,
amounted to NIS 21 million, compared to NIS 204 million in 2004. Investment in
intangible assets amounted to NIS 1 million in 2005, compared to NIS 153 million
in 2004, mainly as a result of investments by MA Industries. Investments in
venture capital companies amounted to NIS 15 million, compared to NIS 35 million
last year. Furthermore, in 2005, cash used to increase short-term deposits and
investments amounted to NIS 167 million, compared to cash generated by the
decrease in short-term deposits and investments of NIS 17 million in 2004. Net
cash inflow generated by investing activities of discontinued operations (mainly
Elisra) was NIS 144 million in 2005, compared to net cash outflow of NIS 49
million in 2004. This includes proceeds from the sale of Elisra in the amount of
NIS 320 million.

         Financing activities during 2005 consumed NIS 553 million, compared to
NIS 128 million during 2004. Long-term loans received in 2005 amounted to NIS
1,338 million, compared to NIS 973 million in 2004. The loans were received
mainly at the parent company level. Repayment of long-term loans in 2005
amounted to NIS 1,887 million compared to NIS 1,782 million in 2004. Loans were
repaid mainly at Koor (the parent company). There were no proceeds from the
issuance of convertible debentures in 2005, compared to proceeds of NIS 666
million in 2004 (issued by MA Industries). Short-term credit, net, decreased by
NIS 475 million in 2005, compared to an increase of NIS 10 million in 2004.

                                      63

<PAGE>

Impact of Inflation and Currency Fluctuations

         The dollar cost of our operations in Israel is influenced by the extent
to which any increase in the rate of inflation in Israel is not offset (or is
offset on a lagging basis) by a devaluation of the NIS in relation to the
dollar. The inflation rate in Israel was 2.4 % in 2005 as compared to 1.2% in
2004. At the same time, the depreciation of the NIS against the dollar was 6.8%
in 2004 as compared to an appreciation of 1.6% in 2004. The decrease in the
dollar cost of our operations in Israel relates primarily to the cost of
salaries in Israel, which are paid in NIS, and constitutes a substantial portion
of our expenses.

Trend Information

         Our financial condition and results of operation may be subject to
significant fluctuations in future periods. Our past financial condition and
results of operation are not necessarily indicative of any future results. Our
future financial condition and results of operation may be subject to
significant fluctuations due to various factors, including changes in our
investment portfolio due to the acquisition or divestiture of subsidiaries or
other companies, and factors affecting our various segments such as the length
of the sale cycles, the timing and size of orders and shipments to customers,
variations in distribution channels, mix of products, new product introductions,
competitive pressures and general economic conditions.

Off-Balance Sheet Arrangements

         The only off-balance sheet arrangements we have that are reasonably
likely to have a material effect on our financial condition, operating results,
liquidity or capital resources are the guarantees and commitments described
above under "Liquidity and Capital Resources -- Summary of our Contractual
Obligations and Commercial Commitments."


                                      64

<PAGE>

Item 6.  Directors, Senior Management and Employees.
         ------------------------------------------

Directors and Senior Management

         The following table sets forth, as of June 30, 2006, the name, age and
position of each of our directors and executive officers:(1)


Charles R. Bronfman                  76       Chairman of the Board of Directors

Rolando Eisen(2)(3)(4)               65       Director

Paulette Eitan(2)(3)(5)              61       Director

Ron Feinstein(2)                     69       Director

Andrew Hauptman(4)                   38       Director

Chemi Peres                          49       Director

Dan Propper(4)                       65       Director

David Rubner                         67       Director

Prof. Gabriela Shalev(2)(4)          65       Director

Jonathan B. Kolber                   45       Chief Executive Officer

Danny Biran                          64       President

Ran Maidan                           35       Senior Vice President and Chief
                                              Financial Officer

Aaron Zuker                          61       Vice President

Shlomo Heller                        63       General Counsel and Corporate
                                              Secretary

________________________

(1)   Following the transfer of 5,081,033 of our shares to Discount Investment
      Corp. on July 3, 2006 described in Item 4 "Information on the Company -
      Business Overview - Major Shareholders", seven of our current directors
      resigned from our Board of Directors, namely Mr. Charles R. Bronfman, Mr.
      Andrew Hauptman, Adv. Roni Feinstein, Mr. Chemi Peres, Mr. Dan Propper,
      Mr. David Rubner and Prof. Gabriela Shalev. The following five new
      directors were nominated - Mr. Nochi Dankner, Mr. Avi Fischer, Mr. Zvi
      Livnat, Mr. Yitzhak Manor and Mr. Ami Erel. The final composition of the
      Board of Directors will be determined within the next few weeks.
      Furthermore, we expect that changes in the composition of our management
      will occur.
(2)   Member of the Audit Committee.
(3)   External director. Under the Israeli Companies Law, 1999, publicly held
      companies in Israel are required to appoint at least two "external
      directors" who serve for three-year terms, as described below. Our
      external directors were appointed in June 2002 and pursuant to the
      Companies Law, their terms expired on June 24, 2005. At our annual general
      meeting of shareholders held on July 3, 2005, our shareholders voted to
      re-appoint our external directors for a second term of three years.
(4)   Member of the Remuneration Committee.
(5)   Serves as the Audit Committee Financial Expert.

         Set forth below is a biographical summary of each of our above-named
directors and executive officers.

         Charles R. Bronfman has been Chairman of the Board of Directors of Koor
since November 1997. Mr. Bronfman is Chairman of the Board of Directors of
Claridge Israel L.L.C.,

                                      65
<PAGE>

Chairman of Andrea and Charles Bronfman Philanthropies Inc., Co-Chairman of
Birthright Israel International and Co-Chairman of the Board of Trustees,
McGill Institute for the Study of Canada. Mr. Bronfman is a former Co-Chairman
of the Seagram Company Ltd. and a former Chairman of the United Jewish
Communities.

         Rolando Eisen has been an external director of Koor since June 2002.
Mr. Eisen serves as a board member in I.D.B. Holdings Ltd. (external director)
and Healthcare Technologies Ltd. which is traded on NASDAQ. Mr. Eisen is a
co-founder and was the Managing Director of Rim Industries Ltd. Mr. Eisen has a
B.Sc. in Industrial Management from Carnegie Mellon University. Mr. Eisen is an
Israeli citizen.

         Paulette Eitan has been an external director of Koor since June 2002.
Ms. Eitan is the Managing Director of Paulette Eitan, Business Planning
Services Ltd., a management consulting firm focusing on business strategy,
performance, monitoring and management incentive programs, mostly for Israeli
high-tech and multinational companies. Ms. Eitan also serves as a board member
of Ham-Let Israel Canada Ltd. (external director). Ms. Eitan has an M.B.A. from
Tel Aviv University and a B.Sc. in Economics and Business from HEC-Paris. Ms.
Eitan is an Israeli citizen.

         Ron Feinstein has been a director of Koor since October 1991. Since
1999, Mr. Feinstein has served as a Chairman of the Board of Directors of
Sheraton Moriah Israel Ltd. From 1996 until 1998, Mr. Feinstein served as a
Chairman of the Board of Radisson Moriah Hotels Ltd. Between 1992 and 1998, Mr.
Feinstein also served as the Chairman of the Board of Tourist Industry
Development Corporation Ltd. Mr. Feinstein was a partner in the law firm of
Glass, Feinstein and Bar-Sela from 1981 through March 1997 and since then he is
self-employed at his own law firm. Mr. Feinstein is presently a member of the
Board of Directors of Migdal Insurance Corp. and the Chairman of the Board of
Directors of Am-Oved Publishers Ltd.

         Andrew Hauptman has been a director of Koor since November 1997. Mr.
Hauptman is the Co-Chairman and Chief Executive Officer of Andell Holdings LLC,
a private investment firm. Mr. Hauptman serves on the Board of Directors of
several privately held and publicly traded companies, including Canyon Ranch
Holdings LLC, Dick Clark Productions and Elizabeth Arden Red Door Salons LLC,
Mr. Hauptman also serves as the Chairman of the Board of Storage Mobility LLC,
as well as Andell Entertainment. In addition, Mr. Hauptman serves on the Board
of Trustees of the Los Angeles County Museum of Art, the Zoe Saidye Hauptman
Memorial Fund, The Hauptman Family Foundation and The Charles Bronfman Prize,
as well as being a member of the Yale University Council, an advisory board to
the President. Prior to joining Andell Holdings LLC, Mr. Hauptman worked in
restructuring and mergers and acquisitions with Alex. Brown & Sons in New York.
Later her worked with Universal Studios in London and played a key role in the
oversight of its international operations, focusing primarily on the music and
filmed entertainment groups. Mr. Hauptman holds an M.B.A. from Harvard
University and a B.A. in History from Yale University. Mr. Hauptman is the
son-in-law of Charles R. Bronfman, our Chairman of the Board.

         Chemi Peres has been a director of Koor since June 2000. Mr. Peres is
a co-founder and Managing Director of Pitango Venture Capital, an Israeli
venture capital fund. In 1992, Mr. Peres founded and managed the Mofet Israel
Technology Fund, a venture capital fund publicly

                                      66

<PAGE>

traded on the Tel Aviv Stock Exchange. Prior to founding Mofet, Mr. Peres
served as Vice President of Marketing and Business Development at Decision
Systems Israel Ltd, and as a Senior Consultant to Israel Aircraft Industries
Ltd. Mr. Peres currently serves on the board of several Pitango portfolio
companies, including Go Networks Ltd., Mercado Software Ltd., Provigent Ltd.,
Radwin Ltd. and Voltaire Ltd.. Mr. Peres also serves as a board member of the
Israel Venture Association, the Ministry of Industry, the Trade Seed Fund and
the Weizman Institute of Science. Mr. Peres holds an M.B.A. and a B.Sc. in
Industrial Engineering and Management from Tel Aviv University.

         Dan Propper is the Chairman of the Osem Group of Companies, one of
Israel's leading food manufacturers and a public company traded on the Tel Aviv
Stock Exchange. Mr. Proper is a member of the boards of various industrial
companies as well as the Technion, Israel Institute of Technology, the Weizman
Institute of Science and Ben-Gurion University. Mr. Propper graduated summa cum
laude from the Technion with a degree in chemical engineering and food
technology. In 1999, he received an honorary doctorate from the Technion for his
contribution to Israeli industry and economy. Between the years 1993-1999 Mr.
Propper served as the President of the Israeli Manufacturers Association.

         David Rubner has been a director of Koor since June 2000. Mr. Rubner
is the Chairman and Chief Executive Officer of Rubner Technology Ventures Ltd.
and a partner in Hyperion Israel Advisors Ltd., a venture capital firm. Mr.
Rubner was employed by ECI from 1970 until February 2000, and served as its
President and Chief Executive Officer from 1991 to October 1999 and February
2000, respectively. Mr. Rubner serves on the board of directors of Checkpoint
Software Ltd., Elbit Imaging Ltd. and Lipman Electronic Engineering Ltd., as
well as several privately held companies. Mr. Rubner also serves on the board
of trustees of Bar-Ilan University and Shaare Zedek Hospital. Mr. Rubner holds
a B.Sc. in Engineering from Queen Mary College, University of London and a
M.Sc. degree from Carnegie Mellon University.

         Prof. Gabriela Shalev has been a director of Koor since February 1999.
Prof. Shalev is the President and Rector of Ono Academic College. Prof. Shalev
also serves on the board of directors of several other companies, including Teva
Pharmaceutical Industries Ltd. and Osem Ltd.

         Jonathan B. Kolber has been Chief Executive Officer of Koor since July
1, 1998. Mr. Kolber served as the Vice Chairman of the Board of Directors of
Koor from November 1997 until he resigned from the Board on March 26, 2003. Mr.
Kolber served as President of Claridge Israel Ltd. from 1989 to 2001 and as
Vice President of Claridge Inc. from 1986 to 1990. Mr. Kolber was associated
with Cemp Investments from 1985 to 1987. Mr. Kolber serves as a director of
several Israeli companies, including ECI Telecom Ltd., MA Industries Ltd,
Telrad Networks Ltd., Elbit Systems Ltd., Knafaim-Arkia Holdings Ltd., and
Sheraton-Moriah (Israel) Ltd. Mr. Kolber has a B.A. in Near Eastern Languages
and Civilizations from Harvard University and a Certificate on Advanced Arabic
from the American University of Cairo.

         Danny Biran has been President of Koor since July 1, 1998. Mr. Biran
currently serves as Chairman of the Board of Makhteshim Agan Industries Ltd., A
Industries, Isrex (94) Ltd., Koor Trade Ltd. R.M. Renaissance Management (1993)
Ltd., and Dekolink Wireless Ltd. Mr. Biran is

                                      67

<PAGE>

also a director of ECI and Sheraton-Moriah. Mr. Biran is a graduate of the Law
faculty of the Tel Aviv University and a member of the Israeli Bar.

         Ran Maidan has been Senior Vice President and Chief Financial Officer
of Koor Industries since August 2005. Prior to joining Koor in 2005, Mr. Maidan
served as Chief Financial Officer of the Elisra Defense Group from March 2003.
Between the years 2000 to 2003 Mr. Maidan was Vice President, Mergers,
Acquisition and Taxation of Koor, and between the years 1999 and 2000 was
Corporate Controller of Koor. During his tenure both at Koor Industries' and
Elisra Mr. Maidan served on the Board of several Israeli companies, private and
public. Between the years 1995 to 1999 Mr. Maidan was an Audit Manager at KPMG
Somekh Chaikin. Mr. Maidan currently serves as a director of MA Industries Ltd.,
Telrad Networks Ltd.and Sheraton Moriah Israel Ltd. Maidan holds an MBA and
Bachelor degree in Accounting and Economics, both from the Bar-Ilan University,
and is a Certified Public Accountant in Israel.

         Aaron Zuker has been a Vice President of Koor since January 1999. He
serves as Managing Director of R.M. Renaissance Management (1993) Ltd. Mr. Zuker
is a director of MA Industries Ltd. Mr. Zuker is also a director of Isrex (94)
Ltd., Clalcom Ltd. and Barak ITC (1995). Between the years 1990 - 1995, Mr.
Zuker served as Chief Financial Officer and then Chief Executive Officer of The
Jerusalem Report Publication.

         Shlomo Heller has been General Counsel and Corporate Secretary of Koor
since August 1997. From 1990 to 1997, Mr. Heller served as the General Counsel
of United Mizrahi Bank Ltd. Mr. Heller also serves as a director of several
other companies within Koor.

Compensation

         The aggregate compensation paid to or accrued on behalf of all our
directors and executive officers as a group (15 persons, including 12 months
compensation to our former Chief Financial Officer) during 2005 consisted of
approximately $4.4 million, in salaries, fees, bonuses, commissions and
directors' fees and $0.6 million to provide pension, retirement or similar
benefits, excluding expenses (including business travel, professional and
business association dues and expenses) reimbursed to officers and other fringe
benefits commonly reimbursed or paid to such officers and directors by companies
in Israel.

         All of our directors received compensation identical to that received
by our external directors as described below.

         Compensation and reimbursement for external directors (as described
below) is statutorily determined pursuant to a formula stated by the Israeli
Companies Law, 1999, which became effective on February 1, 2000, and which we
refer to in this annual report as the Companies Law, and we adopted the highest
compensation payable pursuant to the formula. Compensation and reimbursement of
all other directors who do not serve as officers are the same as the statutory
rates paid to external directors pursuant to a decision of our shareholders at
our annual general meeting. For additional information concerning the
compensation of directors, see Note 26B to our consolidated financial statements
included elsewhere in this annual report.

                                      68

<PAGE>

         In addition, according to decisions of our shareholders at the annual
general meetings of shareholders held on July 23, 2003, and September 12, 2004,
eight directors (including the external directors) who are not associated with
Claridge Israel L.L.C. or with Esarbee Investments Limited and who are not
related to the controlling shareholders, have each been granted 50,000 options
under the 2003 Stock Option Plan which is described below. One of these
directors has since resigned.

         We have not entered into any service contracts with our directors that
provide for benefits upon termination of employment.

Board Practices

         Composition of Board; Election of Directors

         Pursuant to our articles of association, the number of directors
serving on the board is required to be not less than five. The appointment of
members to the board of directors, their replacement and removal, and the
appointment of the chairman of the board of directors requires approval by our
shareholders by ordinary resolution. Each member of the board of directors
remains in office until his/her office is vacated due to any one of the
following events: death, legal incompetence, bankruptcy, resignation or removal
at a shareholders meeting. Our chief executive officer is appointed by the board
of directors. Our executive officers serve at the discretion of our chief
executive officer pursuant to powers delegated to him by our board of directors.

         The board may appoint committees of the board and delegate to such
committees the powers of the board as it deems appropriate, unless the Companies
Law restricts it. Notwithstanding the foregoing, the board may, from time to
time, revoke the delegation made to a committee of its powers and authorities or
a portion thereof. The board has appointed an Audit Committee and a Remuneration
Committee.

         External Directors; Independent Directors

          Israeli Companies Law Requirements

         Under the Companies Law, companies incorporated under the laws of
Israel whose shares have been offered to the public inside or outside of Israel
are required to appoint at least two "external directors". The Companies' Law
provides that a person may not be appointed as an external director if the
person or the person's relative, partner, employer or any entity under the
person's control, has, as of the date of the person's appointment to serve as an
external director, or had during the two years preceding that date, any
affiliation with us or any entity controlling, controlled by or under common
control with us. The term "affiliation" includes:

         o    an employment relationship;

         o    a business or professional relationship maintained on a regular
              basis;

         o    control; and

                                      69

<PAGE>

         o    service as an office holder.

         No person may serve as an external director if the person's position or
other business activities create, or may create, a conflict of interest with the
person's responsibilities as an external director or may otherwise interfere
with the person's ability to serve as an external director.

         Under a recent amendment to the Companies Law, at least one of the
external directors is required to have "financial and accounting expertise" and
the other external directors are required to have "professional expertise". The
terms "financial and accounting expertise" and "professional expertise" have
been defined by regulations adopted according to the Companies Law.

         External directors are to be elected by majority vote at a
shareholders' meeting, provided that either:

                  (1) The majority of shares voted at the meeting, including at
         least one-third of the shares of the non-controlling shareholders voted
         at the meeting, vote in favor of election of the director; or

                  (2) The total number of shares of non-controlling shareholders
         voted against the election of the director does not exceed one percent
         of the aggregate voting rights.

         The initial term of an external director is three years and may be
extended for an additional three years. Both of our external directors are
members of our audit committee and one of them is a member of our remuneration
committee.

         An external director is entitled to compensation as provided in the
regulations adopted under the Companies Law and is otherwise prohibited from
receiving any other compensation, directly or indirectly, in connection with
service provided as an external director.

         New York Stock Exchange Requirements

         Our ADSs are listed on the New York Stock Exchange, or NYSE, and we are
subject to the rules of the NYSE applicable to listed companies. Under the
current NYSE rules, we are required to have an audit committee consisting of at
least three directors, all of who must be independent. The independence standard
under the NYSE rules generally excludes (1) any person who is an employee of a
company or its affiliates or any person who is an immediate family member of an
executive officer of a company or its affiliates, until the lapse of three years
from the termination of such employment, (2) any person who is a partner,
controlling shareholder or executive officer of an organization that has a
business relationship with a company or who has a direct business relationship
with a company, unless the board of directors of the company determines that the
business relationship does not interfere with such person's independent
judgment, or unless three years have lapsed from the termination of such
relationship or his status as a partner, controlling shareholder or executive
officer, and (3) any person who is employed as an executive of another
corporation where any of the company's executives serves on that corporation's
compensation committee. See " - Audit Committee - New

                                      70

<PAGE>

York Stock Exchange Requirements" for a description of the NYSE rules that
became effective with respect to Koor on July 31, 2005.



         Audit Committee

         Israeli Companies Law Requirements

         The Companies Law requires public companies to appoint an audit
committee. The responsibilities of the audit committee under the Companies Law
include identifying irregularities in the management of our business and
approving related party transactions as required by law. The audit committee is
also responsible for recommending to our shareholders the appointment of our
external auditors, for approval of the amounts to be paid to our external
auditors and for assisting our board of directors in overseeing the work of our
external auditors. The audit committee has also adopted procedures for handling
complaints regarding accounting and auditing matters, including anonymous and
confidential methods for addressing concerns raised by employees. Under the
Companies Law, an audit committee must consist of at least three directors,
including at least two external directors. The chairman of the board of
directors, any director employed by or otherwise providing services to us, and a
controlling shareholder or any relative of a controlling shareholder, may not be
a member of the audit committee.

         New York Stock Exchange Requirements

         Under the current NYSE rules, we are required to maintain an audit
committee consisting of independent directors, all of whom are financially
literate and one of whom has accounting or related financial management
expertise. Our audit committee complies with these requirements. The
responsibilities of the audit committee under the NYSE rules include evaluating
the independence of a company's outside auditors.

         Pursuant to the Sarbanes-Oxley Act of 2002, the Securities and Exchange
Commission, or SEC, issued new rules which, among other things, require the NYSE
to impose independence requirements on each member of the audit committees of
listed companies. The NYSE adopted rules that comply with the SEC's requirements
and became effective with respect to Koor on July 31, 2005.

         The requirements implement two basic criteria for determining
independence: (i) audit committee members would be barred from accepting any
consulting, advisory or other compensatory fee from the issuer or an affiliate
of the issuer, other than in the member's capacity as a member of the board of
directors and any board committee, and (ii) audit committee members of an issuer
that is not an investment company may not be an "affiliated person" of the
issuer or any subsidiary of the issuer apart from his or her capacity as a
member of the board and any board committee.

         The SEC has defined "affiliate" for non-investment companies as "a
person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the person
specified." The term "control" is intended to be consistent with the other
definitions of this term under the Securities Exchange Act of 1934, as "the
possession,

                                      71

<PAGE>

direct or indirect, of the power to direct or cause the direction of the
management and policies of a person, whether through the ownership of voting
securities, by contract, or otherwise." A safe harbor has been adopted by the
SEC, under which a person who is not an executive officer, director or 10%
shareholder of the issuer would be deemed not to have control of the issuer.
The SEC has also provided certain limited exceptions for an audit committee
member, who also sits on the board of directors of an affiliate to a listed
issuer, so long as, except for being a director on such board of directors, the
audit committee member otherwise meets the independence requirements for each
entity.

         The role of the audit committee for NYSE purposes includes assisting
our board of directors in fulfilling its responsibility for oversight of the
quality and integrity of our accounting, auditing and reporting practices.

         Remuneration Committee

         The remuneration committee is responsible for determining the
compensation for all our executive officers, which determinations are subject to
approval by our audit committee and board of directors. The remuneration
committee is also responsible for setting the annual bonus compensation, on an
aggregate basis, for all our employees.

         Internal Auditor

         Under the Companies Law, the board of directors must appoint an
internal auditor, nominated by the audit committee. The role of the internal
auditor is to examine, among other matters, whether our actions comply with the
law and with orderly business procedure. Under the Companies Law, the internal
auditor may be an employee of ours but not an office holder, or an affiliate, or
a relative of an office holder or affiliate, and may not be our independent
accountant or its representative. We have appointed Mr. Ezra Yehuda, CPA, who is
not an employee of ours, as our internal auditor in accordance with the
requirements of the Companies Law and his reports are submitted to and reviewed
by the Chairman of our board of directors and the audit committee. The audit
committee follows up on the implementation of the recommendations of the
internal auditor.

Summary of Significant Differences between Koor's Corporate Governance
Practices and Those Required of U.S. Companies under NYSE Listing Standards

         Section 303A.11 of the NYSE's Listed Company Manual, or LCM, requires
that listed foreign private issuers, such as Koor, must disclose any significant
ways in which their corporate governance practices differ from those followed by
U.S. domestic companies under NYSE listing standards.

         Our corporate governance practices are governed by our Articles of
Association, by the corporate governance provisions set forth in the Companies
Law and by applicable U.S. securities laws, including the Sarbanes-Oxley Act of
2002, to the extent they apply to foreign private issuers. We are also subject
to the NYSE corporate governance rules to the extent they apply to foreign
private issuers. Except for those specific rules, foreign private issuers are
permitted to follow home country practice in lieu of the provisions of Section
303A of the LCM.

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<PAGE>

         In order to comply with Section 303A.11 of the LCM, the following is a
summary of significant ways in which our corporate governance practices differ
from those required to be followed by U.S. domestic companies under the NYSE's
listing standards.

         Majority of Independent Directors: Under Section 303A.01 of the LCM,
U.S. domestic listed companies must have a majority of independent directors. We
do not have a similar requirement under Israeli practice or the Companies Law,
however we do have a majority of independent directors serving on our board of
directors.

          Separate Meetings of Non-Management Directors: Under Section 303A.03
of the LCM, the non-management directors of each U.S. domestic listed company
must meet at regularly scheduled executive sessions without management. We do
not have a similar requirement under Israeli practice or the Israeli Companies
Law, and our independent directors do not meet separately from directors who are
not independent, other than in the context of audit committee meetings.

         Nominating/Corporate Governance Committee: Under Section 303A.04 of the
LCM, a U.S. domestic listed company must have a nominating/corporate governance
committee composed entirely of independent directors. We are not required to
have such a committee under the Companies Law.

         Compensation Committee: Under Section 303A.05 of the LCM, a U.S.
domestic listed company must have a compensation committee composed entirely of
independent directors. We do have a remuneration committee, which is similar to
a compensation committee, although there is no requirement for a compensation
committee under Israeli practice or the Companies Law. However, our remuneration
committee is composed entirely of independent directors.

         Audit Committee: Under Section 303A.06 of the LCM, domestic listed
companies are required to have an audit committee that complies with the
requirements of Rule 10A-3 of the Securities and Exchange Act of 1934. Rule
10A-3 requires the audit committee of a U.S. company to be directly responsible
for the appointment, compensation, retention and oversight of the work of any
registered public accounting firm engaged for the purpose of preparing or
issuing an audit report or performing other audit, review, or attest services,
and that each such firm must report directly to the audit committee. Among other
exceptions, Rule 10A-3 provides an exception to such standards for foreign
private issuers where applicable home country law (i) requires or permits
shareholders to appoint the auditors or (ii) prohibits or limits the delegation
of responsibility to the issuer's audit committee.

         Pursuant to the Companies Law, our auditors are appointed by the
shareholders at the annual meeting of shareholders. Our audit committee is
responsible for recommending to the shareholders the appointment of our auditors
and to recommend the amounts to be paid to our auditors. In addition, pursuant
to the Companies Law, our financial statements must be approved by our board of
directors. Our audit committee is responsible for assisting the board of
directors in overseeing the work of our auditors.

         Equity Compensation Plans: Under Section 303A.08 of the LCM,
shareholders must be given the opportunity to vote on all equity-compensation
plans and material revisions thereto,

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<PAGE>

with certain limited exemptions as described in the Rule. We intend to follow
the requirements of the Companies Law under which requirement for shareholder
approval is generally limited to cases where our directors would be entitled to
receive equity under the equity-compensation plan.

         Corporate governance guidelines: Under Section 303A.09 of the LCM,
domestic listed companies must adopt and disclose their corporate governance
guidelines. We do not have a similar requirement under Israeli practice or the
Companies Law.

Employees

         At December 31, 2005, we had 2,318 employees worldwide, which
represented a decrease of 65% from year-end 2004. The decrease in the number of
employees is due to the deconsolidation of MA Industries and Telrad described
elsewhere in this annual report.

         The table below sets forth the number of our employees on a
consolidated basis and a break down of their geographic location at the end of
each of the last three fiscal years:

                         Latin
            Israel      America       USA       Europe     Others      Total
     2003     4,605        993        311          329         90      6,328
     2004     4,732        965        369          373        120      6,559
     2005     1,838         14        251          121         94      2,318


         Our future success will depend in part upon our ability to attract and
retain highly skilled and qualified personnel. Although competition for such
personnel in Israel is generally intense, we believe that adequate personnel
resources are currently available in Israel to meet our requirements.

         Israeli law generally requires the payment by employers of severance
upon the death of an employee, his retirement or upon termination of employment
by the employer without due cause. We currently fund our ongoing severance
obligations by making monthly payments to approved severance funds or insurance
policies. In addition, according to the National Insurance Law, Israeli
employers and employees are required to pay predetermined sums to the National
Insurance Institute, an organization similar to the United States Social
Security Administration. These contributions entitle the employees to benefits
in periods of unemployment, work injury, maternity leave, disability, reserve
military service and bankruptcy or winding-up of the employer. Since January 1,
1995, such amount also includes payments for national health insurance. The
payments to the National Insurance Institute are equal to approximately 15.93%
of an employee's wages limited to a specified amount, of which the employee
contributes approximately 63% and the employer contributes approximately 37%.

         We are subject to various Israeli labor laws, collective bargaining
agreements at our affiliates, Israeli labor practices, as well as orders
extending certain provisions of collective bargaining agreements between the
Histadrut (currently the largest labor organization in Israel) and the
Coordinating Bureau of Economic Organizations (the federation of employers'
organizations). Such laws, agreements and orders have a wide scope, including
minimum

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<PAGE>

employment standards (including, among other things, working hours, minimum
wages, vacation and severance pay), and special issues, such as equal pay for
equal work, equal opportunity in employment, and employment of women, youth and
army veterans. According to the National Insurance Law, Israeli employers and
employees are required to pay predetermined sums to the National Insurance
Institute, an organization similar to the United States Social Security
Administration. These contributions entitle the employees to benefits during
periods of unemployment, work injury, maternity leave, disability, reserve
military service, and bankruptcy or the winding-up of the employer, in addition
to health insurance. The National Health Insurance Law 1994 imposes a health
tax at a rate of approximately 4.8% of an employee's base wage.

         The collective bargaining agreements of our affiliates cover a term of
one to three years, or are for an indefinite period. Upon expiration of the term
of an agreement, and pending negotiations for extension, the provisions of the
agreement remain in force unless one of the parties gives a notice of
termination or a new collective agreement is entered into which explicitly
terminates the previous collective agreements. Management believes that, upon
expiration of such existing agreements, its subsidiaries will be able to
negotiate, without material disruptions to our businesses, satisfactory new
agreements. However, there can be no guarantee that satisfactory agreements will
be reached in each subsidiary or that the negotiation of such agreements will
not generate material disruptions to our businesses.

         Several of our affiliates have collective retirement agreements. These
agreements are due to expire in 2006. Unlike the collective bargaining
agreements, because these agreements have a termination date, the provisions of
these agreements will not remain in force in the period between the expiration
and the signing of an alternative agreement.

         In 2005, our total labor costs amounted to approximately NIS 203
million, which represented approximately 21% of our total net sales, compared to
NIS 1,057 million in 2004. The decrease in labor costs is due to the
deconsolidation of MA Industries and Telrad described elsewhere in this annual
report. Labor costs of our discontinued operations, Elisra and Koor Trade
amounted to approximately NIS 392 million in 2005, or 35% of the net sales of
the discontinued operations, compared to NIS 427 million in 2004. The majority
of our labor costs is denominated in NIS and is affected by the periodic changes
in the inflation rate in Israel.

Share Ownership

         Our directors and executive officers who are deemed to have beneficial
ownership of more than 1% of our outstanding ordinary shares are Mr. Charles R.
Bronfman, Mr. Andrew Hauptman and Mr. Jonathan Kolber. Mr. Charles R. Bronfman
and Mr. Andrew Hauptman are affiliated with Claridge Israel L.L.C., one of our
major shareholders, and Mr. Kolber is affiliated with Anfield Ltd. For details
of their shareholdings, please see "Item 7. Major Shareholders and Related
Party Transactions" and the related footnotes.

         As of June 30, 2006, our executive officers, in the aggregate, held
204,731 ordinary shares and 40,000 options under our stock option plans to
purchase up to 40,000 ordinary shares. These options have an exercise price of
NIS 208.6 per share and an expiration date of December 31, 2010.

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<PAGE>

         The 2003 Stock Based Compensation Plan

         On July 27, 2003, at our annual general meeting of shareholders, our
shareholders approved the 2003 Stock-Based Compensation Plan, which had been
previously approved by our audit committee and by our board of directors, on May
25, 2003 and June 5, 2003, respectively. A framework was approved for the
allotment of up to 1,200,000 stock options exercisable for up to 1,200,000 of
our ordinary shares, out of which 1,112,903 options have been granted.

         Under the terms of the 2003 plan, each stock option is theoretically
exercisable for one share, subject to adjustments. However, in practice,
offerees who exercise the options will not be allotted the full quantity of
shares underlying each option, but only shares which reflect the amount of the
monetary bonus inherent in their option, computed on the date of exercise.
Accordingly, the exercise price of each stock option is intended only for
computation of the bonus component.

         The options are designated for directors and employees who are not
related parties and will not become related parties as a result of allotment of
the stock options. In any event, the total number of offerees under the 2003
plan will not exceed 35 offerees, excluding our directors and chief executive
officer.

         The options will vest gradually over a three-year period from the
record date, with one-sixth of the total number of options vesting every six
months.

         In connection with the approval of the 2003 plan, our shareholders
approved the granting a total of 400,000 options out of the total number of
options allotted under the 2003 plan to eight directors, including one director
who has since resigned (the two directors who are controlling shareholders,
directly or indirectly, were not granted any options), divided equally, as well
as 175,000 options out of the total number of options allotted under the 2003
plan to our chief executive officer. The balance of the options allotted under
the 2003 plan is intended for other employees and officers of the Koor Group.

         As of June 30, 2006, 350,944 options to purchase our ordinary shares
were outstanding, as follows:

                Balance of
             stock options          Exercise        Expiration
             Not exercised             Price              date
           ---------------     -------------   ---------------
                                         NIS
                               -------------
                   227,944              99.5           12/2010
                    13,000             182.9           12/2010
                    50,000             193.4           12/2010
                    40,000             208.6           12/2010
                    10,000             219.0           12/2010
                    10,000             229.6           12/2010
           ---------------
                   350,944
           ===============

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<PAGE>

         Option Plans of Certain Subsidiaries

         In April 2001, the board of directors of MA Industries decided to
distribute options to employees of MA Industries and its consolidated companies.
According to this plan, during 2002 and 2003, 17,400,000 options were allocated,
each of which is exercisable into one ordinary share of MA Industries. Following
the exercise of options, as of March 31, 2006, 2,985,372 options to purchase
shares of MA Industries were outstanding under this plan.

         In April 2003, the board of directors of MA Industries approved a
framework for the allotment of 17,000,000 stock options, each of which is
exercisable into one ordinary share of MA Industries. Out of the framework,
3,400,000 options were allotted to the Chief Executive Officer and to directors
of MA Industries, and following the exercise of options, 4,495,341 options
remained outstanding as of March 31, 2006.

         On March 8, 2005, the board of directors of MA Industries adopted a new
option plan for its and its subsidiaries' officers and employees. Under the
terms of the plan, on March 14, 2005, 14,900,000 stock options, each of which is
exercisable into one ordinary share of MA Industries, were allotted, including
2,500,000 options that were deposited with a trustee for future distribution.
Out of the total number of options allotted under the plan, 800,000 options were
granted to MA Industries' chief executive officer. On March 8, 2006, the board
of directors of M-A Industries resolved to issue the balance of the options
under the plan to employees. As of March 31, 2006, 14,900,000 options were
outstanding under this plan.

         All the options of MA Industries will be exercised for shares in a
quantity reflecting the amount of the financial benefit inherent in the options,
according to the Bonus Component Method.

Item 7.  Major Shareholders and Related Party Transactions.
         -------------------------------------------------

Major Shareholders

         The following table sets forth certain information with respect to the
beneficial ownership of our ordinary shares as of June 30, 2006 with respect to
each person known to us to be the beneficial owner of 5% or more of our
outstanding ordinary shares. None of our major shareholders has any different
voting rights than any other shareholder.

<TABLE>
<CAPTION>
                                                                      Number of               Percentage of
                                                                       Ordinary            Outstanding Ordinary
                                                                        Shares                    Shares
Name                                                              Beneficially Owned               (1)
----                                                             -------------------       ---------------------
<S>                                                                  <C>                      <C>
Claridge Israel L.L.C. (2)(3)................................         2,375,835                  14.74%
Esarbee Investments Limited (4)..............................         2,271,167                  14.09%
IDB Development Corporation Ltd. (5) ........................         1,630,214                  10.11%

All officers and directors as a group (14 persons) (6).......         1,130,925                   7.02%
</TABLE>

                                      77

<PAGE>

_________________

         (1)   Based upon 16,446,964 ordinary shares issued and outstanding on
               June 30, 2006, which amount excludes 15,799 ordinary shares held
               by one of our wholly-owned subsidiaries, which according to the
               Companies Law do not confer voting rights while held by a
               subsidiary. The respective numbers of ordinary shares listed as
               beneficially owned in the table above, and the percentage of
               outstanding ordinary shares represented thereby, do not give
               effect to ordinary shares issuable upon exercise of options
               granted pursuant to the 2003 plan, which are exercisable within
               60 days of this annual report. See "Item 6. Directors, Senior
               Management and Employees," and Note 20 to our consolidated
               financial statements included elsewhere in this annual report.

         (2)   Claridge Israel L.L.C., a Delaware limited liability company, is
               mainly (99%) owned by The Charles Bronfman Trust. The Charles
               Bronfman Trust is a trust established under the laws of the U.S.
               primarily for the benefit of Ellen J. Bronfman Hauptman and her
               issue. Mr. Andrew Hauptman, one of our directors is the husband
               of Mrs. Ellen J. Bronfman Hauptman, the daughter of Charles R.
               Bronfman, our Chairman of the Board.

               The holdings of the Claridge Israel L.L.C. in our ordinary shares
               were pledged in favor of Bank Hapoalim as a guarantee for a loan
               that was given to Claridge Israel L.L.C. by Bank Hapoalim.

         (3)   Excluding  119,316 shares held by CBT Holdings L.L.C. a Delaware
               limited  liability company held by The Charles Bronfman Trust.

         (4)   Esarbee Investments Limited, a company registered in Canada, is
               owned by The Charles Rosner Bronfman Family Trust. The Charles
               Rosner Bronfman Family Trust is a trust established under the
               laws of Canada primarily for the benefit of Stephen R. Bronfman
               and his issue. Mr. Stephen R. Bronfman is the son of Charles R.
               Bronfman, our Chairman of the Board.

               The holdings of the Esarbee Investments Limited in our ordinary
               shares were pledged in favor of Bank Hapoalim as a guarantee for
               a loan that was given to Esarbee Investments Limited by Bank
               Hapoalim.

               An additional 120,046 shares are held by The Charles Rosner
               Bronfman Family Trust.

               An additional 104,669 shares are held by the Charles R. Bronfman
               trust, a trust established under the laws of New York primarily
               for the benefit of Charles R. Bronfman and Stephen R. Bronfman.

         (5)   IDB Development Corporation Ltd., or IDBD is controlled (66%) by
               IDB Holding Corporation Ltd., or IDBH. Both IDBD and IDBH are
               public Israeli companies traded on the Tel Aviv Stock Exchange.
               Approximately 51.7% of the outstanding share capital of IDBH is
               owned by a group comprised as follows: (i) 31.02% is held by
               Ganden Investments I.D.B. Ltd., a private Israeli company
               controlled by Nochi

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<PAGE>

               Dankner and his sister, Shelly Bergman; (ii) 10.34% is held by
               Manor Investments-IDB Ltd., a private Israeli company controlled
               by Ruth Manor; and (iii) 10.34% is held by Avraham Livnat
               Investments (2002) Ltd., a private Israeli company controlled by
               Avraham Livnat. The members of this group entered into a
               shareholders agreement relating to, among other things, their
               joint control of IDBH, the term of which expires in May 2023. In
               addition to her holdings as a controlling shareholder in one of
               the members of this group, as described above, Shelly Bergman
               separately holds approximately 4.9% of IDBH's outstanding share
               capital.

               On May 1, 2006, Discount Investment Corp. Ltd., a subsidiary of
               IDBD, signed an agreement, to acquire from Claridge Israel
               L.L.C., Esarbee Investments Limited, The Charles Rosner Bronfman
               Family Trust, CBT Holdings L.L.C., the Charles R. Bronfman Trust,
               Anfield, Ltd. (see note 6 below) and another company related to
               the family of Jonathan B. Kolber (which holds 90,000 shares of
               our Company), all of our shares held by those entities totaling
               5,753,207 shares, or approximately 34.9% of our outstanding
               shares, for $445.8 million. All approvals to which the
               transaction was subject, including Israel's anti-trust
               commissioner, have been granted. On July 3, 2006, this
               transaction closed and 5,081,033 of our shares, or approximately
               30.9% of our outstanding shares, were transferred to Discount
               Investments Corp., for approximately $394 million, and a put
               option, exercisable during December 2006, was granted to Anfield
               Ltd. in respect of the remaining 672,174 shares. Discount
               Investments is held 74.2% by IDBD, which also directly holds 10%
               of our outstanding ordinary shares, as described above.

         (6)   Includes (i) 218,334 options to purchase our ordinary shares held
               by several of our directors and officers, which are exercisable
               within 60 days of the date of this annual report, (ii) 258,157
               ordinary shares held by several of our directors and officers and
               (iii) 672,174 ordinary shares, representing 4.08% of our
               outstanding ordinary shares, held by Anfield, Ltd., a company
               registered in Israel and owned by Jonathan B. Kolber, our Chief
               Executive Officer. The holdings of Anfield in our ordinary shares
               were pledged in favor of Bank Hapoalim as a guarantee for a loan
               that was given to Anfield by Bank Hapoalim. Does not include the
               ordinary shares held by Claridge Israel L.L.C., which may be
               deemed beneficially owned by Ellen J. Bronfman Hauptman and
               Andrew Hauptman as described in footnote 2 above, or the ordinary
               shares held by Esarbee Investments Limited described in footnote
               4 above.

         As of December 31, 2005, we had 50 ADS holders of record in the United
States, holding ADSs representing approximately 4.3% of our outstanding ordinary
shares, as reported by The Bank of New York, the depositary for our ADSs.

         To our knowledge, (A) we are not directly or indirectly owned or
controlled (i) by another corporation or (ii) by any foreign government and (B)
there are no arrangements, the operation of which may at a subsequent date
result in a change in control of our company.

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<PAGE>

Related Party Transactions

         For details regarding transactions and loans between us and related
parties, please see Note 26 to our consolidated financial statements included
elsewhere in this annual report.

Item 8.  Financial Information.
         ---------------------

Consolidated Statements and Other Financial Information

         See "Item 17. Financial Statements" and pages F-1 through F-146.

Legal Proceedings

         Restrictive Trade Practices

         On September 21, 2004, a suit was filed against us, Bezeq - the Israel
Telecommunications Company Ltd., or Bezeq, Tadiran Ltd. (a subsidiary of Koor),
Tadiran Telecommunications Ltd. (a former subsidiary of Koor which was merged
with ECI), Tadiran Public Switching Ltd., (a former subsidiary of Telrad
Telecommunications Ltd.), and Telrad alleging that during the previous decade,
the defendants had engaged in activities prohibited by the Israeli Anti-Trust
Law that resulted in damages to Bezeq's customers. A motion for recognition of
the suit as a class action was filed together with the suit in accordance with
the Israeli Anti-Trust Law. The plaintiff is asking for damages for the group
that he is seeking to represent in the amount of NIS 1.7 billion.

         On March 10, 2005, we and the other defendants submitted to the
District Court an objection to the plaintiff's request to certify the claim as a
class action, and the plaintiff has filed its response to the objection. As of
the date of this annual report, a date has not yet been set for the start of the
court proceedings.

         Based on advice from our legal counsel, we believe the chances for the
suit and for the action to be recognized as a class action are remote.

         In connection with the sale of shares of Telrad Networks, Koor
committed to indemnify the purchasers in the event that a court ruling will
increase the amount of expenses to be paid by Telrad Networks to an amount
exceeding that stated in the share purchase agreement.

         On June 1, 2005, an indictment was filed with the Jerusalem District
Court prosecuting Koor, and seven other companies that are not members of the
Koor Group (including two companies that had been owned by Koor on the relevant
dates and were later sold to third parties) and nine executives (including two
who had been salaried employees of Koor on the relevant dates) for violations of
the Anti-Trust Law. The indictment was the outcome of an investigation that had
been opened by the Anti-Trust Commission in other companies during 2001, with
respect to price fixing and collusion, and the lack of competition in the frozen
and canned vegetable industry. The Anti-Trust Authority claimed that two
companies that belonged to the Koor Group in the past had colluded with other
companies in the years 1992-1998.

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<PAGE>

         On June 18, 2006, the Jerusalem District Court issued a verdict
imposing a penalty of NIS 400,000 on Koor.

         Environmental

         Pursuant to an agreement with the Ministry of Environmental Protection,
subsidiaries of MA Industries decided to construct facilities for the biological
treatment of waste. Construction of the facility will take approximately three
years. In the estimation of the subsidiary's management, the aggregate
construction cost will be between $30 million and $40 million.

         One of MA Industries' subsidiary's plants, together with other chemical
plants, was constructed in Ramat Hovav, since the Government of Israel
determined that the location was suitable for chemical plants as it was assumed
that the layers of the soil in that area were absolutely sealed against
penetration by liquid discharges or contamination. The Ministry of Environmental
Protection conducted tests as a result of which it was reported that data exist
indicating subterranean contamination in Ramat Hovav. The inspectors recommended
that steps be taken to prevent further leakage from active and dormant
installations that are likely to constitute a source of contamination of the
subterranean water in the region. MA Industries' subsidiary may be required to
clean up the relevant areas or subterranean layers if and when it is found that
the subsidiary is responsible for the contamination. Over the past several years
various tests have been performed by different agencies to test the ground
contamination in the Ramat Hovav area as well as the area surrounding the
subsidiary's premises in Be'er Sheva. Based on studies performed by researchers,
including foreign research institutes, there is no effective process for
cleaning the contaminated soil. The only remediation available is the natural
cleansing processes which will clean the land over a period of 80 years. As of
December 31, 2005, in the opinion of MA Industries' Management, no material
consequences on the financial statements are expected due to application of the
recommendations deriving from the said examinations.

         In May 2004, a MA Industries' subsidiary and other factories in the
Ramat Hovav area, received a notification of a change in the terms of the
license, according to which the factories will be required to treat their waste,
in contrast with the current treatment, independently and through application of
evaporation procedures, in the framework of which the factories are required to
perform within a short time, research and development for purposes of
conformance of the procedures to the composition of each factory's waste, and
later on to construct an appropriate facility, as well as application of
formulation procedures, in the framework of which the factories are required to
present research and development plans to the Ministry for purposes of
application of the procedures with respect to the waste. At the same time, the
Ministry of Environmental Protection set a date by which the factories are
required to treat their waste in the required format and to stop the flow of
waste into the evaporation pools and waste treatment facilities of the Council
of Ramat Hovav. On November 28, 2004, based on these terms, the Israeli
government reached a decision approving a plan to reduce air and water pollution
deriving from the Ramat Hovav industrial area. The plan calls for, among other
things, (i) more restrictive rules regarding the treatment of sewage by the
plants in the area (derived from the additional business license conditions that
are the subject of the administrative appeal described above) to be complied
with in two stages, the first by June 30, 2006 and the second by December 31,
2007; (ii) the drying and rehabilitation of the vaporization pools in the area
by the Ramat

                                      81

<PAGE>

Hovav Industrial Council, to be completed no later than December 31, 2012; and
(iii) the formulation and implementation by the Ministry of Environmental
Protection of a plan to prevent exceptional emission of hazardous materials
into the air from the Ramat Hovav industrial area.

         On October 10, 2004, the MA Industries' subsidiary, together with the
Israeli Union of Industrialists and other companies, filed an administrative
petition with the District Court of Be'er Sheva against the Ministry of
Environmental Protection. The subject of the petition is in respect of the
additional conditions for receipt of a business license that were imposed on the
petitioning factories in May 2004 that deal with treatment and removal of waste
accumulated as a result of their operations. As part of the petition, the Court
was requested to issue an order declaring that the additional conditions are
null and void. On March 3, 2005, the Court approved the Parties' consent to
attempt to settle the dispute through "out of court" mediation. In the framework
of the mediation, the Ministry of Environmental Protection hired the services of
a Dutch company having expertise with respect to the matter. The Dutch company's
conclusions supported the MA Industries' position that there is no treatment
method of pressurized ventilation and crystallization for the type of waste
material produced by the Ramat Hovav factories and it recommended to remain in
the Ramat Hovav pools while improving the quality of the waste material and
preventing the escape of odors and pollution into the environment. The matter is
currently in the mediation process. Agreement regarding the proposed method will
also update the conditions of the business license accordingly.

         In the estimation of MA Industries' management, based on advice of its
legal counsel, in view of the current preliminary stage of the process, it is
probable that the process will succeed and as a result the additional conditions
to the business license will be modified and reasonable to implement. On June
15, 2006 the parties to the mediation agreed, principally, on a solution to the
controversy aforementioned. According to that understanding, the Ministry of
Environment is supposed to publish, in the near future, new terms to the
business license to industries in the Ramat Hovav area that will replace the
existing conditions. However, in case the mediation fails and the petition is
dismissed, it will have a material effect on the activities of the plant in
Ramat Hovav and/or will require investments of amounts that MA Industries'
management is unable to estimate at this time.

         In November 2004, the Board of Directors of MA Industries approved a
master plan for investments in environmental matters as they relate to the
manufacturing sites in Israel. This included approval of investments of
approximately $60 million during the period from 2005 through 2008, the
implementation of which will depend on numerous factors, such as environmental
conditions and technology feasibility studies for the sites), some of which are
beyond MA Industries' control and there is therefore no certainty that they will
take place.

         In August 2003, a criminal complaint has been filed against MA
Industries' subsidiary - Makhteshim and one of its officers by the Man, Nature
and Law Foundation. The complaint alleges that in several instances from 1999 to
2003, there were measurements at MA Industries' Ramat Hovav plant of stack
emissions of materials exceeding the permitted concentrations, and that such
emissions created strong air pollution. MA Industries believes the charges in
the complaint are without merit and intends to defend itself against such
charges. In the opinion of MA Industries' management, based on advice from its
legal counsel, due to the early stage of the

                                      82

<PAGE>

proceedings, it is not possible to estimate the outcome of the complaint and/or
the resultant exposure. Therefore, the financial statements did not include a
provision in respect of the proceedings.

         Claims filed against MA Industries and its foreign subsidiaries

         A claim was filed against several parties including a MA Industries
subsidiary in Brazil, for an aggregate amount of $45 million, by a group that
acquired the rights to two banks that had declared bankruptcy. With respect to
the balance of the claim, the subsidiary has been sued as the guarantor of debts
of agricultural cooperatives, which were its former shareholders.

         The position of the subsidiary is that it was removed from the
guarantee agreement under the terms of a subsequent agreement between the bank,
the previous shareholders and a subsidiary of the former shareholders. The
subsidiary's financial statements include a provision of $1.6 million, based on
the possibility of a compromise agreement with the plaintiffs. In the estimation
of the subsidiary, based on the opinion of its legal counsel, the provision
recorded is sufficient to cover any possible loss from this claim.

         Claims and other monetary demands have been filed against MA
Industries' subsidiary in Brazil, in the aggregate amount of $63.9 million.
Based on the opinion of its legal counsel, the subsidiary's management estimates
that the chances of the subsidiary's success in the proceedings and its defense
against the above claims and demands are high. The subsidiary believes that the
provisions recorded in its financial statements are adequate to cover any
possible damage which may result from these claims.

         Claims filed against ECI

         In January 2005, ECI was served in connection with a purported class
action complaint filed in the United States Federal District Court for the
District of Maryland against ECtel, certain officers and directors of ECtel, and
ECI. The complaint alleges violations of U.S. Federal Securities laws by ECtel
and breach of fiduciary duties by the individual defendants, in connection with
disclosure of ECtel's financial results between April 2001 and April 2003. The
complaint also alleges that ECI was the controlling shareholder of ECtel during
this period and, as such, influenced and controlled the acts and omissions of
ECtel. Damages claimed by the plaintiff have not yet been quantified. ECI
believes that the allegations made in the complaint with respect to it are
without merit.

         Other Claims

         A number of claims have been filed against certain other companies
concerning various matters arising in the normal course of business, including
taxes, customs and VAT liabilities. The management of these companies believes,
based on the opinion of the legal counsel handling the claims, that appropriate
provisions in light of the circumstances have been included in the financial
statements.

                                      83

<PAGE>

Item 9.   The Offer and Listing.

Trading in our ADSs

         In the United States, our American Depositary Shares, or ADSs, have
been traded on the NYSE since our initial public offering in October 1995 under
the symbol "KOR" and are evidenced by ADRs. Each ADS represents 0.20 fully paid
ordinary shares. The following table sets forth, for the periods indicated, the
high and low last reported sale prices for our ADSs.

                                                                ADSs
                                                   -----------------------------
                                                        High             Low
                                                         $                $
                                                   -------------   -------------
Annual
------
         2001......................................     13.9375          4.1400
         2002......................................      7.2700          2.1000
         2003......................................      7.9600          2.0500
         2004......................................     10.5600          7.0500
         2005......................................     13.1800          9.8000

Quarterly 2004
--------------
         First Quarter.............................      8.5700          7.2500
         Second Quarter............................      9.4500          7.0500
         Third Quarter.............................      9.5500          7.2500
         Fourth Quarter............................     10.5600          7.5600

Quarterly 2005
--------------
         First Quarter.............................     12.2900          9.9100
         Second Quarter............................     13.1800         10.5400
         Third Quarter.............................     11.8500         10.0500
         Fourth Quarter............................     11.4200          9.8000

Monthly 2006
------------
         January...................................     10.9700         10.3000
         February..................................     10.2800          9.3400
         March.....................................     10.6400          9.4500
         April.....................................     12.7000         10.3700
         May.......................................     12.6500         11.6000
         June......................................     11.6800         10.1600

On June 30, 2006, the closing price of our ADSs on the NYSE was $10.44 per ADS.


         The ADSs are issued pursuant to a Deposit Agreement entered into
between us and the Bank of New York, as depository. The Bank of New York's
address is 101 Barclay Street, New York, New York 10286.

                                      84

<PAGE>

         Trading in our Ordinary Shares

         Our securities have been listed on the Tel Aviv Stock Exchange, or
TASE, since 1956. Our ordinary shares have been listed on the TASE since 1991.
The ordinary shares are not listed on any other stock exchange and have not been
publicly traded outside of Israel (other than through ADSs as noted above). The
table below sets forth the high and low last reported prices of our ordinary
shares (in NIS and dollars) on the TASE. The translation into dollars is based
on the average period rate of exchange published by the Bank of Israel.

<TABLE>
<CAPTION>
                                                              Ordinary Shares
                                         ----------------------------   --------------------------
                                                     High                          Low
                                         ----------------------------   --------------------------
                                             NIS              $             NIS            $
                                         ------------   -------------   -----------  -------------
<S>                                      <C>            <C>             <C>          <C>
Annual
------
         2001............................      281.20        67.08          89.80         20.34
         2002............................      166.60        36.92          48.60         10.26
         2003............................      171.00        39.05          49.80         11.37
         2004............................      224.90        52.21         165.30         38.37
         2005...........................       287.20        64.00         216.60         48.26

Quarterly 2004
--------------
         First Quarter...................      188.30        41.59         167.20         36.93
         Second Quarter..................      208.50        46.36         167.40         37.22
         Third Quarter...................      211.10        47.10         165.30         36.88
         Fourth Quarter..................      224.90        52.21         173.30         40.23

Quarterly 2005
--------------
         First Quarter...................      261.90        60.08         216.60         49.69
         Second Quarter..................      287.20        65.12         229.30         52.00
         Third Quarter...................      268.20        59.13         230.70         50.86
         Fourth Quarter..................      263.50        56.72         233.30         50.22

Monthly 2006
------------
         January.........................      258.00        55.86         238.50         51.64
         February........................      242.60        51.58         220.10         46.80
         March...........................      245.90        52.44         220.40         47.00
         April...........................      292.80        63.93         234.00         51.10
         May.............................      283.50        63.37         258.90         57.87
         June............................      256.20        57.26         227.40         50.83

</TABLE>

         On June 30, 2006, the closing price of our ordinary shares on the TASE
was NIS 229.5 (or $51.30) per share.


                                      85

Item 10. Additional Information.
         ----------------------

Memorandum and Articles of Association

         Organization and Register

         We are a public company organized in the State of Israel under the
Companies Law. We are registered with the Registrar of Companies of the State of
Israel and we have been assigned company number 52-001414-3.

         Objects and Purposes

         Our objects and purposes include a wide variety of business purposes,
including many types of investments, borrowing and lending, owning and
transacting in real estate, and are set forth in detail in Section 2 of our
memorandum of association.

         Directors

         Pursuant to our articles of association, the number of directors
serving on the board is required to be not less than five. The appointment of
members to the Board of Directors, their replacement and removal, and the
appointment of the Chairman of the Board of Directors require approval by our
shareholders by ordinary resolution. Each member of the Board of Directors
remains in office until his/her office is vacated due to any one of the
following events: death, legal incompetence, bankruptcy or resignation or upon
removal at a shareholders meeting. Our chief executive officer is appointed by
the Board of Directors. Our executive officers serve at the discretion of our
chief executive officer pursuant to powers delegated to him by our Board of
Directors. The board is authorized to appoint additional directors (whether to
fill a vacancy or create new directorship) to serve until the next annual
shareholders meeting, provided that the total number of directors does not
exceed the maximum set by the general meeting. Compensation of the Board of
Directors is fixed by the general meeting and directors are not required to hold
qualifying shares

         A meeting of the board may be called at the request of each director.
The quorum required for a meeting of the board consists of a majority of
directors holding office, for the time being, and entitled under any law to
attend and vote at such meeting, provided that the quorum is not less than
three. In lieu of a board meeting a resolution may be adopted by written
consent.

         The board may appoint a committee of the board and delegate to such
committee all or any of the powers of the board, as it deems appropriate.
Notwithstanding the foregoing, the board may, from time to time, revoke the
delegation made to a committee of its powers and authorities or portion thereof.
The board has appointed an audit committee and a remuneration committee, which
have four members each.

         The board has borrowing powers that may be exercised in accordance with
our articles of association. Our articles of association are silent with regards
to the retirement age of directors and directors' involvement in matters to
which they are materially interested.

                                      86

<PAGE>

         Approval of Certain Transactions

         The Companies Law codifies the fiduciary duties that "office holders,"
including directors and executive officers, owe to a company. An office holder's
fiduciary duties consist of a duty of care and a duty of loyalty. The duty of
loyalty includes avoiding any conflict of interest between the office holder's
position in Koor and his personal affairs, avoiding any competition with Koor,
avoiding exploiting any business opportunity of Koor in order to receive
personal advantage for himself or others, and revealing to Koor any information
or documents relating to Koor's affairs which the office holder has received due
to his position as an office holder. Under the Companies Law, all arrangements
as to compensation of office holders who are not directors require approval of
the board of directors. Arrangements regarding the compensation of directors
also require audit committee and shareholder approval.

         The Companies Law requires that an office holder of Koor promptly
disclose any personal interest that he or she may have and all related material
information known to him or her, in connection with any existing or proposed
transaction by Koor. In addition, if the transaction is an extraordinary
transaction as defined under Israeli law, the office holder must also disclose
any personal interest held by the office holder's spouse, siblings, parents,
grandparents, descendants, spouse's descendants and the spouses of any of the
foregoing. In addition, the office holder must also disclose any interest held
by any corporation in which the office holder is a 5% or greater shareholder,
director or general manager or in which he or she has the right to appoint at
least one director or the general manager. An extraordinary transaction is
defined as a transaction other than in the ordinary course of business,
otherwise than on market terms, or that is likely to have a material impact on
Koor's profitability, assets or liabilities.

         In the case of a transaction which is not an extraordinary transaction,
after the office holder complies with the above disclosure requirement, only
board approval is required unless our articles of association provide otherwise.
The transaction must not be adverse to our interest. Furthermore, if the
transaction is an extraordinary transaction, then, in addition to any approval
stipulated by the articles of association, it also must be approved by our audit
committee and then by the board of directors, and, under certain circumstances,
by a meeting of our shareholders. An office holder who has a personal interest
in a matter that is considered at a meeting of the board of directors or the
audit committee may not be present at this meeting or vote on this matter.

         The Companies Law applies the same disclosure requirements to a
controlling shareholder of a public company, which includes a shareholder that
holds 25% or more of the voting rights if no other shareholder owns more than
50% of the voting rights in Koor. Extraordinary transactions with a controlling
shareholder or in which a controlling shareholder has a personal interest, and
the terms of compensation of a controlling shareholder who is an office holder,
require the approval of the audit committee, the board of directors and our
shareholders. The shareholder approval must include at least one-third of the
shareholders who have no personal interest in the transaction and are present,
in person or by proxy, at the meeting or, alternatively the total shareholdings
of those who have no personal interest in the transaction who vote against the
transaction must not represent more than one percent of the voting rights in
Koor.

                                      87

<PAGE>

         In addition, a private placement of securities that will increase the
relative holdings of a shareholder that holds five percent or more of our
outstanding share capital (assuming the exercise or conversion of all securities
held by such person that are exercisable for or convertible into shares) or that
will cause any person to become, as a result of the issuance, a holder of more
than five percent of our outstanding share capital, requires approval by the
board of directors and our shareholders.

         Certain types of resolutions, called special or extraordinary
resolution, such as resolutions amending a company's articles of association and
regarding changes in capitalization, mergers, consolidations, windings up, or
authorizing a class of shares with special rights, require approval of the
holders of 75% of the shares represented at the meeting and voting thereon.
Under the provisions of the Companies Law, the shareholders of a company may
decide to amend such company's articles of association to reduce the percentage
required for a special resolution to as low as a simple majority or eliminate
the distinction between ordinary and special resolutions completely; such an
amendment must be adopted by a 75% majority.

         Under the Companies Law, our shareholders have a duty to act in good
faith towards us and our shareholders and to refrain from abusing his or her
power in Koor including, among other things, while voting in a general meeting
of shareholders on the following matters:

         o    Any amendment to the articles of association;

         o    An increase of our authorized share capital;

         o    A merger; and

         o    Approval of interested party transactions which require
              shareholders approval.

         In addition, any controlling shareholder, any shareholder who knows
that it possesses power to determine the outcome of a shareholder vote and any
shareholder who, pursuant to the provisions of a company's articles of
association, has the power to appoint or prevent the appointment of an office
holder in Koor, is under a duty to act with fairness towards us. The Companies
Law does not describe the substance of this duty.

         Insurance, Exemption and Indemnity of Office Holders

         Under the Companies Law and pursuant to our articles of association as
amended by a special resolution of the shareholders meeting held on June 1,
2003, we may, from time to time enter into a contract to insure any office
holder including directors, in full or in part, for liability resulting from an
obligation imposed on him or her as a result of an action performed in his or
her capacity as an office holder in Koor, for each of the following:

          (1) A breach of a duty of care towards the company or towards another
person.

          (2) A breach of a duty of trust towards the company, provided that the
office holder acted in good faith and had reasonable grounds to presume that his
or her action would not harm the interests of the company.

          (3) A financial obligation imposed on him in favor of another person.

                                      88

<PAGE>

         In addition, Under the Companies Law and pursuant to our articles of
association as amended, we may, from time to time, indemnify an office holder,
in full or in part, for an obligation or expense imposed on him or her as a
result of an action performed in his or her capacity as an office holder in
Koor, with respect to: (1) any financial obligation imposed on him or her in
favor of another person pursuant to a judgment, including a judgment given in a
settlement or arbitration decision approved by the court; and (2) any reasonable
litigation expenses, including lawyer's fees requited by the office holder or
imposed on him by a court, in a proceeding submitted against him by Koor or in
its name or by another person, or in a criminal indictment in which he was
acquitted, or a criminal indictment in which he was convicted of an offense not
requiring proof of criminal intent.

         We may give an advance undertaking to: (1) indemnify an office holder,
provided that the undertaking is limited to types of events which, in the
opinion of the board of directors, are foreseeable in advance at the time the
undertaking to indemnify is given, and in an amount which the board of directors
has determined is a reasonable amount under the circumstances, on condition that
the amount paid for one set of events shall not exceed 25% of our equity
according to the latest financial statements - annual or quarterly - as
published near the date of payment of the indemnification; and (2) indemnify an
office holder retroactively.

         Required Approvals

         In addition, under the Companies Law, indemnification of, and
procurement of insurance coverage for, our office holders must be approved by
our audit committee and board of directors and, in specified circumstances, by
our shareholders.

         Description of Koor's Deferred Shares

         As of June 30, 2006, we had 15,156,533 Deferred Shares, par value NIS
0.001 per share, outstanding. Holders of Deferred Shares are only entitled to
receive the nominal paid-up value of the Deferred Shares in the event of the
winding up of Koor, subject to prior payment of the nominal paid-up value of the
ordinary shares to the holders of ordinary shares. The holders of the Deferred
Shares do not have any voting rights and they are not entitled to participate in
the distribution of dividend of any kind. As of June 30, 2006, one of our
wholly-owned subsidiaries held 13,598,936 (89.7%) of our Deferred Shares.

         Description of Koor's Ordinary Shares

         The par value of our ordinary shares is NIS 0.001 per share, and all
issued and outstanding ordinary shares are fully paid and non-assessable.
Holders of paid-up ordinary shares are entitled to participate equally in the
payment of dividends and other distributions and, in the event of liquidation,
in all distributions after the discharge of liabilities to creditors. Our
shareholders do not have preferential rights to purchase new shares in Koor.

         As of June 30, 2006, one of our wholly-owned subsidiaries held 15,799
of our ordinary shares; however, pursuant to the Companies Law these ordinary
shares do not confer voting rights while held by our subsidiary.

                                      89

<PAGE>

         Voting is on the basis of one vote per share. An ordinary resolution
(for example, resolutions for the approval of final dividends or the appointment
of auditors) requires the affirmative vote of a majority of shares voting in
person or by proxy. A special resolution (for example, resolutions amending the
articles of association or authorizing changes in capitalization or in the
rights of shareholders) requires the affirmative vote of at least 75% of the
shares voting in person or by proxy.

         Under the articles of association, if at anytime the share capital is
divided into various classes, we may, by way of special resolution consented to
in writing by the holders of three quarters of our issued shares or a special
resolution passed at an extraordinary meeting, alter the previous benefits
restrictions and provisions applicable to that class. We shall also be entitled,
by special resolution, to amend our share capitalization.

         The Board of Directors has the power to set aside our cash profits to
pay a final dividend after making appropriations for capital reserves; such a
dividend must be approved at a general meeting. No dividend shall be declared at
a general meeting which is greater than that recommended by the Board of
Directors. The Board of Directors is also entitled to pay shareholders an
interim divided if it is justified in light of our financial position. All
ordinary shares represented by ADRs will be issued in registered form only.
Ordinary shares do not entitle their holders to preemptive rights.

         Meetings of Shareholders

         Under the Companies Law, we are required to hold an annual meeting
every year no later than fifteen months after the previous annual meeting. In
addition, under the Companies Law, we are required to hold a special meeting in
the following circumstances:

         o    At the direction of the Board of Directors;

         o    If so requested by two directors or 1/4 of the serving directors;
              or

         o    Upon the request of one or more shareholder who have at least 5%
              of the issued share capital and at least 1% of the voting rights
              or more shareholders who have at least 5% of the voting rights.

         If the Board of Directors receives a demand to convene a special
meeting, it must publicly announce the scheduling of the meeting within 21 days
after the demand is delivered. The meeting must then be held no later than 35
days after notice was made public.

         Under the Companies Law, the agenda at an annual meting is determined
by the Board of Directors. The agenda must also include the proposals for which
the convening of a special meeting was called, as well as any proposal requested
by one or more shareholder who holds no less than 1% of the voting rights, as
long as the proposal is one suitable for discussion at an annual meeting.

         Under the Companies Law, a notice of an annual meeting must be made
public (and delivered to every shareholder registered in the shareholders
register, unless it is stated otherwise in the articles of the company as it is
with Koor) at least 21 days before the meeting is convened.

                                      90

<PAGE>

The shareholders entitled to participate and vote at the meeting are the
shareholders as of the record date set at the time of the decision to convene
the meeting, provided that the record date is not more than 40 days, and not
less than four days, before the date of the meeting.

         A quorum is represented by at least two holders of ordinary shares
personally, or by proxy, who together hold at least 1/3 of the voting rights of
Koor. If such quorum is not present, the meeting stands adjourned until the same
day of the following week. At the adjourned meeting, two members, irrespective
of their percentage holding of voting rights, shall constitute a quorum.

         Under the Companies Law, a shareholder who intends to vote at a meeting
must demonstrate that he owns shares in accordance with the regulations. Under
these regulations, a shareholder whose shares are registered with a member of a
stock exchange (such as NYSE or the TASE) must provide us with an authorization
from such member regarding his ownership as of the record date.

         Right of Non-Israeli Shareholders to Vote

         Our memorandum of association, the articles of association, and the
laws of the State of Israel do not restrict in any way the ownership or voting
of our ordinary shares by nonresidents or persons who are not citizens of
Israel, except with respect to citizens or residents of countries that are in a
state of war with Israel.

         Change of Control

         The Companies Law allows mergers, provided that each party to the
transaction obtains the approval of its board of directors and shareholders. For
purposes of the shareholder vote of each party, unless a court rules otherwise,
the merger will not be deemed approved if a majority of the shares not held by
the other party (or by any person who holds 25% or more of the shares or the
right to appoint 25% or more of the directors of the other party) have voted
against the merger. Upon the request of a creditor of either party to the
proposed merger, the court may delay or prevent the merger if it concludes that
there exists a reasonable concern that as a result of the merger the surviving
company will be unable to satisfy the obligations of that party. Finally, a
merger may not be completed unless (i) at least 50 days have passed from the
time that the requisite proposals for approval of the merger have been filed
with the Israeli Registrar of Companies and (ii) 30 days have passed since the
merger was approved by the shareholders of each of the parties.

         Provisions of the Companies Law that deal with "arrangements" between a
company and its shareholders may be used to effect squeeze-out transactions in
which the target company becomes a wholly-owned subsidiary of the acquirer.
These provisions generally require that the merger be approved by a majority of
the participating shareholders holding at least 75% of the shares voted on the
matter. In addition to shareholder approval, court approval of the transaction
is required. The Companies Law also provides for a merger between companies,
after completion of the above procedure for an "arrangement" transaction and
court approval of the merger.

                                      91

<PAGE>

         The Companies Law also provides that an acquisition of shares in a
public company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 25% shareholder of the company, unless
there is already another 25% shareholder of the company. Similarly, the
Companies Law provides that an acquisition of shares in a public company must be
made by means of a tender offer if as a result of the acquisition the purchaser
would become a 45% shareholder of the company, unless there is already a 45%
shareholder of the company. This requirement does not apply if the acquisition
(i) occurs in the context of a private placement by the company that received
shareholder approval, (ii) was from a 25% shareholder of the company and
resulted in the acquirer becoming a 25% shareholder of the company or (iii) was
from a 45% shareholder of the company and resulted in the acquirer becoming a
45% shareholder of the company. The tender offer must be extended to all
shareholders, but the offeror is not required to purchase more than 5% of the
company's outstanding shares, regardless of how many shares are tendered by
shareholders. The tender offer may be consummated only if (i) at least 5% of the
company's outstanding shares will be acquired by the offeror and (ii) the number
of shares tendered in the offer exceeds the number of shares whose holders
objected to the offer. In any event, if as a result of an acquisition of shares
the acquirer will hold more than 90% of a company's shares, the acquisition must
be made by means of a tender offer for all of the shares. If more than 95% of
the outstanding shares are tendered in the tender offer, all the shares that the
acquirer offered to purchase will be transferred to it. The law provides for the
appraisal rights if a shareholder files a request in court within three months
of a full tender offer.

Material Contracts

Sales of MA Industries Shares

         On January 14, 2004, we entered into an agreement, pursuant to which we
sold 27 million shares of MA Industries to UBS Securities Israel Ltd. for
approximately NIS 418 million.

         On February 3, 2005, we entered into a block transfer deed, pursuant to
which we sold 15.9 million shares of MA Industries to Merrill Lynch
International for approximately NIS 374 million. Under the terms of the share
transfer deed, we undertook not to sell additional shares of MA Industries for a
nine-month period from the date of sale. As a result of this sale, and following
the issuance by MA Industries of additional shares in 2005 upon the conversion
of convertible securities and the exercise of employee stock options, our
ownership percentage in MA Industries decreased to 31.5% as of December 31, 2005
(28.6% on a fully diluted basis taking into consideration the exercise of
outstanding stock options and the conversion of outstanding convertible
debentures).

Tadiran Communications Share Purchase Agreement

         On September 10, 2004 we entered into a share purchase agreement with
Trefoil Israel Partners II, L.P., First Israel Mezzanine Fund L.P. and First
Israel Mezzanine Fund (in Israel) Limited Partnership to acquire approximately
33% of the shares of Tadiran Communications (approximately 31% on a fully
diluted basis taking into consideration the exercise of outstanding stock
options) from them for approximately NIS 637 million (approximately $144
million). Our

                                      92

<PAGE>

acquisition of these shares, which closed in November 2004, was
financed through a loan from an Israeli bank secured by these shares.

Sale of Knafaim Shares

         On September 29, 2004, we entered into three share transfer deeds to
sell a total of 19% of the shares of Knafaim to Mr. Israel Borowitz, Ms. Tamar
Borowitz (controlling shareholders of Knafaim) and Mr. Avshalom Nuriel for a
total purchase price of approximately NIS 144 million. As a result of these
sales, our shareholding in Knafaim decreased from approximately 28.3% to
approximately 9.2%.

Koor-Elbit-Federman Transactions

         On December 27, 2004, we entered into a series of agreements with Elbit
Systems Ltd., or Elbit, and with Federmann Enterprises Ltd., or Federmann. Under
the terms of a share transfer deed with Elbit, we agreed to sell our entire
holdings in Tadiran Communications (approximately 33%) to Elbit for
approximately $146 million. Concurrently, pursuant to a share transfer deed with
Federmann, we agreed to acquire approximately 9.8% of Elbit's share capital from
Federmann for approximately $99 million. In connection with each of these
transactions we entered into a shareholders agreement with the other party
relating to, among other things, the voting of shares in the election of
directors and rights of one party in connection with certain dispositions of
shares by the other party. According to the shareholders' agreement, Federmann
has undertaken to support the appointment and vote for the election of directors
to Elbit's Board who are nominated by us, in a number equal to the greater of:
(a) two directors or (b) 20% of the number of Elbit's directors, and we have
undertaken to vote for the election of all the candidates nominated by Federmann
for the offices of the other directors of Elbit. We announced that as long as we
hold Elbit shares we will not invoke our right to appoint 20% of Elbit's
directors. Furthermore, we have undertaken to vote, in every matter and proposed
resolution submitted for approval to a general shareholders' meeting of Elbit's
shareholders, in accordance with instructions given to us by Federmann, subject
to certain exceptions.

         The two sales were interconnected and would be completed in two stages,
the first of which closed on April 18, 2005. For a more detailed description of
these transactions, see "Item 4 - Information on the Company - Business Overview
- Our Defense Electronics Business - Recent Developments."

         On July 6, 2005 we signed an amendment to these agreements, pursuant to
which we would sell our entire holdings in Elisra to Elbit, instead of to
Tadiran Communications as per the original agreements, for approximately $70
million and additional consideration following receipt of future insurance
proceeds. We also received the right to acquire Dekolink Ltd., a start-up
company in the cellular field that is wholly-owned by Elisra. As originally
agreed, we would sell the balance of our holdings in Tadiran Communications to
Elbit for $83 million. However, under the amended terms of the transactions,
contrary to the terms of the original agreement, this sale would be conducted in
two parts, and we and Elbit would share joint control of Tadiran Communications,
as described above, following the sale of the first 5%. The sale of our
remaining shares in Tadiran Communications was contingent on the execution of
our sale of our holdings in Elisra to Elbit. Elbit's acquisition of Elisra was
subject to the approvals of Elbit's

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shareholders at general meeting to be held within sixty days and Israel's
Anti-Trust Commissioner. In addition, under the amended terms of the
transactions, contrary to the terms of the original agreement, we would acquire
only an additional 2.45% of Elbit from Federmann for $25 million, regardless of
whether the sale of Elisra is approved by the Israeli Anti-Trust Commissioner.
Following the completion of all the stages of these transactions, we hold
approximately 7.7% of Elbit.

         The transaction closed on November 30, 2005.

Exchange Controls

         Holders of ADSs are able to convert dividends and liquidation
distributions into freely repairable non-Israeli currencies at the rate of
exchange prevailing at the time of repatriation, pursuant to a general permit
issued by the Controller of Foreign Exchange at the Bank of Israel, or
Controller, under the Currency Control Law, 1978, or Currency Control Law, as
modified by certain reforms in May 1998, provided that Israeli income tax has
been withheld by us with respect to such amounts.

         Our ADSs may be freely held and traded pursuant to the General Permit
and the Currency Control Law. The ownership or voting of ADSs by non-residents
of Israel, except with respect to citizens of countries that are in a state of
war with Israel, are not restricted in any way by our memorandum of association
or articles of association or by the laws of the State of Israel.

         Pursuant to the reforms, the Bank of Israel has issued a new "general
permit." Under such general permit, foreign currency transactions are generally
permitted, except for transactions described in the permit that are specifically
restricted. Among these restricted transactions are foreign currency
transactions by institutional investors, including investments outside of Israel
by pension funds and insurers, as well as futures contracts by foreign residents
for periods of more than one month. All foreign currency transactions must be
reported to the Bank of Israel under the new general permit.

         Certain changes in Israeli tax legislation are expected as a result of
the reforms. No assurance can be given that such legislative changes will be
forthcoming in any particular time frame, or at all.

Taxation

         The following is a discussion of Israeli and United States tax
consequences material to our United States shareholders. The discussion is not
intended, and should not be construed, as legal or professional tax advice and
does not exhaust all possible tax considerations.

         Holders of our ADSs should consult their own tax advisors as to the
United States, Israeli or other tax consequences of the purchase, ownership and
disposition of our ADSs, including, in particular, the effect of any foreign,
state or local taxes.

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Israeli Tax Considerations

         The following discussion describes the current corporate tax structure
applicable to companies in Israel, as well as a summary of certain Israeli tax
laws affecting U.S. and other non-Israeli shareholders, for general information
only and is not intended to substitute for careful or specific tax planning. To
the extent that the discussion is based on legislation yet to be judicially or
administratively interpreted, there can be no assurance that the views expressed
herein will accord with any such interpretation in the future. This discussion
is not intended, and should not be construed, as legal or professional tax
advice, and does not cover all possible tax considerations. Each investor should
consult his or her own tax advisor as to the particular tax consequences of an
investment in the ordinary shares including the effects of applicable Israeli or
foreign or other tax laws and possible changes in the tax laws.

General Corporate Tax Structure

         Israeli companies are generally subject to corporate tax on taxable
income at the rate of 34% for the 2005 tax year, 31% for the 2006 tax year, 29%
for the 2007 tax year, 27% for the 2008 tax year, 26% for the 2009 tax year and
25% for the 2010 tax year and thereafter and are subject to capital gains tax at
a rate of 25% for real capital gains (other than gains deriving from the sale of
listed securities) derived after January 1, 2003. For capital gains derived from
assets acquired prior to January 1, 2003, the tax rate will be proportionate,
based upon the corresponding periods. See also Item 3- "Risks Related to Israel"
for a discussion of tax benefits under the Encouragement of Capital Investments
Law.

Special Provisions Relating to Taxation under Inflationary Conditions

         The Income Tax Law (Inflationary Adjustments), 1985, which we refer to
in this annual report as the "Inflationary Adjustments Law", represents an
attempt to overcome the problems presented to a traditional tax system by an
economy undergoing rapid inflation. The Inflationary Adjustments Law is complex.
Among other features, there is a special tax adjustment for the preservation of
equity as follows:

                  Where a company's equity exceeds the depreciated cost of fixed
assets, as calculated under the Inflationary Adjustments Law, a deduction from
taxable income is permitted equal to the excess multiplied by the applicable
annual rate of inflation. The maximum deduction permitted in any single tax year
is 70% of taxable income, with the unused portion permitted to be carried
forward, linked to the increase in the Israeli Consumer Price Index, or CPI;

                  Where a company's depreciated cost of fixed assets exceeds its
equity, then the excess multiplied by the applicable annual rate of inflation is
added to taxable income;

                  Subject to specified limitations, depreciation deductions on
fixed assets and losses carried forward are adjusted for inflation based on the
increase in the CPI.

                  Furthermore, capital gains and losses from the sale of fixed
assets and securities are calculated on a real basis.

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Recent Israeli Tax Reforms

         On January 1, 2003, the Law for Amendment of the Income Tax Ordinance
(Amendment No. 132), 2002, known as the Tax Reform, came into effect, which
significantly changed the taxation basis of corporate and individual taxpayers
from a territorial basis to a worldwide basis.

         The Tax Reform is aimed at broadening the categories of taxable income
and reducing the tax rates imposed on employment income.

         In January 2006, the Law for Amendment of the Income tax Ordinance
(Amendment No. 147), known as Amendment 147, came into effect. The main purpose
of the Amendment is to continue the trend of reducing the corporate tax rate and
the rate of salary taxes, and to unify and simplify the taxation of capital
income.

         The Tax Reform and Amendment 147, introduced the following, among other
things:

         o    Reduction of the tax rate levied on real capital gains (other
              than gains deriving from the sale of listed securities) derived
              after January 1, 2003, to a general rate of 25% for corporations.
              However, capital gains derived by corporations that are subject
              to the provisions of the Inflationary Adjustments Law or the
              provisions of Article 130a of the Income Tax Ordinance, will be
              subject to ordinary tax rates.

         o    Reduction to 20% of the tax rate applicable to real capital gains
              derived by individuals as of January 1, 2003. Nevertheless, real
              capital gains from the sale of securities by individuals will be
              taxed at 25% if the individual is a significant shareholder in an
              entity whose shares are sold on the same date, or in the
              preceding twelve months, or if the individual is claiming
              deduction of financing expenses from the capital gain on the sale
              of the securities. The term "significant shareholder" is defined
              as one who holds, directly or indirectly, 10% or more of the
              voting power in the entity whose securities are being sold.

         o    In general, regarding assets acquired prior to January 1, 2003,
              the reduced tax rate will apply to a proportionate part of the
              gain, in accordance with the holding periods of the asset, before
              or after January 1, 2003, on a linear basis;

         o    Imposition of Israeli tax on all income of Israeli residents,
              individuals and corporations, regardless of the territorial
              source of income, including income derived from passive sources
              such as interest, dividends and royalties;

         o    Introduction of controlled foreign corporation rules into the
              Israeli tax structure. Generally, under such rules, an Israeli
              resident who holds, directly or indirectly, 10% or more of the
              rights in a foreign corporation which has 70% or more of its
              shares not publicly traded, and in which more than 50% of the
              rights are held directly or indirectly by Israeli residents, and
              a majority of whose income in a tax year is considered passive
              income, will be liable for tax on the portion of such income
              attributed to his holdings in such corporation, as if such income
              were distributed to him as a dividend, provided that the tax
              imposed by the foreign country on the passive income is equal to
              or less than 20%;

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         o    Imposition of capital gains tax on capital gains realized by
              individuals as of January 1, 2003, from the sale of shares of
              publicly traded companies (such gain was previously exempt from
              capital gains tax in Israel). For information with respect to the
              applicability of Israeli capital gains taxes on the sale of
              ordinary shares, see "Capital Gains and Income Taxes Applicable
              to Non-Israeli Shareholders" below; and

         o    Introduction of a new regime for the taxation of shares and
              options issued to employees and officers (including directors).

Capital Gains and Income Taxes Applicable to Non-Israeli Shareholders

         Non-Israeli residents are exempt from Israeli capital gains tax on any
gains derived from the sale of shares of publicly traded Israeli companies , and
are exempt from Israeli capital gains tax on any gains derived from the sale of
shares of Israeli companies publicly traded on a recognized stock exchange
outside of Israel in a country with which Israel has a tax treaty, such as the
NYSE, provided however that such capital gains are not derived from a permanent
establishment in Israel and provided that such shareholders did not acquire
their shares prior to an initial public offering, unless the holder is subject
to the Inflationary Adjustments Law. However, non-Israeli corporations will not
be entitled to the exemption with respect to gains derived from the sale of
shares of Israeli companies publicly traded, if an Israeli resident (i) has a
controlling interest of 25% or more in such non-Israeli corporation, or (ii) is
the beneficiary or is entitled to 25% or more of the revenues or profits of such
non-Israeli corporation, whether directly or indirectly.

         Under the convention between the United States and Israel concerning
taxes on income (See "U.S.-Israel Tax Treaty" below), Israeli capital gains tax
will not apply to the sale, exchange or disposition of ordinary shares by a
person who qualifies as a resident of the United States (within the meaning of
the U.S.-Israel tax treaty) and is entitled to claim the benefits available to
the person by such treaty, except under certain circumstances, when a US
resident holds 10% or more of an Israeli entity, and the US resident is not
eligible for tax exemption according to the Israeli law, as described below.

         In the event that the conditions for tax exemption described above are
not met, or if capital gains are not tax exempt according to the tax treaty
between Israel and the shareholder's country of residence, the following shall
apply:

         Israeli law generally imposes a capital gains tax on the sale of
capital assets located in Israel including shares in Israeli companies by both
residents and non-residents of Israel, unless a specific exemption is available
or unless a tax treaty between Israel and the shareholder's country if residence
provides otherwise. The law distinguishes between real gain and inflationary
surplus. The inflationary surplus is a portion of the total capital gain that is
equivalent to the increase of the relevant asset's purchase price that is
attributable to the increase in the Israeli consumer price index (or, in certain
cases, to the increase in the currency in which they purchased shares) between
the date of purchase and the date of sale. The real gain is the excess of the
total capital gain over the inflationary surplus.

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         Pursuant to the Amendment 147, generally, real capital gains derived
after January 1, 2003 from the sale of shares are subject to a capital tax rate
of 20% if derived by individuals, and a 25% tax rate if derived by corporations.
The abovementioned tax rate does not apply to (1) dealers in securities who are
subject to ordinary tax rates (i.e. corporate tax rates for corporations and
marginal tax rates for individuals) regarding income derived from the sale of
shares; (2) corporations that report in accordance with the Inflationary
Adjustments Law or in accordance with Article 130a of the Income Tax Ordinance
that are subject to ordinary corporate tax rates on capital gains derived from
the sale of marketable securities; shareholders who acquired their shares prior
to an initial public offering (that are subject to a different tax arrangement);
(4) individuals that are significant shareholders in the corporation whose
shares are being sold at the date of the sale or during the preceding twelve
month period. Such shareholders will be subject to a 25% tax rate on capital
gains from the disposal of their shares; and (5) individuals who deduct
financing expenses for tax purposes from their gains from the disposal of
securities, who will be subject to a 25% tax rate until regulations will be
published by the Ministry of Finance, limiting the deduction of financing
expenses against capital gains from disposal of securities.

          In the case of taxpayers that are no subject to the provisions of the
Inflationary Adjustments Law, the tax basis of shares acquired prior to January
1, 2003 will be determined in accordance with the average closing share price in
the three trading days preceding January 1, 2003. However, in some cases, the
actual adjusted cost of the shares will be considered as the tax basis if it is
higher than such average price. In such cases, the capital loss accrued by the
taxpayer amounting to the decrease in the value of the share from the purchase
date until January 1, 2003 will not be recognized for tax purposes.

         Generally, in some instances where our foreign shareholders may be
liable to Israeli tax on the sale of their ordinary shares, the payment of the
consideration may be subject to the withholding of Israeli tax at the source.
However, if the shares are held through an Israeli financial institution and the
foreign resident has filed the proper forms., there will be no withholding tax
deduction.

         Non residents of Israel are subject to income tax on income accrued or
derived from sources in Israel. Such sources of income include passive income
such as dividends, royalties and interest paid by an Israeli resident, and non
passive income if the services were rendered in Israel or if a business is
operated in Israel. On distributions of dividends by us other than bonus shares
(stock dividends), income tax at the rate of 20% (15% in the case of dividend
distributed from the earnings of an approved enterprise) is generally withheld
at source, unless a different rate is provided in a treaty between Israel and
the shareholder's country of residence.

         However, a foreign resident who is a significant shareholder is liable
for 25% tax on dividends paid by an Israeli corporation, that are not derived
from the earnings of an approved enterprise. As a result, the foreign resident
may be required to file a tax return in Israel and pay the tax.

U.S.-Israel Tax Treaty

         Pursuant to the Convention Between the Government of the United States
of America and the Government of Israel with Respect to Taxes on Income, as
amended (the "U.S.-Israel

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Tax Treaty"), which became effective as of January 1, 1995, the sale, exchange
or disposition of ADSs or ordinary shares by a person who qualifies as a
resident of the United States within the meaning of the U.S.-Israel Tax Treaty
and who is entitled to claim the benefits afforded to such resident by the
U.S.-Israel Tax Treaty ("Treaty U.S. Resident") will generally not be subject
to Israeli capital gains tax unless such Treaty U.S. Resident held, directly or
indirectly, shares representing 10% or more of our voting power during any part
of the 12-month period preceding such sale, exchange or disposition, subject to
certain conditions. A sale, exchange or disposition of ADSs or ordinary shares
by a Treaty U.S. Resident who held, directly or indirectly, shares representing
10% or more of our voting power at any time during such preceding 12-month
period would be subject to such Israeli tax, to the extent applicable; however,
under the U.S.-Israel Tax Treaty, such Treaty U.S. Resident would be permitted
to claim a credit for such taxes against the U.S. Federal income tax imposed
with respect to such sale, exchange or disposition, subject to the limitations
in U.S. laws applicable to foreign tax credits. On distributions of dividends
other than bonus shares or stock dividends, income tax is generally withheld at
the source at the rate of 20%, or 15% for dividends of income generated by an
approved enterprise, unless a different rate is provided in a treaty between
Israel and the shareholder's country of residence.

         Under the U.S.-Israel tax treaty, the maximum Israeli tax on dividends
paid to a holder of ordinary shares who is a U.S. resident (as defined in the
treaty) is 25% and if such shareholder is a U.S. corporation holding at least
10% of our issued voting power during the part of the tax year which precedes
the date the dividend is distributed as well as throughout the previous tax year
and the company distributing the dividend in not an "investment company" as
defined in the tax treaty, the maximum Israeli tax on dividends paid to such
corporation is 12.5%, or 15% for dividends derived from income generated from an
approved enterprise.

U.S. Federal Income Tax Considerations

         The following is a summary of the material U.S. Federal income tax
consequences of the purchase, ownership and disposition of our ADSs to U.S.
Holders. This summary is based on U.S. Federal income tax laws, regulations,
rulings and decisions in effect as of the date of this annual report, all of
which are subject to change at any time, possibly with retroactive effect. This
summary does not address all tax considerations that may be may be relevant to
any particular U.S. holder in light of the holder's individual circumstances.
In particular, this summary does not address the potential application of the
alternative minimum tax or the U.S. federal income tax consequences to U.S.
holders that are subject to special treatment, including U.S. holders that:

         o    Are broker-dealers or insurance companies;

         o    Are financial institutions or financial services entities;

         o    Are tax-exempt organizations or retirement plans;

         o    Own directly, indirectly or by attribution 10% or more of our
              voting shares;

         o    Hold ADSs as part of a straddle or a hedging or conversion
              transaction;

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         o    Hold their ADSs through partnerships or other pass through
              entities;

         o    Have elected mark-to-market accounting; and

         o    Have a functional currency that is not the dollar.

         This summary does not address the effect of any U.S. Federal taxation
other than U.S. Federal income taxation. In addition, this summary does not
include any discussion of state, local or foreign taxation.

         You are urged to consult your tax advisors regarding the foreign and
United States Federal, state and local tax considerations of purchasing, holding
or disposing of our ADSs.

         For purposes of this summary, a U.S. Holder is:

         o    An individual who is a citizen or, for U.S. Federal income tax
              purposes, a resident of the United States;

         o    A corporation (or other entity taxable as a corporation) created
              or organized in or under the laws of the United States or any
              political subdivision thereof;

         o    An estate whose income is subject to U.S. Federal income tax
              regardless of its source; or

         o    A trust if:

              (a) a court within the United States is able to exercise primary
                  supervision over administration of the trust; and

              (b) one or more United States persons have the authority to
                  control all substantial decisions of the trust.

         Taxation of Dividends

         Subject to the discussion below under "Passive Foreign Investment
Companies," the gross amount of any distributions that you receive with respect
to ADSs, including the amount of any Israeli taxes withheld from these
distributions, will constitute dividends for U.S. Federal income tax purposes,
to the extent the distribution is paid out of our current or accumulated
earnings and profits, as determined for U.S. Federal income tax principles. You
will be required to include this amount of dividends in gross income as ordinary
income on the date such dividend is actually or constructively received.
Distributions in excess of our earnings and profits will be treated as a
non-taxable return of capital to the extent of your tax basis in the ADSs and,
to the extent in excess of your tax basis, will be treated as capital gain. See
"--Dispositions of ADSs" below for the discussion on the taxation of capital
gains. Dividends generally will not qualify for the dividends-received deduction
available to corporations.

         Dividends that we pay in NIS, including the amount of any Israeli taxes
withheld from these dividends, will be includible as income to you in a U.S.
dollar amount calculated by reference to the exchange rate in effect on the day
such dividends are distributed. If you convert

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dividends paid in NIS into U.S. Dollars on the day the dividends are
distributed, you generally should not be required to recognize foreign currency
gain or loss with respect to such conversion. Any gain or loss resulting from a
subsequent exchange of such NIS generally will be treated as U.S. source
ordinary income or loss.

         Further, and subject to the discussion below under "Passive Foreign
Investment Companies," noncorporate U.S. Holders may be eligible for reduced
rates of U.S. federal income tax (currently a maximum federal tax rate of 15%)
in respect of dividends received with respect to ADSs in taxable years beginning
before January 1, 2011, provided the holders satisfy certain holding period
requirements. Please note that certain restrictions apply to the ability of an
individual U.S. Holder to benefit from the lower rates. For example, the lower
rates are only available to such an individual if such individual (i) holds
stock for more than 60 days during the 121-day period beginning on the date that
is 60 days before the date on which the share becomes ex-dividend (disregarding
any period during which the U.S. Holder has diminished the risk of loss with
respect to such stock (for example, by holding an option to sell such stock)),
and (ii) is not under an obligation to make related payments with respect to
positions in substantially similar or related property. Subject to certain
conditions and limitations, you may elect to claim a credit against your U.S.
Federal income tax liability for Israeli tax withheld from dividends received in
respect of the ADSs. Dividends generally will be treated as foreign-source
passive income or financial services income for United States foreign tax credit
purposes. The rules relating to the determination of the foreign tax credit are
complex, and you should consult your personal tax advisors to determine whether
and to what extent you would be entitled to this credit. Alternatively, you may
elect to claim a U.S. tax deduction, instead of a foreign tax credit, for such
Israeli tax, but only for a year in which you elect to do so with respect to all
foreign income taxes.

         Dispositions of ADSs

         If you sell or otherwise dispose of your ADSs, you will recognize gain
or loss for U.S. Federal income tax purposes in an amount equal to the
difference between the amount realized on the sale or other disposition and your
adjusted tax basis in your ADSs. Subject to the discussion below under the
heading "Passive Foreign Investment Companies,"' such gain or loss generally
will be capital gain or loss and will be long-term capital gain or loss if you
had held the ADSs for more than one year at the time of the sale or other
disposition. Long-term capital gains realized by individual U.S. Holders
generally are subject to a lower marginal U.S. federal income tax rate than
ordinary income. Under most circumstances, any gain that you recognize on the
sale or other disposition of ADSs will be U.S.-source for purposes of the
foreign tax credit limitation; and losses recognized will be allocated against
U.S. source income.

         Passive Foreign Investment Companies

         For U.S. Federal income tax purposes, we will be considered a passive
foreign investment company, or PFIC, if in any taxable year either 75% or more
of our gross income is passive income, or at least 50% of the average value of
all of our assets for the taxable year produce or are held for the production of
passive income. For this purpose, passive income generally includes dividends,
interest, royalties, rents, annuities and the excess of gains over losses from
the disposition of assets which produce passive income. If we were determined to


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be a PFIC for U.S. Federal income tax purposes, highly complex rules would apply
to U.S. Holders owning ADSs. Accordingly, you are urged to consult your tax
advisors regarding the application of such rules.

         If we are treated as a PFIC for any taxable year,

         o    you would be required to allocate income recognized upon
              receiving certain dividends or gain recognized upon the
              disposition of ADSs ratably over your holding period for such
              ADSs,

         o    the amount allocated to the current taxable year, and any taxable
              year prior to the first taxable year in which we were a PFIC,
              would be taxed as ordinary income and would not be "qualified
              dividend income,"

         o    the amount allocated to each of the other taxable years would be
              subject to tax at the highest individual or corporate tax rate,
              as the case may be, and an interest charge would be imposed with
              respect to the resulting tax liability allocated to each such
              year,

         o    noncorporate holders will not be eligible for the reduced rate on
              dividends received with respect to ADSs and

         o    you would be required to make an annual return on IRS Form 8621
              regarding distributions received with respect to ADSs and any
              gain realized on your ADSs.

         One method to avoid the aforementioned treatment is to make a timely
mark-to-market election in respect of your ADSs. If you elect to mark-to-market
your ADSs, you will generally include in income any excess of the fair market
value of the ADSs at the close of each tax year over your adjusted basis in the
ADSs. If the fair market value of the ADSs had depreciated below your adjusted
basis at the close of the tax year, you may generally deduct the excess of the
adjusted basis of the ADSs over its fair market value at that time. However,
such deductions generally would be limited to the net mark-to-market gains, if
any, that you included in income with respect to ADSs in prior years. Income
recognized and deductions allowed under the mark-to-market provisions, as well
as any gain or loss on the disposition of ADSs with respect to which the
mark-to-market election is made, is treated as ordinary income or loss.

         Based on our income, assets and activities for the year 2005, we
believe that we were not a PFIC for that year, and we do not expect to become a
PFIC in the foreseeable future. However, there can be no assurances that we will
not be treated as a PFIC for that year or any taxable year. If we are or become
a PFIC for any taxable year included in your holding period, we generally will
remain a PFIC for all subsequent taxable years with respect to your holding of
our ADSs.

         You are urged to consult your tax advisor regarding the possibility of
us being classified as a PFIC and the potential tax consequences arising from
the ownership and disposition (directly or indirectly) of an interest in a PFIC.


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         Backup Withholding and Information Reporting

         Dividend payments made with respect to ADSs and proceeds received in
connection with the sale or other disposition of ADSs may be subject to
information reporting to the U.S. Internal Revenue Service (the "IRS") and
backup withholding. Backup withholding will not apply, however, if a U.S. Holder
(i) is a corporation or comes within certain other exempt categories and, when
required, demonstrates such fact or (ii) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding and
otherwise complies with applicable backup withholding rules. Persons required to
establish their exempt status generally must provide such certification on IRS
Form W-9 or Form W-8BEN (as applicable). Amounts held as backup withholding may
be credited against a U.S. Holder's U.S. federal income tax liability, and a
U.S. Holder may obtain a refund of any excess amounts withheld under the backup
withholding rules by filing the appropriate claim for refund with the IRS and
furnishing any required information.

Documents on Display

         We are subject to certain of the information reporting requirements of
the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act. We,
as a "foreign private issuer" are exempt from the rules and regulations under
the Exchange Act prescribing the furnishing and content of proxy statements, and
our officers, directors and principal shareholders are exempt from the reporting
and "short-swing" profit recovery provisions contained in Section 16 of the
Exchange Act, with respect to their purchase and sale of our shares. In
addition, we are not required to file reports and financial statements with the
U.S. Securities and Exchange Commission, or SEC, as frequently or as promptly as
U.S. companies whose securities are registered under the Exchange Act. However,
we will file with the SEC an annual report on Form 20-F containing financial
statements audited by an independent accounting firm. We will also furnish
quarterly reports on Form 6-K containing unaudited financial information after
the end of each of the first three quarters.

         You may read and copy any document we file with the SEC at its public
reference facilities at, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the SEC's regional offices at 500 West Madison Street, Suite 1400, Chicago, IL
60661-2511. You may also obtain copies of the documents at prescribed rates by
writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The SEC also maintains a web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC. The address of this web site is
http://www.sec.gov. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference facilities

Item 11. Quantitative and Qualitative Disclosures About Market Risk.
         ----------------------------------------------------------

General

         Our market risk represents the risk of changes in the value of
financial instruments caused by fluctuations in foreign exchange rates, interest
rates and equity prices. From time to time, we enter into hedging arrangements
to reduce our overall exposure to market risk; however, as a matter of policy,
we do not enter into transactions of a speculative or trading nature. Foreign
currency exchange rate and interest rate exposures are monitored by tracking

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actual and projected commitments and through the use of sensitivity analysis. We
do not believe that we are exposed to any material market risk with regard to
market risk sensitive instruments.

Market risk related to foreign currency exchange rates

         We have financial liabilities denominated in various currencies
(primarily dollars). Fluctuations in foreign currency exchange rates are likely
to affect our financing expenses.

         As of December 31, 2005, we had consolidated foreign currency-linked
financial liabilities of approximately NIS 345 million, all of which was
dollar-linked.

         As of December 31, 2005, our net financial liabilities in foreign
currency totaled approximately NIS 35 million, all of which was dollar-linked.
Should the US dollar exchange rate rise by 2%, our financing expenses would
increase by approximately NIS 0.7 million.

         A portion of the currency exposure is derived from the export sales
included in our consolidated financial statements. For the year ended December
31, 2005, those export sales amounted to approximately NIS 672 million,
representing approximately 68% of our total consolidated revenues from sales and
services for that period, while the portion of the expenses included in the
consolidated financial statements that is derived in shekels exceeds 50%.

         Our policy regarding hedging against exposure to fluctuations in
currency prices is that each subsidiary will hedge according to the needs and
markets in which it operates; there is no policy of engaging in currency hedging
over the entire consolidated balance sheet.

         Our consolidated statements as of December 31, 2005 include
transactions with financial instruments that serve mainly as a hedge against
foreign currency exchange rate exposure for our subsidiary companies.

         During 2005, we bought and sold dollars in exchange for other
currencies in forward contracts, call options, put options and swaps. As of
December 31, 2005 there were no open foreign exchange transactions. For a
detailed description of transactions with financial instruments, see Note 21 to
our consolidated financial statements included elsewhere in this annual report.

Market risk related to inflation rates

         Some of our financial loans are linked to the Israeli Consumer Price
Index, or CPI. In accordance with Israeli GAAP, until December 31, 2003 our
financial statements were presented in terms of NIS of identical purchasing
power as of December 31, 2003 to account for the effects of inflation based upon
changes in the CPI. As a result, the CPI linkage component of our financing
expenses was neutralized. Subsequent to the discontinuation of the adjustment of
financial statements for inflation as of January 1, 2004, our financing expenses
are now exposed to fluctuations in the CPI.

         As of December 31, 2005, our consolidated balance sheet contained
CPI-linked loans and other liabilities totaling approximately NIS 1,797 million.
As of such date, our consolidated balance sheets contained CPI-linked financial
assets totaling approximately NIS 217 million.

                                      104

<PAGE>

         Our net financial liabilities exposed to CPI-linkage amounted to
approximately NIS 1,580 million as of December 31, 2005. Should the CPI rise by
2%, our financing expenses would increase by approximately NIS 32 million.

         We believe that a 2% increase in the CPI constitutes a reasonable
increase for examining the impact of exposure to interest rates on our financing
expenses, in view of the changes that have occurred in recent years and those
that are forecast for the coming year.

         We have entered into forward transactions at the parent company level,
in order to reduce the overall exposure to our CPI-linked debt. As at December
31, 2005, we had open CPI-NIS forward contracts for an aggregate notional amount
of NIS 200 million. For a detailed description of transactions with financial
instruments, see Note 21 to our consolidated financial statements included
elsewhere in this annual report.

Market risk related to interest rates

         Some of our financial loans are denominated in variable interest rates
that are likely to fluctuate from time to time. Our policy regarding exposure to
interest rates is that each company in our consolidated group manages its own
exposure.

         We engage in hedge transactions against interest rate fluctuations from
time to time. As of December 31, 2005, these transactions totaled approximately
NIS 230 million at the parent company level.

         As of December 31, 2005, our consolidated balance sheet contained loans
and other liabilities in foreign currencies (in U.S. dollars) totaling
approximately NIS 345 million, and non-index linked shekel-denominated loans
totaling approximately NIS 401 million. As of such date, our consolidated
balance sheets contained financial assets in foreign currencies (in U.S.
dollars) totaling approximately NIS 310 million and non-index linked
shekel-denominated assets totaling approximately NIS 468 million.

         As of December 31, 2005, our net financial liabilities exposed to
fluctuations in the LIBOR interest rate amounted to approximately NIS 220
million. Should the LIBOR interest rate rise by 1%, our financing expenses would
increase by approximately NIS 2 million.

         As of December 31, 2005, our net financial liabilities exposed to
fluctuations in the interest rate in Israel are approximately NIS 233 million.
Should the interest rate in Israel rise by 2%, our financing expenses would
increase by approximately NIS 5 million.

         We believe that a 1% increase in the LIBOR interest rate and 2% in the
interest rate in Israel constitutes a reasonable increase for examining the
impact of exposure to interest rates on our financing expenses, in view of the
changes that have occurred in recent years and those that are forecast for the
coming year.

Market risk related to equity prices

         We had equity marketable short-term securities at December 31, 2005 of
approximately NIS 489 million. Market risk was estimated as the potential
hypothetical decrease of 10% in the

                                      105

<PAGE>

prices of these securities. Assuming such a decrease, the fair value of the
equity marketable securities would decrease by approximately NIS 49 million.

         In addition, we have long-term equity holdings in several subsidiaries
whose securities are traded on the Tel Aviv Stock Exchange and NASDAQ. Ordinary
fluctuations in the prices of these subsidiaries' securities would not affect
our financial statements; however, significant fluctuations may have an adverse
affect on our financial statements.



Item 12. Description of Securities Other than Equity Securities.
         ------------------------------------------------------

         Not Applicable.

                                      106

<PAGE>


                                     PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies.
         -----------------------------------------------

         Not Applicable.

Item 14. Material Modifications to the Rights of Security Holders and Use
         of Proceeds.
         ----------------------------------------------------------------

         Not Applicable.

Item 15. Controls and Procedures.
         -----------------------

         Disclosure Controls and Procedures. Our Chief Executive Officer and
Chief Financial Officer have evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act as of December 31, 2005. Based on such evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures are effective in alerting them on a timely basis to
material information relating to us (including our consolidated subsidiaries)
required to be included in our reports filed or submitted under the Exchange
Act, and that our disclosure controls and procedures are effective to ensure
that information required to be disclosed in the reports that we file or submit
under the Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosure.

         Internal Control Over Financial Reporting. There were no changes in our
internal control over financial reporting (as defined in Rules 13a-15(f) or
15d-15(f) under the Exchange Act) that occurred during the year ended December
31, 2005 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.

Item 16A.  Audit Committee Financial Expert.
           --------------------------------

         Our board of directors has determined that Mrs. Paulette Eitan, an
external director and a member of the audit committee of our board of directors,
is an "audit committee financial expert" as defined in Item 16A of Form 20-F.

Item 16B.  Code of Ethics.
           --------------
         We have adopted a written code of ethics that applies to our Chief
Executive Officer, our Chief Financial Officer and all of our other executive
officers.

         You may request a copy of our code of ethics, at no cost, by writing to
or telephoning us as follows:

                  Koor Industries Ltd.
                  Telrad Building
                  14 Hamelacha Street
                  Park Afek
                  Rosh Ha'ayin 48091, Israel
                  Attn:  Shlomo Heller, General Counsel
                  Telephone:  +011-972-3-900-8333


                                      107

<PAGE>

Item 16C.  Principal Accountant Fees and Services.
           --------------------------------------

         Audit Fees: KPMG and its affiliates charged us and our consolidated
subsidiaries an aggregate of approximately $602,000 for fiscal year 2005 in
connection with the professional services rendered for the audit of our annual
consolidated financial statements and our consolidated subsidiaries' annual
financial statements, review of our statutory quarterly consolidated financial
statements and services normally provided by them relating to statutory and
regulatory filings or engagements, including review of documents filed with the
SEC. For fiscal year 2004, KPMG and its affiliates billed us and our
consolidated subsidiaries an aggregate of approximately $2,436,000 for these
services.

         Audit-Related Fees: KPMG and its affiliates billed us and our
consolidated subsidiaries an aggregate of approximately $ 14,000 in fiscal year
2005 for assurance and related services reasonably related to the performance of
our audit. In fiscal year 2004, KPMG and its affiliates charged us and our
consolidated subsidiaries an aggregate of approximately $148,000 for
audit-related services. These fees relate mainly to the issuance of special
reports.

         Tax Fees: KPMG and its affiliates charged us and our consolidated
subsidiaries an aggregate of approximately $ 77,000 in fiscal year 2005 mainly
for tax compliance. KPMG and its affiliates billed us and our consolidated
subsidiaries an aggregate of approximately $124,000 for tax-related services in
fiscal year 2004.

         All Other Fees: KPMG and its affiliates billed us and our consolidated
subsidiaries an aggregate of approximately $ 211,000 in fiscal year 2005 for
products and services other than those comprising audit fees, audit-related fees
and tax fees. These fees mainly relate to assistance to the companies regarding
documentation of internal control over financial reporting. In fiscal year 2004,
KPMG and its affiliates charged us and our consolidated subsidiaries an
aggregate of approximately $271,000 for products and services in this category.

         Audit Committee Pre-Approval Policy and Procedures

         Our audit committee is responsible, among other things, for
recommending to our shareholders the appointment of our external auditors, for
approval of the amounts to be paid to our external auditors and for assisting
our board of directors in overseeing the work of our external auditors. To
assure compliance with independence requirements applicable to our independent
auditors, our audit committee pre-approves annually a catalog of specific audit
and non-audit services in the categories Audit Services, Audit-Related Services,
Tax-Related Services, and Other Services that may be performed by our auditors,
as well as the budgeted fee levels for each of these categories. All other
permitted services must receive a specific approval from our audit committee.
Our external auditor periodically provides a report to our audit committee in
order for our audit committee to review the services that our external auditor
is providing, as well as the status and cost of those services.

                                      108

<PAGE>

         During 2005, none of the services provided to us by our external
auditors were provided pursuant to the de minimis exception to the pre-approval
requirement provided by paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

Item 16D.  Exemptions from the Listing Standards for Audit Committees.
           ----------------------------------------------------------

         Not Applicable.

Item 16E.  Purchases of Equity Securities by the Issuer and Affiliated
           Purchasers.
           -----------------------------------------------------------

         None.

                                      109

<PAGE>


                                    PART III

Item 17. Financial Statements.
         --------------------

         See pages F-1 through F-141, incorporated herein by reference.

Item 18. Financial Statements.
         --------------------

         Not Applicable.

Item 19. Exhibits.
         --------

      Exhibit No.    Description
      -----------    -----------

         1.1         Memorandum of Association of Koor Industries Ltd.*

         1.2         Articles of Association of Koor Industries Ltd.*

         1.3         Amendments to Articles of Association of Koor Industries
                     Ltd. Pursuant to a General Meeting of Shareholders held on
                     June 1, 2003.***

         2.1         Form of Ordinary Share Certificate.*

         2.2         Form of Deposit Agreement including Form of American
                     Depositary Receipt.**

         4.1         Agreement, dated January 14, 2004, between Koor Industries
                     Ltd. and UBS Securities Israel Ltd. ****

         4.2         Share Purchase Agreement, dated September 10, 2004,
                     between Koor Industries Ltd. and Trefoil Israel Partners
                     II, L.P., First Israel Mezzanine Fund L.P. and First
                     Israel Mezzanine Fund (in Israel) Limited Partnership ****

         4.3         Share Transfer Deed, dated September 29, 2004, between
                     Koor Industries Ltd. and Mr. Israel Borowitz. ****

         4.4         Share Transfer Deed, dated September 29, 2004, between
                     Koor Industries Ltd. and Ms. Tamar Borowitz. ****

         4.5         Share Transfer Deed, dated September 29, 2004, between
                     Koor Industries Ltd. and Mr. Avshalom Nuriel. ****

         4.6         Share Transfer Deed, dated December 27, 2004, and amended
                     July 6, 2005, between Koor Industries Ltd. and Elbit
                     Systems Ltd. ****

         4.7         Shareholders' Agreement, dated December 27, 2004, and
                     amended July 6, 2005, between Koor Industries Ltd. and
                     Elbit Systems Ltd. ****

         4.8         Share Transfer Deed, dated December 27, 2004, and amended
                     July 6, 2005, between Koor Industries Ltd. and Federmann
                     Enterprises Ltd. ****

         4.9         Shareholders' Agreement, dated December 27, 2004, and
                     amended July 6, 2005, among Koor Industries Ltd.,
                     Federmann Enterprises Ltd. and Heris Aktiengesellschaft.
                     ****

         4.10        Share Transfer Deed, dated February 3, 2005, between Koor
                     Industries Ltd. and Merrill Lynch International. ****

         8.1         List of significant subsidiaries and affiliates.*****

        12.1         Certification of the Principal Executive Officer of Koor
                     Industries Ltd. pursuant to Section 302 of the
                     Sarbanes-Oxley Act of 2002.*****

        12.2         Certification of the Principal Financial Officer of Koor
                     Industries Ltd. pursuant to


<PAGE>

                                      110


                     Section 302 of the Sarbanes-Oxley Act of 2002.*****

        13.1         Certification of the Principal Executive and Financial
                     Officers of Koor Industries Ltd. pursuant to 18 U.S.C.
                     Section 1350, as adopted pursuant to Section 906 of the
                     Sarbanes-Oxley Act of 2002.*****

        14.1         Consent of KPMG Somekh Chaikin to the incorporation by
                     reference into the effective registration statement on
                     Form S-8 of Koor Industries Ltd. under the Securities Act
                     of 1933 of their report with respect to the consolidated
                     financial statements of Koor Industries Ltd., which
                     appears in this Annual Report on Form 20-F.*****

_____________________

*        Incorporated herein by reference to Koor Industries Ltd.'s
         Registration Statement on Form F-1 (Registration No. 333-97732)
         filed with the Securities and Exchange Commission on October 3, 1995.
**       Incorporated herein by reference to Koor Industries Ltd.'s
         Registration Statement on Form F-6 (Registration No. 333-97758)
         filed with the Securities and Exchange Commission on October 4, 1995.
***      Incorporated by reference to Koor Industries Ltd.'s Annual Report on
         Form 20-F for the year ended December 31, 2002 filed with the
         Securities and Exchange Commission on July 15, 2003.
****     Incorporated by reference to Koor Industries Ltd.'s Annual Report on
         Form 20-F for the year ended December 31, 2004 filed with the
         Securities and Exchange Commission on July 15, 2005.
*****    Filed herewith.

                                      111

<PAGE>


                                   SIGNATURES

         Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Rosh
Ha'ayin, State of Israel, on the 10th day of July, 2006.



                                            KOOR INDUSTRIES LTD.



                                            By:    /s/ Jonathan B. Kolber
                                                 ---------------------------
                                                  Jonathan B. Kolber
                                                  Chief Executive Officer


<PAGE>


                                   Koor Industries Ltd. (an Israeli Corporation)

-------------------------------------------------------------------------------
Financial Statements as at December 31, 2005



Contents


                                                                           Page
                                                                           ----


Auditors' Report                                                           F-2

Financial Statements:

Consolidated Balance Sheets                                                F-3

Company Balance Sheets                                                     F-5

Consolidated Statements of Operations                                      F-7

Company Statements of Operations                                           F-8

Statement of Shareholders' Equity                                          F-9

Consolidated Statements of Cash Flows                                      F-11

Company Statements of Cash Flows                                           F-17

Notes to the Financial Statements                                          F-19



                                       F-1
<PAGE>

       [Letterhead of Somekh Chaikin, a Member Firm of KPMG International]



Report of Independent Registered Public Accounting Firm

The Shareholders
Koor Industries Ltd.

We have audited the accompanying balance sheets of Koor Industries Ltd. (the
"Company" or "Koor") and the consolidated balance sheets of the Company and its
subsidiaries (the "Group") as at December 31, 2005 and 2004, and the related
statements of operations, shareholders' equity and cash flows, for each of the
years in the three-year period ended December 31, 2005. These financial
statements are the responsibility of the Group's Board of Directors and of its
Management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We did not audit the financial statements of certain subsidiaries, including
those consolidated by the proportionate consolidation method. The financial
statements of these subsidiaries reflect total assets constituting 13% and 12%
of the total consolidated assets as at December 31, 2005 and 2004 respectively,
and total revenues constituting 13%, 9% and 13% of the total continuing
consolidated revenues and 46%, 40% and 46% of the total discontinuing
consolidated revenues for the years ended December 31, 2005, 2004 and 2003,
respectively. Furthermore, we did not audit the financial statements of certain
affiliates, whose company's investments constitute NIS 66,107 thousand and NIS
232,190 thousand, as at December 31, 2005 and 2004, respectively, and its equity
in earnings (losses) constitute NIS (5,469) thousand, NIS 7,336 thousand and NIS
(12,875) thousand for the years ended December 31, 2005, 2004 and 2003,
respectively. The financial statements of those subsidiaries and affiliates were
audited by other auditors whose reports thereon were furnished to us, and our
opinion, insofar as it relates to amounts included for such subsidiaries and
affiliates, is based solely on the reports of the other auditors.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Board of Directors and Management, as well as
evaluating the overall financial statement presentation. We believe that our
audits, and reports of the other auditors, provide a reasonable basis for our
opinion.

In our opinion, based on our audits and on the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of the Company and the consolidated financial position of
the Group as of December 31, 2005 and 2004 and the results of their operations,
the changes in shareholders' equity and their cash flows for each of the years,
in the three-years ended December 31, 2005, in conformity with accounting
principles generally accepted in Israel.

Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America (US GAAP). Information related to the nature and effect of such
differences is presented in Note 29 of the financial statement.

As explained in Note 2(B), the financial statements for dates and reporting
periods subsequent to December 31, 2003 are stated in reported amounts, in
accordance with the accounting standards of the Israel Accounting Standards
Board. The financial statements as of and for the year ended December 31, 2003
are stated in values that were adjusted to that date according to the changes in
the general purchasing power of the Israeli currency, in accordance with
opinions of the Institute of Certified Public Accountants in Israel.

/s/ Somekh Chaikin
Somekh Chaikin
Certified Public Accountants (Isr.)
Member Firm of KPMG International

March 21, 2006, except for Note 29, as to which the date is July 2, 2006
Tel Aviv, Israel

                                      F-2
<PAGE>
<TABLE>
<CAPTION>
                                                                 Consolidated Balance Sheets as at December 31
----------------------------------------------------------------------------------------------------------------


                                                                                                    Convenience
                                                                                                    translation
                                                                                                      (Note 1C)
                                                                                                 --------------
                                                                     2005          2004(1)                2005
                                                              -----------       -----------      ---------------
                                                   Note                NIS thousands              US $ thousands
                                                 ---------    -----------------------------      ---------------
<S>                                                   <C>         <C>               <C>                <C>
Assets

Current assets
Cash and cash equivalents                                         318,798           291,299             69,259
Short-term deposits and investments                   4           541,159           372,137            117,567
Trade receivables                                     5            93,544         1,759,698             20,322
Other receivables                                     6            87,937           483,450             19,104
Inventories and work in progress                      7            90,909         2,158,659             19,750
Assets designated for sale                           10                 -            41,765                  -
                                                                ---------        ----------          ---------
                                                                1,132,347         5,107,008            246,002
                                                                ---------        ----------          ---------


Investments and long-term receivables
Investments in affiliates                             8         2,668,193         1,326,261            579,664
Other investments and receivables                     9           547,013           392,763            118,838
                                                                ---------        ----------          ---------
                                                                3,215,206         1,719,024            698,502
                                                                ---------        ----------          ---------

Fixed assets                                         10           726,606         2,709,106            157,855
                                                                ---------        ----------          ---------

Intangible assets, deferred tax assets and
 deferred expenses                                   11            19,461         2,321,214              4,228
                                                                ---------        ----------          ---------

Assets relating to discontinued
 operations                                          24           198,816         1,273,002             43,193
                                                                ---------        ----------          ---------



                                                                5,292,436        13,129,354          1,149,780
                                                                =========        ==========          =========
</TABLE>

                                                 F-3
<PAGE>
<TABLE>
<CAPTION>

                                                                   Koor Industries Ltd. (An Israeli Corporation)
----------------------------------------------------------------------------------------------------------------

                                                                                                    Convenience
                                                                                                    translation
                                                                                                      (Note 1C)
                                                                                                 --------------
                                                                     2005          2004(1)                2005
                                                              -----------       -----------      ---------------
                                                   Note                NIS thousands              US $ thousands
                                                 ---------    -----------------------------      ---------------
<S>                                                   <C>         <C>               <C>                <C>
Liabilities and Shareholders' Equity

Current liabilities
Credit from banks and others                           12          272,127         1,657,200            59,119
Trade payables                                         13           91,606         1,557,522            19,901
Other payables                                         14          203,289         1,098,851            44,165
Customer advances                                       7           21,942            27,942             4,767
                                                                 ---------         ---------           -------
                                                                   588,964         4,341,515           127,952
                                                                 ---------         ---------           -------

Long-term liabilities
Long-term bank loans                                   15        1,555,149         2,147,784           337,856
Other long-term loans                                  15           54,147           111,427            11,763
Debentures                                            15B          390,854           646,200            84,913
Deferred taxes                                        16G               78           234,184                17
Liability for employee severance benefits, net         17            3,860           152,541               839
                                                                 ---------         ---------           -------
                                                                 2,004,088         3,292,136           435,388
                                                                 ---------         ---------           -------


Liabilities relating to discontinued operations        24          160,048           985,870            34,770

Contingent liabilities and commitments                 18

Convertible debentures of consolidated company        15B                -           165,091
                                                                 ---------         ---------           -------

Minority Interest                                                   56,729         2,468,275            12,324
                                                                 ---------         ---------           -------

Shareholders' Equity                                   20        2,482,607         1,876,467           539,346
                                                                 ---------         ---------           -------



                                                                 5,292,436        13,129,354         1,149,780
                                                                 =========        ==========         =========



/s/ Jonathan Kolber                        /s/ Gabriela Shalev                        /s/ Ran Maidan
-----------------------------              ----------------------------------         ---------------------------
Jonathan Kolber                            Prof. Gabriela Shalev                      Ran Maidan
Chief Executive Officer                    Member of the Board of Directors           Vice President
                                                                                      Chief Financial Officer


March 21, 2006, except for Note 29, as to which the date is July 2, 2006.

</TABLE>

(1)      See Note 3B(2) relating to discontinuance of consolidation of M-A
         Industries and Note 3C(1) relating to discontinuance of proportionate
         consolidation of Telrad Networks.


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


                                               F-4
<PAGE>
<TABLE>
<CAPTION>

Company Balance Sheets as at December 31
----------------------------------------------------------------------------------------------------------------

                                                                                                    Convenience
                                                                                                    translation
                                                                                                      (Note 1C)
                                                                                                 --------------
                                                                     2005              2004                2005
                                                              -----------       -----------      ---------------
                                                   Note                NIS thousands              US $ thousands
                                                 ---------    -----------------------------      ---------------
<S>                                                   <C>         <C>               <C>                <C>
Assets

Current assets
Cash and cash equivalents                                          266,962            29,665             57,997
Short-term deposits and investments                    4           495,473           298,641            107,641
Short-term loans and current maturities
 of loans to investee companies                                     37,212            49,928              8,085
Receivables:
  Investee companies                                                 2,606             9,435                566
  Others                                               6            16,095            84,038              3,497
Assets designated for sale                            10                 -            41,765                  -
                                                                 ---------         ---------            -------

                                                                   818,348           513,472            177,786
                                                                 ---------         ---------            -------

Investments and long-term receivables

Investments in investees                               8         2,966,365         3,601,557            644,442
Other investments and receivables                      9           356,664            33,175             77,485
                                                                 ---------         ---------            -------

                                                                 3,323,029         3,634,732            721,927
                                                                 ---------         ---------            -------

Fixed assets                                          10            62,367            22,484             13,549
                                                                 ---------         ---------            -------



                                                                 4,203,744         4,170,688            913,262
                                                                 =========         =========            =======
</TABLE>


                                                    F-5
<PAGE>
<TABLE>
<CAPTION>

                                                                   Koor Industries Ltd. (An Israeli Corporation)

---------------------------------------------------------------------------------------------------------------

                                                                                                    Convenience
                                                                                                    translation
                                                                                                      (Note 1C)
                                                                                                 --------------
                                                                     2005              2004                2005
                                                              -----------       -----------      ---------------
                                                   Note                NIS thousands              US $ thousands
                                                 ---------    -----------------------------      ---------------
<S>                                                   <C>         <C>               <C>                <C>
Liabilities and Shareholders' Equity

Current liabilities
Credit from banks and others                         12           204,715           719,730             44,474
Trade payables                                       13             1,223               383                266
Other payables:
 Investee companies                                                     -            14,311                  -
 Others                                              14            95,587            49,132             20,766
                                                                ---------         ---------            -------
                                                                  301,525           783,556             65,506
                                                                ---------         ---------            -------

Long-term liabilities
Loans from banks and others                          15         1,028,758         1,505,690            223,497
Debentures                                          15B           390,854                 -             84,913
Liability for employee severance benefits, net       17                 -             4,975                  -
                                                                ---------         ---------            -------
                                                                1,419,612         1,510,665            308,410
                                                                ---------         ---------            -------

Contingent liabilities and commitments               18

Shareholders' equity                                 20         2,482,607         1,876,467            539,346
                                                                ---------         ---------            -------



                                                                4,203,744         4,170,688            913,262
                                                                =========         =========            =======




/s/ Jonathan Kolber                        /s/ Gabriela Shalev                        /s/ Ran Maidan
-----------------------------              ----------------------------------         ---------------------------
Jonathan Kolber                            Prof. Gabriela Shalev                      Ran Maidan
Chief Executive Officer                    Member of the Board of Directors           Vice President
                                                                                      Chief Financial Officer

March 21, 2006, except for Note 29, as to which the date is July 2, 2006.


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

</TABLE>

                                                   F-6
<PAGE>
<TABLE>
<CAPTION>

                                                                                Koor Industries Ltd. (An Israeli Corporation)

Consolidated Statements of Operations for the Year Ended December 31
-----------------------------------------------------------------------------------------------------------------------------

                                                                                                                  Convenience
                                                                                                                  translation
                                                                                                                    (Note 1C)
                                                                                                               --------------
                                                                 2005         2004(1)(2)     2003(1)(2)(3)               2005
                                                            ---------        -----------     -------------     --------------
                                               Note                         NIS thousands                      US $ thousands
                                               ----         ----------------------------------------------     --------------
<S>                                             <C>          <C>              <C>               <C>                 <C>

Revenues and earnings
Revenue from sales and
 services                                       23A          988,382          8,007,613         6,338,626           214,726
Group's equity in the
 operating results of investee
 companies, net                                 23G          363,535            (35,060)         (116,729)           78,978
Other income, net                               23F          223,205                  -                 -            48,491
                                                           ---------          ---------         ---------           -------
                                                           1,575,122          7,972,553         6,221,897           342,195
                                                           ---------          ---------         ---------           -------

Costs and losses
Cost of sales and services                      23B          801,657          5,277,615         4,229,284           174,160
Selling and marketing expenses                  23C           89,146          1,066,064           835,033            19,367
General and administrative
 expenses                                       23D          163,964            460,345           384,441            35,621
Other expenses, net                             23F                -             72,392           194,239                 -
Financing expenses, net                         23E          182,957            272,084           236,488            39,747
                                                           ---------          ---------         ---------           -------
                                                           1,237,724          7,148,500         5,879,485           268,895
                                                           ---------          ---------         ---------           -------

Earnings before income tax                                   337,398            824,053           342,412            73,300
Income tax                                      16H          (80,701)          (272,330)          (93,853)          (17,533)
                                                           ---------          ---------         ---------           -------
                                                             256,697            551,723           248,559            55,767
Minority interest in
consolidated companies'
 results, net                                                  9,135           (430,921)         (207,006)            1,985

Net earnings from
 continuing operations                                       265,832            120,802            41,553            57,752

Net earnings from
discontinued operations                          24           50,381             24,188             4,809            10,945

Cumulative effect as of the
beginning of the year of
change in accounting
method (see Note 2S(1))                                       (3,054)                 -                 -              (663)
                                                           ---------          ---------         ---------           -------
Net earnings for the year                                    313,159            144,990            46,362            68,034
                                                           =========          =========         =========           =======

                                                                NIS                NIS               NIS               US$
                                                           ---------          ---------         ---------           -------

Basic and diluted earnings
 (loss) per NIS 1 par value
 of ordinary shares:                             27
From continuing operations                                    16,057              7,374             2,644             3,488
From discontinued operations                                   3,043              1,477               306               661
From cumulative effect of
 change in accounting method                                    (184)                 -                 -               (40)
Net earnings for the year                                     18,916              8,851             2,950             4,109
                                                           =========          =========         =========           =======
</TABLE>


(1)     See Note 1B relating to reclassification of statement of operations.
(2)     See Note 3B(2) relating to discontinuance of consolidation of M-A
        Industries and Note 3C(1) relating to discontinuance of proportionate
        consolidation of Telrad Networks.
(3)     See Note 2B with respect to discontinuance of adjustment for the effect
        of inflation as of December 2003. The accompanying notes are an
        integral part of the financial statements.


                                                          F-7
<PAGE>
<TABLE>
<CAPTION>

                                                                Koor Industries Ltd. (An Israeli Corporation)

Company Statements of Operations for the Year Ended December 31
-------------------------------------------------------------------------------------------------------------



                                                                                                  Convenience
                                                                                                  translation
                                                                                                    (Note 1C)
                                                                                               --------------
                                                  2005           2004(1)        2003(1)(2)               2005
                                            ----------       -----------        ----------     --------------
                                  Note                   NIS thousands                         US $ thousands
                                  ----      -----------------------------------------------    --------------
<S>                               <C>         <C>                <C>               <C>                <C>

Revenues and earnings
Management services
 from subsidiaries                             20,024            22,334            25,006              4,350
Koor's equity in the
 operating results of
 investee companies, net          23G         134,616            26,200            36,270             29,246
Other income, net                 23F         438,133           234,959             5,691             95,184
                                              -------            ------            ------            -------

                                              592,773           283,493            66,967            128,780
                                              -------            ------            ------            -------

Costs and losses
General and administrative
 expenses                         23D          57,295            46,648            41,164             12,447
Financing expenses, net           23E         144,836           110,806            35,108             31,466
                                              -------            ------            ------            -------

                                              202,131           157,454            76,272             43,913
                                              -------            ------            ------            -------

Earnings (loss) before
 income tax                                   390,642           126,039            (9,305)            84,867
Income tax                                    (77,483)           18,951            55,667            (16,833)
                                              -------            ------            ------            -------

Net earnings for the year                     313,159           144,990            46,362             68,034
                                              =======           =======            ======             ======

</TABLE>



(1)      See Note 1B relating to reclassification of statement of operations,

(2)      See Note 2B with respect to discontinuance of adjustment for the effect
         of inflation as of December 2003.

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


                                                    F-8
<PAGE>
<TABLE>
<CAPTION>


                                                                                      Koor Industries Ltd. (An Israeli Corporation)

Consolidated Statement of Shareholders' Equity
-----------------------------------------------------------------------------------------------------------------------------------


                                                                                                               Company
                                                                                              Amounts       shares held
                                                Number of                                 received in            by the
                                                 ordinary         Share      Capital       respect of       Company and
                                               shares (1)       capital     reserves    stock options      subsidiaries
                                           --------------     ---------   ----------    -------------     -------------
                                                                          NIS thousands
                                           ----------------------------------------------------------------------------

<S>                                           <C>                <C>        <C>                <C>              <C>
Balance at January 1, 2003*                   15,173,377         564,515    2,564,099               -         (272,458)

Changes during 2003:
Net earnings for the year                              -               -            -               -                -
Exercise of stock options
  granted to employees                            67,783               -            -               -                -
Issuance of treasury stock
  (see Note 20B)                                 500,000               -            -               -          192,137
Cancellation of provision for
  decline in value of
  autonomous investee (
  see Note 3A(1))                                      -               -            -               -                -
Cumulative foreign
 currency translation
 adjustments, net                                      -               -            -               -                -
                                             ------------     -----------  - ---------        --------      -----------

Balance at December 31, 2003 *                15,741,160         564,515    2,564,099               -          (80,321)

Changes during 2004:
Net earnings for the year                              -               -            -                                -
Exercise of stock options
  granted to employees                            83,025               -            -                                -
Cumulative foreign
 currency translation
 adjustments, net                                      -               -            -               -                -
                                             ------------     -----------  - ---------        --------      -----------

Balance as December 31, 2004                  15,824,185         564,515    2,564,099               -          (80,321)

Changes during 2005:
Net earnings for the year                              -               -            -               -                -
Issuance of treasury stock (2)                   193,229               -            -               -           74,250
Issuance of stock options (3)                          -               -            -          21,715                -
Exercise of stock options
  granted to employees                           129,254               -            -               -                -
Cumulative foreign currency
  translation adjustments, net                         -               -            -               -                -
                                             ------------     -----------   ----------        --------      -----------
Balance as December 31, 2005                  16,146,668         564,515    2,564,099          21,715           (6,071)
                                             ===========      ==========    ==========        ========      ===========


[table continued]
<CAPTION>


                                                Cumulative
                                                   foreign
                                                  currency
                                               translation     Accumulated
                                               adjustments          losses            Total
                                            --------------     -----------       -----------
                                                             NIS thousands
                                            ------------------------------------------------

<S>                                                <C>           <C>               <C>
Balance at January 1, 2003*                        (120,609)     (1,008,378)       1,727,169

Changes during 2003:
Net earnings for the year                                 -          46,362           46,362
Exercise of stock options
  granted to employees                                    -               -                -
Issuance of treasury stock
  (see Note 20B)                                          -        (149,126)          43,011
Cancellation of provision for
  decline in value of
  autonomous investee (
  see Note 3A(1))                                    73,401               -           73,401
Cumulative foreign
 currency translation
 adjustments, net                                  (149,550)              -         (149,550)
                                                ------------     -----------      ----------

Balance at December 31, 2003 *                     (196,758)     (1,111,142)       1,740,393

Changes during 2004:
Net earnings for the year                                 -         144,990          144,990
Exercise of stock options
  granted to employees                                    -               -                -
Cumulative foreign
 currency translation
 adjustments, net                                    (8,916)              -           (8,916)
                                                ------------     -----------      ----------

Balance as December 31, 2004                       (205,674)       (966,152)       1,876,467

Changes during 2005:
Net earnings for the year                                 -         313,159          313,159
Issuance of treasury stock (2)                            -         (24,641)          49,609
Issuance of stock options (3)                             -               -           21,715
Exercise of stock options
  granted to employees                                    -               -                -
Cumulative foreign currency
  translation adjustments, net                      221,657               -          221,657
                                                ------------     -----------      ----------
Balance as December 31, 2005                         15,983        (677,634)       2,482,607
                                                ============     ===========      ==========



*     See Note 2B with respect to discontinuance of adjustment for the effect of inflation as of December 2003.


(1)   Net of the Company holdings and its subsidiaries' holdings.
(2)   See Note 20B
(3)   See Note 20D.

The accompanying notes are an integral part of the financial statements.
</TABLE>


                                      F-9
<PAGE>
<TABLE>
<CAPTION>

                                                                                      Koor Industries Ltd. (An Israeli Corporation)

Consolidated Statement of Shareholders' Equity (cont'd)
----------------------------------------------------------------------------------------------------------------------------------

Convenience translation into US Dollars (Note 1C)

                                                                                 Company       Cumulative
                                                                Amounts      shares held          foreign
                                                            received in           by the         currency
                                Share           Capital      respect of      Company and      translation   Accumulated
                                capital        reserves   stock options     subsidiaries      adjustments        losses     Total
                              -------------    --------   -------------     ------------      -----------   -----------   -------
                                                                          US$ thousands
                              ---------------------------------------------------------------------------------------------------
<S>                                <C>         <C>               <C>             <C>               <C>       <C>          <C>
Balance at January 1, 2005         122,641     557,050               -          (17,450)         (44,683)    (209,897)    407,661

Changes during 2005
Net earnings for the year                -           -               -                -                -       68,034      68,034
Issuance of treasury stock (1)           -           -               -           16,131                -       (5,353)     10,778
Issuance of stock options (2)            -           -           4,718                -                -            -       4,718
Exercise of stock options
  granted to employees                   -           -               -                -                -       -                -
Cumulative foreign
 currency translation
 adjustments                             -           -               -                -           48,155            -      48,155
                              -------------    --------   -------------     ------------      -----------   -----------   -------
Balance at December 31, 2005       122,641     557,050           4,718           (1,319)           3,472     (147,216)    539,346
                              =============    ========   =============     ============      ===========   ===========   =======

*        Represents an amount lower than US$ 1 thousand.
(1)      See Note 20B.
(2)      See Note 20D.

</TABLE>





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


                                      F-10
<PAGE>
<TABLE>
<CAPTION>


                                                                                 Koor Industries Ltd. (An Israeli Corporation)

Consolidated Statement of Cash Flows for the Year Ended December 31
-------------------------------------------------------------------------------------------------------------------------------


                                                                                                                  Convenience
                                                                                                                  translation
                                                                                                                    (Note 1C)
                                                                                                               --------------
                                                                  2005           2004(1)        2003(1)(2)               2005
                                                         -------------       -----------      ------------     --------------
                                                                         NIS thousands                         US $ thousands
                                                         -------------------------------------------------     ----------------
<S>                                                          <C>                <C>                 <C>               <C>
Cash flows generated by operating activities
Net earnings for the year                                    313,159            144,990             46,362            68,034
Adjustments to reconcile net earnings to net cash
 flows generated by operating activities (A)                (311,190)           707,195            802,260           (67,606)
                                                         -------------       -----------      ------------     --------------
Net cash inflow (outflow) generated by continuing
 operating activities                                          1,969            852,185            848,622               428

Net cash inflow (outflow) generated by
discontinued
 operating activities                                       (177,020)            42,221            (75,572)          (38,458)
                                                         -------------       -----------      ------------     --------------
Net cash flows from operating activities                    (175,051)           894,406            773,050           (38,030)
                                                         =============       ===========      ============     ==============

Cash flows generated by investing activities:
Purchase of fixed assets                                     (23,233)          (211,369)          (164,886)           (5,047)
Investment grants in respect of fixed assets                   2,226              6,908              8,482               484
Amounts charged to intangible assets
 and deferred expenses                                        (1,351)          (153,206)          (313,125)             (294)
Additional investments in subsidiaries                             -                  -               (600)                -
Acquisition of subsidiaries (B)                                    -           (293,781)           (14,372)                -
Investments in affiliates                                          -           (646,672)            (6,316)                -
Investments in loans to affiliates                                 -             (1,680)            (1,616)                -
Repayment of loans from affiliates and others                      -                  -            226,765                 -
Proceeds from realization of investments
 in formerly consolidated subsidiaries,
 net of cash in those subsidiaries at the
 time they ceased being consolidated (C)                     199,953                  -            (14,182)           43,440
Repayment of liability in respect of purchase of
 subsidiary in prior years                                         -            (28,309)                 -                 -
Proceeds from realization of investment in
 proportionately consolidated subsidiary at the
 time it ceased being proportionately consolidated           (14,122)                 -                  -            (3,068)
(E)
Acquisition of minority in subsidiaries                            -             (4,762)                 -                 -
Proceeds from disposal of investments
 in investee companies and others                            644,850            636,286            123,742           140,093
Proceeds from sale of fixed assets and
 intangible assets                                             1,272              7,195             27,081               276
Investment in venture capital companies                      (15,426)           (34,928)           (13,580)           (3,351)
Decrease (increase) in other investments, net               (352,565)            (5,110)             7,465           (76,595)
Decrease (increase) in short-term deposits
 and investments, net                                       (167,297)            16,910            372,833           (36,345)
Proceeds from realization of subsidiary's shares
 that became proportionately consolidated (D)                      -             38,239                  -                 -
                                                         -------------       -----------      ------------     --------------
Net cash inflow (outflow) generated by
 continuing investing activities                             274,307           (674,279)           237,691            59,593

Net cash inflow (outflow) generated by
 discontinued investing activities                           144,623            (48,560)            28,894            31,419
                                                         -------------       -----------      ------------     --------------
Net cash flows from investing activities                     418,930           (722,839)           266,585            91,012
                                                         =============       ===========      ============     ==============


(1) See Note 3B(2) relating to discontinuance of consolidation of M-A Industries and Note 3C(1) relating to
    discontinuance of proportionate consolidation of Telrad Networks.

(2) See Note 2B with respect to discontinuance of adjustment for the effect of inflation as of December 2003.
</TABLE>



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


                                                     F-11
<PAGE>
<TABLE>
<CAPTION>


                                                                                 Koor Industries Ltd. (An Israeli Corporation)

Consolidated Statement of Cash Flows for the Year Ended December 31 (cont'd)
-------------------------------------------------------------------------------------------------------------------------------


                                                                                                                  Convenience
                                                                                                                  translation
                                                                                                                    (Note 1C)
                                                                                                               --------------
                                                                  2005           2004(1)        2003(1)(2)               2005
                                                         -------------       -----------      ------------     --------------
                                                                         NIS thousands                         US $ thousands
                                                         -------------------------------------------------     ----------------
<S>                                                          <C>                <C>                 <C>               <C>
Cash flows generated by financing activities
Proceeds form issuance of debentures                         375,535                  -                  -            81,585
Proceeds from issuance of stock options                       21,715                  -                  -             4,718
Proceeds from issuance of treasury stock                      49,609                  -             43,011            10,778
Issuance of shares to minority interest in
 subsidiaries                                                  7,938             14,466             14,137             1,725
Dividend paid to minority interest
 in subsidiaries                                                   -           (107,006)           (56,529)                -
Issuance of convertible debentures in subsidiary                   -            665,982                  -                 -
Receipt of long-term loans and other
 long-term liabilities                                     1,337,534            973,463            949,392           290,579
Repayment of long-term loans, debentures
 and other long-term liabilities                          (1,886,717)        (1,781,944)        (1,806,899)         (409,889)
Increase (decrease) in credit from banks
 and others, net                                            (475,089)            10,494           (299,604)         (103,213)
                                                         -------------       -----------      ------------     --------------

Net cash outflow generated by continuing
 financing activities                                       (569,475)          (224,545)        (1,156,492)         (123,717)

Net cash inflow (outflow) generated by
 discontinued financing activities                            16,486             96,476            (53,291)            3,582
                                                         -------------       -----------      ------------     --------------

Net cash flows from financing activities                    (552,989)          (128,069)        (1,209,783)         (120,135)
                                                         =============       ===========      ============     ==============

Translation differences in respect of cash
 balances of autonomous foreign investee
 companies in continuing operations                              624             (8,913)           (10,272)              135

Translation differences in respect of cash
 balances of autonomous foreign investee
 companies in discontinued operations                         21,929             (6,945)           (18,001)            4,764
                                                         -------------       -----------      ------------     --------------

Increase (decrease) in cash and cash
 equivalents                                                (286,557)            27,640           (198,421)          (62,254)

Increase (decrease) in cash and cash
 equivalents from discontinued operations                  * 314,056            (83,192)           117,970            68,229
                                                         -------------       -----------      ------------     --------------

Increase (decrease) in cash and cash
 equivalents from continuing operations                       27,499            (55,552)           (80,451)            5,975

Balance of cash and cash equivalents
 at beginning of year                                        291,299            346,851            427,302            63,285
                                                         -------------       -----------      ------------     --------------

Balance of cash and cash equivalents
 at end of year                                              318,798            291,299            346,851            69,260
                                                         =============       ===========      ============     ==============
</TABLE>

*        Including proceeds received from realization of subsidiary classified
         as discontinued operations in the amount of NIS 320,074 thousand.

(1)      See Note 3B(2) relating to discontinuance of consolidation of M-A
         Industries and Note 3C(1) relating to discontinuance of proportionate
         consolidation of Telrad Networks.

(2)      See Note 2B with respect to discontinuance of adjustment for the effect
         of inflation as of December 2003.


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


                                                 F-12
<PAGE>
<TABLE>
<CAPTION>


                                                                                 Koor Industries Ltd. (An Israeli Corporation)

Consolidated Statement of Cash Flows for the Year Ended December 31 (cont'd)
-------------------------------------------------------------------------------------------------------------------------------


                                                                                                                  Convenience
                                                                                                                  translation
                                                                                                                    (Note 1C)
                                                                                                               --------------
                                                                  2005           2004(1)        2003(1)(2)               2005
                                                         -------------       -----------      ------------     --------------
                                                                         NIS thousands                         US $ thousands
                                                         -------------------------------------------------     ----------------
<S>                                                          <C>                <C>                 <C>               <C>
A. Adjustments to reconcile net earnings
   to net cash flows generated by
   operating activities:

Income and expenses not involving cash flows:

Earnings from discontinued operations                        (50,381)           (24,188)            (4,809)          (10,945)
Minority interest in earnings (losses) of
 subsidiaries, net                                            (9,135)           430,921            207,006            (1,985)
Group's equity in operating results of affiliates,
 net                                                        (269,328)            36,493            115,537           (58,512)
Depreciation and amortization                                 42,920            431,004            406,977             9,324
Deferred taxes, net                                           71,034             40,865            (29,203)           15,432
Increase (decrease) in liabilities in respect of
  employee severance benefits, net                            25,281             29,824            (69,674)            5,492
Net capital losses (gains) from realization of:
  Fixed assets and intangible assets                              78             16,574             22,618                17
  Investments in formerly consolidated
   subsidiaries                                             (204,619)                 -            (16,428)          (44,453)
  Investments in investee companies                          (76,653)          (227,477)            (4,852)          (16,653)
Linkage of debentures and amortization
 of bond discount                                             15,318                  -                  -             3,328
Inflationary erosion (linkage) of principal of
 long-term loans and other liabilities                        35,645              7,572            (82,644)            7,744
Inflationary erosion of value of investments,
 deposits and loans receivable                               (14,299)            16,534             38,968            (3,107)
Impairment in value of assets and investments
 (primarily venture capital investments)                      68,746             58,144             70,503            14,935
                                                         -------------       -----------      ------------     --------------

                                                            (365,393)           816,266            653,999           (79,383)
                                                         -------------       -----------      ------------     --------------
</TABLE>


(1)    See Note 3B(2) relating to discontinuance of consolidation of M-A
       Industries and Note 3C(1) relating to discontinuance of proportionate
       consolidation of Telrad Networks.
(2)    See Note 2B with respect to discontinuance of adjustment for the effect
       of inflation as of December 2003.



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

                                                        F-13
<PAGE>
<TABLE>
<CAPTION>


                                                                                 Koor Industries Ltd. (An Israeli Corporation)

Consolidated Statement of Cash Flows for the Year Ended December 31 (cont'd)
-------------------------------------------------------------------------------------------------------------------------------


                                                                                                                  Convenience
                                                                                                                  translation
                                                                                                                    (Note 1C)
                                                                                                               --------------
                                                                  2005           2004(1)        2003(1)(2)               2005
                                                         -------------       -----------      ------------     --------------
                                                                         NIS thousands                         US $ thousands
                                                         -------------------------------------------------     --------------
<S>                                                          <C>                <C>                 <C>               <C>
A. Adjustments to reconcile net earnings
   to net cash flows generated by
   operating activities (cont'd):

Changes in operating asset and liability items:

Increase in trade receivables and
 other receivables (after taking into
 account non-current receivables)                            (36,613)          (129,753)          (205,869)           (7,954)
Decrease (increase) in inventories  (including
 long-term customer advances and deposits)                    13,856           (290,022)           (18,276)            3,010
Increase in trade payables and other payables                 76,960            310,704            372,406            16,721
                                                         -------------       -----------      ------------     --------------

                                                              54,203           (109,071)           148,261            11,777
                                                         -------------       -----------      ------------     --------------

                                                            (311,190)           707,195            802,260           (67,606)
                                                         =============       ===========      ============     ==============

B. Acquisition of subsidiaries

Assets and liabilities of the subsidiaries
at date of acquisition:

Working capital, excluding cash and
 cash equivalents                                                  -            (38,239)           (12,160)                -
Issuance of shares by investee company                             -             34,238                  -                 -
Fixed assets and investments, net                                  -           (286,907)            (2,404)                -
Long-term liabilities                                              -            187,019                192                 -
Goodwill                                                           -           (189,892)                 -                 -
                                                         -------------       -----------      ------------     --------------

                                                                   -           (293,781)           (14,372)                -
                                                         =============       ===========      ============     ==============
</TABLE>

(1)   See Note 3B(2) relating to discontinuance of consolidation of M-A
      Industries and Note 3C(1) relating to discontinuance of proportionate
      consolidation of Telrad Networks.
(2)   See Note 2B with respect to discontinuance of adjustment for the effect
      of inflation as of December 2003.




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

                                                    F-14
<PAGE>
<TABLE>
<CAPTION>


                                                                                 Koor Industries Ltd. (An Israeli Corporation)

Consolidated Statement of Cash Flows for the Year Ended December 31 (cont'd)
-------------------------------------------------------------------------------------------------------------------------------


                                                                                                                  Convenience
                                                                                                                  translation
                                                                                                                    (Note 1C)
                                                                                                               --------------
                                                                  2005           2004(1)        2003(1)(2)               2005
                                                         -------------       -----------      ------------     --------------
                                                                         NIS thousands                         US $ thousands
                                                         -------------------------------------------------     --------------
<S>                                                          <C>                <C>                 <C>               <C>
C. Proceeds from realization of
   investments in formerly
   consolidated subsidiaries, net of cash
   in those subsidiaries at the time
   they ceased being consolidated

Assets and liabilities of the formerly
consolidated subsidiaries at the time
they ceased being consolidated:

Working capital surplus (deficit), excluding
 cash and cash equivalents                                  1,031,023                 -            (47,105)           223,989
Fixed assets and investments                                1,971,804                 -              8,765            428,374
Intangible assets                                           2,316,290                 -             15,440            503,213
Long-term liabilities                                      (1,601,477)                -             (3,463)          (347,920)
Investments in affiliated companies, net                   (1,315,995)                -             12,971           (285,899)
Realization of foreign currency translation
 adjustments of financial statements of
 autonomous investees                                          18,141                 -                  -              3,941
Capital gain (loss) on sale of investments in
 subsidiaries                                                 200,987                 -               (790)            43,664
Minority interest                                          (2,420,820)                -                  -           (525,922)
                                                         -------------       -----------      ------------     --------------

                                                              199,953                 -            (14,182)            43,440
                                                         =============       ===========      ============     ==============

D. Proceeds from realization of subsidiary's
   shares that became proportionately
   consolidated

Working capital surplus excluding cash and
 cash equivalents                                                   -            23,057                  -                  -
Fixed assets, investments and intangible assets                     -            40,851                  -                  -
Realization proceeds receivable                                     -           (25,544)                 -                  -
Capital loss                                                        -              (125)                 -                  -
                                                         -------------       -----------      ------------     --------------

                                                                    -            38,239                  -                  -
                                                         =============       ===========      ============     ==============
</TABLE>


(1)      See Note 3B(2) relating to discontinuance of consolidation of M-A
         Industries and Note 3C(1) relating to discontinuance of proportionate
         consolidation of Telrad Networks.

(2)      See Note 2B with respect to discontinuance of adjustment for the effect
         of inflation as of December 2003.


                                                        F-15
<PAGE>
<TABLE>
<CAPTION>

                                                                                 Koor Industries Ltd. (An Israeli Corporation)

Consolidated Statement of Cash Flows for the Year Ended December 31 (cont'd)
-------------------------------------------------------------------------------------------------------------------------------


                                                                                                                  Convenience
                                                                                                                  translation
                                                                                                                    (Note 1C)
                                                                                                               --------------
                                                                  2005           2004(1)        2003(1)(2)               2005
                                                         -------------       -----------      ------------     --------------
                                                                         NIS thousands                         US $ thousands
                                                         -------------------------------------------------     --------------
<S>                                                          <C>                <C>                 <C>               <C>

E. Proceeds from realization of investment in
   proportionately consolidated subsidiary
   at the time it ceased being proportionately
   consolidated

Assets and liabilities of formerly proportionately
consolidated subsidiary, at the time it ceased
being proportionately consolidated:

Working capital surplus, excluding cash
 and cash equivalents                                          36,900                 -                  -              8,017
Fixed assets and investments                                  129,917                 -                  -             28,224
Long-term liabilities                                         (62,023)                -                  -            (13,475)
Investments in affiliated companies, net                     (117,623)                -                  -            (25,554)
Capital gain                                                    3,632                 -                  -                789
Minority interest                                              (4,925)                -                  -             (1,069)
                                                         -------------       -----------      ------------     --------------

                                                              (14,122)                -                  -             (3,068)
                                                         =============       ===========      ============     ==============

F.  Non-cash transactions

Purchase of fixed assets by credit                              4,712             9,172             24,514              1,024
                                                         =============       ===========      ============     ==============

Purchase of other assets by credit                                  -            28,178              6,639                  -
                                                         =============       ===========      ============     ==============
Proceeds from sale of fixed assets, formerly
 consolidated subsidiaries and realization
 of activities                                                      -                 -             15,145                  -
                                                         =============       ===========      ============     ==============

Proposed dividend to minority shareholders
 by subsidiaries                                                    -            29,614             15,446                  -
                                                         =============       ===========      ============     ==============

Dividend in kind from affiliated company                            -            33,363                  -                  -
                                                         =============       ===========      ============     ==============

Loans converted into shareholders' equity
 of subsidiary                                                 13,419            14,042                  -              2,915
                                                         =============       ===========      ============     ==============

Conversion of investment to loan in an affiliate                    -                 -                470                  -
                                                         =============       ===========      ============     ==============

</TABLE>

(1)      See Note 3B(2) relating to discontinuance of consolidation of M-A
         Industries and Note 3C(1) relating to discontinuance of proportionate
         consolidation of Telrad Networks.
(2)      See Note 2B with respect to discontinuance of adjustment for the effect
         of inflation as of December 2003.



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

                                                          F-16
<PAGE>
<TABLE>
<CAPTION>

                                                                                Koor Industries Ltd. (An Israeli Corporation)

Company Statements of Cash Flows for the Year Ended December 31
-----------------------------------------------------------------------------------------------------------------------------


                                                                                                                  Convenience
                                                                                                                  translation
                                                                                                                    (Note 1C)
                                                                                                               --------------
                                                                  2005              2004           2003(1)               2005
                                                         -------------       -----------      ------------     --------------
                                                                             NIS thousands                     US $ thousands
                                                         -------------------------------------------------     --------------
<S>                                                          <C>                <C>                 <C>               <C>
Cash flows generated by operating activities:
Net earnings for the year                                    313,159            144,990             46,362            68,034
Adjustments to reconcile net income to net cash
 flows generated by operating activities (A)                (432,634)          (136,907)          (163,429)          (93,990)
                                                         ------------        -----------      -------------    --------------
Net cash inflow (outflow) generated by
 operating activities                                       (119,475)             8,083           (117,067)          (25,956)
                                                         ------------        -----------      -------------    --------------

Cash flows generated by investing activities:
Investee companies:
  Acquisition of shares                                      (23,442)          (667,779)           (17,488)           (5,093)
  Loans granted, capital notes and
   non-current accounts                                       40,631             34,950            304,725             8,827
Purchase of fixed assets                                        (176)              (423)              (392)              (38)
Increase in investments and
 other receivables, net                                     (351,631)                 -            (31,428)          (76,392)
Proceeds from sale of fixed assets                                 8                  -                 30                 2
Proceeds from realization of investments
 in investee companies                                     1,372,044            562,177            102,875           298,076
Investment in short-term deposits and
 investments, net                                           (143,307)            63,412            460,818           (31,134)
                                                         ------------        -----------      -------------    --------------
Net cash inflow (outflow) generated by
 investing activities                                        894,127             (7,663)           819,140           194,248
                                                         ------------        -----------      -------------    --------------
Cash flows generated by financing activities:
Proceeds from issuance of debentures                         375,535                  -                  -            81,585
Proceeds from issuance of stock options                       21,715                  -                  -             4,718
Proceeds from issuance of treasury stake                      49,609                  -             43,011            10,778
Receipt of long-term loans and other
 long-term liabilities                                     1,007,119            637,000            360,213           218,796
Payments of long-term loans and
 other long-term liabilities                              (1,812,366)          (628,703)        (1,107,283)         (393,736)
Credit from banks and others, net                           (178,967)            11,743            (13,600)          (38,881)
                                                         ------------        -----------      -------------    --------------
Net cash inflow (outflow) generated by
 financing activities                                       (537,355)            20,040           (717,659)         (116,740)
                                                         ------------        -----------      -------------    --------------
Increase (decrease) in cash and cash
 equivalents                                                 237,297             20,460            (15,586)           51,552

Balance of cash and cash equivalents at
 beginning of year                                            29,665              9,205             24,791             6,445
                                                         ------------        -----------      -------------    --------------

Balance of cash and cash equivalents at
 end of year                                                 266,962             29,665              9,205            57,997
                                                         ============        ===========      =============    ==============


(1) See Note 2B with respect to discontinuance of adjustment for the effect of inflation as of December 2003.
</TABLE>



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

                                                          F-17

<PAGE>
<TABLE>
<CAPTION>

                                                                                Koor Industries Ltd. (An Israeli Corporation)

Company Statements of Cash Flows for the Year Ended December 31 (cont'd)
-----------------------------------------------------------------------------------------------------------------------------


                                                                                                                  Convenience
                                                                                                                  translation
                                                                                                                    (Note 1C)
                                                                                                               --------------
                                                                  2005              2004           2003(1)               2005
                                                         -------------       -----------      ------------     --------------
                                                                             NIS thousands                     US $ thousands
                                                         -------------------------------------------------     --------------
<S>                                                          <C>                <C>                 <C>               <C>
A.    Adjustments to reconcile net earnings
      to cash flows generated by
      operating activities

Income and expenses not involving cash flows:

Equity in operating results of investee
 companies in addition, net of dividend
 received therefrom                                         (113,346)            47,879            (17,120)          (24,624)
Depreciation and amortization                                  2,043              2,022             13,718               444
Deferred taxes, net                                           77,483            (18,580)           (58,903)           16,832
Increase (decrease) in liability in respect of
 employee severance benefits, net                             (1,917)             3,491             (6,898)             (416)
Net capital losses (gains) from realization of:
 Fixed assets                                                      7                  -                 96                 2
 Investment in investee companies                           (424,261)          (213,249)           (11,635)          (92,171)
Increase in value of deposits and other
 erosions, net                                               (13,611)            (6,623)           (11,260)           (2,957)
Exchange rate differences and erosion of
 long-term loans and other liabilities                        49,006              6,077            (24,865)                -
Erosion (linkage) of loans from banks
 and others                                                        -                  -            (10,526)           10,647
Changes in value of investments and assets                      (377)                 -                673               (82)
                                                         -------------       -----------      ------------     --------------
                                                            (424,973)          (178,983)          (126,720)          (92,325)
                                                         -------------       -----------      ------------     --------------
Changes in operating assets and liability items:
Decrease (increase) in current accounts of
 investee companies, net                                       2,103             36,543            (43,975)              457
Decrease (increase) in receivables                            (9,535)              (213)            42,817            (2,072)
Increase (decrease) in trade payables
 and other payables                                             (229)             5,746            (35,551)              (50)
                                                         -------------       -----------      ------------     --------------
                                                              (7,661)            42,076            (36,709)           (1,665)
                                                         -------------       -----------      ------------     --------------
                                                            (432,634)          (136,907)          (163,429)          (93,990)
                                                         =============       ===========      ============     ==============
B. Significant non-cash transactions

Liquidation dividend from subsidiary                          14,407                  -                  -             3,130
                                                         =============       ===========      ============     ==============
Loans converted into shareholders' equity
 of subsidiary                                                46,588              6,837                  -            10,121
                                                         =============       ===========      ============     ==============

(1) See Note 2B with respect to discontinuance of adjustment for the effect of inflation as of December 2003.
</TABLE>



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

                                                          F-18

<PAGE>


                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------



Note 1 - General

         A.       Koor Industries Ltd. is a holding company, engaged mainly in
                  the fields of telecommunications, agro-chemicals, tourism,
                  defense industry and venture capital investments, through its
                  subsidiaries, proportionately consolidated companies and
                  affiliates (the "Koor Group" or the "Group").

                  The Company's shares are traded both on the Tel Aviv Stock
                  Exchange and on the New York Stock Exchange.

         B.       During 2005, the Company sold part of its investments in
                  Makhteshim-Agan Industries Ltd. (as discussed in Note 3B(2))
                  and Telrad Networks Ltd. (as discussed in Note 3C(1)). As a
                  result, the Koor Group ceased to control these companies and
                  which has resulted in their deconsolidation during 2005. The
                  companies are now included in the consolidated financial
                  statements according to the equity method.

                  As a result of the deconsolidation of these companies and to
                  reflect the nature of the Group's activities as a holding
                  company, management has classified the statement of operations
                  in a single-stage format. Total revenues and income, including
                  the Group's equity in the results of affiliates, are presented
                  within revenues. The comparative figures have been
                  reclassified on a consistent basis.

         C.       The adjusted financial statements as at December 31, 2005, and
                  for the year ended have been translated into U.S. dollars
                  using the representative exchange rate at that date ($1 = NIS
                  4.603). The translation was made solely for the convenience of
                  the reader. The amounts presented in these financial
                  statements should not be construed to represent amounts
                  receivable or payable in dollars or convertible into dollars,
                  unless otherwise indicated in these financial statements.


Note 2 - Significant Accounting Policies

         The financial statements have been prepared in accordance with
         generally accepted accounting principles ("GAAP") in Israel.

         The significant accounting policies, which were applied on a consistent
         basis, are as follows:

         A.       Definitions:

         In these financial statements:
<TABLE>
<CAPTION>

<S>     <C>                                          <C>
        1.      The Company                          -   Koor Industries Ltd. ("Koor" or "the Company").

        2.      The Group                            -   Koor Industries Ltd. and its investees

        3.      Subsidiaries                         -   companies,  including  partnerships,  whose  statements  are fully
                                                         consolidated, directly or indirectly, with those of the Company.

        4.      Proportionately consolidated         -   jointly controlled companies, which are proportionately
                companies                                consolidated, directly or indirectly, in Koor's consolidated
                                                         financial statements.
                companies
</TABLE>

                                                          F-19

<PAGE>

<TABLE>
<CAPTION>

                                                                              Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
---------------------------------------------------------------------------------------------------------------------------



Note 2 - Significant Accounting Policies (cont'd)

<S>     <C>                                        <C>

        A.       Definitions (cont'd):

        5.      Affiliates                          -   companies  in which  voting  rights  grant the Company  significant
                                                        influence  over  the  operating  and  financial  policies  of these
                                                        companies,  and  which  are  not  subsidiaries  or  proportionately
                                                        consolidated  companies.  Such companies are included on the equity
                                                        basis.

        6.      Investees                           -   subsidiaries, proportionately consolidated companies or affiliates.

        7.      Other companies                     -   companies  in which  the  investment  does not  confer  significant
                                                        influence, and are accounted for by the cost method.

        8.      Interested parties -                -   as  defined  in  Paragraph  (1) of the  definition  of  "interested
                                                        parties" in Section 1 of the Israeli Securities Law - 1968.

        9.      Related parties                     -   as defined in Opinion No. 29 of the  Institute of Certified  Public
                                                        Accountants in Israel ("ICPAI").

        10.     Controlling shareholders            -   as  defined  in  the  Israeli  Securities   Regulations  (Financial
                                                        Statement  Presentation of  Transactions  between a Company and its
                                                        Controlling Shareholder) - 1996.

        11.     Venture capital fund                -   as defined in  Standard  No. 1 of the Israel  Accounting  Standards
                                                        Board ("IASB").

        12.     Venture capital investments         -   an investment in a company that meets two conditions:

                                                        (a)      The Company is engaged primarily in research, development
                                                                 or marketing of innovative and intellectual property
                                                                 intensive products or processes; and

                                                        (b)      At least 90% of the company's financing stems from
                                                                 shareholder equity (including shareholder loans and
                                                                 shareholders' guaranteed credit), support of State
                                                                 authorities or research grants.

        13.     Consumer Price Index                -   the Israeli  Consumer  Price Index (CPI)  published  by the Central
                                                        Bureau of Statistics.

        14.     Dollar                              -   U.S. dollar.

        15.     Adjusted amount                     -   the  historical  nominal  amount  adjusted in  conformity  with the
                                                        provisions of Opinions 23 and 34 and Opinions 36 and 37.

        16.     Reported amount                     -   the adjusted  amount as at the transition date (December 31, 2003),
                                                        with the  addition  of amounts in  nominal  values  that were added
                                                        after the  transition  date and less amounts  eliminated  after the
                                                        transition date.

        17.     Adjusted financial reporting        -   financial  reporting  based on the  provisions  of Opinions 23, 34,
                                                        36, 37 and 50.

        18.     Nominal financial reporting         -   financial reporting based on reported amounts.
</TABLE>

                                                          F-20

<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 2 - Significant Accounting Policies (cont'd)

          B.      Financial statements in reported amounts

         (1)      In October 2001, the Israel Accounting Standards Board
                  published Accounting Standard No. 12 on "Discontinuation of
                  Adjustment of Financial Statements". According to this
                  standard, and in accordance with Accounting Standard No. 17
                  published in December 2002, the adjustment of financial
                  statements for the effect of changes in the general purchasing
                  power of the shekel was discontinued, commencing January 1,
                  2004. Until December 31, 2003, the Group continued to prepare
                  adjusted financial statements in accordance with Opinion No.
                  36 of the ICPAI. The Group is applying the provisions of the
                  Standard and, accordingly, the adjustment was discontinued,
                  commencing January 1, 2004.

         (2)      In the past, the Company prepared its financial statements on
                  the basis of historical cost, adjusted to the CPI. The
                  adjusted amounts included in the financial statements as at
                  December 31, 2003, served as the starting point for the
                  nominal financial reporting as of January 1, 2004. Additions
                  made during the period were included in nominal values.

         (3)      The non-monetary asset amounts do not necessarily represent
                  their realizable or current economic value, but only the
                  reported amounts of such assets.

         (4)      In the financial statements, the term "cost" means cost in
                  reported amount.

         (5)      The financial statements of certain companies classified as
                  autonomous units are stated based on the changes in the
                  exchange rates of their relevant functional currencies - see
                  2D below.

         (6)      All  comparative  data for prior period until January 1, 2004
                  are stated  adjusted to the CPI of December 2003.


         C.       Reporting principles

         (1)      Balance sheets:

                  a.       The equity value of investments in investees was
                           determined based on the reported financial statements
                           of these companies.

                  b.       Non-monetary items (mainly - fixed assets, inventory,
                           investments stated at cost and equity items) are
                           stated in reported amounts.

                  c.       Monetary items are stated in the balance sheet at
                           historical nominal values as at the balance sheet
                           date.

                                      F-21

<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 2 - Significant Accounting Policies (cont'd)

          C.      Reporting principles (cont'd)

         (2)      Statements of operations:

                  a.       The equity in the results of operations of investees
                           and the minority interest in the results of
                           subsidiaries were determined based on the reported
                           financial statements of such companies.

                  b.       Revenues and expenses deriving from non-monetary
                           items (such as: depreciation and amortization,
                           changes in inventory, prepaid expenses and income,
                           etc.) or from provisions included in the balance
                           sheet, are derived from the change between the
                           reported amounts of the opening balance and the
                           reported amount of the closing balance.

                  c.       The remaining statement of operations items (such as:
                           sales, purchases, current manufacturing costs, etc.)
                           are stated at nominal values.


         (3)      Statement of changes in shareholders' equity:

                  A dividend declared in the reporting period is stated in
                  nominal values.


         D.       Effects of the changes in foreign currency exchange rates

         The Company is applying Accounting Standard No. 13 "Effect of Changes
         in Exchange Rates of Foreign Currency" since January 1, 2004. The
         Standard discusses the translation of foreign currency transactions and
         the translation of financial statements of foreign operations for their
         inclusion in the financial statements of the reporting entity. The
         Standard provides rules for classifying foreign operations as an
         autonomous foreign investee or as an integrated investee, based on
         indications described in the Standard and the use of judgement, as well
         as the method for translating the financial statements of autonomous
         foreign investees.


         Foreign currency transactions
         -----------------------------

         Transactions denominated in foreign currency are recorded when first
         recognized at the exchange rate prevailing on the transaction date.
         Exchange rate differences arising upon the settlement of monetary
         items, or upon reporting of the Group's monetary items at exchange
         rates that are different than those used for initial recognition during
         the period, or from those reported in prior financial statements, are
         charged to the statement of operations.

                                     F-22

<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 2 - Significant Accounting Policies (cont'd)

         D. Effects of the changes in foreign currency exchange rates (cont'd)

         Foreign operations classified as an autonomous investee
         -------------------------------------------------------

         Certain investees domiciled in Israel earn revenues and purchase the
         raw materials and fixed assets primarily in dollars. The dollar is also
         the primary currency of the economic environment in which such
         investees operate. In accordance with the principles prescribed in
         Section 29(a) of Opinion No. 36 of the ICPAI the dollar constitutes the
         measurement and reporting currency in their financial statements.

         The financial statements of investees operating in foreign countries as
         an "autonomous investee", and companies incorporated in Israel for
         which the measurement and reporting currency is the dollar are
         translated to Israeli currency as follows:

         (1)      The assets and liabilities, both monetary and non-monetary of
                  an autonomous foreign investee were translated according to
                  the closing rate. Goodwill is also translated at the closing
                  rate, beginning January 1, 2004.

         (2)      Income and expense items are translated at the exchange rate
                  prevailing on the transaction date.

         (3)      All exchange rate differences created are classified as a
                  separate item in shareholders' equity until the investee is
                  disposed of.

         Impairment in the value of an investment in an autonomous foreign
         investee does not constitute a partial disposal and therefore, no part
         of the translation differences is charged to the statement of
         operations at the time of the impairment.


         Foreign operations classified as integrated investee
         ----------------------------------------------------

         The financial statements of investees operating oversees that are an
         "integrated investee" of the Group, in accordance with the tests
         prescribed in Standard No. 13 of the IASB, are translated from foreign
         currency to Israeli currency - with non-monetary items translated at
         the historical exchange rate prevailing on the transaction date and
         monetary items translated at the exchange rate prevailing on the
         balance sheet date. Statement of operations items are translated at the
         average exchange rate, except for revenues and expenses related to
         non-monetary items that were translated at the historical exchange
         rates at which the related non-monetary items were translated.
         Differences resulting from the translation are charged to financing
         expenses.

                                     F-23
<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 2 - Significant Accounting Policies (cont'd)

         E.                Consolidation of financial statements

         (1)               The consolidated financial statements include the
                           financial statements of the Company and of all the
                           companies in which the Company has control. Jointly
                           controlled companies are included in the consolidated
                           financial statements by the proportionate
                           consolidation method. A jointly controlled entity is
                           an entity in which all the shareholders, by way of
                           contractual arrangement, jointly control the
                           significant operating policies thereof.

         (2)               Regarding companies that were consolidated in the
                           past and are not included in the consolidation in the
                           reporting year - see Note 3B(2) and Note 3C(1).

         (3)               For the purpose of the consolidation, the amounts
                           included in the financial statements of the
                           consolidated companies were included after the
                           adjustments necessitated by the application of the
                           uniform accounting principles adopted by the Group.

         (4)               The consolidated financial statements include the pro
                           rata share of asset, liability, income and expense
                           items of proportionately consolidated companies,
                           based on the holding percentages in these companies.

         (5)               As to the financial statements of subsidiaries that
                           are adjusted according to changes in foreign currency
                           exchange rates - see Note 2D above.

         (6)               a. The excess cost of business over the fair value of
                           its identified assets less the fair value of the
                           identified liabilities (after allocation of the tax
                           deriving from temporary differences) on acquisition
                           date, is charged to goodwill.

                  b.       The excess cost allocated to assets and liabilities
                           is charged to the appropriate balance sheet items.

                  c.       The excess book value over the cost of the investment
                           is deducted first from intangible assets. Negative
                           excess cost remaining after the allocation to
                           intangible assets is deducted from non-monetary
                           assets on a pro rata basis to the fair value of these
                           assets, based on the Company's share. The balance of
                           the negative excess cost, after the said allocation,
                           is stated in the consolidated balance sheet as
                           deferred income and will be amortized on a
                           straight-line basis over ten years.

                  d.       Goodwill is stated in the consolidated balance sheet
                           in "Intangible assets, deferred tax assets and
                           deferred expenses" and is systematically amortized
                           over its estimated useful life. The amortization
                           period represents the best possible estimate of the
                           period in which the Company expects to derive future
                           economic benefit from the goodwill. The Group
                           companies amortize goodwill mainly over a period of
                           10 to 20 years (see Note 2AD(5)).

                                     F-24

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 2 - Significant Accounting Policies (cont'd)

         E.       Consolidation of financial statements (cont'd)

         (7)      Material intercompany balances and transactions between Group
                  companies were eliminated for consolidation purposes.
                  Likewise, material unrealized income from intercompany sales
                  not yet realized outside the Group were eliminated.

         (8)      The Company's shares that were acquired by the Company and
                  subsidiaries are recorded as treasury stock.

         (9)      According to the criteria prescribed in Opinions 48 and 53 of
                  the IACPA, when the sale and/or exercise of convertible
                  securities that were issued by investees (including of
                  employee options) is probable, and a decline in the
                  shareholding percentage is expected upon conversion or
                  exercise, as a result of which the holder will sustain a loss,
                  an appropriate provision is included in respect of the
                  anticipated loss. (See Note 2AD(1).)


         F.       Use of estimates


         Preparation of the financial statements in conformity with generally
         accepted accounting principles requires management to use estimates and
         assessments in determining the reported amounts of assets, liabilities,
         revenues, expenses and the disclosure relating to contingent assets and
         liabilities. Actual results may differ from such estimates.


         G.       Cash and cash equivalents

         Cash and cash equivalents include short-term bank deposits and
         short-term government loans traded in banks, with an original maturity
         of three months or less, on the date of investment, and which are not
         restricted.


         H.       Marketable Securities

         (1)      Marketable securities
                  ---------------------

                  Investments in marketable securities held for the short-term
                  as current investments are stated according to the stock
                  market price as at the balance sheet date. The changes in the
                  fair value of the securities are recorded in the statement of
                  operations in each reporting period.
                  Investments in marketable securities, which are permanent
                  investments (held to maturity), are stated at cost (debentures
                  - including accrued interest), net of a provision for decrease
                  in value that is not of a temporary nature (see also section
                  (3) below).

         (2)      Non-marketable securities
                  -------------------------

                  Non-marketable securities are stated at cost (debentures -
                  including accrued interest), which, in management's opinion is
                  not higher than realization value (see also section (3)
                  below).

                                     F-25

<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 2 - Significant Accounting Policies (cont'd)

         H.       Marketable Securities Cont'd):

         (3)      Decrease in value of investments
                  --------------------------------

                  From time to time, the Group evaluates whether there has been
                  a non-temporary decrease in value in its permanent investments
                  in other companies. Such a review is carried out where there
                  are indications of the possibility that the value of permanent
                  investments has been impaired, including a decline in stock
                  market prices, the investee's businesses, the industry in
                  which the investee operates and other parameters. The
                  impairment in value of these investments, which is not
                  temporary, and which management bases on an evaluation of all
                  the relevant aspects after giving appropriate weight to each
                  of them, is charged to the statement of operations.


         I.       Allowance for doubtful accounts

         The financial statements include allowances for doubtful accounts,
         which management believe that fairly reflect the loss inherent in
         accounts whose collection is doubtful. Management determines the
         allowances on information it has on the financial status of debtors,
         the volume of their activity and a valuation of the collateral received
         from them. The allowance is determined specifically for accounts whose
         collection is doubtful.


         J.       Sale of trade receivables

         The sale of financial assets is recognized as a sale when full control
         of the asset and all of the risks and rewards related to the asset are
         transferred in full to an independent third party. See Note 3B(4).


         K.       Inventories

         Inventories are valued at the lower of cost or market value. Cost is
         determined as follows: Raw materials, ancillary materials and spare
         parts - at "moving average" or by the "first-in, first-out" method.
         Finished goods and goods in process-based on manufacturing costs
         (including materials, labor and subcontractor costs) plus allocated
         indirect manufacturing and other expenses. Merchandise - by the
         "first-in, first-out" or the "moving average" method.

         L.       Projects in progress:

         Work in progress under long-term contracts is stated at cost less
         amounts charged to cost of revenues in the statement of operations and
         associated with revenue recognized on the basis of the "percentage of
         completion" method. Cost includes direct costs of materials, labor,
         subcontractor and other direct costs and allocated indirect
         manufacturing costs (see Note 2T(2) below).

                                     F-26

<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 2 - Significant Accounting Policies (cont'd)


         M. Holdings of a venture capital fund in venture capital investments

         (1)      The holdings of a venture capital fund in venture capital
                  investments are stated at cost (at their reported amounts),
                  net of impairment provisions, if a non-temporary decline in
                  their value occurs. Gains from venture capital investments are
                  charged to the statement of operations when the investment is
                  realized. Also see Note 2H(3) above.

         (2)      Venture capital investments that management intends to realize
                  in the short-term are included in current assets on the basis
                  of cost, net of impairment provision, which does not exceed
                  the market value of the investment.

         N.       Investments in affiliates

         (1)      The investments in affiliates are presented by the equity
                  method. Taken into account when computing the Company's share
                  are losses due to the expected realization of convertible
                  securities issued by affiliates, if the conversion or exercise
                  of those securities is probable.
                  The equity value of the investments in these companies takes
                  into account the amounts as they are included in the
                  companies' financial statements.

         (2) Regarding the goodwill amortization policy - see Note 2E(6) above.

         (3) Regarding the decline in vale of investments in affiliates - see
             Note 2AC.

         O. Monetary balances stated at present value

         Monetary balances - long-term debts and liabilities - that are interest
         free or bear interest at below-market rates, are stated at their
         present value, computed using the interest rate prevailing in the
         market on the date created.

         P.       Fixed assets

         1.       Fixed assets are stated at cost.

         2.       Financing expenses on loans and credit used to finance the
                  construction or purchase of fixed assets, and other costs
                  related to the purchase or construction of the fixed assets,
                  are capitalized to the cost of these assets, in accordance
                  with Accounting Standard No. 3 on the Capitalization of
                  Finance Costs.

         3.       The cost of assets for which an investment grant was received
                  is stated net of the grant amount.

                                     F-27

<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 2 - Significant Accounting Policies (cont'd)

         P.      Fixed assets (cont'd)

         4.      Improvements and renovations are charged to the cost of
                 assets, whereas repair and maintenance expenses are charged to
                 the statement of operations as incurred.

                 The annual depreciation rates used are as follows:

                                                              %
                                                         ------------

                 Buildings and leasehold rights        2-10         (mainly 2%)
                 Machinery, equipment and
                  facilities                           5-20         (mainly 10%)
                 Vehicles and forklifts                10-20        (mainly 15%)
                 Office furniture and equipment        6-33         (mainly 6%
                                                                       and 25%)
                 Computers and auxiliary equipment     20-33
                 Leasehold improvements                 10*


                 * or the lease period, whichever is lower.

         Q.      Other assets and deferred expenses

         Other assets and deferred expenses are amortized on a straight-line
         basis over the expected period of benefit therefrom.

         Licensing of products, marketing rights and intangible assets in the
         purchase of products - 5 to 20 years. See Note 2E(6) regarding goodwill
         deriving from the acquisition of companies that were consolidated.
         Debenture issue costs - according to the debenture period (mainly 6
         years).

         R.       Convertible securities

         1.       Debentures, the conversion of which is not probable, are
                  included at their liability value as at the balance sheet
                  date, in accordance with the provisions of Opinion 53 of the
                  ICPAI, and are stated in long-term liabilities. Debentures,
                  the conversion of which is probable, are disclosed on the
                  balance sheet between long-term liabilities and shareholders'
                  equity, according to the liability value or the capital value,
                  whichever is the higher. See Note 2AD(1).

         2.       In accordance with Opinions 48 and 53 of the ICPAI, the
                  provision for loss on a decline in the shareholding percentage
                  in investee companies is included in the "minority interest"
                  or in "investments in investees" in the consolidated balance
                  sheet, and in "investment in investees" in the Company balance
                  sheet. See Note 2AD(1).

         S.       Deferred taxes

         In July 2004, the Israel Accounting Standards Board ("IASB") published
         Accounting Standard No. 19 on "Taxes on Income" ("the Standard"). The
         new Standard applies to financial statements for periods beginning on
         January 1, 2005. The Standard was adopted as a cumulative effect of a
         change in accounting method. The transition to Accounting Standard No.
         19 resulted in a one-time effect of a net decrease in net earnings of
         NIS 3 million derived mainly from an increase in liabilities for
         deferred taxes relating to property.

                                     F-28

<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 2 - Significant Accounting Policies (cont'd)

         S.       Deferred taxes (cont'd)

         The Group companies create deferred taxes in respect of temporary
         differences. The temporary differences are differences in the value of
         assets and liabilities for tax purposes and for financial reporting
         purposes. Allocation of the taxes, as stated, is executed with respect
         to the differences relating to assets, the amortization of which is
         deductible for tax purposes. The deferred tax balances (asset or
         liability) are calculated according to the liability approach, i.e.,
         the tax rates expected to be in force when the deferred tax liability
         is utilized, or when the deferred tax asset is realized, as they are
         known proximate to the date of approval of the financial statements.

         In calculating deferred taxes, no account was taken of the taxes, which
         would apply in a case of sale of the investments in the investee
         companies, since it is the intention of the Company to hold these
         investments and not to sell them.

         Deferred taxes were not created for taxes to be imposed on earnings
         distributed by subsidiaries, as it is the Group's policy not to
         distribute taxable dividends in the foreseeable future. Likewise, tax
         benefits are not included in respect of temporary differences, the
         realization of which is doubtful.

         T.       Revenue recognition

         1. Sale of products and providing services
            ---------------------------------------

         Revenues from sales and services are recognized upon delivery or
         shipment of the products and transfer of the risks and rewards involved
         in ownership of the products, or upon performance of the services.
         Revenue from the sale of products that require customer acceptance are
         recognized after the work is performed and acceptance tests are passed,
         as prescribed in the product supply contract.

         2. Revenues from execution of work
            -------------------------------

         The revenues and costs from projects in progress under long-term
         contracts are recognized in accordance with Accounting Standard No. 4
         ("Standard 4") published by the IASB, as follows:

         A.       Revenues and costs from projects in progress under long-term
                  contracts are recognized according to the "percentage of
                  completion" method, if all of the following conditions are
                  fulfilled: the revenues are known or can be reliably
                  estimated, the collection of the revenues is expected, the
                  costs involved with execution of the work are known or capable
                  of being reliably estimated, there is no material uncertainty
                  regarding the ability to complete the work and comply with the
                  contractual terms with the customer and the percentage of
                  completion can be reliably estimated.
                  As long as all of the above conditions are not met, income is
                  recognized at the level of the costs incurred and their
                  recovery is expected ("zero margin").

         B.       The percentage of completion is measured on the basis of cost
                  (the ratio of the costs incurred to the total estimated costs)
                  or on the basis of supply of the products, in accordance with
                  the nature of the agreement.

         C.       Anticipated losses on contracts are provided for in full when
                  determined to be expected.

                                     F-29

<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 2 - Significant Accounting Policies (cont'd)

         T.       Deferred taxes (cont'd)

         2.       Revenues from execution of work (cont'd)


         D.       Estimated profit or loss from long-term contracts may change
                  due to changes in estimated resulting from differences between
                  actual performance and original forecast. The effect of such
                  changes in estimates are recognized in the statement of
                  operations at the time they are identified.


         U.       Research and development expenses:

         Research and development costs
         ------------------------------
         Research and development costs, net of participations (mainly from the
         Government of Israel), are charged to the statement of operations as
         incurred. Research and development costs financed by the customer are
         charged to the cost of projects in progress, and are included in the
         statement of operations as part of the recognition of results from such
         projects.

         In-process research and development costs
         -----------------------------------------
         In a business acquisition, in-process research and development expenses
         are charged to the statement of operations immediately.


         V.       Derivative financial instruments:

         The Group companies enter into option and forward contracts that are
         intended to reduce the financial risks (i.e. commitments for the import
         of raw materials, export of products, liabilities linked to the CPI or
         foreign currency) from the exposure to fluctuations in inter-currency
         exchange rates, interest rates and changes in the CPI.
         The results of financial derivatives held to hedge existing assets and
         liabilities are recorded in the statement of operations concurrently
         with the recording of the results of the hedged assets and liabilities.
         Financial derivatives that are not held for hedging are stated in the
         balance sheet at fair value. Changes in the fair value are included in
         the statement of operations in the period they occur. The fair value of
         derivative financial instruments is determined according to their
         market values, stated quotes from financial institutions, and in the
         absence of such, fair value is determined based on valuation models.


         W.       Earnings per share:

         Earnings per share data are computed in accordance with Opinion No. 55
         of the ICPAI. Taken into account in the computation of basic earnings
         per share are convertible securities issued by the Company, if their
         conversion or exercise is probable, based on tests prescribed in the
         opinion.
         Taken into account in the computation of fully-diluted earnings per
         share are convertible securities issued by the Company and its
         investees, which were not included in the computation of basic earnings
         per share, when their conversion or exercise does not increase earnings
         per share. See Note 2AD(3).

                                     F-30

<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 2 - Significant Accounting Policies (cont'd)

         X.       Dividend declared subsequent to balance sheet date

         In accordance with Accounting Standard No. 7 on "Subsequent Events",
         the liability related to a dividend proposed or declared subsequent to
         the balance sheet date is expressed in the accounts only in the period
         in which it was declared. However, separate disclosure is provided in
         the statement of changes in shareholders' equity of the dividend amount
         to be distributed against a reduction in the retained earnings balance.


         Y.       Segment reporting

         Segment reporting is presented in accordance with Accounting Standard
         No. 11, which requires the inclusion of information in respect of
         business and geographical segments, as well as detailed guidelines for
         identification of the business and geographical segments.


         Z.       Discontinued operations

         Discontinued operations are presented in accordance with Accounting
         Standard No. 8, whereby discontinued operations are presented
         separately from the data relating to continuing operations.


         AA.      Environmental costs

         The current operating and maintenance costs of facilities to prevent
         environmental pollution and provisions for expected costs related to
         the rehabilitation of the environment deriving from current or past
         activities, are charged to the statement of operations. Construction
         costs of facilities for prevention of environmental pollution, which
         increase the economic life or efficiency of the facility or reduce or
         prevent environmental pollution, are charged to the cost of the fixed
         assets and are depreciated in accordance with the depreciation policies
         practiced by the Group.

         AB.      Impairment of assets

         The Group applies Accounting Standard No. 15 - Impairment of Assets
         ("the Standard"), which prescribes procedures that the Group must
         implement in order to assure that its assets in the consolidated
         balance sheet are not stated at an amount exceeding their recoverable
         value, which is the higher of the net sales price or the usage value
         (the present value of the estimated future cash flows expected to
         derive from the use and realization of the asset). The Standard applies
         to all of the assets in the consolidated balance sheet, except for tax
         assets, construction contracts and monetary assets (aside from monetary
         assets that are investments in investees that are not subsidiaries).
         Likewise, the Standard prescribes the presentation and disclosure
         principles for assets that have declined in value. When the carrying
         value of an asset in the consolidated balance sheet exceeds its
         recoverable amount, the Group recognizes an impairment loss equal to
         the difference between the book value of the asset and its recoverable
         value. A loss so recognized will be reversed only if changes have
         occurred in the estimates used in determining the recoverable value of
         the asset since the date on which the last impairment loss was
         recognized.

                                     F-31

<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 2 - Significant Accounting Policies (cont'd)

         AC. Data regarding the CPI and the Dollar exchange rate:

                                                      Israeli     Exchange rate
                                                        CPI*      of one Dollar
                                                   ------------   -------------
                                                       Points          NIS
                                                   ------------   -------------
<
         For the year ended:
         December 2005                                 185.05         4.603
         December 2004                                 180.74         4.308
         December 2003                                 178.58         4.379


                                                         %              %
                                                   ------------   -------------
         Changes during:
         2005                                           2.4            6.8
         2004                                           1.2           (1.6)
         2003                                          (1.9)          (7.6)


         Rate of increase (decrease) in the CPI
          relative to the exchange rate
          of the dollar during the year:                  %
                                                   ------------
          2005                                         (4.4)
          2004                                          2.8
          2003                                          5.7

         (*)      According to the CPI for the month of the balance sheet date
                 (1993 average basis = 100).

         Assets and liabilities in foreign currency or linked thereto are
         included in the financial statements according to the representative
         exchange rate published by the Bank of Israel on the balance sheet
         date.

         Assets and liabilities linked to the CPI are included in the financial
         statements according to the CPI of the balance sheet month, or the
         previous month, as relevant.

         AD.      Impact of new accounting standards prior to their application

         (1)      In July 2005 the IASB published Accounting Standard No. 22,
                  "Financial Instruments: Disclosure and Presentation" ("the
                  Standard"). The Standard provides rules for financial
                  statement presentation of financial instruments and specifies
                  the proper disclosure required in respect thereto.
                  Furthermore, the Standard provides the method for classifying
                  financial instruments as financial liabilities and as
                  shareholders' equity, for classifying the interest, dividends,
                  losses and gains related to them and the circumstances for
                  offsetting financial assets and financial liabilities. The new
                  standard will apply to financial statements for periods
                  beginning on or after January 1, 2006. The Standard will be
                  adopted on a prospective basis. Furthermore, a provision for
                  loss that is included in the financial statements as at
                  December 31, 2005, in respect of an anticipated loss from a
                  decline in holding rate that is due to the exercise of options
                  or the conversion of convertible liabilities in investees,
                  will be reversed on the date the Standard comes into effect
                  under the item of a cumulative effect of change in accounting
                  policy. The comparative data presented in the financial
                  statements for periods beginning on the effective date the
                  standard will not be restated. The transition to the Standard
                  will result in an increase in shareholders' equity in the
                  amount of NIS 67 million due to the reversal of provisions for
                  losses in respect of convertible securities in investees.

                                     F-32

<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 2 - Significant Accounting Policies (cont'd)

         AD.      Impact of new accounting standards prior to their application
                  (cont'd)

         (2)      In September 2005 the IASB published Accounting Standard No.
                  24, "Share- Based Payments" ("the Standard"). The Standard
                  requires that share-based payment transactions, including
                  transactions with employees or other parties that are to be
                  settled by equity instruments, cash or other assets, be
                  recognized in the financial statements. In accordance with the
                  Standard, share-based payment transactions in which goods or
                  services are received will be recognized at their fair value.
                  Furthermore, the Standard provides various disclosure
                  requirements regarding the nature and extent of the
                  share-based payment arrangements that existed during the
                  period, and regarding the method by which the fair value of
                  such arrangements was determined. The Standard will apply to
                  financial statements for periods beginning as from January 1,
                  2006. The Standard's provisions should be applied to each
                  share-based payment transaction executed after March 15, 2005
                  that did not vest by the effective date of the Standard.
                  Furthermore, it is required that comparative data relating to
                  periods after March 15, 2005 be restated. With respect to
                  share-based payments classified as liabilities (such as
                  phantom plans) that exist on the effective date of the
                  Standard, the Standard is to be implemented retroactively and
                  the comparative data is to be restated. Changes in the terms
                  of a share-based payment transaction being settled by means of
                  equity instruments and executed after March 15, 2005 are to be
                  treated in accordance with the provisions of the new Standard.

                  Implementation of the new Standard is not anticipated to have
                  a material effect on the Group's results of operations and
                  financial position.

         (3)      In January 2006, the IASB published Accounting Standard No.
                  21, "Earnings per Share ("the Standard"). The Standard
                  provides that an entity should calculate basic earnings per
                  share with respect to the earnings or loss attributable to the
                  ordinary shareholders of the reporting entity and that the
                  entity should calculate basic earnings per share with respect
                  to the earnings or loss from continuing operations
                  attributable to the ordinary shareholders of the reporting
                  entity if such earnings or loss is presented. The basic
                  earnings per share will be calculated by dividing the earnings
                  or loss attributable to the ordinary shareholders of the
                  reporting entity (the numerator) by the weighted average
                  number of ordinary shares outstanding during the period (the
                  denominator). In order to calculate the diluted earnings per
                  share, an entity will adjust the earnings or loss attributable
                  to the ordinary shareholders of the reporting entity, and the
                  weighted average number of outstanding ordinary shares, for
                  the effects of all the dilutive potential ordinary shares. The
                  Standard will apply to financial statements for periods
                  beginning on or after January 1, 2006. The provisions of the
                  Standard are to be implemented retroactively for comparative
                  earnings per share data for prior periods.

                                     F-33

<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 2 - Significant Accounting Policies (cont'd)

         AD.      Impact of new accounting standards prior to their application
                  (cont'd)

         (4)      In January 2006, the IASB published Accounting Standard No.
                  25, "Revenues" ("the Standard"). The Standard provides the
                  required accounting treatment (recognition, measurement,
                  presentation and disclosure principles) for revenues deriving
                  from the selling of goods, the rendering of services, and the
                  use of the entity's assets by others, which generates
                  interest, royalties and dividends. The Standard prescribes
                  that the entity will measure its revenues based on the fair
                  value of the proceeds received and/or the proceeds that the
                  entity is entitled to receive. The Standard will apply to
                  financial statements for periods beginning on or after January
                  1, 2006. An entity that in the past did not present its
                  revenues according to the requirements of the Standard
                  regarding the reporting of gross or net revenues, will
                  implement the requirements of the Standard retroactively with
                  respect to its revenues for all the reported periods as
                  comparative figures in the financial statements for periods
                  beginning from the effective date of the Standard. Assets and
                  liabilities that are included in the financial statements as
                  at December 31, 2005 at amounts different from those that
                  would have been recognized if the provisions of the Standard
                  had been implemented, will be adjusted as at January 1, 2006
                  to the amounts that would have been recognized according to
                  the provisions of this Standard. The effect of adjusting the
                  asset and liability amounts as at January 1, 2006, will be
                  recognized as a cumulative effect of change in accounting
                  method. Other than the aforementioned, the comparative figures
                  in the financial statements for periods beginning from the
                  effective date of the Standard will be presented as in the
                  past. Management is of the opinion that the initial
                  implementation of the Standard will not have an impact on the
                  Group's financial statements.

         (5)      In January 2006, the IASB published an amendment to Accounting
                  Standard No. 20, "The Accounting Treatment of Goodwill and
                  Intangible Assets when Purchasing an Investee" ("the
                  Standard"). In accordance with the Standard, goodwill and
                  intangible assets with an unlimited useful life, which were
                  identified at the time of purchasing an investee, will not be
                  amortized. Instead, an examination of impairment in value
                  should be performed once a year or more frequently if events
                  or changes in circumstances indicate that there may have been
                  impairment in the value of goodwill or of an intangible asset
                  with an unlimited useful life. The Standard will apply to
                  financial statements for periods beginning on or after January
                  1, 2006. The transition date for discontinuing the
                  amortization of goodwill is January 1, 2006 according to this
                  Standard. On the day after the transition date, the entity
                  will examine the impairment in value of goodwill in accordance
                  with Accounting Standard No. 15. The financial statements for
                  periods in which this Standard was not implemented will not be
                  restated.


Note 3 - Information Regarding Certain Investees

         A.       ECI Telecom Ltd. ("ECI") - an affiliate

         1.       In November 2003, a valuation of ECI was performed by an
                  independent appraiser, for the purpose of evaluating the
                  recoverable amount of Koor's investment in ECI. In accordance
                  with this appraisal, the Company reversed the impairment loss
                  that had been created in 2001, based on various indications,
                  including the valuation of ECI. The reversal of the loss of
                  NIS 73 million was charged against the capital reserve from
                  foreign currency translation adjustments (credit), which was
                  realized when the provision was created.

                  As at December 31, 2005, the balance of the investment in ECI,
                  stated by the equity method, is NIS 790 million.

                                     F-34

<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 3 - Information Regarding Certain Investees (cont'd)

         A.       ECI Telecom Ltd. ("ECI") - an affiliate (cont'd)

         2.       On March 9, 2004, the board of directors of ECI resolved to
                  distribute 7.6 million shares of ECtel (approximately 42% of
                  the paid-up share capital of ECtel) as a dividend to the
                  shareholders of ECI. The shares of ECtel were distributed on
                  May 10, 2004, after all the requisite approvals were
                  obtained. Prior to the distribution, ECI held 10.5 million
                  shares of ECtel (approximately 58% of the paid-up share
                  capital of ECtel). Following the distribution, ECI holds 16%
                  of the shares of ECtel and Koor directly holds 12.9% of the
                  shares of ECtel. Furthermore, on December 10, 2005, the
                  Company purchased additional 2% of the shares of ECtel from
                  an affiliate, Telrad Networks Ltd. The investment in ECtel is
                  presented in the financial statements of ECI and of Koor by
                  the cost method.

         3.       In February 2005, ECI entered into a preliminary agreement
                  with ABN Amro Bank ("ABN") to sell the balance of long-term
                  receivables for the sum of 96 million dollars in cash, plus
                  potentially a further amount of approximately 3.3 million
                  dollars. In April 2005, all the approvals for the sale were
                  obtained and the receivables were sold to ABN. As a result,
                  during the second quarter of 2005, ECI recognized a net gain
                  of 10.4 million dollars (excludes weighting the additional
                  gain resulting from the potential amount). The Company's
                  equity in this gain is approximately NIS 14 million.

         4.       On June 3, 2005, ECI acquired 100% of Laurel Networks Inc., a
                  company incorporated and operating in the U.S., for a cash
                  payment of 88 million dollars.

         5.       ECI prepares its financial statements in conformity with U.S.
                  generally accepted accounting principles. Below is the
                  adjustment of the net earnings (loss) of ECI as reported in
                  accordance with U.S. GAAP to net earnings (loss) in accordance
                  with Israeli GAAP:

<TABLE>
<CAPTION>

                                                                                    For the year ended December 31
                                                                       -----------------------------------------------------
                                                                                    2005             2004               2003
                                                                       -----------------  ---------------  -----------------
                                                                           US$ thousands    US$ thousands      US$ thousands
                                                                       -----------------  ---------------  -----------------
<S>                                                                   <C>                 <C>              <C>
                  Net earnings (loss) of ECI as reported
                  in conformity with U.S. GAAP                                   39,864           10,153            (71,040)
                  Adjustments:
                  Temporary difference in recognizing
                   revenues due to application of SAB 101                             -                -             (5,905)
                  Financing income (expenses) - FAS 133                          19,226           (8,303)            (4,843)
                  Tax expenses                                                        -           (1,529)              (956)
                  Amortization of excess cost allocated to
                   intangible assets                                             (2,726)          (1,233)            (1,556)
                  Gain (loss) on marketable securities                             (212)          (1,282)             1,282
                  Impairment in value of assets                                       -              968              2,452
                                                                       -----------------  ---------------  -----------------
                  Net earnings (loss) of ECI in conformity
                   with Israeli GAAP                                             56,152           (1,226)           (80,566)
                                                                       =================  ===============  =================
</TABLE>

                                     F-35

<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 3 - Information Regarding Certain Investees (cont'd)

         B.      Makhteshim Agan Industries Ltd. ("M-A Industries") - an
                 affiliate

         1.      In January 2004, Koor sold 27 million shares of M-A Industries
                 for approximately NIS 418 million. The capital gain of NIS 160
                 million (before tax) is included in "other income (expenses),
                 net". Additionally, as a result of this sale, Koor realized a
                 tax asset of NIS 59 million which had been created in 2003,
                 because of the expectation that carryforward tax losses would
                 be utilized in the aforesaid sale.

                 As a result of this sale, and after the realization and
                 conversion of convertible securities that were issued to the
                 public and to employees, Koor's holding percentage in the
                 voting rights of M-A Industries at December 31, 2004 was
                 38.6%.

                 Following the sale of the shares in January 2004, as a result
                 of which Koor's holding percentage in the shares of M-A
                 Industries fell below 50%, Koor evaluated the existence of
                 effective control in M-A Industries and the resultant
                 continuation of the consolidation of M-A Industries in the
                 financial statements of Koor, beginning from the first quarter
                 of 2004.

                 In the opinion of Koor's management, the range of
                 circumstances that weight Koor's shareholding percentage in
                 M-A Industries, the broad dispersal of voting rights among the
                 other shareholders, the low level of shareholding by the other
                 shareholders, the slim probability of the creation of a block
                 of votes opposing Koor at shareholder meetings and past
                 experience related to the attendance at shareholder meetings,
                 as well as the voting percentages and opposition at the
                 meetings - showed that the economic substance that stood and
                 continued to stand at the basis of the relationship between
                 the Company and M-A Industries immediately before and after
                 the said transactions demonstrated effective control, i.e.,
                 Koor had the ability to set the financial and operational
                 policies of M-A Industries.

         2.      In February 2005, Koor sold 15.9 million shares of M-A
                 Industries for NIS 374 million. As a result of the sale,
                 Koor's holding percentage in M-A Industries fell to 34.6%
                 (fully diluted -28.6%) and Koor recorded a capital gain
                 amounted to NIS 201 million (before tax), which is included in
                 the item "other income (expenses), net". Likewise, a tax asset
                 of NIS 69 million which had been created in 2004, because of
                 the expectation that carryforward tax losses would be
                 utilized, was realized as a result of this sale.

                 Following the sale of shares in February 2005, Koor's
                 management reevaluated whether to continue to consolidate M-A
                 Industries in the financial statements of Koor beginning from
                 the first quarter of 2005.
                 As a result of the evaluation of the range of existing
                 circumstances created as a result of the sale, Koor's
                 management decided that continuing the consolidation of M-A
                 Industries is not consistent with the economic substance.
                 Therefore, beginning from the first quarter of 2005, the
                 consolidation of M-A Industries' financial statements in
                 Koor's financial statements was ceased, and the investment is
                 stated by the equity method.


                 Presented below are balance sheet data of M-A Industries as at:
                 ---------------------------------------------------------------
                                                                     December 31
                                                                            2004
                                                                 ---------------
                                                                   NIS thousands
                                                                 ---------------

                  Current assets                                       3,921,252
                  Non-current assets                                   4,461,078
                  Current liabilities                                  2,672,565
                  Non-current liabilities                              1,913,366


                                     F-36

<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 3 - Information Regarding Certain Investees (cont'd)

         B. Makhteshim Agan Industries Ltd. ("M-A Industries") - an affiliate

         2. (cont'd)

                  Presented below are operating results data of M-A Industries:
                  -------------------------------------------------------------

                                                    For the year   For the year
                                                           ended          ended
                                                     December 31    December 31
                                                            2004           2003
                                                  --------------  -------------
                                                   NIS thousands  NIS thousands
                                                  --------------  -------------
<
                  Revenues                            6,895,238      5,191,913
                  Operating costs and expenses        5,594,734      4,254,429

         3.       In the current period, 135,650 thousand dollars par value of
                  debentures of M-A Industries, which had been allotted in
                  March 2004 in a private placement to institutional investors,
                  were converted into 29,869 thousand ordinary shares, NIS 1
                  par value, of M-A Industries. Additionally, NIS 55,412
                  thousand par value of debentures (Series A) were converted
                  into 5,687 thousand ordinary shares, NIS 1 par value, of M-A
                  Industries and 13,380 option warrants (Series 1) of M-A
                  Industries were exercised for 13,380 thousand ordinary
                  shares, NIS 1 par value, of M-A Industries. Moreover, 2,752
                  thousand option warrants issued to employees were exercised
                  for 1,893 thousand ordinary shares, NIS 1 par value of M-A
                  Industries in the current period. Consequently, the Company
                  recorded gains of NIS 79 million during 2005, were included
                  in "Group's equity in the net earnings of affiliates".

                  Koor's holdings in the voting rights of M-A Industries as at
                  December 31, 2005 is 31.5% (fully diluted - 30.0%).

         4.       On September 28, 2004, M-A Industries entered into an
                  agreement with Rabobank International for the sale of trade
                  receivables in a securitization transaction. Under the terms
                  of the securitization agreement, companies from M-A
                  Industries Group sold their trade receivables to a foreign
                  company established for this purpose and which is neither
                  owned nor controlled by the M-A Industries Group ("the
                  Purchasing Company"). The purchase of the trade receivables
                  by the Purchasing Company is financed by an American company
                  of the Rabobank International Group. This agreement replaces
                  a previous agreement with Bank of America from 2001, which
                  was similar in principle to the current agreement.

                  The maximum amount of financial resources expected to be made
                  available to the Purchasing Company to purchase the trade
                  receivables of the companies is 250 million dollars on a
                  current basis, so that the proceeds received from the
                  customers whose receivables had been sold will be used to
                  purchase new trade receivables.

                  The period in which the companies will sell their trade
                  receivables to the Purchasing Company will be one year from
                  the closing date of the transaction. This period may be
                  extended, with the consent of all the parties, for additional
                  one-year periods, up to a maximum of four extensions.

                  M-A Industries will bear all the losses sustained by the
                  Purchasing Company as a result of the non payment of the trade
                  receivables included in the securitization transaction up to
                  the total balance of the subordinated note.

                                     F-37

<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 3 - Information Regarding Certain Investees (cont'd)

         B. Makhteshim Agan Industries Ltd. ("M-A Industries") - an affiliate

                  The accounting treatment of the sale of trade receivables in a
                  securitization transaction is the recognition of the sale of
                  the trade receivables only for that part for which the control
                  and risks were transferred finally and absolutely to the
                  purchaser. Accordingly, the trade receivable balances included
                  in the securitization transaction, for which the consideration
                  of cash and/or non recourse liabilities was received, were
                  written off. For the part of the trade receivables included in
                  the securitization transaction which was not recognized as a
                  sale, a subordinated note was recorded.
                  A loss from the sale of trade receivables is charged at the
                  time of sale to the statement of operations.

                  Under the terms of the agreement, M-A Industries undertook to
                  meet certain financial covenants, mainly a ratio of
                  liabilities to capital and profitability ratios. As at the
                  balance sheet date, M-A Industries is in compliance with the
                  covenants.

         5.       In April 2001, the board of directors of M-A Industries
                  resolved to adopt a dividend policy of distributing 15%-30% of
                  annual net earnings, subject to the existence of distributable
                  earnings and to specific resolutions by the board of
                  directors.

                  On March 8, 2006, the board of directors of M-A Industries
                  resolved to change the dividend policy such as beginning in
                  the fourth quarter of 2005, M-A Industries will distribute
                  dividends amounting to up to 50% of net earnings for the
                  period.

                  In accordance with this policy, a dividend was declared in
                  2005 in the amount of 59.5 million dollars (of which 12.7
                  million dollars is in respect of the earnings of 2004). Koor's
                  share in these dividends amounted to approximately NIS 89
                  million. Subsequent to the balance sheet date, another
                  dividend was declared in respect of the earnings of 2005, in
                  the amount of 23.5 million dollars.


         6. Acquisition of companies in 2004:

                  a.       In April 2004, M-A Industries, through wholly-owned
                           and controlled subsidiaries, signed agreements to
                           acquire ownership and control in a group of three
                           companies, Farm Saver.com LLC, Vegetation Management
                           LLC and Nation Ag II LLC ("the acquired companies"),
                           which are engaged in the registration, import and
                           marketing of agrochemicals in the U.S.
                           The total purchase price amounted to NIS 303 million.
                           NIS 34.4 million of the total proceed was paid
                           through a transfer of 1,908 thousand shares of M-A
                           Industries that had been held by a subsidiary of M-A
                           Industries.

                           The excess cost of investment created upon the
                           acquisition was NIS 235.8 million, of which NIS 130.2
                           million was allocated to intangible assets (mainly
                           registration and licenses), NIS 2.3 was allocated to
                           deferred tax liabilities and NIS 2.7 million was
                           allocated to inventories. The balance of NIS 105.2
                           million was allocated to goodwill.

                                     F-38

<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 3 - Information Regarding Certain Investees (cont'd)

         B. Makhteshim Agan Industries Ltd. ("M-A Industries") - an affiliate

         6. (cont'd)

                  b.       In 2004, M-A Industries, through subsidiaries, signed
                           agreements for the acquisition of three marketing
                           companies, as follows:

                           1)       Acquisition of 45% of the rights in a U.S.
                                    company, Control Solutions Inc. ("CSI"),
                                    which is engaged in the marketing of
                                    pesticides to the non-agricultural market in
                                    the United States. The acquisition included
                                    an option for the increase of M-A Industries
                                    shareholding to 60% during 2004-2006 and to
                                    100% from 2009. See also Note 3B(7)(c)
                                    below.

                           2)       Acquisition of all the shares and rights of
                                    Farmoz PTY Limited, an Australian company
                                    engaged in the marketing and distribution of
                                    pesticides in Australia.

                           3)       Acquisition of 50.1% of the shares in a U.S.
                                    company, RiceCo LLC, which is engaged in the
                                    development and marketing of herbicides for
                                    rice.

                           The aggregate acquisition cost of the marketing
                           companies was NIS 185.7 million. The excess cost
                           created as at the acquisition date totalled NIS 140.9
                           million, of which NIS 68 million was allocated to
                           intangible assets (mainly registration and licenses),
                           NIS 15.8 million to deferred tax liabilities, NIS 3.1
                           million to inventories and the balance of NIS 85.6
                           million was allocated to goodwill. The statements of
                           operations and cash flows of the three marketing
                           companies acquired have been consolidated by M-A
                           Industries from the respective dates of their
                           acquisition. The total effect of the first time
                           consolidation of the aforementioned marketing
                           companies on M-A Industries consolidated statements
                           of income from the date of their initial
                           consolidation is an increase in revenues of NIS 207
                           million for the period ended December 31, 2004 and a
                           reduction of net earnings (after goodwill
                           amortization) of NIS 1 million for that period. The
                           effect on the consolidated balance sheet as at
                           December 31, 2004, is an increase of assets in the
                           amount of NIS 314 million.

         7. Acquisition of companies in 2005:

                  a.       In January 2005, M-A Industries, through a wholly
                           owned and controlled subsidiary, signed an agreement
                           to acquire 49% of the shares of Makhteshim Agan
                           Benelux & Nordic B.V. ("MABENO"), which serves as the
                           exclusive distributor of agrochemicals in the
                           Benelux, Holland and Scandinavian regions.
                           Pursuant to the agreement, proceed was paid in the
                           form of 693 thousand shares of M-A Industries which
                           were held by a subsidiary of M-A Industries.
                           Additionally, the subsidiary of M-A Industries was
                           given an option, exercisable at any time, to increase
                           its share in MABENO to 55%.
                           Beginning from 2008, the remaining shareholders in
                           MABENO have the right to require the subsidiary of
                           M-A Industries to buy the balance of their shares in
                           MABENO from them. Beginning from 2013, the subsidiary
                           of M-A Industries has the right to require the
                           remaining shareholders in MABENO to sell the balance
                           of their shares in MABENO to it.

                  b.       In April 2005, M-A Industries, through wholly owned
                           and controlled subsidiaries, signed an agreement to
                           acquire 70% of the shares of K.F.T. - Biomark Trading
                           House, which is engaged in the marketing of
                           agrochemicals in Hungary.

                                     F-39

<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 3 - Information Regarding Certain Investees (cont'd)

         B. Makhteshim Agan Industries Ltd. ("M-A Industries") - an affiliate

         7. Acquisition of companies in 2005: (cont'd)

                  c.       In October 2005, the wholly-owned and controlled
                           subsidiary of M-A Industries exercised its option to
                           increase its share in CSI, and thereby increased its
                           share to 60% (see Note 3.B(6)(b)(1)).

                  The cost to M-A Industries of the three acquisitions,
                  including the cost of exercising the option to increase the
                  shareholding of the percentage in CSI ("the acquired
                  companies") totalled NIS 56.5 million. The excess cost created
                  as at acquisition date amounted to NIS 65.9 million, of which
                  NIS 40.3 million was allocated to intangible assets (mainly
                  registration and licenses), NIS 2.3 million to inventory and
                  the balance of NIS 23.3 million was allocated to goodwill.
                  The impact of the first time consolidation of the acquired
                  companies on M-A Industries consolidated statement of income
                  is not material.

         8.       On November 14, 2005, the board of directors of M-A Industries
                  resolved to adopt a policy, whereby M-A Industries will act to
                  buy back its shares in the amount of up to 150 million
                  dollars.
                  The board of directors' resolution prescribes various
                  parameters for executing the aforesaid buy back, including
                  purchase in response to an offer without creation of demand,
                  limitations on the volume of daily purchases, price criteria
                  and the execution of off-exchange transactions.
                  The shares to be purchased will become dormant shares for as
                  long as they will be held by M-A Industries.

                  As at the balance sheet date, M-A Industries holds 12,018,603
                  par value of its shares, representing for 2.6% of its total
                  issued and paid-up share capital, in the amount of 65.6
                  million dollars.

         C.       Telrad Networks Ltd. ("Telrad") - an affiliate

         1.       In September 2004, Koor and Telrad Holdings Ltd., a
                  wholly-owned subsidiary of Koor ("the Koor group"), entered
                  into an agreement for the sale of 39% of the shares of Telrad
                  to Fortissimo Capital Fund GP L.P. ("Fortissimo").
                  This sale was executed in two stages.
                  In the first stage, which was completed in November 2004, the
                  Koor group transferred 19.5% of Telrad's shares to Fortissimo
                  for 10.5 million dollars. According to the sale agreement,
                  Telrad's board of directors shall be comprised of three
                  directors nominated by Koor, three directors nominated by
                  Fortissimo and an external expert nominated by mutual
                  agreement of the parties.
                  The agreement includes a number of matters, the approval of
                  which requires mutual agreement of the Koor group and
                  Fortissimo ("joint control rights"). The agreement included
                  the granting of Fortissimo with joint control rights, as
                  Fortissimo is a strategic investor who will assist the Koor
                  Group with the active management of Telrad and bring about its
                  recovery. The joint control rights were granted upon
                  completion of the first stage of the transaction as from the
                  outset, the intention of the parties was the sale of 39% of
                  Telrad's shares, and the agreement stipulated that the second
                  closing would take place within a relatively short period from
                  the first closing (180 days). These matters include: approval
                  of Telrad's budget, election of Telrad's executive officers
                  and the remuneration thereof and the distribution of
                  dividends. These rights grant Fortissimo (the minority
                  shareholder) the right to participate actively in significant
                  decisions relating to Telrad's ordinary course of business and
                  therefore prevent the Koor group, the majority shareholder,
                  from having control of Telrad, and require mutual agreement of
                  Koor and Fortissimo in decisions crucial to Telrad's
                  operations.

                                     F-40

<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 3 - Information Regarding Certain Investees (cont'd)

         C.     Telrad Networks Ltd. ("Telrad") - an affiliate (cont'd)

         1. (cont'd)

                Therefore, as of the fourth quarter of 2004 and through the
                end of the second quarter of 2005, Telrad was proportionately
                consolidated in Koor's financial statements according to a
                shareholding of 80.5%.

                On June 22, 2005 ("the completion date") the Company completed
                the second stage of the sale of 19.5% of Telrad's shares,
                after certain changes were made to the original agreement.
                According to the amendment to the original agreement, the
                international investment fund HarbourVest and the Israeli
                investment fund Poalim Ventures joined Fortissimo and together
                purchased 19.5% of Telrad's shares for 6.25 million dollars.
                Furthermore, in the amendment to the agreement, Koor's
                obligation to extend an additional loan to Telrad was
                cancelled, and Koor was released from certain of the
                indemnifications granted to Fortissimo under the original
                agreement. Subsequent to the sale, the Koor group's
                shareholding in Telrad decreased to 61% and a capital gain of
                approximately NIS 4 million was recorded.

                The rights granted to Fortissimo under the original agreement
                described above, whereby mutual agreement of the Koor group
                and Fortissimo is required on significant matters relating to
                Telrad's ordinary course of business, are still in effect.
                However, due to the presence of two additional shareholders
                who are not party to these rights, the proportionate
                consolidation of Telrad has been discontinued as of the
                completion date. Beginning the end of the second quarter of
                2005, Koor's investment in Telrad is presented according to
                the equity method.

                Below is the balance sheet data of Telrad as included in
                Koor's financial statements as at:


                                                                December 31,
                                                                        2004
                                                               NIS thousands
                                                            ----------------

                Current assets                                      295,867
                Non-current assets                                  144,386
                Current liabilities                                 197,173
                Long-term liabilities                                86,589


                Below are the operating results data of Telrad as included
                in Koor's financial statements:

                                    Six months
                                         ended   For the year ended December 31
                                       June 30   -----------------------------
                                          2005            2004           2003
                                 -------------   -------------  -------------
                                 NIS thousands   NIS thousands  NIS thousands
                                 -------------   -------------  -------------
                                   (Unaudited)       (Audited)      (Audited)
                                 -------------   -------------  -------------
                Revenues              177,631          470,252        656,019
                Operating
                  costs and
                  expenses            201,179         531,369         643,109


                                     F-41

<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 3 - Information Regarding Certain Investees (cont'd)

         C.       Telrad Networks Ltd. ("Telrad") - an affiliate (cont'd)

         2.       During 2004, Telrad recorded a valuation allowance in the
                  amount of NIS 67 million due to changes in the management's
                  estimation relating to the probability of the realization of
                  carry forward losses for tax purposes.

         3.       In 2004, Telrad's board of directors approved a reorganization
                  plan that included employee layoffs. In the 2005 financial
                  statements, expenses in the amount of NIS 38 million were
                  recorded under the item "other income (expenses), net" (in
                  2004 - NIS 29 million).

         4.       In November 2005, the board of directors of Telrad resolved to
                  sell the subsidiary Telrad Connegy Communication Inc.
                  Therefore, Telrad Connegy was classified as a discontinued
                  operation in Telrad's financial statements and Telrad recorded
                  a loss in the amount of NIS 58 million. Koor's share in this
                  loss was NIS 35 million included in "Group's equity in the
                  operating results of investee companies, net".

         D.       Defense Electronics Segment

         1.       In November 2004, the Company acquired 33% of the shares of
                  Tadiran Communications Ltd. ("Tadiran Communications")
                  (approximately 31% taking into consideration options that are
                  likely to be exercised) from two shareholders for
                  approximately NIS 637 million (approximately 144 million
                  dollars). Tadiran Communications develops, manufactures and
                  markets combat-proven military communications solutions.
                  The excess cost of the investment created on the acquisition
                  date amounted to NIS 490 million (approximately 111 million
                  dollars) of which NIS 288 million was allocated to intangible
                  assets (trademark, customer base, technology and order
                  backlog), NIS 20 million was allocated to in-process research
                  and development and was expensed immediately, NIS 242 was
                  allocated to goodwill, NIS 98 million was allocated to
                  deferred tax liabilities and the remaining NIS 38 million was
                  allocated to various tangible assets and liabilities. The
                  excess cost was allocated based on the valuation received from
                  an independent external appraiser.
                  During 2005, Koor's investment in Tadiran Communications was
                  sold for a total amount of 146 million dollars and Koor
                  recorded a capital gain of NIS 72 million. See Note 3D(2).

         2.       On December 27, 2004, Koor entered into a series of agreements
                  with Elbit Systems Ltd. ("Elbit") and with Federmann
                  Enterprises Ltd. ("Federmann"). Under the terms of the
                  agreements, Koor will sell its entire holdings in Tadiran
                  Communications to Elbit for 146 million dollars. Concurrently,
                  Koor will acquire 9.8% of Elbit's share capital from Federmann
                  for 99 million dollars. The sale of the shares of Tadiran
                  Communications and the purchase of the Elbit shares will be
                  executed in two stages, as follows:

                  In the first stage, which was completed on April 18, 2005,
                  Koor sold to Elbit 13.8% of the shares of Tadiran
                  Communications to Elbit for 63 million dollars and
                  concurrently Koor acquired 5.3% of the shares of Elbit from
                  Federmann for 53 million dollars. After the closing of the
                  first stage, Koor is entitled to appoint one director of
                  Elbit's board, and Elbit is entitled to appoint three of the
                  members of Tadiran Communications' board of directors.

                  Pursuant to the original series of agreements, in the second
                  stage, Koor was, inter alia, to have realized the balance of
                  its holdings in Tadiran Communications and in Elisra
                  Electronic Systems Ltd. ("Elisra"), in which Koor had a
                  holding of 70%.

                                     F-42

<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 3 - Information Regarding Certain Investees (cont'd)

         D.       Defense Electronics Segment (cont'd)

2. (cont'd)


                  On July 6, 2005, the original agreements between Koor and
                  Federmann and between Koor and Elbit were amended, whereby
                  Amended Stage 2 and Amended Stage 3 were stipulated. According
                  to Amended Stage 2, Koor acquired 2.45% of the shares of Elbit
                  from Federmann for 24.7 million dollars. Koor announced that
                  as long as it holds Elbit shares it will not invoke its right
                  to appoint 20% of the Elbit directors and therefore Koor's
                  investment in Elbit is stated by the cost method.

                  Additionally, Koor sold to Elbit 5% of the shares of Tadiran
                  Communications for 23 million dollars and recognized a gain in
                  the amount of NIS 11 million. After execution of this
                  transaction, Koor and Elbit acted by virtue of the joint
                  holdings, so that half of the directors in Tadiran
                  Communications (other than the external directors) will be
                  appointed by Koor and half by Elbit.

                  According to Amended Stage 3 between Koor and Elbit, it was
                  stipulated that Koor will sell to Elbit 13.2% of the shares in
                  Tadiran Communications for 60 million dollars, as well as all
                  of its holdings in Elisra (70%) for 70 million dollars and for
                  additional consideration contingent on future insurance
                  receipts in respect of a fire that occurred in the plants of
                  Elisra's subsidiaries in 2001.

                  On November 30, 2005, after all the requisite approvals for
                  closing the sale were received, Stage 3 was closed. The said
                  sale generated a capital gain to Koor of NIS 148 million in
                  respect of the sale of Elisra, which was recorded in the
                  statement of operations in the fourth quarter of 2005.
                  Moreover, as a result of the sale, the financial statements
                  were reclassified, such that the operating results of Elisra
                  and the capital gains generated from its sale were reported as
                  discontinued operations.


         E.       Knafaim Arkia Holdings Ltd. ("Knafaim") - former affiliate

         During the third and fourth quarters of 2004, the Company sold 19% of
         the shares of Knafaim for approximately NIS 144 million. As a result of
         the sale, the Company's shareholding in Knafaim decreased from
         approximately 28.3% to approximately 9% and the Company recorded a gain
         of approximately NIS 51 million. Accordingly, the investment in Knafaim
         is stated by the cost method, beginning from the date of the sale.
         As management intends to sell the remainder of the shares in Knafaim,
         the investment is presented within short-term assets.

                                     F-43

<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
-------------------------------------------------------------------------------


Note 3 - Information Regarding Certain Investees (cont'd)

         F.       Koor Corporate Venture Capital ("Koor CVC") - a consolidated
                  partnership

         1.       In June 2004, Cisco Systems purchased all the shares of
                  Riverhead Inc. from its shareholders for consideration of 39
                  million dollars. As a result, in 2004 Koor CVC recorded a gain
                  of approximately NIS 17 million.

         2.       During the current reporting period, Koor CVC's management
                  estimated that the value of the portfolio investments was
                  lower than their cost, and therefore decided to write-down the
                  value of the investments by approximately NIS 64 million (in
                  2004- NIS 58 million and in 2003 - NIS 72 million).

         3.       In December 2005, one of Koor CVC's portfolio investments,
                  Scopus, Video Networks Ltd. raised approximately 31 million
                  dollars in an IPO. As a result, Koor CVC recorded a gain of
                  approximately NIS 31 million.

         G.       Koor Trade Ltd. - a subsidiary designated for sale

         During August 2005, a valuation was conducted in respect of an
         affiliated company of Koor Trade Ltd., in order to examine the
         necessity of writing down the value of the affiliated company in the
         financial statements of Koor Trade Ltd. as prescribed by the Israel
         Accounting Standards Board Accounting Standard No. 15. The valuation
         was performed by an independent external expert and as a result, Koor
         Trade Ltd. included a loss from write down of value of approximately
         NIS 44 million in the current reporting period.
         See Note 24 regarding discontinued operations.


Note 4 - Short-Term Deposits and Investments

<TABLE>
<CAPTION>

                                                       Consolidated                          Company
                                             --------------------------------     ---------------------------------
                                                       December 31                          December 31
                                             --------------------------------     ---------------------------------
                                                       2005              2004               2005               2004
                                             --------------    --------------     --------------     --------------
                                                       NIS thousands                        NIS thousands
                                             --------------------------------     ---------------------------------

<S>                                                <C>                <C>              <C>                 <C>
         Marketable securities (1):
          Debentures                                208,453           117,110            189,599            117,110
          Short-term treasury notes                 124,320           119,006            119,528             81,901
          Shares and options                        155,789            99,630            153,948             99,630
                                             --------------    --------------     --------------     --------------
                                                    488,562           335,746            463,075            298,641
         Deposits in banks and financial
          institutions                               52,564            32,913             32,398                  -
         Short-term loans and current
          maturities of long-term loans                  33             3,478                  -                  -
                                             --------------    --------------     --------------     --------------
                                                    541,159           372,137            495,473            298,641
                                             ==============    ==============     ==============     ==============

         (1)      Presented at market value, except for shares in investees in the amount of NIS 56,609
                  thousand that are presented according to cost.
</TABLE>

                                                          F-44

<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 5 - Trade Receivables
<TABLE>
<CAPTION>
         Consolidated:
                                                                             December 31
                                                                      -----------------------------
                                                                             2005              2004
                                                                      -----------       -----------
                                                                            NIS thousands
                                                                      -----------------------------
<S>                                                                        <C>            <C>
         Open accounts                                                     88,285         1,463,795
         Deferred promissory note and receivables from sale of
          customers' debts*                                                     -           261,004
         Post dated checks receivable and credit card companies             3,974            29,920
         Current maturities of long-term trade receivables                  1,285             4,979
                                                                      -----------       -----------

                                                                           93,544         1,759,698
                                                                      ===========       ===========

         Net of allowance for doubtful accounts                             3,692           120,939
                                                                      ===========       ===========
</TABLE>

         *  See Note 3B(4).


Note 6 - Other Receivables

<TABLE>
<CAPTION>
                                                    Consolidated                            Company
                                           -----------------------------        -----------------------------
                                                  December 31                        December 31
                                           -----------------------------        -----------------------------
                                                  2005              2004               2005              2004
                                           -----------       -----------        -----------       -----------
                                                 NIS thousands                        NIS thousands
                                           -----------------------------        -----------------------------
<S>                                              <C>             <C>                    <C>                <C>
         Government agencies                     3,722           181,867                748                357
         Deferred taxes                            309           157,442                  -             77,483
         Accrued income                         10,704            30,086              1,190                390
         Prepaid expenses                       15,030            41,971              3,263                  -
         Employees                                 190             6,297                  -                  -
         Affiliates - current accounts          24,528               957              4,714                376
         Others                                 33,454            64,830               6,180             5,432
                                           -----------       -----------        -----------        -----------

                                                87,937           483,450             16,095             84,038
                                           ===========       ===========        ===========        ===========
</TABLE>



Note 7 - Inventories and Work in Progress

         Consolidated:

                                                        December 31
                                                 -----------------------------
                                                        2005              2004
                                                 -----------       -----------
                                                       NIS thousands
                                                 -----------------------------

         Raw and auxiliary materials                  66,169           674,525
         Goods and work in progress                    4,497           157,109
         Finished goods                               20,243         1,327,025
                                                 -----------       -----------

                                                      90,909         2,158,659
                                                 ===========       ===========

                                      F-45
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 8 - Investments in Investee companies

         A.       Consolidated balance sheet - affiliates
<TABLE>
<CAPTION>
                                                                                                     December 31
                                                                                              ------------------------------
                                                                                                     2005               2004
                                                                                              -----------       ------------
                                                                                                      NIS thousands
                                                                                              ------------------------------
<S>                                         <C>                                                  <C>                 <C>

         Net asset value of the investments (1)(2)                                               2,520,847           839,741
                                                                                              ------------        ----------

         Goodwill and original differences:
          Original amount                                                                          153,997           491,044
          Less - accumulated amortization                                                          (88,496)          (26,859)
                                                                                              ------------        ----------

                                                                                                    65,501           464,185
                                                                                              ------------        ----------
         Total investment in share capital                                                       2,586,348         1,303,926
         Long-term loans (3)                                                                        81,845            22,335
                                                                                              ------------        ----------
                                                                                                 2,668,193         1,326,261
                                                                                              ============        ==========

         (1) As follows:
                  Net asset value of investments as at December 31, 1991                           277,159           277,159
                  Changes from January 1, 1992:
                  Companies that ceased being consolidated                                       1,499,387                 -
                  Companies whose operations have been discontinued                                (43,113)          (43,113)
                  Cost of shares acquired or received                                            1,462,678         1,427,857
                  Accumulated losses, net                                                         (422,839)         (744,819)
                  Changes in capital reserves and foreign currency
                   translation adjustments                                                         143,974           (32,626)
                  Initially consolidated subsidiaries, net                                         465,193           465,193
                  Disposals, net                                                                  (861,592)         (509,910)
                                                                                              ------------        ----------

                                                                                                 2,520,847           839,741
                                                                                              ============        ==========

         (2)      Including investments in companies traded on the Stock
                  Exchange in Tel Aviv or abroad, in NIS millions:

                  Carrying value in the balance sheet                                                2,526             1,275
                                                                                              ============        ==========

                  Market value as at balance sheet date                                              4,851             1,754
                                                                                              ============        ==========
</TABLE>


<TABLE>
<CAPTION>
                                                                           Interest rate
                                                                                   as at               December 31
                                                                             December 31      -----------------------------
                                                                                    2005             2005              2004
                                                                        ----------------      -----------       -----------
                                                                                       %              NIS thousands

<S>                                                                          <C>              <C>                 <C>
         (3)      Linkage terms and interest rates relating to
                   long-term loans:

                  Linked to the CPI -  without maturity date                          6            24,792            22,335
                  Linked to the Dollar - without maturity date               LIBOR* + 2            57,053                 -
                                                                                              ------------        ----------
                                                                                                   81,845            22,335
                                                                                              ============        ==========
</TABLE>

                  * As of December 31, 2005, the LIBOR rate is 4.84%.


                                      F-46
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 8 - Investment in Investee Companies (cont'd)

         B.       Company balance sheet - investees

<TABLE>
<CAPTION>
                                                                                           December 31
                                                                                   ------------------------------
                                                                                          2005               2004
                                                                                   -----------       ------------
                                                                                             NIS thousands

<S>                                                                                <C>               <C>
         Net asset value of the investments                                           1,653,052         1,729,813
                                                                                   ------------      ------------

         Goodwill and original differences:
         Original amount, net                                                            12,834           556,043
         Less - accumulated amortization                                                 (3,546)          (57,236)
                                                                                   ------------      ------------

                                                                                          9,288           498,807
                                                                                   ------------      ------------

         Book value (1)                                                               1,662,340         2,228,620
         Payments on account of shares (1)                                               60,927            60,927
         Long-term loans and capital notes (2)                                        1,240,583         1,307,998
         Non-current accounts (3)                                                         2,515             4,012
                                                                                   ------------      ------------

                                                                                      2,966,365         3,601,557
                                                                                   ============        ==========

         (1) As follows:

                  Cost of shares including accumulated earnings as at
                   December 31, 1991                                                  2,032,681         2,032,681

                  Changes from January 1, 1992:
                  Cost of acquired shares                                             7,784,507         7,714,479
                  Accumulated losses, net                                            (4,368,396)       (4,467,604)
                  Changes in capital reserves and erosion of capital notes, net         175,174           (33,483)
                  Disposals                                                          (3,900,699)       (2,956,526)
                                                                                   ------------      ------------

                  Book value, including payments on account of shares (4)             1,723,267         2,289,547
                                                                                   ============        ==========
</TABLE>


                                      F-47
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 8 - Investment in Investee Companies (cont'd)

         B.       Company balance sheet - investees (cont'd)

         (2) Long-term loans and capital notes:
<TABLE>
<CAPTION>
                                                                                                     December 31
                                                                                              ------------------------------
                                                                                                     2005               2004
                                                                                              -----------       ------------
                                                                                                    NIS thousands
                                                                                              ------------------------------

<S>                                                                     <C>                   <C>               <C>
                  Long-term loans (a) (b)                                                           52,854            93,476
                  Capital notes - unlinked and not bearing interest (c)                          1,187,729         1,251,902
                                                                                              ------------      ------------
                                                                                                 1,240,583         1,345,378
                  Less - current maturities of long-term loans                                           -           (37,380)

                                                                                                 1,240,583         1,307,998
                                                                                              ============        ==========

                  (a) Long-term loans classified by linkage terms and interest rates:

                                                                           Interest rate       December 31       December 31
                                                                          at December 31      ------------      -----------
                                                                                    2005              2005              2004
                                                                        ----------------      ------------      ------------
                                                                                       %              NIS thousands
                                                                        ----------------      -----------------------------

                           Linked to the Dollar                                        -                 -            42,765
                           Linked to the CPI                                           2            43,707            41,803
                           Linked to the CPI                                 No interest             9,147             8,908
                                                                                              ------------      ------------

                                                                                                    52,854            93,476
                                                                                              ============        ==========

                  (b)      The loans mature in the years subsequent to the balance sheet date (excluding current
                           maturities) as follows:


                                                                                              December 31       December 31
                                                                                              -----------       -----------
                                                                                                     2005              2004
                                                                                              -----------       -----------
                                                                                              NIS thousands
                                                                                              -----------------------------

                           Second year                                                                   -                 -
                           Third year                                                                    -                 -
                           Fourth year                                                                   -                 -
                           Fifth year                                                                    -             5,385
                           Sixth year or thereafter                                                 52,854            50,711
                                                                                              ------------      ------------

                                                                                                    52,854            56,096
                                                                                              ============      ============

                  (c)      Capital notes are not presented at their present value, since their repayment date has not
                           yet been fixed by the parties.
</TABLE>

                                      F-48
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------

Note 8 - Investment in Investee Companies (cont'd)

         B.       Company balance sheet - investees (cont'd)

         (3)      Non-current inter-company accounts:
<TABLE>
<CAPTION>
                                                                                        December 31
                                                                                   ---------------------------
                                                                                        2004              2003
                                                                                   ---------         ---------
                                                                                        NIS thousands
                                                                                   ---------------------------
<S>                                                                                <C>               <C>
                  Linked to the Dollar                                                   640               599
                  Unlinked-bears interest at the rate of the increase in the CPI       1,875             3,413
                                                                                   ---------         ---------
                                                                                       2,515             4,012
                                                                                   =========         =========
          (4)     Including investments in marketable shares traded on
                  the Tel Aviv Stock Exchange or abroad in NIS millions:

                                                                                        December 31
                                                                                   ---------------------------
                                                                                        2004              2003
                                                                                   ---------         ---------
                                                                                        NIS thousands
                                                                                   ---------------------------

                           Carrying value in balance sheet                                 -               754
                                                                                   =========         =========
                           Market value as at balance date                                 -               960
                                                                                   =========         =========

</TABLE>


Note 9 - Other Investments and Receivables

         A.       Composition:

<TABLE>
<CAPTION>
                                                         Consolidated                            Company
                                                   -----------------------------        ------------------------------
                                                          December 31                          December 31
                                                   -----------------------------        ------------------------------
                                                          2005              2004               2005               2004
                                                   -----------       -----------        -----------        -----------
                                                          NIS thousands                        NIS thousands
                                                   -------------------------------------------------------------------

<S>                                                    <C>                <C>               <C>                 <C>
         Deposits in banks and in
          financial institutions                        13,459            47,278                  -             32,028
         Non-current trade receivables                   3,802             5,229                  -                  -
         Long-term loans receivable                     24,804           128,877                  -                  -
                                                   -----------       -----------        -----------        -----------
         Total (see B and C below)                      42,065           181,384                  -             32,028

         Other companies -
          marketable securities (1)                    386,521            33,471            353,001                  -

         Venture capital investment                    114,764           171,207                  -                  -
         Non-marketable shares                               -             1,040                  -              1,040
         Excess of amounts funded over
          amounts accrued for severance
          pay (see Note 17)                              3,449             5,553              3,449                  -
         Others                                            214               108                214                107
                                                   -----------       -----------        -----------        -----------

                                                       547,013           392,763            356,664             33,175
                                                   ===========       ===========        ===========        ===========

         (1) Market value as at balance
                sheet date                             411,472            39,485            364,197                  -
                                                   ===========       ===========        ===========        ===========
</TABLE>


                                      F-49
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 9 - Other Investments and Receivables (cont'd)

         B.       Classification by linkage terms and interest rates of
                  deposits, non - current debts of customers and long - term
                  loans receivables:

         Consolidated:
<TABLE>
<CAPTION>
                                                              Interest rate at                December 31
                                                                   December 31      -------------------------------
                                                                          2005              2005              2004
                                                              ----------------      ------------      ------------
                                                                             %              NIS thousands

<S>                                                           <C>                   <C>               <C>
         Linked to the CPI                                    Mainly 5.7                   3,802             36,228
         Linked to foreign currency (mainly to the dollar)    No interest                 38,263            121,955
         Linked to dollar, interest bearing                                                    -             12,757
         Unlinked                                                                              -             10,444
                                                                                    ------------       ------------

                                                                                          42,065            181,384
                                                                                    ============       ============

         Company:
                                                                                              December 31
                                                                                    -------------------------------
                                                                                            2005              2004
                                                                                    ------------      ------------
                                                                                            NIS thousands


         Linked to the CPI                                                                     -             32,028
                                                                                    ============       ============
</TABLE>

         C.       Repayment schedule of deposits, non-current customer balances
                  and long-term loans receivable in the years subsequent to the
                  balance sheet date:


<TABLE>
<CAPTION>
                                             Consolidated                            Company
                                       -----------------------------        ------------------------------
                                              December 31                          December 31
                                       -----------------------------        ------------------------------
                                              2005              2004               2005               2004
                                       -----------       -----------        -----------        -----------
                                              NIS thousands                        NIS thousands

<S>                                    <C>                <C>               <C>               <C>
         Second year                        12,950            75,680                  -             32,028
         Third year                          8,127            19,957                  -                  -
         Fourth year                         3,136            13,748                  -                  -
         Fifth year                            556             3,852                  -                  -
         Thereafter and without a
          specific maturity date            17,296            68,147                  -                  -
                                       -----------       -----------        -----------        -----------

                                            42,065           181,384                  -             32,028
                                       ===========       ===========        ===========        ===========
</TABLE>

                                      F-50
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 10 - Fixed Assets

         A.       Consolidated
<TABLE>
<CAPTION>
                                                             Land                                                           Office
                                                       (including                       Machinery,         Vehicles      furniture
                                                        leasehold                    equipment and          and            and
                                                            land)        Buildings   installations        forklifts      equipment
                                                      -----------      -----------   -------------      -----------    -----------
                                                                                                      NIS thousands
                                                      ----------------------------------------------------------------------------
<S>                                                   <C>            <C>             <C>                 <C>           <C>
         Cost as at January 1, 2005                       111,951        1,604,382       3,452,659           22,915        169,021

         Additions                                              -           52,104          15,343                -          1,574
         Disposals                                              -             (514)         (2,272)               -           (116
         Adjustments resulting from foreign
          currency translation differences*                     -              381           1,406                7            972
          Company that ceased being consolidated          (80,727)        (627,574)     (3,084,726)         (22,183)      (149,562
                                                      -----------      -----------     -----------      -----------    -----------
         Balance as at December 31, 2005                   31,224        1,028,779         382,410              739         21,889
                                                      ===========      ===========     ===========      ===========    ===========

         Accumulated depreciation as at
          January 1, 2005                                   1,184          638,625       1,876,732           12,572        114,169
         Additions                                             22           20,851          21,659                9          1,889
         Disposals                                              -                -          (1,456)               -            (96
         Adjustments resulting from foreign
          currency translation differences*                     -              367             969                6            815
          Company that ceased being consolidated           (1,206)        (254,021)     (1,591,412)         (11,848)       (99,935
                                                      -----------      -----------     -----------      -----------    -----------
         Balance as at December 31, 2005                        -          405,822         306,492              739         16,842
                                                      -----------      -----------     -----------      -----------    -----------
         Write down for decline in value                        -          (11,707)              -                -              -
                                                      -----------      -----------     -----------      -----------    -----------
         Net book value as at December 31, 2005            31,224          611,250          75,918                -          5,047
                                                      ===========      ===========     ===========      ===========    ===========

         Net book value as at December 31, 2004           110,767          954,050       1,575,927           10,343         54,852
                                                      ===========      ===========     ===========      ===========    ===========

<CAPTION>
                                                        Tools and
                                                      instruments            Total
                                                      -----------      -----------

                                                      ----------------------------
<S>                                                     <C>          <C>
         Cost as at January 1, 2005                         3,167        5,364,095

         Additions                                              -           69,021
         Disposals                                              -           (2,902)
         Adjustments resulting from foreign
          currency translation differences*                     -            2,766
          Company that ceased being consolidated                -       (3,964,772)
                                                      -----------      -----------
         Balance as at December 31, 2005                    3,167        1,468,208
                                                      ===========      ===========

         Accumulated depreciation as at
          January 1, 2005                                       -        2,643,282
         Additions                                              -           44,430
         Disposals                                              -           (1,552)
         Adjustments resulting from foreign
          currency translation differences*                     -           2, 157
          Company that ceased being consolidated                -       (1,958,422)
                                                      -----------      -----------
         Balance as at December 31, 2005                        -          729,895
                                                      -----------      -----------
         Write down for decline in value                        -          (11,707)
                                                      -----------      -----------
         Net book value as at December 31, 2005             3,167          726,606
                                                      ===========      ===========

         Net book value as at December 31, 2004             3,167        2,709,106
                                                      ===========      ===========
</TABLE>
         *  See Note 2D

                                      F-51
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 10 - Fixed Assets (cont'd)

         A.       Consolidated (cont'd)

         (1)      Certain of the real estate properties have not yet been
                  registered in the Land Registry Office in the name of the
                  Group's subsidiaries, primarily due to the absence of formal
                  parceling in the areas in which the properties are located

                  Leasehold rights are for a period of 49 years, ended in the
                  year 2005 and thereafter. Certain leases provide an option for
                  extension for another 49 years.

                  The cost of leasehold real estate as at December 31, 2005, is
                  approximately NIS 547 million, of which approximately NIS 197
                  million is recorded as capital lease.

         (2)      Fixed assets are presented after deduction of investment
                  grants (net of depreciation), which have been received from
                  the State of Israel by certain subsidiaries under the terms of
                  the Law for the Encouragement of Capital Investments, 1959.
                  These grants amount to NIS 113 million and NIS 540 million as
                  at December 31, 2005 and 2004, respectively (see also Note
                  16A).

         (3)      Includes capitalized interest amounting to NIS 55 million and
                  NIS 137 million at December 31, 2005 and 2004, respectively.

         (4)      As for amounts charged to cost of fixed assets, see Notes 23B
                  and 23E.

         (5)      See Note 22 regarding liens.

         (6)      See also Note 10B(1).

         B.       Company
<TABLE>
<CAPTION>
                                                                Offices            Office
                                                               and land          Equipment             Total
                                                          -------------      ------------      -------------
                                                          NIS thousands      NIS thousands     NIS thousands
                                                          -------------      ------------      -------------
<S>                                                       <C>                <C>               <C>
         Cost as at January 1, 2005                            * 36,275             5,793             42,068
         Additions                                               43,729               177             43,906
         Disposals                                                    -               (23)               (23)
                                                          -------------      ------------      -------------
         Balance as at December 31, 2005                         80,004             5,947             85,951
                                                          -------------      ------------      -------------
         Accumulated depreciation as at January 1, 2005           4,973             2,904              7,877
         Additions                                                3,448               560              4,008
         Disposals                                                    -                (8)                (8)
                                                          -------------      ------------      -------------
         Balance as at December 31, 2005                          8,421             3,456             11,877
                                                          -------------      ------------      -------------
         Write down for decline in value                        (11,707)                -            (11,707)
                                                          -------------      ------------      -------------

         Net book value as at December 31, 2005                  59,876             2,491             62,367

         Net book value as at December 31, 2004                  19,595             2,889             22,484
                                                          =============      ============      =============
</TABLE>

         *        Represents the ownership of two stories in an office building
                  in Tel Aviv and leasehold rights to land in Dimona, in an area
                  of 27 thousand square meters, not yet registered in Koor's
                  name.
                  The offices have not as yet been registered in the name of the
                  Company at the Land Registry Office. The offices are on land
                  leased under a capital lease for a period of 49 years ending
                  in 2044.

         C.       The additions to fixed assets in 2005 include assets held for
                  sale in 2004 that due to management revoking its intention to
                  sell the property, were classified as fixed assets in 2005.

                                      F-52
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 11 - Intangible Assets, Deferred Tax Assets and Deferred Expenses

         A.       Consolidated
<TABLE>
<CAPTION>
                                                                                    December 31
                                                                          -------------------------------
                                                                                  2005              2004
                                                                          ------------      ------------
                                                                                  NIS thousands
                                                                          -------------------------------
<S>                                                                       <C>                <C>
         Intangible assets-goodwill:
         Original amounts                                                       15,765            808,418
         Less - accumulated amortization                                        14,541            323,666
                                                                          ------------       ------------
                                                                                 1,224            484,752
                                                                          ------------       ------------
         Licensing of products abroad:
         Original amounts                                                            -          1,144,717
         Less - accumulated amortization                                             -            474,767
                                                                          ------------       ------------
                                                                                     -            669,950
                                                                          ------------       ------------
         Intangible assets in the purchase of products *:
         Original amounts                                                            -          1,211,508
                                                                          ------------       ------------
         Less - accumulated amortization                                             -            177,429
                                                                          ------------       ------------
                                                                                     -          1,034,079
                                                                          ------------       ------------
         Marketing rights and others:
         Original amounts                                                       16,940            183,494
                                                                          ------------       ------------
         Less - accumulated amortization                                        16,153             66,352
                                                                          ------------       ------------
                                                                                   787            117,142
                                                                          ------------       ------------
         Deferred expenses in respect of issuance of debentures
         Original amount                                                             -             16,069
         Less - accumulated amortization                                             -              5,480
                                                                          ------------       ------------
                                                                                     -             10,589
                                                                          ------------       ------------
         Deferred tax assets (see Note 16G)                                     17,450              4,702
                                                                          ------------       ------------
                                                                                19,461          2,321,214
                                                                          ============       ============
</TABLE>

* Including intellectual property rights, trade mark, technological
  know-how, etc.

                                      F-53
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 12 - Credit from Banks and Others

         A.       Composition:
<TABLE>
<CAPTION>
                                                                Consolidated                        Company
                                                      ---------------------------------     ---------------------------------
                                                                December 31                  December 31
                                                      ---------------------------------     ---------------------------------
                                                                2005              2004       2005               2004
                                                      --------------  -----------------     --------------  -----------------
                                                                NIS thousands                NIS thousands
                                                      ---------------------------------     ---------------------------------
<S>                                                   <C>                 <C>               <C>                  <C>
         Credit from banks (B)                                 51,862         1,021,000              7,290            181,452

         Current maturities of long-term
          loans and debentures (Note 15)                      220,265           636,200            197,425            538,278
                                                      ---------------    --------------     --------------       -------------
                                                              272,127         1,657,200            204,715            719,730
                                                      ===============    ==============     ==============       ============

         B. Credit from banks classified by linkage terms and interest rates:

                                                                           Interest rate               Consolidated
                                                                          at December 31      -------------------------------
                                                                                    2005               December 31
                                                                        ----------------      -------------------------------
                                                                                    2005               2005            2004
                                                                        ----------------      -------------  ----------------
                                                                                       %              NIS thousands
                                                                        ----------------      -------------------------------

         Linked to foreign currency (mainly to
          the Dollar)                                                        LIBOR + 1.5            27,618            689,956


         Unlinked                                                               5.5-6.75            24,244            331,044
                                                                                              ------------       ------------

                                                                                                    51,862          1,021,000
                                                                                              ============       ============

                                                                           Interest rate               Company
                                                                          at December 31      -------------------------------
                                                                                    2005               December 31
                                                                        ----------------      -------------------------------
                                                                                    2005               2005            2004
                                                                        ----------------      -------------  ----------------
                                                                                       %              NIS thousands
                                                                        ----------------      -------------------------------

         Linked to the Dollar                                                                            -           166,427
         Unlinked                                                                    5.5             7,290            15,025
                                                                                              ------------       ------------

                                                                                                     7,290           181,452
                                                                                              ============       ============
</TABLE>

         C. See Note 22 regarding liens to secure credit.


                                      F-54
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 13 - Trade Payables
<TABLE>
<CAPTION>
                                                                Consolidated                            Company
                                                      ---------------------------------     ---------------------------------
                                                                December 31                           December 31
                                                      --------------------------------     ---------------------------------
                                                                2005              2004               2005               2004
                                                      --------------    ---------------     --------------    ---------------
                                                                NIS thousands                         NIS thousands
                                                      ---------------------------------     ---------------------------------

<S>                                                   <C>                 <C>               <C>                  <C>
         Open debts                                            80,391         1,550,829                558                379
         Cheques and notes payable                             11,215             6,693                665                  4
                                                      ---------------    --------------     --------------       -------------

                                                              91,606          1,557,522              1,223                383
                                                      ===============    ==============     ==============       ============

Note 14 - Other Payables

                                                                Consolidated                           Company
                                                      ---------------------------------     ---------------------------------
                                                                December 31                          December 31
                                                      ---------------------------------     ---------------------------------
                                                                2005              2004               2005               2004
                                                      --------------   ----------------     --------------    ---------------
                                                                NIS thousands                        NIS thousands
                                                      ---------------------------------     ---------------------------------

         Employees and
          withholdings remitted                                21,523           115,774              9,403              3,213
         Provision for vacation pay and
          vacation expense allowance                           11,436            56,835              5,099              4,795
         Expenses to be paid                                   38,404           312,447             15,173             22,932
         Government agencies
          (including taxes)                                    46,398           236,317             43,979              1,217
         Provision for warranty and repairs
          and provision for losses in
          respect of long-term contracts                          921             7,636                  -                  -
         Payables for purchase of assets
          and investees                                             -            28,002                  -                  -
         Severance pay payable and current
          portion of early retirement
          pensions (see Note 17)                                  364            47,874                364                122
         Dividend proposed by subsidiary                            -            29,615                  -                  -
         Deferred income                                       24,427            20,568                  -                  -
         Liability in respect of securities
          that were sold short                                      -            24,241                  -                  -
         Liabilities regarding forward
          transaction                                           1,001            46,388              1,001              4,997
         Others                                                58,815           173,154             20,568             11,856
                                                      ---------------    --------------     --------------       -------------

                                                              203,289         1,098,851             95,587             49,132
                                                      ===============    ==============     ==============       ============

         Includes interested parties                                                                   756                712
                                                                                            ==============       ============
</TABLE>
                                      F-55
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 15 - Long Term Liabilities

         A.       Loans
<TABLE>
<CAPTION>
                                                                Consolidated                          Company
                                                      ---------------------------------     ---------------------------------
                                                                December 31                          December 31
                                                      ---------------------------------     ---------------------------------
                                                                2005              2004               2005               2004
                                                      --------------  -----------------     --------------  -----------------
                                                                NIS thousands                        NIS thousands
                                                      ---------------------------------     ---------------------------------
<S>                                                   <C>                <C>                <C>                  <C>
         1.       Loans from banks                          1,774,414         2,781,636          1,219,470          1,995,835
                  Less - current maturities                   219,265           633,852            197,425            498,270
                                                      ---------------    --------------     --------------       -------------
                                                            1,555,149         2,147,784          1,022,045          1,497,565
                                                      ---------------    --------------     --------------       -------------
         2.       Loans and liabilities from others:
                  Shareholders in subsidiaries                  7,691            19,399                  -                  -
                  Investees                                         -                 -              6,713             48,133
                  Receipts from
                   time-sharing units                          34,107            33,053                  -                  -
                  Others                                       13,349            61,323                  -                  -
                                                      ---------------    --------------     --------------       -------------
                                                               55,147           113,775              6,713             48,133
                  Less - current maturities                     1,000             2,348                  -             40,008
                                                      ---------------    --------------     --------------       -------------
                                                               54,147           111,427              6,713              8,125
                                                      ---------------    --------------     --------------       -------------

                                                            1,609,296         2,259,211          1,028,758          1,505,690
                                                      ===============    ==============     ==============       ============
</TABLE>


         3.       Loans classified by linkage terms and interest rates:

                  Consolidated:
<TABLE>
<CAPTION>
                                                               Interest rate at                December 31
                                                                    December 31      -------------------------------
                                                                           2005              2005              2004
                                                               ----------------      ------------      ------------
                                                                              %              NIS thousands
                                                               ----------------      -------------------------------
<S>                                                           <C>                    <C>               <C>
                  Linked to the foreign currency
                   (mainly Dollar)                                    6.6 - 7.6            253,996           883,059

                  Linked to the CPI                                   3.6 - 6.2
                                                             (mainly 4.4 - 4.8)          1,359,565         1,368,683

                  Unlinked                                     Prime* + 0.25% -
                                                                  Prime* + 0.5%            216,000           643,669
                                                                                    --------------     -------------
                                                                                         1,829,561         2,895,411
                  Less - current maturities                                                220,265           636,200
                                                                                    --------------     -------------

                                                                                         1,609,296         2,259,211
                                                                                    ==============      ============
</TABLE>

*  Prime interest rate at December 31, 2005 - 6%

                                      F-56
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 15 - Long Term Liabilities (cont'd)

         A.       Loans (cont'd)

         Company:
<TABLE>
<CAPTION>
                                                               Interest rate at                December 31
                                                                    December 31      -------------------------------
                                                                           2005              2005              2004
                                                               ----------------      ------------      ------------
                                                                              %              NIS thousands
                                                               ----------------      -------------------------------
<S>                                                           <C>                    <C>               <C>

         a.       From banks:

                  Linked to the CPI                                    4.4 - 6.2         1,210,200         1,256,006
                                                              (mainly 4.4 - 4.8)
                  Linked to the Dollar                                      7.65             9,270           102,829
                  Unlinked                                                                       -           637,000
                                                                                    --------------      ------------
                                                                                         1,219,470         1,995,835
                  Less - current maturities                                                197,425           498,270
                                                                                    --------------      ------------
                                                                                         1,022,045         1,497,565
                                                                                    ==============      ============


                                                                                               December 31
                                                                                     -------------------------------
                                                                                             2005              2004
                                                                                     ------------      ------------
                                                                                             NIS thousands
                                                                                     -------------------------------
         b.       From investees:

                  Unlinked capital note, non-interest  bearing                               6,713            8,125
                  Linked to the CPI                                                               -           40,008
                                                                                    --------------     -------------
                                                                                             6,713            48,133

                  Less - current maturities                                                       -           40,008
                                                                                    --------------     -------------
                                                                                             6,713             8,125
                                                                                    ==============      ============
</TABLE>

         B.       Debentures

         1.       Presented as long-term liabilities:

<TABLE>
<CAPTION>
                                                      Consolidated                        Company
                                                 -----------------------       -------------------------
                                                          December 31                  December 31
                                                 -----------------------       -------------------------
                                                      2005          2004           2005            2004
                                                 ==========    =========       =========       ========
                                                      NIS thousands                  NIS thousands
                                                 -----------------------       ------------------------

<S>                                                  <C>            <C>          <C>              <C>
                  Debentures (1)                    390,854            -         390,854              -
                                                  =========    =========       =========       ========
                  Debentures convertible into
                  shares of subsidiary (2)(a)             -      646,200               -              -
                                                  =========    =========       =========       ========
</TABLE>

                                      F-57
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 15 - Long Term Liabilities (cont'd)

         B.       Debentures (cont'd)

         2.       Presented between long-term liabilities and shareholders'
                  equity:

                                                              Consolidated
                                                         ----------------------
                                                              December 31
                                                         ----------------------
                                                            2005           2004
                                                         -------       ---------
                                                            NIS thousands
                                                         ----------------------
                  Debentures convertible into
                  shares of subsidiary (2)(b)                  -        165,091
                                                         =======       ========


          (1)     On April 10, 2005, as part of a private placement to Israeli
                  institutional investors, the Company issued NIS 400 million
                  par value in debentures, as well as 800,000 options (see Note
                  20D) for NIS 400 million in cash. The debentures bear annual
                  interest of 3.75%, linked to the CPI, which is paid on April
                  30 and October 31 of each year. The debentures are linked to
                  the CPI and will be repaid in a balloon payment on April 30,
                  2010. The issue proceeds were allocated to the components of
                  the package according to the fair value of the securities
                  issued. Accordingly, the discount in respect of the debentures
                  amounted to approximately NIS 22 million which will be
                  amortized as finance expenses over the life of the debentures.
                  The debentures are presented net of deferred issue costs of
                  approximately NIS 2.6 million.

         (2)      a.   The  debentures   were  issued  by  M-A   Industries  in
                       a private placement to institutional investors (mainly
                       overseas). M-A Industries allotted non-marketable
                       convertible debentures in the amount of 150 million
                       dollars par value in consideration for their par value.
                       The debentures are for a 7-year period, linked to the
                       dollar and bear annual interest at the rate of 1.75%. The
                       debentures may be converted into ordinary shares of M-A
                       Industries, of NIS 1 par value each, at a conversion rate
                       of NIS 20.5 par value, according to a fixed exchange rate
                       of NIS 4.514 per 1 U.S. dollar. M-A Industries has the
                       right to force the conversion of the debentures,
                       beginning March 22, 2007 under certain circumstances.

                  b.   M-A Industries issued NIS 270,000 thousand par value
                       of debentures (Series A) listed on the Tel Aviv Stock
                       Exchange, bearing interest at 2.5% p.a. and linked
                       (principal and interest) to the representative exchange
                       rate of the Dollar. The debentures are repayable in one
                       payment in November 2007 if not converted before then
                       into shares. The debentures are convertible into ordinary
                       shares of NIS 1 par value each of M-A Industries at the
                       rate of NIS 9.61 (following distribution of a dividend)
                       par value of debentures per one ordinary share.

                       In January 2002 M-A Industries issued NIS 133,980
                       thousand par value of debentures (Series A) in a private
                       placement in a total consideration of approximately NIS
                       129 million. The terms of the debentures are the same as
                       the terms of the debentures (Series A) issued by M-A
                       Industries as above.

                       Beginning from 2003, conversion of the debentures became
                       probable. Accordingly, in 2004 the balance of the
                       debentures is stated in a separate item between long-term
                       liabilities and shareholders' equity.

         C.       See Note 18A3 regarding the Koor's commitment to comply with
                  financial covenants.

                  See Note 22 regarding liens provided in connection with
                  liabilities.


                                      F-58
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------

Note 15 - Long Term Liabilities (cont'd)

<TABLE>
<CAPTION>

         D.1.  Consolidated Liabilities - (net of current maturities) that will  mature in the following years subsequent
               to balance sheet date are as follows:

                                        Loans from banks                 Loans from others                    Debentures
                                  -----------------------------      ---------------------------   -------------------------------
                                            December 31                      December 31                      December 31
                                  -----------------------------      ---------------------------   -------------------------------
                                           2005            2004             2005            2004             2005             2004
                                  -------------   -------------      -----------   -------------   --------------    -------------
                                                                                            NIS thousands
                                  -------------------------------------------------------------------------------------------------
<S>                               <C>              <C>               <C>           <C>              <C>           <C>          <C>
         Second year                     17,061       1,267,441            6,000          16,884                -                -
         Third year                     224,902         581,537           14,691          17,660                -          165,091
         Fourth year                    124,065         165,094            3,000          12,911                -                -
         Fifth year                     831,965          44,170            1,349           9,046          390,854                -
         Sixth year                      19,190          18,710            1,000           1,000                -                -
         Subsequent years               337,966          70,832           28,107          53,926                -          646,200
                                  -------------   -------------      -----------   -------------   --------------    -------------
                                      1,555,149       2,147,784           54,147         111,427          390,854          811,291
                                  =============   =============      ===========   =============   ==============    =============

<CAPTION>
                                                 Total
                                  ---------------------------------
                                              December 31
                                  ---------------------------------
                                             2005             2004
                                  ---------------   --------------
                                   NIS thousands
                                  ---------------------------------
<S>                               <C>                    <C>
         Second year                       23,061        1,284,325
         Third year                       239,593          764,288
         Fourth year                      127,065          178,005
         Fifth year                     1,224,168           53,216
         Sixth year                        20,190           19,710
         Subsequent years                 366,073          770,958
                                   --------------    -------------
                                        2,000,150        3,070,502
                                   ==============    =============
</TABLE>

<TABLE>
<CAPTION>

         2.     The Company Liabilities - (net of current maturities) that will mature in the following years subsequent
                to balance sheet date are as follows:


                                                                        Loans and capital notes
                                           Loans from banks                  from investees                  Debentures
                                  ---------------------------------  ---------------------------   --------------------------------
                                            December 31                       December 31                    December 31
                                  ---------------------------------  ---------------------------   --------------------------------
                                           2005            2004             2005            2004             2005             2004
                                  -------------   -------------      -----------   -------------   --------------    -------------
                                                                                            NIS thousands
                                  -------------------------------------------------------------------------------------------------
<S>                               <C>              <C>               <C>           <C>              <C>           <C>
         Second year                          -       1,027,889                -               -                -                -
         Third year                     100,000         461,000                -               -                -                -
         Fourth year                    109,270               -                -               -                -                -
         Fifth year                     812,775           8,676                -               -          390,854                -
         Sixth year                           -               -                -               -                -                -
         Subsequent years                     -               -            6,713           8,125                -                -
                                  -------------   -------------      -----------   -------------   --------------    -------------

                                      1,022,045       1,497,565            6,713           8,125          390,854                -
                                  =============   =============      ===========   =============   ==============    =============

<CAPTION>

                                                 Total
                                  --------------------------------
                                            December 31
                                  --------------------------------
                                             2005             2004
                                  ---------------   --------------
                                   NIS thousands
                                  --------------------------------
<S>                               <C>                <C>
         Second year                            -        1,027,889
         Third year                       100,000          461,000
         Fourth year                      109,270                -
         Fifth year                     1,203,629            8,676
         Sixth year                             -                -
         Subsequent years                   6,713            8,125
                                  ---------------   --------------

                                        1,419,612        1,505,690
                                  ===============   ==============
</TABLE>


         3.     See Note 22 for details of security pledged to secure loans.

                                      F-59
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 16 - Taxes on Income

         A.       Tax benefits under the Law for Encouragement of Capital
                  Investments, 1959

         Under this law, by virtue of the "approved enterprise" status granted
         to certain enterprises of several investees, these companies are
         entitled to various tax benefits. The income derived from these
         enterprises during a period of 7 to 10 years, from the year in which
         these enterprises first had taxable income (limited to 12 years from
         commencement of production or 14 years from the date of the approval,
         whichever is earlier), is subject to a corporate tax rate of 0 - 25%.
         According to the alternative track, some of the plants of subsidiaries
         were granted a tax exemption for a two to four year period and are
         taxed at the preferential rate of 25% during the remaining benefits
         period.
         For fixed assets owned by investees who are approved enterprises, are
         entitled to an accelerated amortization deduction.

         In the event that an investee distributes a dividend to shareholders
         out of income attributable to revenues which received the approved
         enterprise tax exemption, the distributing investee will be required to
         pay the company tax (25%) it had saved in the period of the benefits.

         Deferred taxes in respect of income from approved enterprises were not
         provided, since it is the Group's policy not to initiate a distribution
         of dividends from its subsidiaries that would result in an additional
         tax liability to the Group.

         Benefits are conditional upon the fulfillment of terms set out in law
         or in deeds of approval. Non-fulfillment of terms could cause
         cancellation of the benefit, in whole or in part, and the return of
         benefit sums, plus interest and linkage differentials. The investees
         met all terms set out as above as at the dates of the financial
         reports.

         As security for the implementation of the approved projects and
         compliance with the conditions of the approval, a pledge has been
         registered on the above subsidiaries' assets in favor of the State of
         Israel.


         B.       Measurement of results for tax purposes in accordance with the
                  Income Tax (Inflationary Adjustments) Law, 1985 (hereinafter -
                  "the Adjustments Law")

         The Company and its subsidiaries in Israel are subject to the Income
         Tax Law (Inflationary Adjustments), 1985. Under this Law, the results
         for tax purposes are adjusted principally for the changes in the
         Consumer Price Index. However, the adjusted income under the tax laws
         is not always identical to the reported income according to the
         accounting standards of the IASB. As a result, there are differences
         between the earnings reported according to financial statements and the
         adjusted income for tax purposes.

         See Note 2S(2) and Note 16G regarding deferred taxes on such
         differences.

                                      F-60
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 16 - Taxes on Income (cont'd)

         C.       Law for the Encouragement of Industry (Taxation), 1969:

         Certain companies qualify as "industrial companies" under the above
         law. By virtue of this status and certain regulations published under
         the inflationary adjustments law, the companies are entitled to claim,
         and have claimed, accelerated rates of depreciation.

         D.       Tax rates applicable to income from other sources:

         Income not eligible for "approved enterprise" benefits, is subject to
         tax at the statutory tax rate of 34% (or if the investee is registered
         and operates outside of Israel, at the tax rate prescribed for that
         territory).


         E.       Losses for tax purposes carried forward to future years and
                  tax assessments:

         1.       The consolidated balance of carryforward tax losses as at
                  December 31, 2005 amounted to approximately NIS 2,071 million,
                  of which NIS 1,527 million relates to Koor. Carryforward tax
                  losses are linked to the CPI, according to the Adjustments
                  Law.

         2.       The Company has received final assessments up to and including
                  the year ended 2002. Subsidiaries have received final
                  assessments up to and including the year ended 2003.

         F.       Amendment to the Income Tax Ordinance

         1.       On June 29, 2004, the Knesset passed the "Law for the
                  Amendment of the Income Tax Ordinance (No. 147 and Temporary
                  Order) - 2004 (hereinafter - the Amendment). The amendment
                  provides for a gradual reduction in the company tax rate from
                  36% to 30% in the following manner: in 2004 the tax rate will
                  be 35%, in 2005 the tax rate will be 34%, in 2006 the tax rate
                  will be 32% and from 2007 onward the tax rate will be 30%.

                  Current taxes and deferred tax balances as at December 31,
                  2004 were calculated based on the new tax rates prescribed in
                  the Amendment. The effect of the change in the consolidated
                  financial statements as at the beginning of 2004 is a decrease
                  in income tax expenses of NIS 5 million.

         2.       On July 25, 2005 the Israeli Knesset passed the Law for the
                  Amendment of the Income Tax Ordinance (No.147 and Temporary
                  Order) - 2005 (hereinafter - the Amendment). The Amendment
                  provides for a gradual reduction in the statutory company tax
                  rate in the following manner: in 2006 the tax rate will be
                  31%, in 2007 the tax rate will be 29%, in 2008 the tax rate
                  will be 27%, in 2009 the tax rate will be 26% and from 2010
                  onward the tax rate will be 25%. Furthermore, as from 2010,
                  upon reduction of the company tax rate to 25%, real capital
                  gains will be subject to tax of 25%.

                  The current taxes and deferred tax balances at December 31,
                  2005 are calculated in accordance with the new a tax rates
                  specified in the Amendment. The effect of the change in the
                  new tax rate on the Company's equity was approximately NIS 8
                  million.

                                      F-61
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 16 - Taxes on Income (cont'd)

         G.       Deferred taxes:

         1.       Deferred taxes are presented in the consolidated balance sheet
                  as follows:

<TABLE>
<CAPTION>
                                                                                               December 31
                                                                                     -----------------------------
                                                                                             2005             2004
                                                                                     ------------      -----------
                                                                                             NIS thousands
<S>                                                                                  <C>              <C>
                  Within current assets:

                  Provision for vacation pay and severance benefits                         276             4,527
                  Operating loss and capital loss carried forwards (2)                        -            87,665
                  Inventory, net of customer advances                                       (74)           65,994
                  Timing differences in respect of recognition of
                   income and expenses, net                                                 107              (744)
                                                                                     ----------        ----------
                                                                                            309           157,442
                                                                                     ----------        ----------
                  Within long-term assets:

                  Depreciation                                                          (16,403)          (21,162)
                  Operating loss and capital loss carried forwards                      536,494           691,275
                  Liability in respect of employee severance benefits                     1,837             1,614
                  Timing differences in respect of recognition of income
                   and expenses, net                                                        184              (437)
                                                                                     ----------        ----------

                                                                                        522,112           671,290
                  Balance not expected to be realized (1)                              (504,662)         (666,588)
                                                                                     ---------        ----------
                                                                                         17,450             4,702
                                                                                     ==========        ==========
                  Within long-term liabilities:

                  Depreciation                                                              (78)         (368,424)
                  Operating loss and capital loss carried forwards                            -            81,115
                  Inventories, net of customer advances                                       -             9,934
                  Liability in respect of employee severance benefits                         -            45,049
                  Timing differences in respect of recognition of income
                   and expenses, net                                                          -            (1,805)
                                                                                     ----------        ----------
                                                                                            (78)         (234,131)
                                                                                     ==========        ==========
</TABLE>

                  (1)      The Company and certain subsidiaries have deferred
                           tax assets, that are not expected to be realized,
                           because of accumulated tax loss carryforwards and
                           other timing differences. The managements of the
                           companies believe it is not likely that these
                           balances will be realized and, accordingly, no
                           deferred taxes were created in respect thereof.

                  (2)      The Company's balances at December 31, 2004 - see
                           Note 3B(2).

                                      F-62
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 16 - Taxes on Income (cont'd)

         G.       Deferred taxes (cont'd):

         2.       Balances and movement of deferred taxes in the consolidated
                  balance sheet:
<TABLE>
<CAPTION>
                                                                                                      Timing
                                                                                                 differences
                                                                                                          in
                                                  Inventories     Provisions      Losses and      respect of
                                  Depreciable         net of             for      deductions     recognition
                                       fixed        customer        employee         carried       of income
                                      assets        advances          rights         forward    and expenses           Total
                                  ----------      ----------      ----------      ----------    ------------      ----------
                                                                        NIS thousands
                                  ------------------------------------------------------------------------------------------
<S>                               <C>             <C>              <C>             <C>            <C>              <C>
         Balance as at
          January 1 2004            (391,165)            919          78,289         271,566          27,675         (12,716)
         Translation
          differences in
          subsidiaries                 7,943             (11)           (791)         (4,088)           (206)          2,847
         Adjustments to
          changes in tax rate         19,202             (93)           (918)         (9,704)         (3,404)          5,083
         Amounts charged
          to statement of
          operations                  (7,827)         75,113         (25,390)        (60,844)        (27,051)        (45,999)
         Other differences,
          net*                       (17,739)              -               -          (3,463)              -         (21,202)
                                  ----------      ----------      ----------      ----------      ----------      ----------

         Balance as at
          December 31, 2004         (389,586)         75,928          51,190         193,467          (2,986)        (71,987)

         Translation
          differences in
          subsidiaries                   124               -               -             554              18             696
         Amounts charged to
          statement of
          operations                   4,371            (117)            323         (76,615)            248         (71,790)
         Other differences,
          net *                      368,610         (75,885)        (49,400)        (85,574)          3,011         160,762
                                  ----------      ----------      ----------      ----------      ----------      ----------

         Balances as at
         December 31, 2005           (16,481)            (74)          2,113          31,832             291          17,681
                                  ==========      ==========      ==========      ==========      ==========      ==========
</TABLE>


         * Mainly subsidiaries that were sold/acquired, net.

         Deferred taxes were computed at tax rates of 22% - 35%.

                                      F-63
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 16 - Taxes on Income (cont'd)

         H.       Taxes on income included in consolidated statements of
                  operations:

         1.       Composition of income tax on continuing operations:

<TABLE>
<CAPTION>
                                                                                       Year ended December 31
                                                                          --------------------------------------------------
                                                                                   2005               2004              2003
                                                                          -------------       ------------     -------------
                                                                                           NIS thousands
                                                                          --------------------------------------------------

<S>                                                                          <C>              <C>              <C>
                  Current taxes                                                   5,854            236,160           107,483
                  Deferred taxes                                                 71,790             40,643           (30,140)
                  In respect of previous years, net                               3,057             (4,473)           16,510
                                                                          -------------       ------------     -------------
                                                                                 80,701            272,330            93,853
                                                                          =============       ============     =============

         2.       Below is the adjustment between the theoretical tax amount which would have been applicable if all the
                  income of Koor Group and the consolidated companies were taxable at the statutory tax rate effective in
                  Israel at that time, and the tax amount charged in the statement of income.

                                                                                       Year ended December 31
                                                                          --------------------------------------------------
                                                                                   2005               2004              2003
                                                                          -------------       ------------     -------------
                                                                                           NIS thousands
                                                                          --------------------------------------------------
                  Earnings from continuing operations before
                   taxes on income                                              337,398            824,053           342,412
                                                                          =============       ============     =============
                  Statutory tax rate                                                34%                35%               36%
                                                                          =============       ============     =============

                  Theoretical tax expenses in respect
                   of these earnings                                            114,715            288,419           123,268
                  Decrease in taxes resulting from
                   the following factors - the tax effect:
                  Tax deducted from Koor group's equity in
                   operating results of investee companies                     (123,602)            12,271            42,022
                  Tax benefits under various encouragement laws                  (6,344)           (49,676)          (30,132)
                  Non-deductible expenses for tax purposes                          315             15,702            19,561
                  Losses for which deferred taxes were
                   not recorded                                                 144,551            115,009            40,492
                  Provisions for anticipated losses from the
                   sale of assets, net                                                -                  -            25,748
                  Utilization of tax loss carry forwards and
                   temporary differences from prior years for
                   which deferred taxes were not created and
                   which were utilized during the current year                  (62,428)           (18,935)                -
                  Deferred taxes in respect of prior years and
                   which were written-off at the reporting year                   9,951             75,601                 -
                  Tax losses from prior years, for which
                   deferred taxes were recorded this year                             -            (77,483)          (56,912)
                  Differences between the measurement
                   basis according to the financial statement
                   to measurement basis for tax purposes                              -             11,460           (23,711)
                  Taxes in respect of prior years                                 3,057             (4,473)           16,510
                  Effect of foreign subsidiaries *                                    -            (92,839)          (62,605)
                  Others **                                                         486             (2,726)             (388)
                                                                          -------------       ------------     -------------
                  Total taxes on income                                          80,701            272,330            93,853
                                                                          =============       ============     =============
</TABLE>

                  *  Relates to territories of operations in which the
                     statutory tax rate is lower than that used in Israel.

                  ** Including influence of changes in tax rate.


                                      F-64
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 17 - Liabilities for Employee Severance Benefits, Net

         A.       Pension, severance pay and retirement grants:

         Under current labor laws and existing labor agreements, the companies
         in the Group are required to make severance payments, to employees who
         are dismissed or who retire.

         In respect of these liabilities, regular deposits are made by Group
         companies with pension and severance pay funds. The balance sheet
         amount represents the unfunded balance of the liabilities. As the funds
         deposited are not under the control and management of the Group
         companies, the funded amounts are not reflected in the balance sheets.
         These deposits and the amount stated in the balance sheet fully cover
         the Group's liability for employee severance benefits.

         Employees dismissed before reaching retirement age are entitled to
         severance pay, computed on the basis of their latest salary. In certain
         affiliates, the amounts accumulated in the pension funds are
         insufficient to cover such severance pay, the companies will make up
         the amount of the shortfall at the time of payment. In such companies,
         past experience indicates that the majority of the employees who
         continue to work until retirement age, and these companies were not
         required to make up amounts of the shortfall to employees who ceased
         being employed before retirement age. Therefore, the management of
         these companies believes that the probability to make up the shortfall
         is low and thus no provision has been included in the financial
         statements of these companies. Investees in which irregular severance
         has been planned or agreed upon have recorded provisions to record
         their liability for the supplementary amounts.

         In January 2004, the Retirement Age Law, 2004 (hereinafter - "the Law")
         was enacted. The Law raises the retirement age for men and women. In
         the estimation of the Group's management, the Law will not have a
         material impact on the Group's recorded liability for early pension in
         respect of its employees, beyond the provisions that have been recorded
         in respect thereof.

         B.       Funds for severance pay and retirement grants:

         The funds for severance pay and retirement include accrued linkage
         differences and interest, and they are deposited in severance pay funds
         in banks and insurance companies. Withdrawals of the funded amount is
         on fulfillment of the provisions of the Severance Pay Law.

         C.       Early retirement pension:

         Under agreements with certain employees who retired from service, Koor
         Group companies have undertaken to make pension payments until they
         reach retirement age. The entire liability for such pensions is
         included in the accounts on the basis of the present value of future
         pension payments, computed at a monthly discount rate of 0.3%-0.4% per
         month (3.6% - 5% per annum).

         D.       Compensation for unutilized sick leave:

         A provision for unutilized sick leave, according to agreements, is
         included in the accounts in respect of those employees who have reached
         the age of 55. Due to the uncertainty as to whether employees who have
         not reached that age will be entitled to such compensation (as a result
         of utilization of sick leave or early retirement), no provision has
         been made. The provision is computed on the basis of the latest salary
         for 8 working days in respect of each year during which the sick leave
         was not utilized.

                                      F-65
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 17 - Liabilities for Employee Severance Benefits, Net (cont'd)

         E.       Liabilities for severance benefits, which are presented in the
                  balance sheet, and the amount funded in severance pay funds,
                  are as follows:

<TABLE>
<CAPTION>
                                                                Consolidated                        Company
                                                      ---------------------------------     ---------------------------------
                                                                December 31                  December 31
                                                      ---------------------------------     ---------------------------------
                                                                 2005              2004               2005               2004
                                                       --------------    --------------     --------------       ------------
                                                                NIS thousands                NIS thousands
                                                      ---------------------------------     ---------------------------------

<S>                                                   <C>                <C>                <C>                  <C>
         Severance pay and retirement grants                   10,580           149,573              6,030              6,903

         Amount accrued for
          early retirement                                      1,602           136,233              1,602                575

         Amount accrued in respect of
          unutilized sick leave                                     -            14,177                  -                362
                                                       --------------    --------------     --------------       ------------
                                                               12,182           299,983              7,632              7,840

         Less - amount funded                                  11,771           152,995             11,081              2,865
                                                       --------------    --------------     --------------       ------------

                                                                  411           146,988             (3,449)             4,975

         Classification of excess of amount
          funded over amount accrued
          (see Note 9)                                          3,449             5,553              3,449                  -
                                                       --------------    --------------     --------------       ------------

                                                                3,860           152,541                  -              4,975
                                                      ===============    ==============     ==============       ============
</TABLE>



Note 18 - Contingent Liabilities and Commitments

         A.       Contingent liabilities

         1.       The Company:

                  a.   On  September  21, 2004 a suit was filed with the Tel
                       Aviv District Court against the Company, Bezeq - the
                       Israel Telecommunications Company Ltd. ("Bezeq"), Tadiran
                       Ltd. (a subsidiary of Koor - "Tadiran"), Tadiran
                       Telecommunications Ltd. (a former subsidiary of Koor
                       which was merged with ECI - "Telecommunications"),
                       Tadiran Public Switching Ltd., (a former subsidiary in
                       Telecommunications), and Telrad Networks Ltd. (an
                       affiliate of Koor - "Telrad Networks") in connection with
                       the public switches. A motion for recognition of the suit
                       as a class action was filed together with the suit in
                       accordance with the Anti-Trust Law, 1988 ("the Anti-Trust
                       Law"), and according to Civil Procedure regulations. In
                       the Statement of Claim, the plaintiff alleges that during
                       the previous decade, the defendants had engaged in
                       activities prohibited by the Anti-Trust Law that resulted
                       in damages to Bezeq's customers. In respect of the
                       actions alleged by the Plaintiff, the Plaintiff is asking
                       for damages for the group that he is seeking to represent
                       in the amount of NIS 1.7 billion.

                                      F-66
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 18 - Contingent Liabilities and Commitments (cont'd)

         A.       Contingent liabilities (cont'd)

         1.       a.   The Company (cont'd):

                       On March 10, 2005, the Company and the other defendants
                       submitted to the District Court their clarified objection
                       to the request of the plaintiff to certify the claim as a
                       class action. On December 5, 2005 the Plaintiff filed his
                       response to the said objection.

                       In the opinion of the management which is based on the
                       opinion of its legal counsel, the chances of the claim
                       and of the certify the claim as a class action are
                       remote.

                       Further to the sale of shares of Telrad Networks (as
                       described in Note 3C(1)), Koor committed to indemnify the
                       purchasers in the event that a court ruling will increase
                       the amount of expenses to be paid by Telrad Networks to
                       an amount exceeding that stated in the share purchase
                       agreement.

                  b.   On June 1,  2005,  an  indictment  was  filed  with

                       the Jerusalem District Court prosecuting Koor, and seven
                       other companies that are not members of the Koor Group
                       (including two companies that had been owned by Koor on
                       the relevant dates and were later sold to third parties)
                       and nine executives (including two who had been salaried
                       employees of Koor on the relevant dates) for violations
                       of the Anti-Trust Law. The indictment is the outcome of
                       an investigation that had been opened by the Anti-Trust
                       Commission in other companies during 2001, with respect
                       to price fixing and collusion, and the lack of
                       competition in the frozen and canned vegetable industry.
                       The Anti-Trust Authority claims that two companies that
                       belonged to the Koor Group in the past had colluded with
                       other companies in the years 1992-1998.

                       According to the Anti-Trust Law, penalties can be imposed
                       on those who violate the Law, but the Company believes,
                       based on its legal counsel, that the said penalties, if
                       imposed, will not have a material effect on the financial
                       statements. Moreover, there may be civil implications if
                       it is possible to prove that damages were caused by the
                       aforementioned violation. The Company is unable to assess
                       the implications in the civil law track, if any,
                       especially due to the fact that in the opinion of the
                       Company and its legal counsel, for the vast majority of
                       the period involved, the statute of limitations has
                       expired.

         2.       Indemnification in connection with the agreement for the sale
                  of Elisra in 2002

                  As part of the agreement for the sale of 30% of Koor's
                  holdings in Elisra to Elta Electronic Industries Ltd. ("Elta")
                  in 2002, Koor undertook to indemnify Elta for any amount of
                  damages that will be sustained as a result of breach of the
                  representation concerning the insurance indemnity rights to
                  which the Elisra Group is entitled, relating to the fire that
                  occurred at Elisra's subsidiaries' plants. Elta's right to
                  demand payment of the indemnity in this matter carries no time
                  limit.

         3.       Pursuant to agreements with the banks, Koor undertook to
                  maintain certain financial covenants, including a minimum
                  equity and maximum debt of Koor and certain affiliates, a
                  ratio of shareholders' equity to debt capital, prohibition
                  against creating liens without prior consent of the banks and
                  limitations stipulated in the agreement. Additionally, Koor
                  undertook, under certain circumstances to repay part of the
                  existing debt by using the proceeds to be received from the
                  divestiture of certain assets, if sold.
                  As at balance sheet date, Koor is in compliance with these
                  conditions.

                                      F-67
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 18 - Contingent Liabilities and Commitments (cont'd)

         A.       Contingent liabilities (cont'd)

         4.       Tadiran and its investees

                  Employees of a Tadiran plant that closed during 1990 filed
                  actions against Tadiran, alleging that they sustained injuries
                  or certain work-related illnesses resulting from alleged
                  exposure to certain substances.
                  Tadiran has insurance policies which, relying on legal
                  opinions, substantially cover possible damages resulting from
                  these claims. Therefore, no provisions have been made in
                  respect of these claims. The financial statements include
                  provisions in respect of possible damages which had been
                  covered by an insurance company currently in liquidation.
                  During 2005 as part of Tadiran's liquidation process,
                  Tadiran's assets and liabilities, including the said claims,
                  were transferred to Koor.

         5.       M-A Industries and its investees

                  a) Quality of the environment

                       The activities of M-A Industries are exposed to the risks
                       of harming the environment, since it manufactures, stores
                       and sells chemicals. M-A Industries invests significant
                       amounts in order to comply with the provisions of
                       environmental laws and regulations, and in the opinion of
                       the management, the companies are in compliance with
                       these provisions. According to M-A Industries' insurance
                       experts, the insurance policies provide coverage in the
                       event of a sudden unexpected occurrence of environmental
                       pollution in Israel and worldwide, subject to the
                       relevant terms of the policy. As at balance sheet date,
                       M-A Industries does not have insurance coverage for
                       continuous environmental pollution. Such insurance is
                       difficult to obtain, and even where it can be obtained,
                       the company believes that the terms of the insurance,
                       including the sum insured, do not at present justify
                       taking out such insurance.

                       In accordance with the agreement of the Ministry of the
                       Environment, the subsidiaries decided to build facilities
                       for biological treatment of the sewage. Construction of
                       the facilities will last about 3 years. The management of
                       M-A Industries estimates the total construction costs at
                       30-40 million dollars.

                       One of the plants of M-A Industries subsidiary is located
                       in Ramat Hovav, along with other chemical plants, since
                       the Government decided that the geological layers in that
                       particular area are completely impermeable to seepage or
                       pollution. The Ministry of the Environment conducted
                       tests, which determined that there are indications of
                       subterranean pollution in Ramat Hovav. The investigators
                       recommended that steps be taken to prevent the
                       continuation of leakages from active and inactive plants,
                       which could constitute a source of pollution of the water
                       table in the area. The subsidiary could be required to
                       clean the areas or relevant subterranean layers if and
                       when it is found that it is responsible for the
                       pollution. In recent years, various tests have been
                       performed by different institutions for research of
                       pollutants of the land in the Ramat Hovav area and near
                       the site of a subsidiary in Beer Sheba.


                                      F-68
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 18 - Contingent Liabilities and Commitments (cont'd)

         A.       Contingent liabilities (cont'd)

         5.       M-A Industries and its investees (cont'd)

                  a)   Quality of the environment (cont'd)

                       According to the research performed by the investigators,
                       including foreign research institutes, there is no need
                       to clean the land, since there is no effective process
                       for doing so. All there is to do is to prevent
                       continuation of the pollution and natural cleaning
                       processes will clean the land for 80 years. In
                       management's estimation, the subsidiary is not expected
                       to have a material effect on the financial statements,
                       due to implementation of the recommendations as a result
                       of the said testing.

                       In May 2004, a subsidiary of M-A Industries owning
                       additional plants at the Ramat Hovav site received notice
                       of a change in the terms of the license, whereby the
                       plants must change the method it uses to treat its sewage
                       from the existing treatment, do so independently and
                       through the implementation of vaporization processes.
                       These terms include demands that, within a short period
                       of time, the plants conduct research and development for
                       the purpose of customizing the process to the composition
                       of each plant's sewage, and later, to build a suitable
                       facility. Additionally, formulation processes are to be
                       implemented, whereby the plants must present the Ministry
                       with a research and development program for the purpose
                       of implementing the process with respect to the sewage.
                       At the same time, the Ministry of the Environment set the
                       date by which the plants must treat the sewage in the
                       requisite format and to stop the flow of sewage into the
                       Council's vaporization pools and treatment facilities.

                       On October 10, 2004, a subsidiary of M-A Industries,
                       together with the Israel Manufacturers Association and
                       other companies, filed an administrative appeal with the
                       Beer Sheba District Court against the Ministry of the
                       Environment. The subject of the appeal is the additional
                       conditions for obtaining a business license imposed on
                       the appealing plants in May 2004 which are engaged in the
                       treatment and discharge of sewage created by their
                       activities. At the agreement of the parties and with the
                       approval of the court the dispute was transferred to
                       mediation proceedings.

                       In the framework of the mediation, the Ministry of
                       Environment Protection hired the services of a Dutch
                       company having expertise with respect to the matter. The
                       Dutch company's conclusions supported the Company's
                       position that there is no treatment method of pressurized
                       ventilation and crystallization for the type of waste
                       material produced by the Ramat Hovav factories and it
                       recommended to remain in the Ramat Hovav pools while
                       improving the quality of the waste material and
                       preventing the escape of odors and pollution into the
                       environment. The matter is currently in the mediation
                       process. Agreement regarding the proposed method will
                       also update the conditions of the business license
                       accordingly.

                       In the estimation of M-A Industries management, based on
                       its legal counsel, in view of the preliminary stage of
                       the process, it is not possible at this time to estimate
                       the prospects of the administrative appeal. In the
                       estimation of M-A Industries, if the appeal is dismissed,
                       it will have a material effect on the activities of the
                       plant in Ramat Hovav and/or will require investments of
                       amounts that M-A Industries is unable to estimate at this
                       time.

                       On November 28, 2004, the Government reached a decision
                       approving a plan related to reducing air and water
                       pollution deriving from the "Ramat Hovav" industrial
                       area.


                                      F-69
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 18 - Contingent Liabilities and Commitments (cont'd)

         A.       Contingent liabilities (cont'd)

         5.       M-A Industries and its investees (cont'd)

                  a)   Quality of the environment (cont'd)

                       The key points of the plan are:

                       a.   Treatment of the plants' sewage

                            1.   By June 30, 2006, the flow of untreated sewage
                                 to the joint biological treatment facility will
                                 be halted and each plant will treat the sewage
                                 to the quality level prescribed by the Ministry
                                 of the Environment (as derive from the
                                 additional conditions for a business license
                                 from May 2004).

                            2. By December 31, 2007, the flow of waste water to
                                 the vaporization pools will be halted and each
                                 plant will treat the waste water. To the level
                                 of quality and concentration of salts
                                 prescribed by the Ministry of the Environment
                                 (as derive from the additional conditions for a
                                 business license from May 2004).

                       b.   Rehabilitation of existing vaporization pools

                            1.   On January 1, 2005, the Ramat Hovav Industrial
                                 Council will begin taking action to dry and
                                 rehabilitate the area of the vaporization pools
                                 spanning 1,500 thousand square meters, in an
                                 attempt to complete the drying and
                                 rehabilitation activities by not later than the
                                 end of 2012.

                            2.   The Ramat Hovav Industrial Council will submit
                                 a detailed plan and timetable for drying and
                                 rehabilitating the vaporization pools site to
                                 the Ministry of the Environment for approval by
                                 December 31, 2004.

                       c.   Treatment of air pollution
                            The Ministry of the Environment will formulate and
                            operate a plan to prevent exceptional emission of
                            hazardous materials into the air from the Ramat
                            Hovav industrial area.

                            As to the possible implications of the Government's
                            decision on the activities of M-A Industries, see
                            above.

                            In addition, a criminal complaint was filed against
                            M-A Industries and one of its executives by the Man,
                            Nature and Law Foundation. The complaint accuses M-A
                            Industries that in several instances during
                            1999-2002, there were measurements at its Ramat
                            Hovav plant of chimney emissions of materials at
                            prohibited concentrations, which created strong air
                            pollution. M-A Industries does not admit to the
                            charges in the complaint. In the opinion of M-A
                            Industries and its legal counsel, because of the
                            early stage of the proceedings, it is not possible
                            to estimate the outcome of the complaints. However,
                            according to the accepted penalty standards, there
                            is high probability that if M-A Industries is
                            convicted, there will not be a material impact on
                            M-A Industries, therefore no provision has been
                            recorded in the financial statement.



                                      F-70
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 18 - Contingent Liabilities and Commitments (cont'd)

         A.       Contingent liabilities (cont'd)

         5.       M-A Industries and its investees (cont'd)

                  b)   In 1995, a claim was filed against a subsidiary of
                       M-A Industries and several other defendants, totaling
                       approximately 45 million dollars, by a group that had
                       acquired the rights of two banks which declared
                       bankruptcy. The subsidiary is being sued as the guarantor
                       of debts of agricultural cooperatives that were its
                       former shareholders. The position of the subsidiary is
                       that it was removed from the guarantee agreement under
                       the terms of a subsequent agreement between the bank, the
                       previous shareholders and a subsidiary of the former
                       shareholders. The subsidiary's financial statements
                       include a provision of 1.6 million dollars, based on the
                       possibility of a compromise agreement with the
                       plaintiffs. In the estimation of the subsidiary, based on
                       the opinion of its legal counsel, the provision recorded
                       is sufficient to cover any possible loss from this claim.

                  c)   Administrative proceedings, civil actions and other
                       monetary claims of approximately 64 million dollars have
                       been filed against a subsidiary of M-A Industries. Based
                       on the opinion of its legal counsel, the subsidiary's
                       management estimates that the chances of the subsidiary's
                       success in the proceedings and its defense against the
                       above claims and demands are high. The subsidiary
                       believes that the provisions recorded in its financial
                       statements are adequate to cover any possible damage
                       which may result from these claims.

                  d)   In April 2005, M-A Industries received notice from an
                       international chemicals company that it had opened
                       international arbitration proceedings against M-A
                       Industries relating to a licensing and supply agreement
                       that was signed in 1998. The amount of the claim
                       according to the notice is 10.6 million dollars. M-A
                       Industries recorded an adequate proper provision in its
                       books, based on the opinion of its legal counsel.

                  f)   On the matter of undertakings in securitization
                       transactions and financial covenants in respect of those
                       transaction, see Note 3B4.

         6.       ECI Telecom Ltd. ("ECI")

                  In January 2005, ECI was named one of the defendants in a
                  purported class action complaint filed in the United States
                  against ECtel, certain directors and officers of ECtel, and
                  against ECI. The complaint alleges violations of U.S. Federal
                  Securities laws by ECtel and breach of fiduciary duties by the
                  directors and officers of ECtel, in connection with disclosure
                  of ECtel's financial results, between April 2001 and April
                  2003. It also alleges that ECI was the controlling shareholder
                  of ECtel during this period and, as such, influenced and
                  controlled the acts and omissions of ECtel. Damages claimed by
                  the plaintiff have not yet been quantified. ECI's management,
                  based on the advice of its legal counsel, believes that the
                  allegations made in the complaint with respect to it are
                  without merit, therefore no provision has been recorded in the
                  financial statements in respect thereof.

                                      F-71
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 18 - Contingent Liabilities and Commitments (cont'd)

         A.       Contingent liabilities (cont'd)

         7.       A number of claims have been filed against the Company and
                  certain investees concerning various matters arising in the
                  normal course of business, including litigation with tax,
                  customs and VAT authorities, which are in various legal
                  proceedings. In the estimation of the managements of these
                  companies, based on the opinions of their legal counsel, the
                  provisions for these claims included in their financial
                  statements, are adequate in light of the circumstances.

         8.       On fulfillment of conditions relating to an investment grant -
                  see Note 16A.

         9.       On the indemnity granted to Claridge as advisor - see Note
                  26B(2).

         10.      Stamps duty

                  In Israel, the Stamp Duty on Documents Law, 1961 ("the Law")
                  was applicable to various documents at different rates,
                  depending on the kind of document and the amount stipulated
                  therein, or not stipulated therein. In June 2003, the wording
                  of Section 15.A of the Law was amended, prescribing who is
                  obligated for stamp duty.

                  As of June 2003, the tax authorities notified of their
                  intention to intensify their activities for enforcement of the
                  law.

                  The Company and certain investee companies received requests
                  from the Tax Authorities to produce documents, as well as
                  various notifications to make payment. The law was nullified
                  on December 22, 2005, effective from January 1, 2006. In the
                  estimation of the managements of the Company and the
                  investees, based on the opinions of their legal counsel, the
                  companies are not expected to have material exposure related
                  to the Stamp Duty Law.

         11.      The liability of directors and officers in the Company and in
                  investee companies is insured by Clal Insurance Company Ltd.,
                  a member of the IDB Group, which is an interested party, in
                  directors and officers (D&O) insurance, subject to the terms
                  of the insurance policy. Additionally, in accordance with a
                  resolution by the general meeting of the Company's
                  shareholders, the Company resolved to indemnify its directors
                  and officers against various events that the insurance does
                  not cover, and in monetary amounts exceeding the insured
                  amounts, all as provided in the said resolution.

         B.       Commitments

         1.       Several companies in the Group have research and development
                  contracts with the Government of Israel. Under these
                  contracts, the companies are required to pay royalties to the
                  Government of Israel if they generate income from such
                  research (at rates of 2% - 5% of sales proceeds from products
                  resulting from the research and development), in amounts not
                  exceeding 100% - 150% of the amounts of the grants, linked to
                  the dollar, received by the companies as participation in the
                  research and development projects.

                  Royalty expenses paid to the Government of Israel in respect
                  of these research and development contracts, are as follows:

                  In the year ended December 31, 2005 - NIS 2,919 thousand.
                  In the year ended December 31, 2004 - NIS 29,758 thousand
                  (mainly M-A Industries). In the year ended December 31, 2003 -
                  NIS 22,902 thousand (mainly M-A Industries).


                                      F-72
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 18 - Contingent Liabilities and Commitments (cont'd)

         B.       Commitments (cont'd)

         2.       Certain subsidiaries have undertaken to pay royalties at the
                  rate of 3% per year in respect of the incremental export
                  sales, up to the amount financed by the Fund for the
                  Encouragement of Marketing Abroad. Such amounts are linked to
                  the exchange rate of the dollar.

         3.       At December 31, 2005, the Company and subsidiaries were not
                  committed for the purchase of fixed assets (31.12.2004 - NIS
                  22 million).

         4.       Certain companies in the Group lease and rent industrial and
                  office premises under long-term contracts. The lease contracts
                  are non-cancelable and in most cases include renewal options.
                  The expenses of these companies were NIS 11 million in 2005,
                  (NIS 43 million in 2004, NIS 50 million in 2003).
                  Future minimum payments under the non-cancelable operating
                  leases and rental fees for the years subsequent to balance
                  sheet date, are as follows:
                                                                    December 31
                                                                           2005
                                                                ----------------
                                                                 (NIS thousands)
                                                                ----------------
                  First year                                              12,235
                  Second year                                              2,704
                  Third year                                               2,577
                  Fourth year                                                151
                  Fifth year and thereafter                                  132
                                                                          17,799
                                                                ================

         5.       Koor Corporate Venture Capital's commitment for additional
                  investments in venture capital funds as at December 31, 2005
                  is approximately 2.3 million dollars.


Note 19 - Convertible Securities of Investee Companies

         Option warrants to employees:

         Certain investees issued options to their employees. Employee
         entitlement to such options is usually accrued over a number of years
         from their date of issue, subject to continued employment. The exercise
         term of the options varies according to the terms of the different
         plans.


         Convertible debentures and options

         See Note 15B.

         At each reporting date, Koor reviews the probability that the
         convertible securities will be exercised. If a loss, as a result of
         dilution, following the convertible securities exercise, is expected,
         the Company records the loss.

                                      F-73
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 20 - Share Capital and Stock Options

         A.       Share capital is composed as follows:
<TABLE>
<CAPTION>
                                               December 31, 2005                    December 31, 2004
                                         --------------------------------      --------------------------------
                                            Authorized        Issued and         Authorized         Issued and
                                                              Outstanding                           outstanding
                                         --------------      ------------      ------------      -------------
<S>                                      <C>                 <C>               <C>               <C>
         Number of shares:
         Ordinary shares, par value
          of NIS 0.001 (1) (3) (4)           83,932,757        16,162,467        83,932,757         16,033,213
                                         ==============      ============      ============      =============
         Deferred shares, par value
          of NIS 0.001  (2)                  15,792,243        15,156,533        15,792,243         15,156,533
                                         ==============      ============      ============      =============

         Amount in nominal NIS:
         Ordinary shares, par value
          of NIS 0.001                           83,933            16,162            83,933             16,033
                                         ==============      ============      ============      =============
         Deferred shares, par value
          of NIS 0.001                           15,792            15,157            15,792             15,157
                                         ==============      ============      ============      =============
</TABLE>

         (1)      These shares are listed on the Tel Aviv Stock Exchange (TASE).
                  On December 29, 2005, the share price on the TASE was NIS
                  252.80.

                  The ADS (American Depository Shares) of the Company, each of
                  which represents 0.2 ordinary shares, par value of NIS 0.001
                  ("Ordinary Shares"), are traded on the New York Stock Exchange
                  (NYSE). The ADS price on the NYSE on December 30, 2005 was
                  10.99 dollars.

         (2)      The holders of the deferred shares are entitled to recovery of
                  paid up capital upon liquidation in its nominal amount, after
                  payment of the nominal amount to the holders of the Ordinary
                  Shares. The holders of the deferred shares do not have voting
                  rights, and they are not entitled to participate in a dividend
                  distribution of any kind.

         (3)      On the balance sheet date, subsidiaries hold 15,799 Ordinary
                  Shares of Koor. (4) During 2005, options in the employee stock
                  option plans (See C above) were exercised for 129,254 ordinary
                  shares.


         B.       Buy-back of Company shares

         In 2000, the Company purchased 538,592 ordinary shares (approximately
         3.4% of the ordinary share capital), at a cost of approximately NIS 219
         million. This amount was deducted from the shareholders' equity of the
         Company.

         On December 31, 2001, the Company purchased 154,637 of its ordinary
         shares from a subsidiary.

                                      F-74
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 20 - Share Capital and Stock Options (cont'd)

         B.       Buy-back of Company shares (cont'd)

         On May 27, 2003, a foreign institutional investor (hereinafter - "the
         Buyer") purchased 500,000 of the aforementioned Company shares. The
         Purchaser declared that the sale was effected without his requesting or
         receiving any information from the Company, and undertook not to trade
         the shares to be purchased within a specified period. The sale was
         effected on that day in an off-market transaction, at the market price,
         for total consideration of approximately NIS 43 million. On April 15,
         2005, the Company sold to the foreign institutional investor 193,229
         shares of the Company it had held, in an off-market transaction for
         consideration of approximately NIS 50 million.

         As at the balance sheet date, the Company had sold all of its holdings
         in its shares. The total holdings of subsidiaries in Koor's shares is
         15,799 ordinary shares, and the amount deducted from shareholders'
         equity for the shares held is NIS 6,071 thousand.


         C.       Stock options to senior employees

         1.       1998 and 2000 plans:

                  During 1998 and 2000 stock option plans were approved with the
                  following main points:

                  1.   A total framework was approved for the allotment of
                       800,000 stock options theoretically exercisable for up to
                       800,000 ordinary shares of the Company.

                  2.   The options are designated for Company employees who are
                       not related parties in the Company and will not become
                       related parties in the Company as a result of allotment
                       of the stock options.

                  3.   Most of the options allotted under these plans were
                       exercised by the balance sheet date.

                  4.   The balance of options outstanding at December 31, 2005:

                                      Balance of
                                    stock option       Exercise        Exercise
                       Year Plan   not exercised          price            date
                       ---------   -------------      ---------       ---------
                                                            NIS
                                                      ---------

                            1998             670         101.38         06/2006
                            2000           1,734         101.38         06/2007




         2.       2003 Plan:

                  On July 27, 2003, a general meeting of shareholders approved
                  Stock Option Plan 2003, which had been approved previously by
                  the Audit Committee and by the Board of Directors, on May 25,
                  2003 and June 5, 2003, respectively. The key points of the
                  Plan are:

                  1)   A total framework was approved for the allotment of
                       1,200,000 stock options, theoretically exercisable for up
                       to 1,200,000 ordinary shares of the Company, i.e. about
                       6.8% of the ordinary shares (fully diluted) of the
                       Company.

                                      F-75
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 20 - Share Capital and Stock Options (cont'd)

         C.       Stock options to senior employees (cont'd)

                  2)   The options allotted to the trustee will be exercised for
                       shares in a quantity reflecting the amount of the
                       financial benefit inherent in the options, according to
                       the Benefit Component Method. Under the terms of the
                       Plan, each stock option is theoretically exercisable for
                       one share, subject to adjustments. However, in practice,
                       offerees who exercise the options will not be allotted
                       the full quantity of shares underlying each option, but
                       only shares which reflect the amount of the financial
                       benefit inherent in their option, computed on the date of
                       exercise. Accordingly, the exercise price of each stock
                       option is intended only for computation of the benefit
                       component.

                  3)   The exercise price of every option will be NIS 96 linked
                       to the CPI, unless the Company decides to prescribe a
                       higher exercise price for options that will be allotted
                       on dates subsequent to the approval date of the plan.

                  4)   The options are designated for Company employees who are
                       not related parties in the Company and will not become
                       related parties in the Company as a result of allotment
                       of the stock options. In any event, the total number of
                       offerees under Plan 2003 will not exceed 35 offerees.

                  5)   The right of every offeree to exercise the options for
                       shares will vest in six stages during the three-year
                       period from the record date, whereby at the end of every
                       calendar half-year, one-sixth of the number of options
                       allotted to the trustee on his behalf will vest.

                  6)   Options not exercised by December 31, 2010 will expire.

                  7)   The Plan will be taxed under the Capital Gains Track,
                       under the provisions of Section 102 of the Income Tax
                       Ordinance and the regulations promulgated hereunder. Any
                       tax to be imposed in respect of the exercise of the
                       options will be borne solely by the offerees. The Company
                       will be unable to claim any tax deduction for the
                       expense.

                  8)   Also approved within the framework of the approval of
                       Plan 2003 was the granting of 350,000 options out of the
                       total number, to seven directors (except for two
                       directors who are controlling shareholders in the
                       Company, directly or indirectly), divided equally, as
                       well as 175,000 options to the Company's CEO. The balance
                       of the options is intended for other employees and
                       officers of the Koor Group.

                                      F-76
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 20 - Share Capital and Stock Options (cont'd)

         C.     Stock options to senior employees (cont'd)

                9)   The balance of options outstanding as at December 31, 2005:

                                     Balance of
                                   stock option       Exercise       Exercise
                                  not exercised          price           date
                                  -------------   ------------     -----------
                                                           NIS
                                                  ------------

                                        722,648          96.00       12/2010
                                         20,000         175.95       12/2010
                                         50,000         186.20       12/2010

                                         40,000         200.00       12/2010
                                         10,000         209.69       12/2010
                                         10,000         225.00       12/2010
                                  -------------
                                        852,648
                                  =============


         3.     Changes in the options in respect of all stock option plans
                during 2005:

<TABLE>
<CAPTION>
                                  1997 Plan         1998 Plan          2000 Plan         2003 Plan             Total
                                  ---------         ---------          ---------         ---------        ---------
<S>                               <C>              <C>                <C>              <C>               <C>
         Balance as at
          beginning of year          5,519            53,263             31,734           939,450         1,029,966
         Granted                         -                 -                  -            60,000            60,000
         Exercised                  (5,519)          (52,593)           (30,000)         (146,802)        *(234,914)
                                  =========         =========          =========         =========        =========

         Balance as at end
          of the year                    -               670              1,734           852,648           855,052
                                  =========         =========          =========         =========        =========
</TABLE>

         *      Because of the "Benefit Component Method", a total of 129,254
                ordinary shares of the Company were issued.


         D.     Option warrants to institutional investors

                In the framework of a private placement to Israeli
                institutional investors, as described in Note 15B(1), 800,000
                option warrants were issued on April 10, 2005. Each option
                warrant is exercisable until April 30, 2010 into one share of
                the Company of a par value of NIS 0.001 for an exercise price
                of NIS 300 linked to the CPI. The Company intends to register
                the underlying shares for trading on the Tel Aviv Stock
                Exchange.

                                      F-77
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 21 - Financial Instruments and Linkage Terms of Monetary Balances

         A.       Derivative financial instruments

         The Company has entered into forward transactions, in order to reduce
         the overall exposure of its CPI-linked debt. As at December 31, 2005,
         the Company had open CPI-NIS forward contracts in the amount of NIS 200
         million.

         Furthermore, the Company entered into an interest rate swap (IRS) in
         the amount of 50 million dollars, in order to reduce its exposure to
         fluctuations in interest rates. In the transaction, variable interest
         was exchanged for fixed interest.

         B.       Fair value of financial instruments:

         The carrying amounts of cash and cash equivalents, short-term
         investment, trade receivables, other accounts receivable, credits from
         banks and others, trade payables and other accounts payable, debentures
         and convertible debentures derivatives and other financial instruments
         is approximate or similar to at their fair value. With respect to the
         market value of certain affiliated and other companies whose shares are
         traded on the stock exchange, see Notes 8A(2) and 9.

         C.       Credit risk of trade receivables:

                                                                   NIS millions
                                                                   ------------

         Condensed data of credit risk of trade
          receivables as at December 31, 2005:
         Receivables insured by credit card companies                         3
         Receivables - Government authorities                                 3
         Other receivables, including checks and c
           redit card companies                                              91
                                                                   ------------
         Total (including non-current receivables)                           97
                                                                   ============


         In Management's opinion, the financial statements include suitable
         provisions in respect of exposure to doubtful debts.

         The exposure to credit risks relating to trade receivables is limited,
         due to the relatively large number of customers.


                                      F-78
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 21 - Financial Instruments and Linkage Terms of Monetary Balances (cont'd)

         F.       Linkage terms of monetary balances:

         (1)      Consolidated
<TABLE>
<CAPTION>
                                                                               December 31, 2005
                                                 ---------------------------------------------------------------------------------
                                                     In foreign          Linked         Unlinked           Total       In foreign
                                                    currency or          to the                                       currency or
                                                 linked thereto             CPI                                    linked thereto
                                                 --------------        --------         --------         -------   --------------
                                                                                  NIS thousands

<S>                                                     <C>           <C>                <C>           <C>              <C>
         Assets
         Cash and cash equivalents                       33,725               -          285,073         318,798          229,946
         Short-term deposits and investments             91,549         186,931          106,890         385,370           86,387
         Trade receivables                               52,337           1,285           39,922          93,544        1,640,819
         Other accounts receivable                       36,412             275           35,911          72,598          170,572
         Other investment and receivables                95,587          28,594              100         124,281          119,680
                                                        -------         -------          -------         -------        ---------

                                                        309,610         217,085          467,896         994,591        2,247,404
                                                        =======         =======          =======         =======        =========
         Liabilities
         Credits from banks and others
          (not including current maturities
          of long-term liabilities)                      27,618               -           24,244          51,862          689,956
         Trade payables                                  48,263               -           43,343          91,606        1,347,165
         Other accounts payable                          53,531           8,086          117,245         178,862          687,826
         Long-term loans and debentures
          (including current maturities)                215,645       1,788,770          216,000       2,220,415        1,712,562
                                                        -------         -------          -------         -------        ---------
                                                        345,057       1,796,856          400,832       2,542,745        4,437,509
                                                        =======       =========          =======       =========        =========


<CAPTION>
                                                         December 31, 2004
                                                 -------------------------------------------------
                                                           Linked        Unlinked            Total
                                                           to the
                                                              CPI
                                                         --------        --------          -------
                                                           NIS thousands
                                                 -------------------------------------------------
<S>                                                     <C>             <C>              <C>
         Assets
         Cash and cash equivalents                              -          61,353          291,299
         Short-term deposits and investments              100,790          85,330          272,507
         Trade receivables                                  1,531         121,211        1,763,561
         Other accounts receivable                         17,211          99,585          287,368
         Other investment and receivables                  58,562          10,346          188,588
                                                          -------         -------        ---------

                                                          178,094         377,825        2,803,323
                                                          =======         =======        =========
         Liabilities
         Credits from banks and others
          (not including current maturities
          of long-term liabilities)                             -         331,044        1,021,000
         Trade payables                                         -         227,942        1,575,107
         Other accounts payable                            39,648         328,691        1,056,165
         Long-term loans and debentures
          (including current maturities)                1,368,683         685,471        3,766,716
                                                        ---------       ---------        ---------
                                                        1,408,331       1,573,148        7,418,988
                                                        =========       =========        =========
</TABLE>

                                      F-79
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 21 - Financial Instruments and Linkage Terms of Monetary Balances (cont'd)


         F.       Linkage terms of monetary balances (cont'd):

         (2)      Company

<TABLE>
<CAPTION>
                                                                       December 31, 2005
                                                 ---------------------------------------------------------------------------------
                                                     In foreign          Linked         Unlinked           Total       In foreign
                                                    currency or          to the                                       currency or
                                                 linked thereto             CPI                                    linked thereto
                                                 --------------      ----------       ----------       ---------   --------------
                                                                         NIS thousands
                                                 ---------------------------------------------------------------------------------

<S>                                                     <C>           <C>                <C>           <C>              <C>
         Assets
         ------
         Cash and cash equivalents                         740               -          266,222         266,962            2,547
         Short-term deposits and
          investments                                   79,995         179,358           82,172         341,525           51,909
         Other receivables                               2,865               -           12,573          15,438            1,121
         Short term loans to
          investee companies                                 -          37,212                -          37,212                -
         Other investments and receivables                 114               -                -             114              107
         Investments and other long-term
          receivables:
         Investee companies (including
          current maturities of loans)                     640          52,854        1,189,604       1,243,098           43,364
                                                  ------------      ----------       ----------       ----------     ------------
                                                        84,354         269,424        1,550,571        1,904,349           99,048
                                                  ============      ==========       ==========       ==========     ===========
         Liabilities
         -----------
         Credits from banks and others
          (not including current maturities
          of long-term liabilities)                           -               -            7,290           7,290          166,427
         Trade payables                                      10               -            1,213           1,223               43
         Other accounts payable                          12,837           5,955           76,795          95,587           18,864
         Long-term liabilities (including
          current maturities of loans)                    9,270       1,601,054            6,713       1,617,037          102,829
                                                  ------------      ----------       ----------       ----------     ------------
                                                         22,117       1,607,009           92,011       1,721,137          288,163
                                                   ============      ==========       ==========       ==========     ===========


<CAPTION>
                                                             December 31, 2004
                                                 ------------------------------------------
                                                    Linked        Unlinked            Total
                                                    to the
                                                       CPI
                                                 ---------      ----------        ---------
                                                              NIS thousands

<S>                                              <C>             <C>              <C>
         Assets
         ------
         Cash and cash equivalents                       -          27,118           29,665
         Short-term deposits and
          investments                               80,235          66,867          199,011
         Other receivables                               -          14,869           15,990
         Short term loans to
          investee companies                        12,548               -           12,548
         Other investments and receivables          32,028               -           32,135
         Investments and other long-term
          receivables:
         Investee companies (including
          current maturities of loans)              50,711       1,255,315        1,349,390
                                                 ---------      ----------        ---------
                                                   175,522       1,364,169        1,638,739
                                                 =========      ==========        =========
         Liabilities
         -----------
         Credits from banks and others
          (not including current maturities
          of long-term liabilities)                      -          15,025          181,452
         Trade payables                                  -             340              383
         Other accounts payable                     17,143          27,436           63,443
         Long-term liabilities (including
          current maturities of loans)           1,296,014         645,125        2,043,968
                                                 ---------         -------        ---------
                                                 1,313,157         687,926        2,289,246
                                                 =========       =========        =========
</TABLE>


                                      F-80
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 22 - Liens and Guarantees

         A.       In order to secure some liabilities, certain subsidiaries have
                  mortgaged their real estate and have placed fixed charges on
                  plant, equipment and bank deposits, as well as floating
                  charges on all of their assets. In addition, pledged a portion
                  of their shares in investee companies.

                  For additional information regarding assets pledged relating
                  to fixed asset investment grants, see Note 10A(2)


         B.       The balances of secured liabilities are as follows:
<TABLE>
<CAPTION>
                                                                                                Consolidated
                                                                                      ---------------------------------
                                                                                                December 31
                                                                                      ---------------------------------
                                                                                                 2005              2004
                                                                                      ----------------    --------------
                                                                                                NIS thousands
<S>                                                                                             <C>              <C>
                  Credit from banks                                                             16,433           333,113
                  Loans from banks and others and debentures (including
                   current maturities), see Note 15, and also C below                          539,034         2,017,912
                                                                                      ----------------    --------------
                                                                                               555,467         2,351,025
                                                                                      ----------------    --------------



         C.       Guarantees to banks and others for loans and for assuring
                  credit lines and other guarantees given by the Company in
                  favor of:

                                                            Consolidated                         Consolidated
                                                    -------------------------------      -------------------------------
                                                            December 31                          December 31
                                                    -------------------------------      -------------------------------
                                                             2005              2004               2005              2004
                                                    --------------     ------------      --------------    --------------
                                                            NIS thousands                        NIS thousands
                                                    -------------------------------      -------------------------------

                  Subsidiaries (1)                         260,794           240,151           260,794            240,151
                  Others                                    13,640            31,232                40                150
                                                   ---------------    -------------      --------------     -------------
                                                           274,434           271,383           260,834            240,301
                                                   ===============    ==============     ==============     ==============


         (1)      Includes NIS 132 million (NIS 125 million in 2004) that Koor granted to Bezeq in connection with Bezeq's
                  agreement to transfer ownership of the public switching activities to a third party. (See Note 18A(1)(a))
</TABLE>


                                      F-81
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 23 - Data concerning Items in Statements of Operations

         A.       Revenues from sales and services, net - Consolidated:
<TABLE>
<CAPTION>
                                                                                        Year ended December 31
                                                                                --------------------------------------------
                                                                                      2005            2004              2003
                                                                                ----------      ----------        ----------
                                                                                              NIS thousands
<S>                                                                             <C>              <C>               <C>
         Local:
         ------
         Industrial operations                                                   24,580            266,785           239,219
         Trading operations                                                     291,309            504,676           245,095

         Abroad:
         -------
         Industrial operations - export and
          international operations                                              427,853          6,446,300         5,165,766
         Trading operations                                                     244,640            789,852           688,546
                                                                                -------          ---------         ---------
         Total *                                                                988,382          8,007,613         6,338,626
                                                                                =======          =========         =========

         B.       Cost of sales and services - consolidated:
                                                                                        Year ended December 31
                                                                                --------------------------------------------
                                                                                      2005            2004              2003
                                                                                ----------      ----------        ----------
                                                                                              NIS thousands
         Industrial operations:
         ----------------------

         Materials                                                              248,829          3,320,256         2,235,687
         Labor                                                                   96,522            428,622           397,269
         Subcontracted work                                                       7,146             41,640            49,725
         Depreciation and amortization                                           11,908            146,204           147,683
         Research and development expenses, net (*)                                 924            215,953           224,768
         Other                                                                   29,360            525,788           404,285
                                                                                -------          ---------         ---------
                                                                                394,689          4,678,463         3,459,417
         Less - expenses charged to fixed assets                                      -              3,949             4,208
                                                                                -------          ---------         ---------
                                                                                394,689          4,674,514         3,455,209
         (Decrease) increase in inventory of goods and
          work in process                                                        (2,660)           (16,506)            3,105
                                                                                -------          ---------         ---------
                                                                                392,029          4,658,008         3,458,314
         Increase in inventory of finished goods                                (13,335)          (175,467)          (20,547)
                                                                                -------          ---------         ---------
                                                                                378,694          4,482,541         3,437,767
                                                                                -------          ---------         ---------
         Trading operations:
         -------------------

         Merchandise                                                             26,362            438,594           471,310
         Labor                                                                   63,311             55,394            93,235
         Depreciation                                                            25,365             26,155            26,873
         Others                                                                 307,925            274,931           200,099
                                                                                -------          ---------         ---------
                                                                                422,963            795,074           791,517
                                                                                -------          ---------         ---------
                                                                                801,657          5,277,615         4,229,284
                                                                                =======          =========         =========
         (*)  Net of grants and participations that were
              received and royalties that were paid                                924              8,219            (8,446)
                                                                                =======          =========         =========
</TABLE>



                                      F-82
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 23 - Data to Items in Statements of Operations (cont'd)

C.       Selling and marketing expenses - consolidated:

<TABLE>
<CAPTION>
                                                       Year ended December 31
                                               --------------------------------------------
                                                     2005            2004              2003
                                               ----------      ----------        ----------
                                                             NIS thousands

<S>                                               <C>              <C>               <C>
         Salaries                                  34,218         282,044           203,345
         Commissions                               16,462         149,584           138,024
         Advertising expenses                       9,707          36,135            21,224
         Depreciation and amortization                596         112,093            95,455
         Other                                     28,163         486,208           376,985
                                               ----------      ----------        ----------

                                                   89,146       1,066,064           835,033
                                               ==========      ==========        ==========
</TABLE>


         D.       General and administrative expenses:

<TABLE>
<CAPTION>
                                             Consolidated                                    Company
                                  -------------------------------------------  -----------------------------------------
                                        Year ended December 31                        Year ended December 31
                                  -------------------------------------------  -----------------------------------------
                                     2005            2004            2003         2005            2004             2003
                                  -------         -------         -------        ------          ------          ------
                                            NIS thousands                                 NIS thousands
                                  -------------------------------------------  -----------------------------------------
<S>                               <C>             <C>             <C>            <C>             <C>             <C>
         Salaries                  72,240         190,086         171,067        27,187          22,399          17,325
         Bad and
          doubtful debts            3,733          54,766          36,061             -               -               -
         Depreciation and
          amortization              4,638          22,542          22,374         1,283           1,262           1,342
         Other                     83,353         192,951         154,939        28,825          22,987          22,497
                                  -------         -------         -------        ------          ------          ------

                                  163,964         460,345         384,441        57,295          46,648          41,164
                                  =======         =======         =======        ======          ======          ======
</TABLE>

                                      F-83
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 23 - Data to Items in Statements of Operations (cont'd)

         E.       Financing expenses, net:

<TABLE>
<CAPTION>
                                                Consolidated                                    Company
                                     -------------------------------------------  -----------------------------------------
                                           Year ended December 31                        Year ended December 31
                                     -------------------------------------------  -----------------------------------------
                                        2005            2004            2003         2005            2004             2003
                                     -------         -------         -------        ------          ------          ------
                                               NIS thousands                                 NIS thousands
                                     -------------------------------------------  -----------------------------------------
<S>                                  <C>             <C>             <C>            <C>             <C>             <C>
         In respect of
          convertible
          debentures                       -          18,942          15,319              -               -             612
         In respect of
          debentures                  26,512               -               -         26,512               -               -
         In respect of
          long-term loans            155,387         199,326         141,078        122,391         111,396          94,641
         In respect of
          short-term loans
          and credit                  36,660          77,298         181,423         23,800          10,756          (2,458)
         Amortization of
          capital raising
          expenses                         -          4,334            2,106              -               -               -
         Gains from
          marketable
          securities, net            (27,545)        (22,393)        (68,757)       (25,540)       (18,568)         (61,974)
         Interest
          capitalized to
          fixed assets and
          work in process                  -               -            (305)             -               -               -
         Expenses
          (income) from
          balance with
          investees, net                   -               -               -           (302)          1,430          (2,833)
         Expenses
          (income) from
          deposits and
          others, net                 (8,057)         (5,423)        (34,376)        (2,025)          5,792           7,120
                                     -------         -------         -------        -------         -------          ------
                                     182,957         272,084         236,488        144,836         110,806          35,108
                                     =======         =======         =======        =======         =======          ======
</TABLE>




                                      F-84
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 23 - Data to Items in Statements of Operations (cont'd)

         F.     Other income (expenses), net

<TABLE>
<CAPTION>
                                                                              Year ended December 31
                                                                    --------------------------------------------
                                                                       2005               2004               2003
                                                                    -------            -------          --------
                                                                                  NIS thousands

<S>                                                                 <C>                <C>              <C>
         1.     Consolidated:

         Sale of investments and activities in investees
          (including changes in rates of holding)                   308,025            223,095            22,211
         Expenses relating to the termination of activities
          and sale and write-down of assets, net                    (68,746)           (73,523)         (107,031)
         Supplemental severance pay and pensions                    (38,531)           (45,356)            8,329
         Management services - affiliated companies                  13,820                455               293
         Securitization costs (see Note 3B(4))                            -            (27,783)          (16,112)
         Compensation for damages                                         -                  -             3,017
         Amortization of goodwill                                      (507)          (131,934)         (113,545)
         Miscellaneous, net                                           9,144            (17,346)            8,599
                                                                    -------            -------          --------

                                                                    223,205            (72,392)         (194,239)
                                                                    =======            =======          ========


                                                                              Year ended December 31
                                                                    --------------------------------------------
                                                                       2005               2004               2003
                                                                    -------            -------          --------
                                                                                  NIS thousands
         2.     Company:

         Profit from sale of investments in
          investee companies                                         424,261            212,024             7,039
         Write-down in value of long-term assets                           -                  -           (12,382)
         Rental income, net*                                           7,202              8,135             7,216
         Capital gain from sale of fixed assets                           (7)                  -              (96)
         Dividend                                                     10,389              4,701                 -
         Miscellaneous, net                                           (3,712)            10,099             3,914
                                                                     -------            -------          --------

                                                                     438,133            234,959             5,691
                                                                     =======            =======          ========

         *  Depreciation included in the item                            760                760               668
                                                                     =======            =======          ========
</TABLE>



                                      F-85
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 23 - Supplementary Data to Items in Statements of Operations (cont'd)


         G.     Koor's equity in the operating results of investee companies,
                net

<TABLE>
<CAPTION>
         1.     Consolidated:
                                                                     Year ended December 31
                                                           --------------------------------------------
                                                              2005               2004               2003
                                                           -------            -------          --------
                                                                          NIS thousands

<S>                                                        <C>                <C>              <C>
         Affiliated companies, net                         430,492            (10,779)         (110,955)
         Amortization of goodwill                          (66,957)           (24,281)           (5,774)
                                                           -------            -------          --------
                                                           363,535            (35,060)         (116,729)
                                                           =======            =======          ========


         2.     Company:
                                                                     Year ended December 31
                                                           --------------------------------------------
                                                              2005               2004               2003
                                                           -------            -------          --------
                                                                          NIS thousands

         Equity of Koor in operating results               195,115             57,192            51,709
         Amortization of goodwill                          (60,499)           (30,992)          (15,439)
                                                           -------            -------          --------

         Total*                                            134,616             26,200            36,270
                                                           =======            =======          ========

         Dividend received/proposed                         22,019             74,201            23,043
                                                           =======            =======          ========



         *Composition:                                                Year ended December 31
                                                           --------------------------------------------
                                                              2005               2004               2003
                                                           -------            -------          --------
                                                                          NIS thousands

         Subsidiaries                                      260,441            122,172           151,053
         Proportionately consolidated companies            (75,199)           (61,114)                -
         Affiliates                                        (50,629)           (34,858)         (114,783)
                                                           -------            -------          --------

                                                           134,616             26,200            36,270
                                                           =======            =======          ========
</TABLE>

                                      F-86
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 23 - Supplementary Data to Items in Statements of Operations (cont'd)


         H. Income (expenses) from investee companies and their participation in
expenses - Company

<TABLE>
<CAPTION>
                                                                  Year ended December 31
                                --------------------------------------------------------------------------------------------
                                            2005                           2004                            2003
                                ------------------------------  -----------------------------  ------------------------------
                                 Consolidated      Affiliated    Consolidated     Affiliated    Consolidated      Affiliated
                                    companies       companies       companies      companies       companies       companies
                                -------------   --------------  --------------  -------------  --------------  --------------
                                                                       NIS thousands
                                --------------------------------------------------------------------------------------------
<S>                                   <C>             <C>             <C>               <C>          <C>                <C>
         Income from
          management
          services                     2,057          17,967          22,334              -          25,006               -
                                =============   ==============  ==============  =============  ==============  ==============

         Administrative
          expenses -
         Salary and other
          administrative
          expenses                     2,751               -           1,457              -           1,679               -
                                =============   ==============  ==============  =============  ==============  ==============

         Financing
          income
          (expenses), net               (302)              -           1,430              -          (2,828)             (5)
                                =============   ==============  ==============  =============  ==============  ==============

         Rental income,
          net                              -           7,200              -               -               -               -
                                =============   ==============  ==============  =============  ==============  ==============
</TABLE>

                                      F-87
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 24 - Discontinued Operations

         1.       On November 30, 2005 the closing of the transactions for the
                  sale of Elisra to Elbit took place, in accordance with the
                  agreements from July 6, 2005. See Note 3D.

         Following are the assets and liabilities relating to the discontinued
         operations:

<TABLE>
<CAPTION>
                                                                         Year ended December 31
                                                                       -------------------------------
                                                                                2005            2004
                                                                       -------------     -------------
                                                                       NIS thousands     NIS thousands
                                                                       -------------     -------------
 <S>                                                                     <C>               <C>
         Assets related to discontinued operations:
         Cash and cash equivalents                                                -           297,507
         Short-term deposits and investments                                      -            39,660
         Trade receivables                                                        -           364,991
         Other accounts receivable                                                -            36,762
         Inventories and work in progress,
          net of customer advances                                                -           123,255
         Other long-term investments and receivables                              -           111,508
         Fixed assets, net                                                        -           108,306
         Intangible assets, deferred tax assets and deferred expenses             -            27,660
                                                                       -------------     -------------

         Total assets                                                             -         1,109,649
                                                                       =============     =============

         Liabilities related to discontinued operations:
         Credit from banks and others                                             -            75,880
         Trade and other payables                                                 -           323,935
         Customer advances                                                        -           180,807
         Bank loans, net of current maturities                                    -            60,312
         Customer advances, net of costs incurred on projects                     -           142,164
         Deferred taxes                                                           -             6,284
         Liability for employee severance benefits, net                           -            43,309
         Minority interest                                                        -            83,689
                                                                       -------------     -------------

                                                                                  -           916,380
                                                                       =============     =============
</TABLE>


                                      F-88
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 24 - Discontinued Operations (cont'd)

         1.       (cont'd)

         Following are the results of operations of the discontinued operations,
         as included in the financial statements for the year ended December 31:

<TABLE>
<CAPTION>
                                                                         2005               2004              2003
                                                                -------------      -------------     -------------
                                                                NIS thousands      NIS thousands     NIS thousands
                                                                -------------      -------------     -------------
<S>                                                                <C>                <C>               <C>
         Revenues and earnings
         Revenue from sales and services                             969,235          1,109,524         1,255,490
         Other income, net                                           142,734                  -                 -
                                                                -------------      -------------     -------------
                                                                   1,111,969          1,109,524         1,255,490

         Costs and losses
         Cost of sales and services                                  894,249            940,111         1,096,978
         Selling and marketing expenses                               91,817             85,454            91,431
         General and administrative expenses                          50,996             55,795            68,253
         Koor Group's equity in the operating results of                   -                  -               130
         Finance expenses, net                                         3,271               (675)           (6,452)
         Other expenses, net                                               -             12,265            27,614
                                                                -------------      -------------     -------------
                                                                   1,040,333          1,092,950         1,277,954
                                                                -------------      -------------     -------------

         Earnings before income tax                                   71,636             16,574           (22,464)
         Income tax                                                  (15,874)            (9,485)           10,069
                                                                -------------      -------------     -------------
                                                                      55,762              7,089           (12,395)

         Minority interest in subsidiaries' results, net              44,116             (1,821)            4,290
                                                                -------------      -------------     -------------

         Net earnings for the year                                    99,879              5,268            (8,105)
                                                                =============      =============     =============
</TABLE>


         2.       Koor Trade Ltd.

         In 2005, the Board of Directors of the Group granted the Group's
         management the authority to sell the Group's entire holding in Koor
         Trade Ltd. The management is of the opinion that the closing of the
         transaction will take place during 2006. Therefore the activities of
         Koor Trade have been classified as discontinued operations. The Company
         recorded a provision in the amount of approximately NIS 20 million for
         impairment in value of its investment in Koor Trade, based on
         indicators relating to the fair value of the investment, including a
         valuation by an external valuation expert.


                                      F-89
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 24 - Discontinued Operations (cont'd)

         2.       Koor Trade Ltd. (cont'd)

         Following are the assets and liabilities relating to the discontinued
         operation as at December 31:

<TABLE>
<CAPTION>
                                                                        2005              2004
                                                               -------------     -------------
                                                               NIS thousands     NIS thousands
                                                               -------------     -------------
<S>                                                                 <C>                <C>
         Assets related to discontinued operation:
         Cash and cash equivalents                                    30,379            28,504
         Short-term deposits and investments                           4,713             4,671
         Trade receivables                                            52,233            48,910
         Other accounts receivable                                    32,348             5,259
         Inventories                                                  19,516            12,971
         Investments in affiliates                                    18,530            48,899
         Other long-term investments and receivables                  26,546                 -
         Fixed assets, net                                             6,989             5,555
         Intangible assets, deferred tax assets
          and deferred expenses, net                                   7,562            8,584
                                                               -------------     -------------

                                                                     198,816           163,353
                                                               =============     =============

         Liabilities related to discontinued operation:
         Credit from banks and others                                  9,629             5,376
         Trade and other payables                                    147,884            56,589
         Customer advances                                                55             2,458
         Other loans, net of current maturities                          156             3,380
         Liability for employee severance
          benefits, net                                                1,645             1,318
         Minority interest                                               679               369
                                                               -------------     -------------

                                                                     160,048            69,490
                                                               =============     =============
</TABLE>

                                      F-90
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 24 - Discontinued Operations (cont'd)

         2.       Koor Trade Ltd. (cont'd)

         Following are the results of operations of the discontinued operations,
         as included in the financial statements, for the year ended December
         31:

<TABLE>
<CAPTION>
                                                                        2005               2004              2003
                                                               -------------      -------------     -------------
                                                               NIS thousands      NIS thousands     NIS thousands
                                                               -------------      -------------     -------------
<S>                                                                 <C>                  <C>               <C>
         Revenues and earnings
         Revenue from sales and services                            157,171             111,536           96,314
         Group's equity in the operating results
          of affiliates, net                                        (33,674)              7,373             3,036
         Other income                                                     -               5,898             2,132
                                                               -------------      -------------     -------------
                                                                    123,497             124,807           101,482
                                                                -------------      -------------     -------------
         Costs and losses
         Cost of sales and services                                 110,160              69,953            66,682
                                                               -------------      -------------     -------------
         Selling and marketing expenses                              28,827              20,686            13,993
         General and administrative expenses                         11,524               9,864             8,050
         Other expenses                                              18,068                  -                 -
         Finance expenses, net                                        1,409                (47)           (1,836)
                                                               -------------      -------------     -------------
                                                                    169,988             100,456            86,889
                                                               -------------      -------------     -------------

         Earnings before income tax                                 (46,491)             24,351           14,593
         Income tax                                                  (2,855)            (5,285)           (1,588)
                                                               -------------      -------------     -------------
                                                                    (49,346)             19,066            13,005
         Minority interest in subsidiaries' results, net               (151)              (146)              (91)
                                                               -------------      -------------     -------------

         Net earnings (loss) for the year                           (49,497)             18,920            12,914
                                                               =============      =============     =============
</TABLE>

                                      F-91
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 25 - Business Segments

         A.       The Koor Group operates in the following business segments:

                  Most of the Group's telecommunication activities are focused
                  in two companies - Telrad Networks Ltd., which develops and
                  markets telecom products and provides end-user solutions and
                  appears as an affiliated company as of the end of the second
                  quarter of 2005, and ECI Telecom Ltd., an affiliated company,
                  that provides solutions for broadband access networks and
                  transmission optical networks. In addition, the
                  telecommunications segment includes a number of subsidiaries
                  that develop and market equipment in the fields of microwave
                  and cellular communications.

                  The Group's agrochemical activities are carried out through
                  M-A Industries considered one of the world's foremost
                  manufacturer of generic crop protection solutions. M-A
                  Industries produces a full range of products, including
                  insecticides, fungicides and herbicides, as well as plant
                  growth regulators. In addition, the M-A Industries is engaged
                  in specialty aroma chemicals and other different kinds of
                  chemicals. As of 2005, M-A Industries is included in the
                  financial statements according to the equity method.

                  Activities in venture capital investments are carried out
                  through the Koor Corporate Venture Capital partnership, which
                  invests in high-tech companies and venture capital funds with
                  high growth potential. Most of the investments are in the
                  fields of communication and life sciences.

                  The Group's tourism activities are conducted primarily by
                  Sheraton Moriah, which holds the Sheraton Hotel chain in
                  Israel, Isram, a group tour operator that operates worldwide
                  and Knafayim-Arkia (an affiliated company until the third
                  quarter of 2004) which holds 40% of the EL-AL airline company
                  and provides aviation and holiday services and leases
                  aircrafts to other companies.


         B.       Segment sales include products sold and services rendered to
                  unrelated customers, which are not part of the group.

                  Inter-industry segment sales are immaterial and are based
                  primarily on prices determined in the ordinary course of
                  business. Accordingly, these sales are not presented
                  separately. Segment operating earnings include all costs and
                  expenses directly related to the relevant segment and for
                  those that benefit more than one segment, are charged on a
                  proportionate basis. Identifiable assets and liabilities by
                  industry segments are those that are used by Koor in its
                  activities in each segment.

                                      F-92
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 25 - Business Segments (cont'd)

         C.       Data regarding business segments of the Koor Group -
                  consolidated:
<TABLE>
<CAPTION>
                                                                   Year ended December 31
                                 -------------------------------------------------------------------------------------------
                                             2005                          2004                            2003
                                 ----------------------------   ----------------------------   -----------------------------
                                 NIS thousands              %   NIS thousands              %   NIS thousands              %
                                 -------------     ----------   -------------     ----------   -------------     ----------

<S>                                    <C>              <C>        <C>                 <C>        <C>                 <C>
         Revenues and
          earnings

         Telecommunication*            452,433           45.77       671,531             8.39       827,001            13.05
         Agro-chemicals                      -               -     6,895,238            86.11     5,191,913            81.91
         Tourism                       526,194           53.24       430,280             5.37       309,264             4.88
         Others                          9,755            0.99        10,564             0.13        10,448             0.16
                                       -------          ------     ---------           ------     ---------           ------

         Total                         988,382          100.00     8,007,613           100.00     6,338,626           100.00
                                       =======          ======     =========           ======     =========           ======

         * Including sales
          to major customer            180,130                       586,114                        753,863
                                       =======                     =========                      =========
</TABLE>

<TABLE>
<CAPTION>
                                                                   Year ended December 31
                                 -------------------------------------------------------------------------------------------
                                             2005                          2004                            2003
                                 ----------------------------   ----------------------------   -----------------------------
                                 NIS thousands              %   NIS thousands              %   NIS thousands              %
                                 -------------     ----------   -------------     ----------   -------------     ----------

<S>                                    <C>              <C>        <C>                 <C>       <C>                 <C>
         Earnings before
          income tax

         Telecommunication             (30,613)         (5.41)       (110,617)         (9.85)      ( 56,638)         (9.16)
         Defense electronics            56,180           9.93         (20,000)         (1.78)             -              -

         Agro-chemicals                559,093          98.81       1,263,541         112.53        789,213         127.61
         Venture capital
          investments                  (41,472)         (7.33)        (43,327)         (3.86)       (71,499)        (11.56)
         Tourism                        27,646           4.89          36,651           3.26        (45,024)         (7.28)
         Others                         (5,006)         (0.89)         (3,414)         (0.30)         2,433           0.39
                                       -------          ------     ---------           ------     ---------           ------

         Total                         565,828         100.00       1,122,834         100.00        618,485         100.00
                                       =======         ======       =========         ======        =======         ======

         Joint general
          expenses                     (45,473)                       (26,697)                      (39,585)
         Financing
          expenses, net               (182,957)                      (272,084)                     (236,488)
                                       -------                      ---------                     ---------

         Earnings before
          income tax                   337,398                        824,053                      342,412
                                       =======                      =========                    =========
</TABLE>

                                      F-93
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 25 - Business Segments (cont'd)

         C. Data regarding business segments of the Koor Group (cont'd):

         The Koor Group's equity in the results of investee companies, net:

<TABLE>
<CAPTION>
                                                                   Year ended December 31
                                 -------------------------------------------------------------------------------------------
                                             2005                          2004                            2003
                                 ----------------------------   ----------------------------   -----------------------------
                                 NIS thousands              %   NIS thousands              %   NIS thousands              %
                                 -------------     ----------   -------------     ----------   -------------     -----------
<S>                                    <C>              <C>           <C>             <C>            <C>             <C>
         Telecommunications             29,954          8.24         (15,919)         (45.40)       (101,795)        (87.21)
         Defense
          electronic                   (23,288)        (6.40)        (20,000)         (57.05)              -              -
         Agro-chemicals                360,469         99.16               -               -               -              -
         Venture capital
          investments                    (755)         (0.21)           (329)          (0.94)           (329)         (0.28)
         Tourism                       (1,769)         (0.49)         (1,148)          (3.27)        (12,407)        (10.63)
         Others                        (1,076)         (0.30)          2,336            6.66          (2,198)         (1.88)
                                 -------------     ----------   -------------     ----------   -------------     -----------

                                       363,535        100.00         (35,060)        (100.00)       (116,729)       (100.00)
                                 =============     ==========   =============     ===========   =============    ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                    December 31
                                              -----------------------------------------------------------
                                                                2005                          2004
                                              ----------------------------   ----------------------------
                                              NIS thousands              %   NIS thousands              %
                                              -------------     ----------   -------------     ----------
<S>                                               <C>               <C>          <C>               <C>
         Identifiable assets
         Telecommunications                         175,618          14.51         590,591           5.93
         Agro-chemicals                                   -              -       8,242,246          82.72
         Venture capital investments                121,444          10.04         175,818           1.76
         Tourism                                    802,569          66.32         761,147           7.64
         Others                                     110,508           9.13         194,233           1.95
                                                  ---------         ------       ---------         ------

         Total                                    1,210,139         100.00       9,964,035         100.00
                                                                    ======                         ======

         Joint assets                             1,215,288                        566,056
         Affiliated companies*                    2,668,193                      1,326,261
         Assets relating to discontinued
          operations                                198,816                      1,273,002
                                                  ---------                      ---------

                                                  5,292,436                     13,129,354
                                                  =========                     ==========


         *Investments in affiliated companies are as follows:

         Telecommunications                         906,237                        738,782
         Defense electronics                              -                        602,134
         Agro -chemicals                          1,690,397                              -
         Tourism and others                          71,559                        (14,655)
                                                  ---------                      ---------

                                                  2,668,193                      1,326,261
                                                  =========                     ==========
</TABLE>

                                      F-94
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 25 - Business Segments (cont'd)


         C.       Data regarding business segments of the Koor Group (cont'd):

<TABLE>
<CAPTION>
                                                                    December 31
                                              -----------------------------------------------------------
                                                                2005                          2004
                                              ----------------------------   ----------------------------
                                              NIS thousands              %   NIS thousands              %
                                              -------------     ----------   -------------     ----------
<S>                                           <C>               <C>          <C>               <C>
         Identifiable liabilities

         Telecommunications                          91,124          41.87         260,177         10.37
         Agro-chemicals                                   -              -       2,089,083         83.30
         Tourism                                    116,128          53.37          79,099          3.16
         Others                                      10,363           4.76          79,532          3.17
                                                  ---------         ------       ---------         ------

         Total segments                             217,615         100.00       2,507,891        100.00
                                                                    ======                         ======

         Joint liabilities                           54,908                         49,515


         Financing commitments                    2,272,277                      4,562,611

         Others                                      48,252                        513,634

         Liabilities relating to discontinued
          operations                                159,369                        901,812
                                                  ---------         ------       ---------         ------

                                                  2,752,421                      8,535,463
                                                  =========                     ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                   Year ended December 31
                                 ---------------------------------------------------------------------------------------
                                             2005                          2004                           2003
                                 ----------------------------   ----------------------------  --------------------------
                                 NIS thousands              %   NIS thousands              %  NIS thousands            %
                                 -------------     ----------   -------------     ----------  -------------    ---------
<S>                                    <C>            <C>          <C>              <C>         <C>              <C>
         Capital
          investments:
         Telecommunications              7,529        28.00         21,825            2.56         7,449            2.56
         Agro-chemicals                      -            -        816,287           95.44       277,195           95.44
         Tourism                        19,125        71.11         12,735            1.63         4,722            1.63
         Others                            239         0.89            148            0.37         1,061            0.37
                                        ------       ------        -------          ------       -------          ------

         Total segments                 26,893       100.00        850,995          100.00       290,427          100.00
                                                     ======                         ======                        ======

         Corporate assets                  177                         423                           392
                                       -------                   ---------                     ---------

                                        27,070                     851,418                       290,819
                                       =======                   =========                     =========
</TABLE>

                                      F-95
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 25 - Business Segments (cont'd)

         C.       Data regarding business segments of the Koor Group (cont'd):

<TABLE>
<CAPTION>
                                                                   Year ended December 31
                                 ---------------------------------------------------------------------------------------
                                             2005                          2004                           2003
                                 ----------------------------   ----------------------------  --------------------------
                                 NIS thousands              %   NIS thousands              %  NIS thousands            %
                                 -------------     ----------   -------------     ----------  -------------    ---------
<S>                                    <C>            <C>          <C>              <C>         <C>              <C>
         Depreciation and
          amortization:
         Telecommunications             13,243        32.33         32,281            7.58         45,055          11.28
         Agro-chemicals                    -            -        364,995           85.74          318,492          79.71
         Tourism                        27,721        67.67         28,416            6.68         35,822           8.97
         Others                            -            -             17              -               193           0.04
                                        ------       ------        -------          ------       -------          ------
         Total segments                 40,964       100.00        425,709          100.00        399,562         100.00
                                                     ======                         ======                        ======
         Corporate assets                1,956                       1,183                        13,050
                                        ------                     -------                        -------

                                        42,920                     426,892                        412,612
                                       =======                   =========                      =========
</TABLE>


         D.       Revenues from sales and services by geographic destinations
                  according to customer location

                                              Year ended December 31
                                   -----------------------------------------
                                       2005            2004             2003
                                  ---------       ---------        ---------
                                               NIS thousands

         North America              517,875       1,443,596        1,032,421
         Europe                     109,872       3,062,793        2,357,259
         South America               11,950       1,946,416        1,565,019
         Asia and Australia          17,527         566,494          614,054
         Africa                      15,269         216,853          285,559
         Israel                     315,889         771,461          484,314
                                  ---------       ---------        ---------

                                    988,382       8,007,613        6,338,626
                                  =========       =========        =========


                                      F-96
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 26 - Transactions and Balances with Related Parties

         A.       The following are details of interested parties in Koor
                  resulting from their holdings of Koor's ordinary shares:

         1.       Claridge Group (hereinafter - ("Claridge")

         2.       Anfield Ltd.

         3.       I.D.B. Development Corp. Ltd. (as of May 25, 2005)


         B.       Transactions with Related Parties - Company

         1.       Directors (*)

<TABLE>
<CAPTION>
                                                                          Year ended December 31
                                                               --------------------------------------------
                                                                  2005                2004             2003
                                                               -------             -------         --------
                                                                           NIS thousands
<S>                                                                <C>             <C>              <C>
                  Directors not employed by the Company,
                  in respect of annual compensation and
                   participation in meetings:

                  Claridge Group                                   126                116               115
                                                               ===========     ===========        ==========
                  Number of directors                                2                  2                 3
                                                               ===========     ===========        ==========

                  Other directors                                  539                516               442
                                                               ===========     ===========        ==========
                  Number of directors                                7                  8                 8
                                                               ===========     ===========        ==========
</TABLE>

                  (*) Including directors who have been replaced during the
                  year.

                                      F-97
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 26 - Transactions and Balances with Related Parties (cont'd)

         B.       Transactions with Related Parties - Company (cont'd)

         2.       General and administrative expenses

                                                   Year ended December 31
                                        ----------------------------------------
                                           2005             2004            2003
                                        --------        --------       ---------
                                                    NIS thousands

                  Interested parties       4,156           1,788          1,789
                                        ========        ========       =========


                  The Company has agreements with Claridge for the receipt of
                  consultancy services. These services include, inter alia,
                  advice in respect of investment strategies, monetary policies,
                  international activities, strategic partnerships and company
                  structuring. The agreements include instructions regarding the
                  indemnification of the consultants in respect of claims
                  connected to the consultancy, except for cases of gross
                  negligence and/or intentional damage. In consideration for the
                  consultancy the Company has agreed to pay an annual sum which
                  will not exceed 400,000 dollars. The agreements with Claridge
                  are for the period of one year and are automatically renewable
                  each year, unless one of the parties gives 60 days' prior
                  notice of the termination of the agreement.

                  As of 2005, the Group entered into an agreement with an
                  insurance company in the IDB Group regarding insurance and
                  indemnification of interested parties. See Note 18A(11).

         3.       See Note 20C(2)(h) regarding options granted to interested
                  parties.


Note 27 - Earnings Per Share

         A.       Weighted number of ordinary shares of NIS 0.001 used in the
                  computation of net earnings per NIS 1 par value of the shares:

                                                Number of ordinary shares
                                       -----------------------------------------
                                             2005           2004            2003
                                       ----------     ----------      ----------

         Total share capital used
           in the computation of
           earnings per share          16,555,143     16,381,279      15,716,725
                                       ==========     ==========      ==========


         B.       To examine that the conversion or exercise of convertible
                  securities is reasonable, the present value of these
                  securities was computed according to a discount rate of 3%
                  (December 31, 2004 - 3.5%, December 31, 2003 - 4%) for
                  securities linked to the CPI.


                                      F-98
<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 28 - Events Subsequent to the Balance Sheet Date

         In January 2006, Koor signed an agreement for the acquisition of 50% of
         the issued and paid share capital, of Epsilon Investment House Ltd.
         ("Epsilon"). Epsilon is engaged in providing a wide range of financial
         services including portfolio management, mutual funds' management,
         underwriting, provident fund management and consulting in mergers and
         acquisitions.
         The transaction is subject to the receipt of approvals under all
         applicable laws, including the approval of the Israeli capital market
         commissioner, which as at the date of these financial statements have
         still not been received.
         According to the agreement, Koor was allocated new shares, and also
         purchased shares from certain of the existing shareholders of Epsilon,
         for total consideration of NIS 105 million.


Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements

         A.       Differences between Israeli GAAP and US GAAP

         As discussed in Note 2, the accompanying consolidated financial
         statements were prepared in accordance with Israeli generally accepted
         accounting principles ("Israeli GAAP"), which differ in certain
         significant respects from those generally accepted in the United States
         of America ("US GAAP"). Information related to the nature and effect of
         such differences is presented below.

         1.       Effect of inflation

                  In accordance with Israeli GAAP:

                  The Company, in accordance with Israeli GAAP, comprehensively
                  included the effect of price level changes in the accompanying
                  financial statements, as described in Note 2B through December
                  31, 2003. According to such Israeli accounting principles, the
                  Company discontinued the adjustment for such changes as of
                  January 1, 2004. The adjusted amounts included in the
                  financial statements as at December 31, 2003 served as the
                  starting point for the financial reporting at January 1, 2004.

                  US GAAP does not provide for recognition of the effects of
                  price level changes and accordingly, the effects of such
                  changes are excluded from amounts determined in conformity
                  with US GAAP.

                  In accordance with the directives of the US Securities and
                  Exchange Commission, this difference between Israeli GAAP and
                  US GAAP is not included in this reconciliation to US GAAP.

                                      F-99
<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         A.       Differences between Israeli GAAP and US GAAP

         2.       Deferred taxes

                  a)       Measurement differences

                           In accordance with Israeli GAAP:

                           Deferred taxes are recognized in respect of
                           differences related to assets and liabilities that
                           result from translation of the local currency into
                           the functional currency using historical exchange
                           rates that prevailed at the time the asset or
                           liability were first recorded and that result from
                           (1) changes in exchange rates or (2) indexing for tax
                           purposes.

                           In accordance with US GAAP:
                           According to paragraph 9(f) of FAS No. 109, deferred
                           tax liabilities or assets are not provided for
                           differences related to assets and liabilities that
                           are remeasured from the local currency into the
                           functional currency and that result from (1) changes
                           in exchange rates or (2) indexing for tax purposes.

                  b)       Earnings from "Approved Enterprises"

                           Under the Israeli Law for the Encouragement of
                           Capital Investments, 1959, a 25% tax rate is
                           generally applicable on the profits of an "approved
                           enterprise" that received investment grants, usually
                           during a period of seven years.

                           An "approved enterprise" which chooses the
                           "alternative benefits" track is generally eligible
                           for tax benefits during the benefit period (seven or
                           ten years, depending on the geographical location of
                           the approved enterprise) as follows: tax exemption on
                           undistributed profits during a period of two to ten
                           years and a reduced tax rate of 25% for the remainder
                           of the benefit period.

                           In the event that a dividend is distributed out of
                           tax-exempt earnings of the "approved enterprise"
                           under the "alternative benefits" track, the
                           distributing company will generally be subject to a
                           25% tax on the distributed earnings.

                           Dividends paid to shareholders from the earnings of
                           an "approved enterprise" are subject to income tax at
                           a rate of 15%. However, if the shareholder is a
                           company, that shareholder will be entitled to a 15%
                           tax credit, upon payment of any such dividend.

                           In accordance with Israeli GAAP:

                           Deferred taxes are not provided in respect of the
                           undistributed tax-exempt earnings attributed to the
                           "approved enterprise" of subsidiaries, if such
                           earnings have been reinvested and are not intended to
                           be distributed to their shareholders.

                           In accordance with US GAAP:

                           Deferred taxes are provided in respect of the
                           undistributed tax-exempt earnings of approved
                           enterprises of subsidiaries established subsequent to
                           December 15, 1992, as their distribution results in
                           additional tax.

                                     F-100
<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         A.       Differences between Israeli GAAP and US GAAP (cont'd)

         3.       Salary expenses in respect of share options issued to
                  employees

                  In accordance with Israeli GAAP:
                  No expense is recorded with respect to stock options granted
                  to employees. For the accounting treatment beginning January
                  1, 2006 - see Note 2AD(2).

                  In accordance with US GAAP:

                  a)       Fixed Option Awards

                           Under APB-25, total compensation cost is measured as
                           the difference between the share market price and the
                           exercise price of the option, at the date of grant.
                           Compensation cost so determined is charged to expense
                           over the vesting period.

                  b)       Variable Option Awards:

                           Under APB-25 total compensation cost is measured as
                           the difference between the share market price and the
                           exercise price of the option at the end of each
                           reporting period. Compensation cost so determined is
                           charged to expense over the vesting period.

                           Commencing January 1, 2006, the Company and its
                           investees will apply FAS No. 123R which requires
                           entities to measure the cost of employee services
                           received in exchange for an award of equity
                           instruments based on the grant-date fair value of the
                           award and recognize the cost over the period during
                           which an employee is required to provide service in
                           exchange for the award.

         4.       The accounting treatment of marketable securities:

                  In accordance with Israeli GAAP:
                  Marketable securities which constitute a short-term investment
                  are stated at market value. Changes to the market value are
                  recorded as profits or losses.

                  Marketable securities which constitute a permanent investment
                  are stated at cost (regarding debentures, including
                  accumulated interest), except where market value is lower, and
                  the decline in value is not considered to be temporary. (See
                  Note 2H).

                  In accordance with US GAAP:
                  FAS No. 115 differentiates between three categories of
                  marketable securities: trading securities, available for sale
                  securities and held-to-maturity securities.

                  Debt securities that the enterprise has the positive intent
                  and ability to hold to maturity are classified as
                  held-to-maturity securities and reported at amortized cost,
                  except where market value is lower, and the decline in value
                  is not considered to be temporary. Debt and equity securities
                  that are bought and held principally for the purpose of
                  selling them in the near term are classified as trading
                  securities and reported at fair value, with unrealized gains
                  and losses included in earnings.
                  Debt and equity securities not classified as either
                  held-to-maturity securities or trading securities are
                  classified as available-for-sale securities and reported at
                  fair value, with unrealized gains and losses excluded from
                  earnings and reported in a separate component of shareholders'
                  equity.

                  Most of the short-term marketable securities held by the Group
                  are available-for-sale securities.

                                     F-101
<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         A.       Differences between Israeli GAAP and US GAAP (cont'd)

         5.       Provisions for anticipated losses from realization of
                  convertible securities of investee companies:

                  In accordance with Israeli GAAP:
                  According to Opinions No. 48 and 53 of the ICPAI, a parent
                  company is required to record a provision for losses, which it
                  may incur from the potential dilution of its holdings in
                  investee companies, when it is probable that share options
                  will be exercised or debentures will be converted.
                  As for a new standard which will apply beginning January 1,
                  2006 ceasing this treatment - see Note 2AD(1).

                  In accordance with US GAAP:
                  A loss in the parent company resulting from the dilution of
                  its holdings, because of share options being exercised or
                  debentures being converted, is recorded only at the time of
                  exercise or conversion.

         6.       One-time termination benefits:

                  In accordance with Israeli GAAP:

                  Under Israeli GAAP, one-time termination benefits are recorded
                  only when an obligation to the employees exists.

                  In accordance with US GAAP:

                  One-time termination benefits are benefits provided to current
                  employees that are involuntarily terminated under the terms of
                  a one-time benefit arrangement. A one-time benefit arrangement
                  is an arrangement established by a plan of termination that
                  applies for a specified termination event or for a specified
                  future period.

                  A one-time benefit arrangement exists at the date the plan of
                  termination meets all of the following criteria and has been
                  communicated to employees (hereinafter referred to as the
                  communication date):

                  a.       Management, having the authority to approve the
                           action, commits to a plan of termination.

                  b.       The plan identifies the number of employees to be
                           terminated, their job classifications or functions
                           and their locations, and the expected completion
                           date.

                  c.       The plan establishes the terms of the benefit
                           arrangement, including the benefits that employees
                           will receive upon termination (including but not
                           limited to cash payments), in sufficient detail to
                           enable employees to determine the type and amount of
                           benefits they will receive if they are involuntarily
                           terminated.

                  d.       Actions required to complete the plan indicate that
                           it is unlikely that significant changes to the plan
                           will be made or that the plan will be withdrawn.

                  The difference between Israeli GAAP and US GAAP pertaining to
                  employee severance benefits as part of an efficiency program
                  is essentially a timing difference.

                                     F-102
<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         A.       Differences between Israeli GAAP and US GAAP (cont'd)

         7.       Earnings per share:

                  In accordance with Israeli GAAP:
                  In accordance with Opinion No. 55, basic earnings per share is
                  computed on the basis of the weighted average number of shares
                  outstanding during the year, and the dilutive effect of share
                  options and convertible debentures is included in the
                  computation of basic earnings per share if their exercise or
                  conversion is considered to be probable. Calculation of the
                  probability is based on the ratio between the market price of
                  the shares and the present value of the price of exercising
                  the stock options into shares or the present value of the
                  payments for conversion of the debentures into shares.
                  As for a new standard which will apply beginning January 1,
                  2006 - See Note 2AD(3).

                  In accordance with US GAAP:
                  In accordance with FAS 128 "Earnings Per Share" - basic
                  earnings per share is computed on the basis of the weighted
                  average number of shares outstanding during the year and does
                  not include any potential dilutive effect of options and
                  convertible instruments. Diluted earnings per share are
                  computed on the basis of the weighted average number of shares
                  outstanding during the year, plus the potential dilutive
                  effect of ordinary share options and convertible debentures
                  outstanding during the year, regardless of probability.
                  Diluted EPS calculation does not assume conversion or exercise
                  if the effect thereof would be anti-dilutive.

         8.       Venture capital fund investments:

                  In accordance with Israeli GAAP:
                  Investments in venture capital funds are reported at cost less
                  a provision for devaluation in the event of a permanent
                  impairment.

                  In accordance with US GAAP:
                  Venture capital fund investments are reported at fair value.
                  Changes in fair value are recognized as profits and losses.

         9.       Revenue recognition - Adoption of SAB 101:

                  In accordance with US GAAP:
                  During the fourth quarter of 2000, the US SEC published Staff
                  Accounting Bulletin No. 101 (hereinafter - "SAB 101"), which
                  provides stricter criteria for revenue recognition. SAB 101
                  was implemented for US GAAP reporting purposes retroactively
                  to the beginning of 2000, by way of cumulative effect at the
                  beginning of the year.
                  The cumulative effect, of the sales deferred upon initial
                  adoption of SAB 101, under US GAAP, was recognized over the
                  years 2000 through 2003. Commencing in 2004, there is no
                  additional impact from the deferral of these revenues.

                  In accordance with Israeli GAAP:
                  SAB 101, as discussed above, was adopted prospectively for
                  purposes of Israeli GAAP as of the fourth quarter of 2000,
                  without recording a cumulative effect to the beginning of
                  2000.

                                     F-103
<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         A.       Differences between Israeli GAAP and US GAAP (cont'd)

         10.      Derivatives

                  In accordance with Israeli GAAP:

                  The results of financial derivatives held to hedge assets and
                  liabilities are recorded in the statement of operations
                  concurrently with the recording of the changes in the hedged
                  assets and liabilities. Financial derivatives that are not
                  held for hedging are stated in the balance sheet at fair value
                  and changes in the fair value of such instruments are
                  recognized in the statement of operations in the period they
                  occur.

                  In accordance with US GAAP:
                  The Company applied FAS 133 to account for its derivatives.
                  Most derivatives in the consolidated group do not meet the
                  hedging criteria prescribed by FAS 133, therefore they are
                  stated at fair value and changes in the fair value are charged
                  to the statement of operations in the period they occurred.

                  For certain derivatives, the Group meets the criteria for
                  cash-flow hedging under FAS 133. These derivatives are
                  recorded at fair value, with changes in fair value recorded
                  within shareholders' equity as a component of accumulated
                  other comprehensive income.

         11.      Impairment of Long-lived Assets to be Held and Used

                  In accordance with Israeli GAAP:
                  The Company applies Standard No. 15 under which the Company is
                  required to test for impairment indicators and if there are
                  such indicators, the Company is required to calculate the
                  recoverable amount of the assets, which is the higher of the
                  net sales price and the value in use (the present value of the
                  estimated future cash flows expected to be derived from the
                  use and realization of the asset). A loss from impairment is
                  reversed only if changes occur in the estimates used to
                  determine the recoverable value of the asset.

                  In accordance with US GAAP:
                  The Company applies FAS 144 under which a long-lived asset to
                  be held and used is assessed for impairment using a two-step
                  impairment test. Under step one of the test, the carrying
                  amount of the long-lived asset is compared to the sum of the
                  undiscounted cash flows expected to result from the use and
                  eventual disposition of the asset. If the carrying amount
                  exceeds the amount calculated, an impairment loss is measured
                  as the amount by which the carrying amount exceeds its fair
                  value. Reversals of impairment losses are not allowed under US
                  GAAP.

                                     F-104
<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         A.       Differences between Israeli GAAP and US GAAP (cont'd)

         12.      Amortization of Goodwill:

                  In accordance with Israeli GAAP:
                  Goodwill is amortized over its economic life, which may not
                  exceed 20 years. Goodwill is tested for an impairment in value
                  only when there are indications of possible impairment in the
                  value of the goodwill.
                  As for a new standard which will apply beginning January 1,
                  2006 - See Note 2AD(5).

                  In accordance with US GAAP:
                  Effective January 1, 2002, goodwill is not amortized but
                  instead is evaluated for recoverability by means of an
                  impairment test which is performed at least once a year in
                  accordance with FAS 142. Impairment of goodwill upon
                  implementation of FAS 142 was recorded as a cumulative effect
                  of a change in accounting principle in the amount of NIS 806
                  thousand. No further impairments have been required subsequent
                  to the initial implementation.

         13.      Consolidation of M-A Industries

                  As a result of the sale of shares of M-A Industries at the
                  beginning of 2004, Koor's share ownership in M-A Industries
                  decreased to below 50%.

                  In accordance with Israeli GAAP:
                  The position of the Israeli Securities Authority is that when
                  a company has been consolidated in the financial statements of
                  the holding company and there has been a decrease in the
                  voting rights to below 50%, if the overall economic
                  circumstances have not essentially changed the consolidation
                  of the investee company should be continued because of the
                  importance of continuity and consistency of the accounting
                  reports. Therefore and as explained in Note 3B(1), as of
                  December 31, 2004, Koor continued to consolidate M-A
                  Industries' financial statements. Following an additional sale
                  of the Company's holding in M-A Industries in February 2005,
                  and based on evaluation of the new circumstances, Koor ceased
                  to consolidate M-A Industries as from January 1, 2005.

                  In accordance with US GAAP:
                  A controlling financial interest, generally determined by the
                  ownership by one company, directly or indirectly, of over
                  fifty percent of the outstanding voting shares of another
                  company, is a prerequisite for consolidation. Therefore, Koor
                  discontinued the consolidation of M-A Industries and began
                  accounting for the investment in MA Industries by the equity
                  method for US GAAP purposes, beginning in 2004.

         14.      Capitalization of licensing costs

                  In accordance with Israeli GAAP:
                  Certain costs incurred by the Company in connection with the
                  registration process to obtain licenses to sell products in
                  various jurisdictions are capitalized.

                  In addition, amounts which are paid by the Company to the
                  original registrant as data compensation costs only after the
                  U.S. Environmental Protection Agency (hereinafter: "EPA")
                  issues a registration to the Company are also capitalized.

                  The capitalized licensing costs are amortized over the
                  expected benefit period.

                                     F-105
<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         A.       Differences between Israeli GAAP and US GAAP (cont'd)

         14.      Capitalization of licensing costs (cont'd)

                  In accordance with U.S. GAAP:
                  The costs incurred by the Company in connection with the
                  registration process to obtain licenses to sell products in
                  various jurisdictions are deemed to be development costs under
                  US GAAP and are expensed as incurred.

                  The amounts paid by the Company to the original registrant as
                  data compensation costs only after the EPA issues a
                  registration to the Company are capitalized and amortized over
                  the expected benefit period.

         15.      Gains (losses) from decline in holdings in consolidated and
                  affiliated companies

                  Various GAAP differences affecting shareholders' equity of
                  consolidated or affiliated company result in differences in
                  the book value of the investment under Israeli and US GAAP.
                  Therefore the amounts of the gain or loss on sale of interest
                  in such consolidated subsidiaries or affiliates differs under
                  Israeli and US GAAP.

         16.      Impairment of Investment in ECI

                  In accordance with Israeli GAAP:
                  The Company applied Standard No. 15 under which the Company is
                  required to test the recoverable amount of the investment,
                  which is the higher of the net selling price and value in use
                  (the present value of the estimated future cash flows expected
                  to be derived from the use and realization of the asset). A
                  loss from impairment is reversed only if changes occur in the
                  estimates used to determine the recoverable value of the
                  investment.

                  In accordance with US GAAP:
                  The Company has applied APB 18 in testing for impairment of
                  its investment in ECI. Under APB 18, a loss is recorded only
                  when the impairment of the investee is other than temporary
                  and reversals of impairments are not allowed.

                  The impact of the differences between Israel GAAP and US GAAP
                  was as follows:

                  1.       Recording of impairment in value

                           As a result of negative indications concerning ECI in
                           2002, an impairment charge of NIS 130 million was
                           recorded under both Israeli GAAP and US GAAP.
                           According to Israeli GAAP, the impairment charge was
                           recorded first by writing-off credit balances of
                           foreign currency translation differences that were
                           recorded directly to equity in the amount of NIS 105
                           million, and only the remainder of NIS 25 million was
                           recorded as an expense in the statement of income.
                           According to US GAAP, foreign currency translation
                           differences are not written-off and the entire
                           impairment is recorded as an expense in the statement
                           of income.

                                     F-106
<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         A.       Differences between Israeli GAAP and US GAAP (cont'd)

         16.      Impairment of Investment in ECI (cont'd)

         2.       Amortization differences

                  The Company allocated the impairment provision to the net
                  assets of ECI.

                  According to Israeli GAAP, the allocation is first to the
                  intangible assets of the investee and then to the non-monetary
                  assets of the investee on a proportional basis.

                  According to US GAAP the allocation is to non-current assets
                  only, on a proportional basis. The different bases of
                  allocation between Israeli GAAP and US GAAP resulted in
                  differences in the amortization amounts recorded in the
                  statement of income, due to different consumption patterns and
                  amortization rates of different asset types (inventory, fixed
                  assets, intangible assets). These differences are presented in
                  the reconciling item entitled "differences from investee due
                  to impairment previously recorded".

         3.       Reversal of impairment

                  According to Israeli GAAP, an impairment provision may be
                  reversed if there is an increase in the recoverable amount of
                  the investee company. Under Israeli GAAP the impairment charge
                  in ECI was reversed due to positive indicators in activity.
                  The reversal according to Israeli GAAP was not recorded in the
                  statement of income, but rather as a credit to equity as
                  foreign currency translation differences.

                  According to US GAAP, an impairment provision may not be
                  reversed.

         17.      Liabilities for employee severance benefits

                  In accordance with Israeli GAAP:
                  Amounts funded by the purchase of insurance policies and by
                  deposits with recognized severance pay funds are deducted from
                  the related severance pay liability, which is then presented
                  at a net amount.

                  In accordance with US GAAP:
                  The amounts funded are presented as other long-term assets and
                  the amount of the liability is presented under long-term
                  liabilities.

                                     F-107
<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         A.       Differences between Israeli GAAP and US GAAP (cont'd)

         18.      Statements of cash flows

                  (a)      Translation differences in respect of cash and cash
                           equivalents

                           In accordance with Israeli GAAP:

                           The statements shall report the effect of exchange
                           rate changes on cash and cash equivalents balances
                           held in foreign currencies, only in "autonomous
                           foreign entities".

                           In accordance with US GAAP:

                           The statements shall report the effect of exchange
                           rate changes on all cash and cash equivalents
                           balances held in foreign currencies.

                           There is no GAAP difference in respect of translation
                           differences in 2005 as the cash flows of subsidiaries
                           in respect of which GAAP differences were recorded in
                           2003 and 2004 are no longer consolidated in 2005.

                  (b)      Securitization transaction

                           In accordance with Israeli GAAP:

                           The securitization transaction (see Note 3B(4)) was
                           classified as a sale of trade receivables. Thus, cash
                           flows, derived from that transaction, were classified
                           as cash flows from operating activities.

                           In accordance with US GAAP:

                           Until June 30, 2003 the securitization transaction
                           did not meet the criteria set out by FAS 140 for the
                           classification as a sale of trade receivables and was
                           classified as a secured borrowing. Therefore, cash
                           flows derived from this transaction until June 30,
                           2003 were classified as cash flows from financing
                           activities.

                  (c)      Consolidation of M-A Industries

                           In accordance with Israeli GAAP:

                           In 2004, Koor consolidated M-A Industries' cash
                           flows. The consolidation of such cash flows was
                           discontinued in 2005. See Note 3B(2).

                           In accordance with US GAAP:

                           Beginning in 2004, M-A Industries is accounted under
                           the equity method for US GAAP purposes, therefore M-A
                           Industries' cash flows for 2004 are not consolidated.

                           Therefore, under Israeli GAAP, MA Industries' cash
                           and cash equivalents are included in the consolidated
                           closing balance of cash and cash equivalents in 2004,
                           and in the consolidated opening balance of cash and
                           cash equivalents for 2005.

                           Under US GAAP, MA Industries' cash and cash
                           equivalents are not included in the consolidated
                           closing balance of cash and cash equivalents in 2004,
                           or in the consolidated opening balance of cash and
                           cash equivalents for 2005.

                           See also Note 29A(13).

                                     F-108
<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         B.       The effect of the differences between Israeli and US GAAP on
                  the financial statements

<TABLE>
         1.       Statements of operations:
<CAPTION>
                                                                                           Year ended December 31
                                                                               ------------------------------------------------
                                                                                    2005               2004               2003
                                                                               ----------         ----------        -----------
                                                                                                NIS thousands
                                                                               ------------------------------------------------
<S>                                                                             <C>                <C>                <C>
         a)       Net earnings as reported, according to
                  Israeli GAAP                                                  313,159            144,990            46,362

                  Salary expenses in respect of share options
                   issued to employees - Note 29A(3)                            (64,692)           (91,318)         (185,276)
                  Loss (gain) from marketable securities, net -
                   Note 29A(4)                                                  (11,614)            (4,295)          (58,319)
                  Provisions for anticipated losses from realization
                   of convertible securities in investee companies
                   - Note 29A(5)                                                  2,272             10,106            50,729
                  One-time termination benefits
                   - Note 29A(6)                                                (17,326)            17,326           (10,181)
                  Gains from decline in holding in consolidated
                   and affiliated companies - Note  29A(15)                     (20,429)            11,829                 -
                  Venture capital investments - Note 29A(8)                      31,714            (20,726)           15,790
                  Temporary differences resulting from recognition
                   of revenue arising from application of SAB 101
                   - Note 29A(9)                                                      -                  -             7,949
                  Impairment in value of long-lived assets to be
                   held and used  - Note 29A(11)                                      -             (1,277)           (4,983)
                  Differences from investee due to impairment
                   previously recorded - Note 29A(16)                            28,038             29,588           (19,676)
                  Amortization of goodwill - Note 29A(12)                        46,129             39,938            40,949
                  Capitalization of licensing costs - Note 29A(14)                3,217             (8,859)          (16,793)
                  Derivatives (FAS 133) - Note 29A(10)                            6,839              4,602           (34,002)
                  Other                                                           3,120                711              1,060
                  Income taxes - Note 29A(2)                                     38,152            (21,213)          (79,808)
                  Minority interests in respect of the above
                   differences                                                  (10,174)               170           137,275
                  Cumulative effect as at beginning of the year of
                   change in accounting method                                     3,054                 -                 -
                                                                               ----------         ----------        -----------
                                                                                  38,300           (33,418)         (155,286)
                                                                               ----------         ----------        -----------

                  Net earnings (loss) according to US GAAP                       351,459           111,572          (108,924)
                                                                               ==========         ==========        ===========
                  Net earnings (loss) from continuing operations
                   according to US GAAP                                          295,975             83,109         (109,316)
                                                                               ==========         ==========        ===========
                  Net earnings (loss) from discontinued operations
                   according to US GAAP                                           55,484             28,463              392
                                                                               ==========         ==========        ===========
</TABLE>

                                     F-109
<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         B.       The effect of the differences between Israeli and US GAAP on
                  the financial statements (cont'd)

         1.       Statements of operations (cont'd):

<TABLE>
         b)       Earnings (loss) per ordinary share
<CAPTION>
                                                                                           Year ended December 31
                                                                              -------------------------------------------------
                                                                                    2005               2004               2003
                                                                              -----------       ------------        -----------
                                                                                                     NIS
                                                                              -------------------------------------------------
<S>                                                                             <C>                <C>                <C>
                  Basic earnings (loss) per ordinary share according to US GAAP:

                  From continuing operations                                       18.40              5.25             (7.07)
                  From discontinued operations                                      3.45              1.80              0.03
                                                                              -----------       ------------        -----------
                  Net earnings                                                     21.85              7.05             (7.04)
                                                                              ===========       ============        ===========

                  Weighted average of number of shares
                   and share equivalents according to
                   US GAAP                                                    16,082,258        15,824,185        15,474,614
                                                                              ===========       ============      =============

                  Fully diluted earnings (loss) per ordinary share according to
                  US GAAP:

                  From continuing operations                                       16.42               3.14            (7.85)
                  From discontinued operations                                      3.35               1.75             0.03
                                                                              -----------       ------------      -------------
                  Net earnings                                                     19.77               4.89            (7.82)
                                                                              ===========       ============      =============

                  Weighted average of number of shares and
                   share equivalents according to US GAAP                     16,565,358        16,242,770        15,474,614
                                                                              ===========       ============      =============
</TABLE>

                                     F-110
<PAGE>

                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         B.       The effect of the differences between Israeli and US GAAP on
                  the financial statements (cont'd) 2. Balance sheet:

<TABLE>
<CAPTION>


                                                                                                                      December 31
                                                                    ----------------------------------------------------------------
                                                                                        2005                                2004**
                                                                    ----------------------------------------------------------------
                                                                          Israeli                                           Israeli
                                                                             GAAP                                              GAAP
                                                                                        Adjustment         US GAAP
                                                                    -------------    -------------   -------------    -------------
                                                                    NIS thousands    NIS thousands   NIS thousands    NIS thousands
                                                                    -------------    -------------   -------------    -------------

<S>                                                                      <C>               <C>           <C>              <C>
         Cash and cash equivalents                                       318,798                -         318,798          291,299
         Short-term deposits and investment - Note 29A(4)                541,159           12,127         553,286          372,137
         Trade receivables                                                93,544                -          93,544        1,759,698
         Other receivables                                                87,937                -          87,937          483,450
         Inventories and projects in progress                             90,909                -          90,909        2,158,659
         Assets designated for sale                                            -                -               -           41,765
         Investments in affiliates (1)                                 2,668,193          (72,808)      2,595,385        1,326,261
         Other investments and receivables  - Note 29A(4); Note          547,013           67,403         614,416          392,763
         29A(17)
         Fixed assets, net - Note 29A(2); Note 29A(11)                   726,606           45,876         772,482        2,709,106
         Intangible assets, deferred tax assets and deferred
         expenses - Note 29A(12)                                          19,461                -          19,461        2,321,214
         Assets relating to discontinued operations                      198,816            1,086         199,902        1,273,002
         Total assets                                                  5,292,436           53,684       5,346,120       13,129,354
         Credit from banks and others                                    272,127                -         272,127        1,657,200
         Trade payables                                                   91,606                -          91,606        1,557,522
         Other payables - Note 29A(6); Note 29A(10)                      203,289           14,722         218,011        1,098,851
         Customer advances                                                21,942                -          21,942           27,942
         Long-term bank loans and other long-term loans                1,609,296                -       1,609,296        2,259,211
         Debentures                                                      390,854                -         390,854                -
         Convertible debentures                                                -                -               -          811,291
         Deferred taxes  - Note 29A(2)                                        78           26,942          27,020          234,184
         Liability for employee severance benefits - Note 29A(17)          3,860            8,322          12,182          152,541
         Liabilities relating to discontinued operations                 160,048            1,086         161,134          985,870
         Minority interests (1)                                           56,729            2,107          58,836        2,468,275
         Additional paid-in capital  for "available-for-sale"                  -           27,945          27,945                -
         securities - Note 29A(4)
         Additional paid-in capital  - Note 29A(3); Note 29A(5);
         Note
          29A(10); (2)                                                 2,601,797          325,738       2,927,535        2,358,425
         Retained earnings (deficit) (1)                                (677,634)        (353,178)     (1,030,812)        (966,152)
         Total shareholders' equity                                    2,482,607              505       2,483,112        1,876,467

         *        See Note 29A(13)
         **       Reclassified in respect to discontinued operations. (See Note 24).

(table continued)





                                                                                               December 31
                                                                       ------------------------------------------------------------
                                                                                            2004**
                                                                       ------------------------------------------------------------
                                                                       Discontinuance of
                                                                           consolidation
                                                                       of M-A Industries*    Adjustment          US GAAP
                                                                          -------------   -------------    -------------
                                                                          NIS thousands   NIS thousands    NIS thousands
                                                                          -------------   -------------    -------------

         Cash and cash equivalents                                            (174,375)              -          116,924
         Short-term deposits and investment - Note 29A(4)                       (6,733)         32,911          398,315
         Trade receivables                                                  (1,590,552)              -          169,146
         Other receivables                                                    (332,817)              -          150,633
         Inventories and projects in progress                               (1,985,428)              -          173,231
         Assets designated for sale                                                  -               -           41,765
         Investments in affiliates (1)                                       1,471,197        (154,317)       2,643,141
         Other investments and receivables  - Note 29A(4); Note                (95,073)         83,311          381,001
         29A(17)
         Fixed assets, net - Note 29A(2); Note 29A(11)                      (1,876,731)          8,574          840,949
         Intangible assets, deferred tax assets and deferred
         expenses - Note 29A(12)                                            (2,316,290)          7,351           12,275
         Assets relating to discontinued operations                                  -         141,641        1,414,643
         Total assets                                                       (6,906,802)        119,471        6,342,023
         Credit from banks and others                                         (603,210)              -        1,053,990
         Trade payables                                                     (1,404,171)              -          153,351
         Other payables - Note 29A(6); Note 29A(10)                           (867,233)          1,325          232,943
         Customer advances                                                      (9,891)              -           18,051
         Long-term bank loans and other long-term loans                       (440,968)              -        1,818,243
         Debentures                                                                  -               -                -
         Convertible debentures                                               (811,291)              -                -
         Deferred taxes  - Note 29A(2)                                        (234,157)            (26)               1
         Liability for employee severance benefits - Note 29A(17)             (115,061)         78,699          116,179
         Liabilities relating to discontinued operations                             -         145,763        1,131,633
         Minority interests (1)                                             (2,420,820)          2,327           49,782
         Additional paid-in capital  for "available-for-sale"                        -           6,442            6,442
         securities - Note 29A(4)
         Additional paid-in capital  - Note 29A(3); Note 29A(5);
         Note
          29A(10); (2)                                                               -         276,419        2,634,844
         Retained earnings (deficit) (1)                                             -        (391,478)      (1,357,630)
         Total shareholders' equity                                                  -        (108,617)       1,767,850

         *        See Note 29A(13)
         **       Reclassified in respect to discontinued operations. (See Note 24).

</TABLE>





                                     F-111
<PAGE>


                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------



Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

  B.      The effect of the differences between Israeli and US GAAP on the
          financial statements (cont'd)

  (1)     These items are impacted by all the various differences between
          Israeli GAAP and US GAAP that are described in the reconciliation to
          US GAAP.
  (2)     This item also includes cumulative foreign currency translation
          adjustments in respect of all the various differences between Israeli
          GAAP and US GAAP that are described in the reconciliation to US GAAP.

  3.      Comprehensive income (loss)

          "Comprehensive income (loss)" consists of the change, during the
          current period, in the Company's shareholders' equity that does not
          derive from shareholders' investments or from the distribution of
          earnings to shareholders.

          Comprehensive income (loss) includes two components - net income and
          other comprehensive income. Net income is the income stated in the
          statement of operations, while other comprehensive income includes
          the amounts that are recorded directly in shareholders' equity and
          that are not derived from transactions with shareholders recorded
          directly in shareholders' equity.


<TABLE>
<CAPTION>


                                                                Year ended December 31
                                                       ------------------------------------------------
                                                            2005               2004               2003
                                                       ------------------------------------------------
                                                                           NIS thousands
                                                       ------------------------------------------------
<S>                                                     <C>                <C>              <C>
           Net income (loss) according to US GAAP       351,459            111,572          (108,924)
                                                        -------            -------          --------

           Other comprehensive income, after tax:
           Adjustments from translation of
            financial statements of investee
            companies                                   199,986             (9,546)         (143,585)
           Adjustments in respect of derivatives         26,737            (10,964)            6,487
           Unrealized gains from securities              21,503             36,516            32,572
                                                        -------             ------          --------
           Total other comprehensive income (loss)      248,226             16,006          (104,526)
                                                        -------             ------          --------

           Total comprehensive income (loss)            599,685            127,578          (213,450)
                                                      =========          =========         ==========


</TABLE>



                                    F-112
<PAGE>



                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------




Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         B. The effect of the differences between Israeli and US GAAP on the
            financial statements (cont'd)

         4. Cash flows:

<TABLE>
<CAPTION>

                                                                              Year ended December 31
                                                                      ------------------------------------------------
                                                                          2005             *2004              *2003
                                                                      ------------------------------------------------
                                                                                  NIS thousands
                                                                      ------------------------------------------------
         Net cash flows from operating activities:
<S>                                                                   <C>                  <C>               <C>
         Israeli GAAP                                                 (175,051)            894,406           773,050
         Adjustments (1) (2) (3)                                          (823)          (907,798)         (235,808)
                                                                    ----------          ---------          ---------
         US GAAP                                                      (175,874)           (13,392)           537,242
                                                                    ----------          ---------          ---------

         Net cash flows from investing activities:
         Israeli GAAP                                                  418,930           (722,839)          266,585
         Adjustments (1)                                               174,375            383,650                 -
                                                                    ----------          ---------          ---------
         US GAAP                                                       593,305           (339,189)          266,585
                                                                    ----------          ---------          ---------

         Net cash flows from financing activities:
         Israeli GAAP                                                 (552,989)          (128,069)       (1,209,783)
         Adjustments (1) ((2))                                               -             340,457           211,182
                                                                    ----------          ---------          ---------
         US GAAP                                                      (552,989)            212,388         (998,601)
                                                                    ----------          ---------          ---------

         Translation differences in respect of cash and
         cash equivalents:
         Israeli GAAP                                                   22,553            (15,858)          (28,273)
         Adjustments (3)                                                   823              9,316             24,626
                                                                    ----------          ---------          ---------
         US GAAP                                                        23,376             (6,542)           (3,647)
                                                                    ----------          ---------          ---------

         Increase (decrease) in cash and cash equivalents:
         Israeli GAAP                                                 (286,557)            27,640          (198,421)
         Adjustments (1)                                               174,375           (174,375)                -
                                                                    ----------          ---------          ---------
         US GAAP                                                      (112,182)          (146,735)         (198,421)
                                                                    ----------          ---------          ---------

         Increase (decrease) in cash and cash equivalents
         from discontinued operations:
         Israeli GAAP and US GAAP                                      314,056            (83,192)           117,970

         Increase (decrease) in cash and cash equivalents
         from continuing operations:
         Israeli GAAP                                                   27,499            (55,552)          (80,451)
         Adjustments (1)                                               174,375           (174,375)                 -
                                                                    ----------          ---------          ---------
         US GAAP                                                       201,874           (229,927)          (80,451)
                                                                    ----------          ---------          ---------

         Balance of cash and cash equivalents at beginning
         of year:
         Israeli GAAP                                                  291,299             346,851           427,302
         Adjustments (1)                                              (174,375)                  -                -
                                                                    ----------          ---------          ---------
         US GAAP                                                       116,924             346,851           427,302
                                                                    ----------          ---------          ---------

         Balance of cash and cash equivalents at end of
         year:
         Israeli GAAP                                                  318,798             291,299           346,851
         Adjustments (1)                                                     -           (174,375)                -
                                                                    ----------          ---------          ---------
         US GAAP                                                       318,798             116,924           346,851
                                                                    ----------          ---------          ---------


</TABLE>


(1) See Note 29A(18)(c).
(2) See Note 29A(18)(b).
(3) See Note 29A(18)(a).
 * Reclassified in respect to discontinued operations (See Note 24).




                                    F-113
<PAGE>



                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         B. The effect of the differences between Israeli and US GAAP on the
            financial statements (cont'd)

         5. Changes in shareholders' equity in accordance with US GAAP

<TABLE>
<CAPTION>




                                                                              Company    Cumulative
                                          Number                          shares held       foreign
                                              of             Additional        by the      currency    Retained
                                        ordinary     Share      paid-in   Company and   translation    earnings
                                      shares (1)   capital      capital  subsidiaries   adjustments    (deficit)    Total
                                     -------------------------------------------------------------------------------------------
                                                                        Reported amounts
                                     -------------------------------------------------------------------------------------------
                                                                         NIS thousands
                                     -------------------------------------------------------------------------------------------
<S>                                  <C>            <C>       <C>              <C>           <C>        <C>           <C>
         Balance at December 31,
          2003                       15,741,160     564,515   2,800,211        (80,321)      (233,081)  (1,469,202)   1,582,122

         Changes during 2004:
         Net earnings                         -           -           -              -              -      111,572      111,572
         Unrealized gains  from
          available-for-sale securities       -           -      36,516              -              -            -       36,516
        Exercise of stock options
          granted to employees           83,025          *-           -              -              -            -            -
         Employee stock option
          compensation expenses               -           -      58,150                                          -      58,150
         Derivatives (FAS 133)                -           -     (10,964)             -              -            -      (10,964)
         Cumulative foreign currency
         translation adjustments,  net        -           -           -              -         (9,546)           -       (9,546)
                                     ----------   ---------    --------        -------        --------   ---------    -----------



         Balance at
          December 31,  2004         15,824,185     564,515   2,883,913        (80,321)      (242,627)  (1,357,630)   1,767,850

         Changes during 2005:
         Net earnings                         -           -           -              -              -      351,459      351,459
         Issuance of treasury stock     193,229           -           -         74,250              -     (24,641)       49,609
         Issuance of stock options            -           -      21,715              -              -            -       21,715
         Unrealized gains  from
          available-for-sale securities       -           -      21,503              -              -            -       21,503
         Exercise of stock options
          granted to employees          129,254          *-           -              -              -            -            -
         Employee stock option
          compensation expenses               -           -      44,253              -              -            -       44,253
         Derivatives (FAS 133)                -           -      26,737              -              -            -       26,737
         Cumulative foreign currency
         translation adjustments, net        -           -            -              -        199,986            -      199,986
                                     ----------   ---------    --------        -------        --------   ---------    -----------

         Balance as
          December 31,2005           16,146,668     564,515   2,998,121         (6,071)       (42,641)  (1,030,812)   2,483,112
                                    ===========   =========   =========        =======        ========   =========    ===========


</TABLE>

         *        Represents an amount lower than NIS 1,000.
         (1)      Net of the Company holdings and its subsidiaries' holdings.



                                    F-114
<PAGE>



                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------


Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         C. Condensed figures of M-A Industries and ECI according to Regulation
            S-X 4-08

         (1) M-A Industries condensed figures

         A. As at December 31,

<TABLE>
<CAPTION>



                                 Israeli GAAP     Adjustments         US GAAP   Israeli GAAP     Adjustments         US GAAP
                                -------------   -------------   -------------  -------------   -------------   -------------
                                US$ thousands   US$ thousands   US$ thousands  US$ thousands   US$ thousands   US$ thousands
                                -------------   -------------   -------------  -------------   -------------   -------------
                                         2005            2005            2005           2004            2004            2004
                                -------------   -------------   -------------  -------------   -------------   -------------

<S>                                 <C>                <C>          <C>             <C>               <C>           <C>
         Current assets             1,108,638          18,659       1,127,297       949,338           5,323         954,661
         Non-current
          assets                    1,021,104          55,095       1,076,199       985,229          42,118       1,027,347
         Current liabilities          797,867           2,718         800,585       669,571          14,685         684,256
         Non-current
          liabilities                 127,713          36,724         164,437       333,423          24,631         358,054
         Minority
          interests                    28,586          (2,256)         26,330        18,756          (1,981)         16,775
         Convertible
          debentures                   40,479               -          40,479        38,322               -          38,322


         B. According to Israeli GAAP, for the year ended December 31,
                                                                                                        2005            2004
                                                                                               -------------   -------------
                                                                                               US$ thousands   US$ thousands
                                                                                               -------------   -------------

         Revenue from sales and services                                                           1,740,717      1,539,702
         Gross profit                                                                                681,002        595,794
         Net income according to Israeli GAAP                                                        205,493        165,527

         Adjustment to US GAAP                                                                        20,607        (41,789)
         Net income according to US GAAP                                                             226,100        123,738

         (2)      ECI's condensed figures according to US GAAP

                                                                                                        2005            2004
                                                                                               -------------   -------------
                                                                                               US$ thousands   US$ thousands
                                                                                               -------------   -------------
         As at December 31

         Current assets                                                                              436,205        449,556
         Non-current assets                                                                          412,530        405,253
         Current liabilities                                                                         176,989        248,012
         Non-current liabilities                                                                      48,497         50,943
         Minority interests                                                                            4,120          4,086

         For the year ended December 31

         Revenues                                                                                    629,918        496,712
         Gross profit                                                                                262,139        195,741
         Income from continuing operations                                                            39,864         14,056
         Net income                                                                                   39,864         10,153


</TABLE>



                                    F-115
<PAGE>



                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------



Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         D. Summarized financial information of proportionately consolidated
            companies

         (1) Telrad

         A. As at December 31, 2004

<TABLE>
<CAPTION>

                                                             Israeli GAAP      Adjustments           US GAAP
                                                            -------------    -------------     -------------
                                                            NIS thousands    NIS thousands     NIS thousands
                                                            -------------    -------------     -------------

<S>                                                               <C>                <C>             <C>
         Current assets                                           295,867            4,735           300,602
         Non-current assets                                       144,386            6,735           151,121
         Current liabilities                                      197,173          (17,326)          179,847
         Non-current liabilities                                   86,589                -            86,589
         Minority interests                                         4,814            3,765             8,579

         B.       Statement of operations data (1)

                                                                               For the six    For the three
                                                                              months ended     months ended
                                                                                  June 30,     December 31,
                                                                                      2005             2004
                                                                             -------------     -------------
                                                                             NIS thousands    NIS thousands
                                                                             -------------     -------------
         Revenue from sales and services                                          177,631           93,403
         Gross profit (loss)                                                        9,898          (11,565)
         Net loss according to Israeli GAAP                                       (90,136)         (61,114)
         Adjustment to US GAAP                                                    (16,952)          18,970
         Net loss according to US GAAP                                           (107,088)         (42,144)

         Cash flows from operating activities                                      (4,072)           7,259
         Cash flows from investing activities                                      (3,418)         (13,043)
         Cash flows from financing activities                                      (9,265)          27,757

</TABLE>



         (1)      Telrad was included in Koor's financial statements by the
                  proportionate consolidation method from the fourth quarter of
                  2004 until June 30, 2005. See Note 3C(1).




                                    F-116
<PAGE>



                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------



Note 29 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         (2)      Proportionately consolidated companies of Sheraton

         A.       As at December 31,


<TABLE>
<CAPTION>


                                 Israeli GAAP     Adjustments         US GAAP   Israeli GAAP     Adjustments         US GAAP
                               --------------   -------------   -------------  -------------   -------------   -------------
                                US$ thousands   US$ thousands   US$ thousands  US$ thousands   US$ thousands   US$ thousands
                               --------------   -------------   -------------  -------------   -------------   -------------
                                         2005            2005            2005           2004            2004            2004
                               --------------   -------------   -------------  -------------   -------------   -------------
<S>                                   <C>             <C>            <C>            <C>             <C>            <C>
         Current assets               27,113               -          27,113         20,694               -          20,694
         Non-current
          assets                     216,191           1,837         218,028        220,893          (2,516)        218,377
         Current
          liabilities                (50,585)              -         (50,585)        29,530               -          29,530
         b
          liabilities               (217,459)         (3,287)       (220,746)       219,890               -         219,890


         B.       For the year ended December 31,
                                                                                                       2005               2004
                                                                                                  NIS thousands       NIS thousands
                                                                                                  -------------       -------------

         Revenue from sales and services                                                              89,460            83,238
         Gross profit                                                                                 24,446            22,710
         Net loss according to Israeli GAAP                                                          (17,772)           (1,416)
         Adjustment to US GAAP                                                                         3,902             1,078
         Net loss according to US GAAP                                                               (13,870)             (338)

         Cash flows from operating activities                                                          7,004             5,808
         Cash flows from investing activities                                                         (3,276)              942
         Cash flows from financing activities                                                         (1,100)           (3,584)

</TABLE>



                                    F-117
<PAGE>



                                   Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements for the year ended December 31, 2005
--------------------------------------------------------------------------------




Note 30 - Change in Principal Shareholders (Unaudited)

         On May 1, 2006, Discount Investments Corp. Ltd., a subsidiary of IDB
         Development Corporation Ltd., signed an agreement to acquire from the
         Claridge Group, as well as from Anfield Ltd. (a company registered in
         Israel and owned by Jonathan B. Kolber, the Company's Chief Executive
         Officer) and another entity, all of the Koor's shares held by those
         entities totaling 5,753,207 shares, or approximately 34.9% of Koor's
         outstanding shares, for $ 445.8 million. As of June 30, 2006 all
         approvals to which the transaction is subject, including Israel's
         anti-trust commissioner, have been granted and the closing of the
         transaction is expected to take place shortly. Subsequent to the
         closing, the Company expects that changes in the composition of its
         Board of Directors and management will occur. Discount Investments is
         held 74.2% by IDB Development, which also holds 10% of Koor's
         outstanding ordinary shares.


                                    F-118
<PAGE>




 [Letterhead of Kost, Forer Gabbay & Kasierer, a Member of Ernst & Young Global]

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                               To the Partners of

                            Koor Venture Capital L.P.

         We have audited the accompanying balance sheets of Koor Ventures
Capital L.P. (the "Partnership") as at December 31, 2005 and 2004, and the
related statements of operations, shareholders' equity and cash flows, for each
of the three years, the last of which ended December 31, 2005. These financial
statements are the responsibility of the Partnership's Management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

         We did not audit the financial statements of certain affiliate (Scopus
Video Networks Ltd.), whose company's investments constitute NIS 44,964 thousand
and NIS 12,466 thousand, as at December 31, 2005 and 2004, respectively, and its
equity in losses constitute NIS 755 thousand, NIS 329 thousand and NIS 329
thousand for the years ended December 31, 2005, 2004 and 2003, respectively. The
financial statements of the affiliate were audited by other auditors whose
reports thereon were furnished to us. Our opinion, insofar as it relates to
amounts included for those companies, is based solely on the said reports of the
other auditors.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Partnership's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Partnership's internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of the other auditors provide a reasonable basis for our
opinion.

In our opinion, based on our audits and on the reports of the above-mentioned
other auditors, the financial statements referred to above present fairly, in
all material respects, the financial position of the Partnership as of December
31, 2005 and 2004 and the results of their operations, the changes in
shareholders' equity and their cash flows for each of the three years, the last
of which ended December 31, 2005, in conformity with accounting principles
generally in Israel which differ in certain respects from those following in the
United States, as described in Note 9 to the financial statements.

                                           /s/ Kost, Forer Gabbay & Kasierer

Tel-Aviv, Israel                               KOST, FORER GABBAY & KASIERER
March 21, 2006                                 A Member of Ernst & Young Global


                                     F-119
<PAGE>

                    [Letterhead of Brightman Almagor & Co.,
                   a Member Firm of Deloitte Touche Tohmatsu]

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Scopus Video Networks Ltd.


We have audited the accompanying consolidated balance sheets of Scopus Video
Networks Ltd. and its subsidiary ("the Company") as of December 31, 2005 and
2004 and the related consolidated statements of operations, shareholders' equity
and cash flows, for each of the three years, in the period ended December 31,
2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Scopus Video
Networks Ltd. and its subsidiary as of December 31, 2005 and 2004, and the
results of their operations, and their cash flows for each of the three years,
in the period ended December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America.

Accounting principles generally accepted in the United States of America vary in
certain significant respects from accounting principles generally accepted in
Israel. The application of the latter would have affected the Company's net loss
for the years presented to the extent summarized in Note 16.

/s/ Brightman Almagor & Co.

Brightman Almagor & Co.
Certified Public Accountants
A member firm of Deloitte Touche Tohmatsu

Tel Aviv, Israel
March 16, 2006

                                     F-120
<PAGE>

 [Letterhead of Kost, Forer Gabbay & Kasierer, a Member of Ernst & Young Global]

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                             To the shareholders of

                          LUXEMBURG PHARMACEUTICAL LTD.

         We have audited the accompanying consolidated balance sheets of
Luxemburg Pharmaceutical Ltd. ("the Company") and its subsidiaries as of
December 31, 2005 and 2004, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 2005 (not presented separately herein).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

         We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the company's internal control over financial reporting. An
audit includes consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts (including the Company's reconciliation of the financial
statements of the aforementioned certain subsidiary to Israel generally accepted
accounting principles) and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.

         In our opinion, based on our audits, the consolidated financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of
December 31, 2005 and 2004, and the consolidated results of their operations and
cash flows for each of the three years in the period ended of December 31, 2005,
in conformity with Israel generally accepted accounting principles, which differ
in certain respects form those followed in the United States, as described in
Note 22 to the consolidated financial statements.


                                               /s/ Kost, Forer Gabbay & Kasierer

Tel-Aviv, Israel                                   KOST, FORER GABBAY & KASIERER
February 19, 2006                               A Member of Ernst & Young Global


                                     F-121
<PAGE>

 [Letterhead of Kost, Forer Gabbay & Kasierer, a Member of Ernst & Young Global]

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                             To the shareholders of

                                  LYCORED LTD.
              (FORMERLY: LYCORED NATURAL PRODUCTS INDUSTRIES LTD.)

         We have audited the accompanying consolidated balance sheets of Lycored
Ltd. (formerly: Lycored Natural Products Industries Ltd.) ("the Company") and
its subsidiaries as of December 31, 2005 and 2004, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 2005 (not presented
separately herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

         We did not audit the financial statements of a certain subsidiary
(Lycored Limited), whose assets included in consolidation constitute
approximately 21% and 18% of total consolidated assets as of December 31, 2005
and 2004, and whose revenues included in consolidation constitute approximately
34%, 37% and 35% of total consolidated revenues for the three years ended
December 31, 2005. Those financial statements, presented in accordance with
accounting principles generally accepted in the United Kingdom and including
reconciliation to United States generally accepted accounting principles, were
audited by other auditors whose reports as of and for the years ended December
31, 2005 and 2004, have been furnished to us, and our opinion, insofar as it
relates to the amounts utilized by Company's management (before reconciliation
to Israel generally accepted accounting principles) of and for the years ended
December 31, 2005 and 2004, is based solely on the reports of the other
auditors.

         We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the company's internal control over financial reporting. An
audit includes consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts (including the Company's reconciliation of the financial statements
of the aforementioned certain subsidiary to Israel generally accepted accounting
principles) and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for our
opinion.

         In our opinion, based on our audits and the reports of other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2005 and 2004, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
of December 31, 2005, in conformity with Israel generally accepted accounting
principles, which differ in certain respects from those followed in the United
States, as described in Note 21 to the consolidated financial statements.


                                               /s/ Kost, Forer Gabbay & Kasierer

Tel-Aviv, Israel                                   KOST, FORER GABBAY & KASIERER
February 15, 2006                               A Member of Ernst & Young Global


                                     F-122
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                             To the Shareholders of

                                Lycored Limited.

         We have audited the accompanying balance sheets of Lycored Limited.
("the Company") as at December 31, 2005 and 2004, and the related statements of
operations, shareholder's equity and cash flows, for each of the three years,
the last of which ended December 31, 2005. These financial statements are the
responsibility of the Company's Board of Directors and of its Management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.

In our opinion, based on our audit, the financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2005 and 2004 and the results of their operations, the
changes in shareholders' equity and their cash flows for each of the three
years, the last of which ended of December 31, 2005, in conformity with
accounting principles generally in United Kingdom which differ in certain
respects from those followed in the United States, as described in Note 24 to
the financial statements.


/s/ Goodman Jones LLP

Goodman Jones LLP
29/30 Fitzroy Square
London WIT 6LQ

February 14, 2006

                                     F-123
<PAGE>

                     [Letterhead of Brightman Almagor & Co.,
                   a Member Firm of Deloitte Touche Tohmatsu]

             Report Of Independent Registered Public Accounting Firm

To the Shareholders of
Herods Hotel Spa and Recreation Ltd

We have audited the accompanying balance sheets of Herods Hotel Spa and
Recreation Ltd. (the "Company") as at December 31, 2005 and 2004, and the
related statements of operations, changes in shareholders' deficiency, and cash
flows, for each of the three years, in the period ended December 31, 2005. These
financial statements are the responsibility of the Company's Management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by Management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, based on our audit the financial statements referred to above
present fairly, in all material respects, the financial position of the
consolidated financial position of the Company and its subsidiaries as of
December 31, 2005 and 2004, and the results of operations, the changes in
shareholders' deficiency and their cash flows and on a consolidated basis for
each of the three years, the last of which ended December 31, 2005, in
conformity with accounting principles generally accepted in Israel.

As explained in Note 2(1), the financial statements for dates and reporting
periods subsequent to December 31, 2003 are stated in reported amounts, in
accordance with the accounting standards of the Israel Accounting Standards
Board. The financial statements for dates and reporting periods ended up to the
aforementioned date are stated in values that were adjusted to that date
according to the changes in the general purchasing power of the Israeli
currency, in accordance with opinions of the Institute of Certified Public
Accountants in Israel.

Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America (US GAAP). The effect of the application of the latter on the
consolidated financial position as of December 31, 2005 and on the consolidated
results of operations for the year then ended is summarized in Note 25.

/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants (Isr.)
A member firm of Deloitte Touche Tohmatsu

Tel Aviv, Israel
March 13, 2006

                                     F-124
<PAGE>

 [Letterhead of Kost, Forer Gabbay & Kasierer, a Member of Ernst & Young Global]

                         REPORT OF INDEPENDENT AUDITORS

                             To the Venturers of the
                       Joint Venture - Sheraton City Tower

         We have audited the balance sheets of the Joint Venture - Sheraton City
Tower ("the Joint Venture") as of December 31, 2005 and 2004, and the related
statements of operations, changes in venturers' deficiency and cash flows for
the three years in the period ended December 31, 2005 (not presented separately
herein). These financial statements are the responsibility of the Joint
Venture's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

         We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Joint Venture's internal control over financial
reporting. An audit includes consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Joint Venture's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of the Joint Venture as of
December 31, 2005 and 2004 and the results of its operations and its cash flows
of the three years in the period ended December 31, 2005, in conformity with
Israel generally accepted accounting principles, which differ in certain
respects from those followed in the United States, as described in Note 18 to
the financial statements.


                                             /s/ Kost, Forer Gabbay & Kasierer

Tel-Aviv, Israel                                KOST, FORER GABBAY & KASIERER
February 27, 2006                              A Member of Ernst & Young Global


                                     F-125
<PAGE>


              [Letterhead of Brightman Almagor & Co., a Member Firm
                         of Deloitte Touche Tohmatsu]

             Report Of Independent Registered Public Accounting Firm

To the Shareholders
of Sheraton Moriah (Israel) Ltd.

We have audited the accompanying balance sheets of Sheraton Moriah (Israel) Ltd.
(the "Company") as of December 31, 2004 and 2003, and the consolidated balance
sheets of the Company and its subsidiaries as at such dates, and the related
statements of operations, shareholders' equity, and cash flows, for each of the
three years, in the period ended December 31, 2004. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We did not
audit the fmancial statements of certain subsidiaries, including those whose
assets constitute 2% of the total consolidated assets as of December 31, 2003,
and whose revenues constitute 12% and 18% of the total consolidated revenues for
the years ended December 31, 2003 and 2002 respectively. Furthermore, we did not
audit the financial statements of an affiliate accounted for by use of the
equity method. The Company's equity in that affiliate's net assets as of
December 31, 2004 and 2003, amounts to NIS 4.7 million and NIS 5.6 million,
respectively and its shares in losses constitutes NIS 0.9 million, NIS 1.1
million and NIS 2.2 million in that affiliate's net loss for the years ended
December 31, 2004, 2003 and 2002, respectively. The financial statements of
those consolidated subsidiaries and the affiliate which were prepared in
accordance with Israeli GAAP, were audited by other auditors whose reports
thereon were furnished to us, and our opinion, insofar as it relates to amounts
included for such subsidiaries and affiliate, before conversion to generally
accepted accounting principles in the United States of America, is based solely
on the reports of the other auditors.

We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over fmancial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, based on our audits and on the reports of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of the Company and the consolidated financial
position of the Company and its subsidiaries as of December 31, 2004 and 2003,
and the results of operations and cash flows - of the Company and on a
consolidated basis - for each of the three years in the period ended December
31, 2004, in conformity with accounting principles generally accepted in Israel.

As explained in Note 2(1), the fmancial statements for dates and reporting
periods subsequent to December 31, 2003 are stated in reported amounts, in
accordance with the accounting standards of the Israel Accounting Standards
Board. The fmancial statements for dates and reporting periods ended up to the
aforementioned date are stated in values that were adjusted to that date
according to the changes in the general purchasing power of the Israeli
currency, in accordance with opinions of the Institute of Certified Public
Accountants in Israel.

Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The effect of the application of the latter on the consolidated
fmancial position as of December 31, 2004 and on the consolidated results of
operation for the year then ended is summarized in Note 28.

As described in Note 2 (15) to the financial statements the 2002 and 2003 annual
financial statements have been restated due to an expense paid by a controlling
party for the Company to a third party.

/s/ Brightman Almagor & Co.

Brightman Almagor & Co.
Certified Public Accountants (Isr.)
A member firm of
Deloitte Touche Tohmatsu

Tel Aviv, March 9, 2005


                                     F-126

<PAGE>


                     [Letterhead of Brightman Almagor & Co.,
                   a Member Firm of Deloitte Touche Tohmatsu]

         Report of Independent Registered Public Accounting Firm To The
                                 Shareholders of
                         Tadiran Electronic System Ltd.



We have audited the accompanying balance sheets of Tadiran Electronic System
("the Company") as of December 31, 2005 and 2004 and the related statements of
operations, changes in shareholders' equity and cash flows, for each of the
three years, in the period ended December 31, 2005. These financial statements
are the responsibility of the Company's Board of Directors and of its
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2005 and 2004, and the results of its operations, changes in its shareholders'
equity and its cash flows for the three years, in the period ended December 31,
2005, in conformity with generally accepted accounting principles in Israel.

Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such differences is
presented in Note 16 to the financial statements.

As explained in Note 2A, the financial statements are presented in U.S. dollars.


/s/ Brightman Almagor & Co.

Brightman Almagor & Co.
Certified Public Accountants

Tel Aviv, Israel
February 15, 2006

                                     F-127
<PAGE>

                     [Letterhead of Brightman Almagor & Co.,
                   a Member Firm of Deloitte Touche Tohmatsu]

         Report of Independent Registered Public Accounting Firm To The
                                 Shareholders of
                            Tadiran Spectralink Ltd.

We have audited the accompanying balance sheets of Tadiran Sprectralink Ltd.
("the Company") as of December 31, 2005 and 2004 and the related statements of
operations, changes in shareholders' equity and cash flows, for each of the
three years, in the period ended December 31, 2005. These financial statements
are the responsibility of the Company's Board of Directors and of its
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2005 and 2004, and the results of its operations, changes in its shareholders'
equity and its cash flows for the three years, in the period ended December 31,
2005, in conformity with generally accepted accounting principles in Israel.

Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such differences is
presented in Note 22 to the financial statements.

As explained in Note 2A, the financial statements are presented in U.S. dollars.


/s/ Brightman Almagor & Co.

Brightman Almagor & Co.
Certified Public Accountants

Tel Aviv, Israel
February 15, 2006


                                      F-128
<PAGE>


           [Letterhead of Hoberman, Miller, Goldstein & Lesser, P.C.]

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors
Microwave Networks, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Microwave
Networks, Inc. and Subsidiaries as of December 31, 2005 and 2004, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Microwave Networks,
Inc. and Subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.

Accounting principles generally accepted in the United States vary in certain
significant respects from accounting principles generally accepted in Israel.
Application of accounting principles generally accepted in Israel did not have
any effect on the results of operations, stockholders' equity and cash flows for
the years ended December 31, 2005 and 2004.

                           /s/ Hoberman, Miller, Goldstein & Lesser, CPA'S, P.C.

New York, New York
February 3, 2006, except for the Note 6,
  as to which the date is March 13, 2006



                                      F-129
<PAGE>


                    [Letterhead of Brightman Almagor & Co.,
                   a Member Firm of Deloitte Touche Tohmatsu]

             Report Of Independent Registered Public Accounting Firm

To the Shareholders of
Koorshevel Ltd.

We have audited the accompanying balance sheets of Koorshevel (the "Company") as
of December 31, 2005 and 2004 and the related statements of operations
shareholders' equity, for each of the three years, in the period ended December
31, 2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2005 and 2004, and the results of operations and the changes
in shareholders' equity of the Company for each of the three years in the period
ended December 31, 2005, in conformity with accounting principles generally
accepted in Israel.

As explained in Note 2, the financial statements for dates and reporting periods
subsequent to December 31, 2003 are stated in "reported amounts", in accordance
with the accounting standards of the Israel Accounting Standards Board. The
financial statements for the year ended at December 31, 2003, have been prepared
on the basis of historical cost adjusted for changes in the Consumer price
index, in accordance with pronouncements of the Institute of Certified Public
Accountants is Israel.

Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America (U.S. GAAP). The effect of the application of the latter on the
financial positions as of December 31, 2005 and on the results of operations for
the year then ended is summarized in Note 8.

/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants (Isr.)
A member firm of Deloitte Touche Tohmatsu

Tel Aviv, March 13, 2006


                                      F-130
<PAGE>



           [Letterhead of Hoberman, Miller, Goldstein & Lesser, P.C.]

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Member and Board of Directors
Tadiran Electronic Industries, LLC

We have audited the accompanying balance sheets of Tadiran Electronic
Industries, LLC (formerly Tadiran Electronic Industries, Inc.) as of December
31, 2005 and 2004, and the statements of operations, member's equity, and cash
flows for the year ended December 31, 2005 and the consolidated statements of
operations, member's equity and cash flows for the years ended December 31, 2004
and 2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tadiran Electronic Industries,
LLC as of December 31, 2004, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2005, in
conformity with accounting principles generally accepted in the United States of
America.

Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The additional information on pages 11
through 12 is presented for the purpose of additional analysis rather than to
present the financial position and results of operations of the individual
companies, and is not a required part of the basic financial statements. This
additional information is the responsibility of the Company's management. Such
information has been subjected to the auditing procedures applied in our audits
of the basic financial statements and, in our opinion, is fairly stated in all
material respects when considered in relation to the basic financial statements
taken as a whole.

Accounting principles generally accepted in the United States vary in certain
significant respects from accounting principles generally accepted in Israel.
Application of accounting principles generally accepted in Israel did not have
any effect on the results of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2005.

                           /s/ Hoberman, Miller, Goldstein & Lesser, CPA'S, P.C.

New York, New York
February 8, 2006

                                      F-131
<PAGE>

 [Letterhead of Kost, Forer Gabbay & Kasierer, a Member of Ernst & Young Global]

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                             To the Shareholders of

                       TELRAD CONNEGY COMMUNICATIONS INC.

         We have audited the accompanying consolidated balance sheet of Telrad
Connegy Communications Inc. ("the Company") and its subsidiaries as of December
31, 2004 and 2003 and the related consolidated statements of operations in
shareholders' equity (deficiency) and the consolidated cash flows for each of
the three years in the period ended December 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

         We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiaries as of December 31, 2004, and 2003 and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States, which differ in certain
respects from those followed in Israel, as described in Note 14 to the
consolidated financial statements.

                                               /s/ Kost, Forer Gabbay & Kasierer

Tel-Aviv, Israel                                 KOST, FORER GABBAY & KASIERER
March 27, 2005                                  A Member of Ernst & Young Global


                                      F-132
<PAGE>


 [Letterhead of Kost, Forer Gabbay & Kasierer, a Member of Ernst & Young Global]

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                             TO THE SHAREHOLDERS OF

                           TADIRAN COMMUNICATIONS LTD.

         We have audited the consolidated balance sheet of Tadiran
communications Ltd. ("the Company") and its subsidiaries as of December 31, 2005
(not presented separately herein), and its condensed consolidated statement of
operation. This balance sheet and condensed consolidated statement of operation
are the responsibility of the Company's management. Our responsibility is to
express an opinion on this balance sheet and condensed consolidated statement of
operation based on our audit. We did not audit the balance sheet and condensed
statement of operation of a certain subsidiary (Talla-Com, Tallahassee
Communications Industries, Inc.), whose assets included in consolidation
constitute approximately 9.3% of total consolidated assets as of December 31,
2005. The balance sheet and condensed consolidated statement of operation of
this subsidiary was audited by other independent auditors, whose report has been
furnished to us, and our opinion, insofar as it relates to amounts included for
this certain subsidiary, is based solely on the report of the other independent
auditors.

         We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. An
audit includes consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit and the report of other auditors provide a reasonable basis for our
opinion.

         In our opinion, based on our audit and the report of other independent
auditors, the consolidated balance sheet and condensed consolidated statement of
operation referred to above presents fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of
December 31, 2005 and the condensed consolidated result of operations, in
conformity with generally accepted accounting principles in Israel, which differ
in certain respects from accounting principles generally accepted in the United
States (see Note 31 to the consolidated financial statements).

         Without qualifying our opinion, we draw attention to the matter
discussed in Note 31h to the financial statements regarding the restatement of
the financial statements for the year ended December 31, 2005 in order to
retroactively reflect the effect of creating a tax reserve in respect of
earnings of an approved enterprise.


                                               /s/ Kost, Forer Gabbay & Kasierer

Tel-Aviv, Israel                                 KOST, FORER GABBAY & KASIERER
March 5, 2006                                  A Member of Ernst & Young Global
Except for note 31, as to
which the date is May 9, 2006


                                      F-133
<PAGE>

 [Letterhead of Kost, Forer Gabbay & Kasierer, a Member of Ernst & Young Global]

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                             TO THE SHAREHOLDERS OF

                           TADIRAN COMMUNICATIONS LTD.

         We have audited the consolidated balance sheet of Tadiran
communications Ltd. ("the Company") and its subsidiaries as of December 31, 2004
(not presented separately herein.) This balance sheet is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit. We did not audit the balance sheet of a
certain subsidiary, whose assets included in consolidation constitute
approximately 7% of total consolidated assets as of December 31, 2004. The
balance sheet of this subsidiary was audited by other independent auditor, whose
report has been furnished to us, and our opinion, insofar as it relates to
amounts included for this certain subsidiary, is based solely on the report of
the other independent auditors.

         We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. An
audit includes consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit and the report of other auditors provide a reasonable basis for our
opinion.

         In our opinion, based on our audit and the report of other independent
auditors, the consolidated balance sheet referred to above presents fairly, in
all material respects, the consolidated financial position of the Company and
its subsidiaries as of December 31, 2004, in conformity with generally accepted
accounting principles in Israel, which differ in certain respects from
accounting principles generally accepted in the United States (see Note 32 to
the consolidated financial statements).


                                               /s/ Kost, Forer Gabbay & Kasierer

Tel-Aviv, Israel                                 KOST, FORER GABBAY & KASIERER
March 20, 2006                                  A Member of Ernst & Young Global


                                      F-134
<PAGE>


           [Letterhead of Hoberman, Miller, Goldstein & Lesser, P.C.]

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Stockholder and Board of Directors
Talla-Com, Tallahassee Communications Industries, Inc.


We have audited the accompanying consolidated balance sheets of Talla-Com,
Tallahassee Communications Industries, Inc. and Subsidiaries as of December 31,
2005 and 2004, and the related consolidated statements of operations and
retained earnings and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Talla-Com, Tallahassee Communications Industries, Inc. and Subsidiaries as of
December 31, 2005 and 2004, and the results of their operations and their cash
flows for the years then needed, in conformity with accounting principles
generally accepted in the United States of America.

Accounting principles generally accepted in the United States vary in certain
significant respects from accounting principles generally accepted in Israel.
Application of accounting principles generally accepted in Israel did not have
any effect on the results of operations, shareholder's equity and cash flows for
the years ended December 31, 2005 and 2004.


                           /s/ Hoberman, Miller, Goldstein & Lesser, CPA'S, P.C.

New York, New York
January 20, 2006


                                      F-135
<PAGE>

 [Letterhead of Kost, Forer Gabbay & Kasierer, a Member of Ernst & Young Global]

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                             To the shareholders of

                                 KOOR TRADE LTD.

       We have audited the accompanying consolidated balance sheets of Koor
Trade Ltd. ("the Company") and its subsidiaries as of December 31, 2005 and
2004, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2005 (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

       We did not audit the financial statements of certain subsidiaries
(Agroreg PTY Limited, Koor Inter Trade (Asia) PTY Limited, SKY LINK Ltd. Zagreb,
Star Medical Technology Company Limited, Advance Medical Esthetics (Thailand)
Company Limited, Astracom Networks Company Limited, Agrostar Technology Limited,
Astraco (Thailand) Limited, Trezor sp. z.o.o. Ltd.), whose assets included in
consolidation constitute approximately 27% and 40% of total consolidated assets
as of December 31, 2005 and 2004, and whose revenues included in consolidation
constitute approximately 34%, 12% and 46% of total consolidated revenues for the
years ended December 31, 2005, 2004 and 2003 respectively. The financial
statements of these companies, presented in accordance with generally accepted
accounting principles other than Israel generally accepted accounting principles
and including reconciliation to United States generally accepted accounting
principles, were audited by other auditors whose reports, have been furnished to
us, and our opinion, insofar as it relates to the amounts utilized by Company's
management (before reconciliation to Israel generally accepted accounting
principles), is based solely on the reports of the other auditors.

       We did not audit the financial statements of a certain company (Balton CP
Limited) the investment in which based on the equity method of accounting,
amounted to NIS 12.3 million and NIS 43.1 million as of December 31, 2005 and
2004, respectively, and the Company's equity in its income (losses) amounted to
NIS (33.7) million, NIS 8.8 million and NIS 1.7 million for the years ended
December 31, 2005, 2004 and 2003, respectively. The financial statements of
Balton CP Limited, presented in accordance with accounting principles generally
accepted in the United States, were audited by other auditors whose reports have
been furnished to us, and our opinion, insofar as it relates to the amounts
utilized by Company's management (before reconciliation to Israel generally
accepted accounting principles), is based solely on the reports of the other
auditors.

       We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the company's internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts (including the Company's reconciliation of the financial
statements of the aforementioned certain Companies to Israel generally accepted
accounting principles) and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.

       In our opinion, based on our audits and the reports of other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2005 and 2004, and the consolidated results of
their operations and its cash flows for each of the three years in the period
ended of December 31, 2005, in conformity with Israel generally accepted
accounting principles, which differ in certain respects from those followed in
the United States, as described in Note 22 to the financial statements.


                                               /s/ Kost, Forer Gabbay & Kasierer

Tel-Aviv, Israel                                 KOST, FORER GABBAY & KASIERER
March 21, 2006                                  A Member of Ernst & Young Global


                                      F-136
<PAGE>

                      [Letterhead of Einfeld Symonds Vince]

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE SHAREHOLDERS OF AGROREG PTY LIMITED

         We have audited the accompanying balance sheets of Agroreg Pty Limited
("the Company") as of December 31, 2005 and the related statement of operation
and cash flow, for the nine months period ended December 31, 2005. The financial
statements are the responsibility of the Company's Management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

         We conducted our audits in accordance with standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2005 and the results of its operations and its cash flows for the
financial period ended December 31, 2005, in conformity with Australia's
generally accepted accounting principles which differ in certain respects from
those followed in the United States, as described in Note 1 to the financial
statements.

Dated at Sydney the 1st day of February 2006

/s/ Einfeld Symonds Vince
Einfeld Symonds Vince
Chartered Accountants

/s/ Christopher Kirkwood
CHRISTOPHER KIRKWOOD
Partner


                                      F-137
<PAGE>


                      [Letterhead of Einfeld Symonds Vince]

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE SHAREHOLDERS OF KOOR INTER-TRADE (ASIA)
PTY LIMITED AND ITS SUBSIDIARIES

         We have audited the accompanying consolidated balance sheets of Koor
Inter-Trade (Asia) Pty Limited ("the Company") and its subsidiaries as at
December 31, 2005 and 2004, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows, for each of the
three years, the last of which ended December 31, 2005 (not presented separately
herein). These financial statements are the responsibility of the Company's
Management. Our responsibility is to express an opinion on these financial
statements based on our audits.

         We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiaries as of December 31, 2005 and 2004 and the
consolidated results of their operations, and their cash flows for each of the
three years, the last of which ended December 31, 2005, in conformity with
Australia's generally accepted accounting principles which differ in certain
respects from those following in the United States, as described in Note 1 to
the consolidated financial statements.


Dated at Sydney the 25th day of January 2006

/s/ Einfeld Symonds Vince
EINFELD SYMONDS VINCE

Chartered Accountants


/s/ Chris Kirkwood
CHRIS KIRKWOOD
Partner

                                      F-138
<PAGE>

                   [Letterhead of Revizija Zagreb Ltd Zagreb]

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of SKY LINK Ltd Zagreb

1.       We have audited the accompanying balance sheets of SKY LINK Ltd Zagreb,
         ("the Company") as of December 31, 2005 and as of December 31, 2004,
         and the related statements of operations, changes in shareholders'
         equity and cash flows for each of three years in the period ended
         December 31, 2005 (not presented separately herein). These financial
         statements are the responsibility of the Company's management. Our
         responsibility is to express an opinion on these financial statements
         based on our audits.

2.       We conducted our audits in accordance with the standards of Public
         Company Accounting Oversight Board (United States). Those standards
         require that we plan and perform the audit to obtain reasonable
         assurance about whether the financial statements are free of material
         misstatement. We were not engaged to perform an audit of the company's
         internal control over financial reporting. An audit includes
         consideration of internal control over financial reporting as a basis
         for designing audit procedures that are appropriate in the
         circumstances, but not for the purpose of expressing an opinion on the
         effectiveness of the company's internal control over financial
         reporting. Accordingly, we express no such opinion. An audit includes
         examining, on a test basis, evidence supporting the amounts and
         disclosures in the financial statements, assessing the accounting
         principles used and significant estimates made by management and
         evaluating the overall financial statement presentation. We believe
         that our audits provide a reasonable basis for our opinion.

3.       In our opinion based on our audits, the financial statements referred
         to above present fairly, in all material respects, the financial
         position of the Company as of December 31, 2005 and as of December 31,
         2004, and the results of its operations and cash flows for each the
         three years in the period ended December 31, 2005, in conformity with
         Generally Accepted Accounting Principles applied in the United States
         of America.

                                                Yours truly,

                                                /s/ Revizija Zagreb Ltd Zagreb
                                                Revizija Zagreb Ltd Zagreb

Zagreb, January 25, 2006

                                      F-139
<PAGE>

                    [Letterhead of ASV & Associates Limited]


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANT

To the shareholders of
Star Medical Technology Company Limited


We have audited the accompanying balance sheets of Star Medical Technology
Company Limited as of 31 December 2005 and the related statements of operations,
changes in shareholders' equity and cash flows for the year ended 31 December
2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The balance sheet of Star Medical Technology
Company Limited as of 31 December 2004 and related statements of operations,
changes in shareholders' equity and cash flows as from 27 July 2004 (date of
incorporation) to 31 December 2004, as presented herein for comparative
purposes, were audited by other auditors, whose reports dated 5 March 2005 and
20 January 2006 expressed an unqualified opinion on those financial statements.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the company's internal control over financial reporting. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, based on our audit, the financial statements referred to above
present fairly, in all material respects, the financial position of Star Medical
Technology Company Limited as of 31 December 2005 and the results of their
operations and cash flows for the year ended 31 December 2005 in conformity with
Thailand generally accepted accounting principles, which differ in certain
respects from those followed in the United States, as described in Note 3 to the
financial statements.

/s/  Kwunjai Kiatgungwalgri

Ms. Kwunjai Kiatgungwalgri
Certified Public Accountant No. 5875


Bangkok
20 January 2006


                                      F-140
<PAGE>

                    [Letterhead of ASV & Associates Limited]


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANT

To the shareholders of
Advance Medical Esthetics (Thailand) Company Limited


We have audited the accompanying balance sheets of Advance Medical Esthetics
(Thailand) Company Limited as of 31 December 2005 and the related statements of
operations, changes in shareholders' equity and cash flows for the period as
from 20 January 2005 (the date of incorporation) to 31 December 2005. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the company's internal control over financial reporting. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, based on our audit, the financial statements referred to above
present fairly, in all material respects, the financial position of Advance
Medical Esthetics (Thailand) Company Limited as of 31 December 2005, and the
results of their operations and cash flows for the period as from 20 January
2005 (the date of incorporation) to 31 December 2005, in conformity with
Thailand generally accepted accounting principles, which differ in certain
respects from those followed in the United States, as described in Note 3 to the
financial statements.

/s/  Kwunjai Kiatgungwalgri

Ms. Kwunjai Kiatgungwalgri
Certified Public Accountant No. 5875


Bangkok
20 January 2006

                                      F-141
<PAGE>

                    [Letterhead of ASV & Associates Limited]


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANT

To the shareholders of
Astracom Networks Company Limited


We have audited the accompanying balance sheets of Astracom Networks Company
Limited as of 31 December 2005 and the related statements of operations, changes
in shareholders' equity and cash flows for the year ended 31 December 2005.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. The balance sheet of Astracom Networks Company Limited as of 31
December 2004 and related statements of operations, changes in shareholders'
equity and cash flows for each of the two years in the period ended 31 December
2004, as presented herein for comparative purposes, were audited by other
auditors, whose reports dated 5 March 2005 and 20 January 2006 expressed an
unqualified opinion on those financial statements.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the company's internal control over financial reporting. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, based on our audit, the financial statements referred to above
present fairly, in all material respects, the financial position of Astracom
Networks Company Limited as of 31 December 2005 and the results of their
operations and cash flows for the year ended 31 December 2005 in conformity with
Thailand generally accepted accounting principles, which differ in certain
respects from those followed in the United States, as described in Note 3 to the
financial statements.

/s/  Kwunjai Kiatgungwalgri

Ms. Kwunjai Kiatgungwalgri
Certified Public Accountant No. 5875


Bangkok
20 January 2006

                                      F-142
<PAGE>

                    [Letterhead of ASV & Associates Limited]


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANT

To the shareholders of
Agrostar Technology Limited
(Formerly Agrostar Limited)


We have audited the accompanying balance sheets of Agrostar Technology Limited
as of 31 December 2005 and 2004 and the related statements of operations,
changes in shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The related statements of operations, changes in shareholders'
equity and cash flows for the period as from 25 June 2003 (the date of
incorporation) to 31 December 2003 of Agrostar Technology Limited, as presented
herein for comparative purposes, were audited by other auditors, whose reports
dated 27 February 2004 and 20 January 2006 expressed an unqualified opinion on
those financial statements.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the company's internal control over financial reporting. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, based on our audit, the financial statements referred to above
present fairly, in all material respects, the financial position of Agrostar
Technology Limited as of 31 December 2005 and 2004 and the results of their
operations and cash flows for the years then ended in conformity with Thailand
generally accepted accounting principles, which differ in certain respects from
those followed in the United States, as described in Note 3 to the financial
statements.

/s/  Kwunjai Kiatgungwalgri

Ms. Kwunjai Kiatgungwalgri
Certified Public Accountant No. 5875


Bangkok
20 January 2006


                                      F-143
<PAGE>

                    [Letterhead of ASV & Associates Limited]


REPORT OF CERTIFIED PUBLIC ACCOUNTANT

To the shareholders of
Astraco (Thailand) Limited


We have audited the accompanying consolidated and company balance sheets of
Astraco (Thailand) Limited as of 31 December 2005, and the related consolidated
and company statements of operations, changes in shareholders' equity and cash
flows for the year ended 31 December 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The consolidated and
company balance sheets of Astraco (Thailand) as of 31 December 2004 and related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the two years in the period ended 31 December 2004, as
presented herein for comparative purposes, were audited by other auditors, whose
reports dated 3 March 2005 and 20 January 2006 expressed an unqualified opinion
on those financial statements.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the company's internal control over financial reporting. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, based on our audit, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of the Company and its subsidiary as of 31 December 2005, and the
consolidated results of their operations and cash flows for the year ended 31
December 2005, in conformity with Thailand generally accepted accounting
principles, which differ in certain respects from those followed in the United
States, as described in Note 3 to the financial statements.

/s/  Kwunjai Kiatgungwalgri

Ms. Kwunjai Kiatgungwalgri
Certified Public Accountant No. 5875


Bangkok
20 January 2006


                                      F-144
<PAGE>


                    [Letterhead of ELMA-POLAUDIT SP, Z.O.O.]


            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                             To the Shareholders of
                             Trezor sp. z.o.o. LTD.


         We have audited the accompanying balance sheets of Trezor sp. z.o.o.
Ltd. Company (the "Company") as at December 31, 2005 and the related statements
of operations in shareholder's equity and cash flows, for the period started in
May and ended December 31, 2005. These financial statements are the
responsibility of the Company's Management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.

In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2005 and the results of their operations and their cash flows
for the period started in May and ended December 31, 2005, in conformity with
accounting principles generally in the United States.


Signed                                            /s/  Krzysztof Burnos
Partner name:                                     KRZYSZTOF BURNOS
Firm name:                                        ELMA-POLAUDIT SP. Z.O.O.
Country:                                          POLAND
Date:                                             FEBRUARY 20, 2006


                                      F-145
<PAGE>


             [Letterhead of Blick Rothenberg, Chartered Accountants]


Report of Independent Registered Accounting Firm to the Shareholders of
Balton CP Limited


We have audited the accompanying consolidated balance sheets of Balton CP
Limited ("the company") at December 31, 2005 and 2004, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the three-year period ended December 31,
2005. These consolidated financial statements are the responsibility of the
company's Board of directors and management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards
as established by the Auditing Standards Board (United States) and in accordance
with the auditing standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. The company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.

In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of the company
and its subsidiary undertakings as at December 31, 2005 and 2004 and the results
of its operations and its cash flows for each of the three years in the
three-year period ended of December 31, 2005, in conformity with accounting
principles generally accepted in United States.


/s/ Blick Rothenberg

Blick Rothenberg
Chartered Accountants
London, England

21 March 2006


                                      F-146
<PAGE>




                                                 Makhteshim-Agan Industries Ltd.

Financial Statements as at December 31, 2005
--------------------------------------------------------------------------------


Contents


                                                                          Page


Auditors' Report                                                         F-148


Consolidated Balance Sheets                                              F-149


Company Balance Sheets                                                   F-151


Consolidated Statements of Income                                        F-152


Company Statements of Income                                             F-153


Statements of Changes in Shareholders' Equity                            F-154


Consolidated Statements of Cash Flows                                    F-156


Company Statements of Cash Flows                                         F-158


Notes to the Financial Statements                                        F-160


Appendix to the Financial Statements - Schedule of Investee Companies    F-236



                                     F-147
<PAGE>

       [Letterhead of Somekh Chaikin, a Member Firm of KPMG International]


Report of Independent Registered Public Accounting Firm

The Shareholders of Makhteshim-Agan Industries Ltd.

We have audited the accompanying balance sheets of Makhteshim-Agan Industries
Ltd. (hereinafter - "the Company") as at December 31, 2005 and 2004, and the
consolidated balance sheets of the Company and its subsidiaries (hereinafter -
the "consolidated") as at such dates, and the related statements of income,
changes in shareholders' equity and cash flows - Company and consolidated - for
each of the years in the three year period ended December 31, 2005. These
financial statements are the responsibility of the Company's Board of Directors
and its Management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We did not audit the financial statements of certain subsidiaries, which
statements constituting 3.3% and 5% of the total consolidated assets as at
December 31, 2005 and 2004, respectively, and total revenues constituting 3.4%,
(4)% and (6)% of the total consolidated revenues for each of the years in the
three year period ended December 31, 2005, respectively. The financial
statements of those subsidiaries were audited by other auditors whose reports
have been furnished to us and our opinion, insofar as it relates to the amounts
included for those companies, is based solely on such reports of the other
auditors.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance that the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Company's Board of Directors and by its
Management, as well as evaluating the overall financial-statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.

In our opinion, based on our audits and on the reports of other auditors, the
financial statements referred to above present fairly, all material respects,
the financial position of the Company and the consolidated financial position of
the Company and its subsidiaries, as at December 31, 2005 and 2004, and their
results of the operations, the changes in the shareholders' equity and their
cash flows - Company and consolidated - for each of the years in the three year
period ended December 31, 2005, in conformity with generally accepted accounting
principles in Israel. Furthermore, in our opinion, these statements are prepared
in accordance with the Securities Regulations (Preparation of Annual Financial
Statements), 1993.

Accounting Principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America (US GAAP). Information related to the nature and effect of such
differences is presented in Note 34 of the financial statements.

As explained in Note 2A., these financial statements are prepared in U.S.
dollars, which the company has designated as its functional currency.

/s/ Somekh Chaikin
Somekh Chaikin
Certified Public Accountants (Isr.)
Member Firm of KPMG International

Tel-Aviv, Israel
March 8, 2006

                                     F-148
<PAGE>
<TABLE>
<CAPTION>

Consolidated Balance Sheets
---------------------------------------------------------------------------------------------


                                                                    As at December 31
                                                            --------------------------------
                                                                      2005              2004
                                                            --------------   ---------------
                                                   Note      US$ thousands     US$ thousands
--------------------------------------------------------------------------------------------
<S>                                                  <C>       <C>               <C>
Current assets
Cash and cash equivalents                                          71,293             40,477
Short-term investments                                              1,269              1,563
Trade receivables                                      3          383,246            369,209
Other receivables                                      4           86,414             77,219
Inventories                                            6          566,416            460,870
                                                            -------------       -------------
                                                                1,108,638            949,338
                                                            -------------       -------------

Long-term investments, loans and receivables           8           22,684             22,070


Fixed assets                                           9
Cost                                                              884,480            824,544
Less - accumulated depreciation                                   421,114            388,805
                                                            -------------       -------------
                                                                  463,366            435,739
                                                            -------------       -------------
Other long-term assets and deferred expenses          10
Cost                                                              812,516            743,310
Less - accumulated amortization                                   277,462            215,890
                                                            -------------       -------------
                                                                  535,054            527,420
                                                            -------------       -------------




                                                            -------------       -------------
                                                                2,129,742          1,934,567
                                                            =============       =============
</TABLE>

                                     F-149
<PAGE>
<TABLE>
<CAPTION>
                                                                         Makhteshim-Agan Industries Ltd.

--------------------------------------------------------------------------------------------------------


                                                                              As at December 31
                                                                        --------------------------------
                                                                                  2005              2004
                                                                        --------------   ---------------
                                                               Note      US$ thousands     US$ thousands
--------------------------------------------------------------------------------------------------------

<S>                                                              <C>            <C>          <C>
Current liabilities
Credit from banks                                                 11          248,038            140,021
Trade payables                                                    12          338,598            325,945
Other payables                                                    13          197,173            192,405
Proposed dividend payable                                                      14,058             11,200
                                                                        --------------   ---------------
                                                                              797,867            669,571
                                                                        --------------   ---------------
Long-term liabilities
Loans from banks                                                  14           35,584             93,023
Convertible debentures                                            15                -            150,000
Other long-term liabilities                                       16            4,314              9,337
Deferred taxes, net                                               17           59,801             54,354
Employee severance benefits, net                                  18           28,014             26,709
                                                                        --------------   ---------------
                                                                              127,713            333,423
                                                                        --------------   ---------------

Minority interest                                                              28,586             18,756
                                                                        --------------   ---------------
Commitments and contingent liabilities                            19

Convertible debentures                                            15           40,479             38,322
                                                                        --------------   ---------------
Shareholders' equity                                              21        1,135,097            874,495
                                                                        --------------   ---------------



                                                                        --------------   ---------------
                                                                            2,129,742          1,934,567
                                                                        ==============   ===============


/s/ Danny Biran                                /s/ Shlomo Yanai                     /s/ Eli Assraf
----------------------------------             ----------------------------------   ---------------------------
Danny Biran                                    Shlomo Yanai                         Eli Assraf
Chairman of the Board of Directors             Chief Executive Officer              Chief Financial Officer

</TABLE>

Approval date of the financial statements:  March 8, 2006


The notes and appendix to the financial statements are an integral part thereof.


                                     F-150
<PAGE>
<TABLE>
<CAPTION>

                                                                            Makhteshim-Agan Industries Ltd.

Company Balance Sheets
----------------------------------------------------------------------------------------------------------


                                                                                As at December 31
                                                                          --------------------------------
                                                                                    2005              2004
                                                                          --------------   ---------------
                                                                 Note      US$ thousands     US$ thousands
----------------------------------------------------------------------------------------------------------

<S>                                                               <C>           <C>                <C>
Current assets
Cash and cash equivalents                                                         8,837              2,649
Short-term investments                                                                -              1,900
Other receivables                                                   4            14,613             11,699
Loans to investee companies                                         5            39,880             30,959
                                                                          --------------   ---------------
                                                                                 63,330             47,207
                                                                          --------------   ---------------
Long-term investments, loans and receivables
Investee companies                                                  7         1,171,531          1,008,999
Bank deposits                                                       8            19,176             19,016
Deferred taxes, net                                                17             7,234              6,674
                                                                          --------------   ---------------
                                                                              1,197,941          1,034,689
                                                                          --------------   ---------------

Office furniture and equipment, net                                                 769                601
                                                                          --------------   ---------------
Deferred expenses                                                   10              346              2,458
                                                                          --------------   ---------------
                                                                              1,262,386          1,084,955
                                                                          ==============   ===============
Current liabilities
Credit from banks                                                  11            59,000                  -
Other payables                                                     13             9,887              6,760
Proposed dividend payable                                                        14,200             11,200
                                                                          --------------   ---------------
                                                                                 83,087             17,960
                                                                          --------------   ---------------
Long-term liabilities
Convertible debentures                                              15                -            150,000
Employee severance benefits, net                                    18            4,136              4,591
                                                                          --------------   ---------------
                                                                                  4,136            154,591
                                                                          --------------   ---------------

Commitments and contingent liabilities                             19

Convertible debentures                                             15            40,066             37,909
                                                                          --------------   ---------------
Shareholders' equity                                               21         1,135,097            874,495
                                                                          --------------   ---------------
                                                                              1,262,386          1,084,955
                                                                          ==============   ===============


/s/ Danny Biran                                /s/ Shlomo Yanai                     /s/ Eli Assraf
----------------------------------             ---------------------------          -----------------------------
Danny Biran                                    Shlomo Yanai                         Eli Assraf
Chairman of the Board of Directors             Chief Executive Officer              Chief Financial Officer

</TABLE>

Approval date of the financial statements:  March 8, 2006


The notes and appendix to the financial statements are an integral part thereof.



                                                F-151
<PAGE>
<TABLE>
<CAPTION>

                                                                                            Makhteshim-Agan Industries Ltd.

Consolidated Statements of Income
-----------------------------------------------------------------------------------------------------------------------------



                                                                                    For the year ended December 31
                                                                          ---------------------------------------------------
                                                                                   2005               2004              2003
                                                                          --------------   ---------------   ----------------
                                                                 Note     US$ thousands      US$ thousands     US$ thousands
                                                            ---------     --------------   ---------------   ----------------

<S>                                                                <C>        <C>               <C>                <C>
Revenues                                                           23         1,740,717         1,539,702          1,177,255
Cost of sales                                                      24         1,059,715           943,908            730,305
                                                                          --------------   ---------------   ----------------
Gross profit                                                                    681,002           595,794            446,950
                                                                          --------------   ---------------   ----------------
Expenses
Research and development, net                                      25            20,628            19,480             16,820
Selling and marketing                                              26           267,918           220,212            163,836
General and administrative                                         27            61,386            66,915             53,899
                                                                          --------------   ---------------   ----------------
                                                                                349,932           306,607            234,555
                                                                          --------------   ---------------   ----------------
Operating income                                                                331,070           289,187            212,395

Financing expenses, net                                            28            34,573            27,571             37,956
                                                                          --------------   ---------------   ----------------
Income before other expenses, net                                               296,497           261,616            174,439

Other expenses, net                                                29            44,211            42,735             38,245
                                                                          --------------   ---------------   ----------------
Income before taxes on income                                                   252,286           218,881            136,194

Taxes on income                                                    17            39,952            52,334             32,618
                                                                          --------------   ---------------   ----------------
Income after taxes on income                                                    212,334           166,547            103,576

Minority interest in income of
 subsidiaries, net                                                               (4,816)           (1,020)              (802)
                                                                          --------------   ---------------   ----------------
Income from continuing operations                                               207,518           165,527            102,774

Cumulative effect as at beginning of the
 year of change in accounting method                             2(R)            (2,025)                 -                  -
                                                                          --------------   ---------------   ----------------
Net income                                                                      205,493           165,527            102,774
                                                                          ==============   ===============   ================

                                                                                     US$              US$                US$
                                                                          --------------   ---------------   ----------------
Earnings per share                                                31
Basic earnings per share of NIS 1 par value                                         0.44             0.39               0.26
                                                                          ==============   ===============   ================
Fully diluted earnings per share of NIS 1
 par value                                                                          0.44             0.37               0.25
                                                                          ==============   ===============   ================
</TABLE>


The notes and appendix to the financial statements are an integral part thereof.


                                                    F-152
<PAGE>
<TABLE>
<CAPTION>

                                                                                              Makhteshim-Agan Industries Ltd.

Company Statements of Income
-----------------------------------------------------------------------------------------------------------------------------


                                                                                    For the year ended December 31
                                                                          ---------------------------------------------------
                                                                                   2005               2004              2003
                                                                          --------------   ---------------   ----------------
                                                                 Note     US$ thousands      US$ thousands     US$ thousands
                                                        -------------     --------------   ---------------   ----------------

<S>                                                              <C>             <C>              <C>             <C>
Income
Company's equity in income of investee
 companies, net                                                                 217,362           163,406            104,015
Management fees from investee companies                                          14,208            13,559             10,007
                                                                          --------------   ---------------   ----------------
                                                                                231,570           176,965            114,022
                                                                          --------------   ---------------   ----------------
Expenses
Research and development, net                                                         -                 -                401
General and administrative                                         27            12,990            15,371             13,927
                                                                          --------------   ---------------   ----------------
                                                                                 12,990            15,371             14,328
                                                                          --------------   ---------------   ----------------
Operating income                                                                218,580           161,594             99,694

Financing expenses (income), net                                   28             9,055            (5,036)              (598)
                                                                          --------------   ---------------   ----------------
Income before other expenses                                                    209,525           166,630            100,292

Other expenses (income), net                                                          6             1,850                 (4)
                                                                          --------------   ---------------   ----------------
Income before taxes on income                                                   209,519           164,780            100,296

Taxes on income                                                    17             4,026              (747)            (2,478)
                                                                          --------------   ---------------   ----------------
Net income                                                                      205,493           165,527            102,774
                                                                          ==============   ===============   ================

                                                                                     US$                US$               US$
                                                                          --------------   ---------------   ----------------

Earnings per share                                                 31
Basic earnings per share of NIS 1 par value                                         0.44              0.39              0.26
                                                                          ==============   ===============   ================
Fully diluted earnings per share of NIS 1
 par value                                                                          0.44              0.37              0.25
                                                                          ==============   ===============   ================
</TABLE>


The notes and appendix to the financial statements are an integral part thereof.


                                                        F-153
<PAGE>
<TABLE>
<CAPTION>
                                                                                      Makhteshim-Agan Industries Ltd.

Statements of Changes in Shareholders' Equity
---------------------------------------------------------------------------------------------------------------------



                                                                                       Receipts from
                                                               Share         Premium     issuance of         Capital
                                                             capital       on shares         options        reserves
                                                       -------------   -------------   -------------   -------------
                                                       US$ thousands   US$ thousands   US$ thousands   US$ thousands
                                                       -------------   -------------   -------------   -------------
<S>                                                        <C>             <C>               <C>            <C>
Balance as at December 31, 2002                             101,804         357,324           4,046          (7,279)
Employee options exercised                                      581            (581)              -               -
Conversion of convertible debentures into shares              1,270          11,331               -               -
Options exercised                                               138           1,469            (134)              -
Adjustments deriving from translation of
 financial statements of investee companies                       -               -               -           1,886
Dividend                                                          -               -               -               -
Proposed dividend payable                                         -               -               -               -
Dividend proposed subsequent to the balance sheet date            -               -               -               -
Net income for the year ended December 31, 2003                   -               -               -               -
                                                       -------------   -------------   -------------   -------------

Balance as at December 31, 2003                             103,793         369,543           3,912          (5,393)
Employee options exercised                                      578            (578)              -               -
Conversion of convertible debentures into shares              3,974          35,581               -               -
Options exercised                                               913           9,637            (903)              -
Adjustments deriving from translation of
 financial statements of investee companies                       -               -               -           2,825
Realization of treasure stoke (see
 Note 21C)                                                        -           3,304               -               -
Dividend                                                          -               -               -               -
Proposed dividend payable                                         -               -               -               -
Dividend proposed subsequent to the balance sheet date            -               -               -               -
Net income for the year ended December 31, 2004                   -               -               -               -
                                                       -------------   -------------   -------------   -------------
Balance as at December 31, 2004                             109,258         417,487           3,009          (2,568)


[Table continued - Statements of Changes]
<CAPTION>

                                                              Dividend
                                                              proposed                   Company shares
                                                            subsequent                      held by the
                                                        to the balance         Retained     Company and
                                                            sheet date         earnings  by a subsidiary           Total
                                                        --------------   --------------  ---------------  --------------
                                                         US$ thousands    US$ thousands   US$ thousands    US$ thousands
                                                        --------------   --------------  ---------------  --------------

<S>                                                           <C>            <C>             <C>              <C>
Balance as at December 31, 2002                                 9,500          157,940         (15,428)         607,907
Employee options exercised                                          -                -               -                -
Conversion of convertible debentures into shares                    -                -               -           12,601
Options exercised                                                   -                -               -            1,473
Adjustments deriving from translation of
 financial statements of investee companies                         -                -               -            1,886
Dividend                                                       (9,500)         (16,600)              -          (26,100)
Proposed dividend payable                                           -           (7,000)              -           (7,000)
Dividend proposed subsequent to the balance sheet date          7,200           (7,200)              -                -
Net income for the year ended December 31, 2003                     -          102,774               -          102,774
                                                        --------------   --------------  ---------------  --------------

Balance as at December 31, 2003                                 7,200          229,914         (15,428)         693,541
Employee options exercised                                          -                -               -                -
Conversion of convertible debentures into shares                    -                -               -           39,555
Options exercised                                                   -                -               -            9,647
Adjustments deriving from translation of
 financial statements of investee companies                         -                -               -            2,825
Realization of treasure stoke (see
 Note 21C)                                                          -                -           4,196            7,500
Dividend                                                       (7,200)         (25,700)              -          (32,900)
Proposed dividend payable                                           -          (11,200)              -          (11,200)
Dividend proposed subsequent to the balance sheet date         12,700          (12,700)              -                -
Net income for the year ended December 31, 2004                     -          165,527               -          165,527
                                                        --------------   --------------  ---------------  --------------
Balance as at December 31, 2004                                12,700          345,841         (11,232)         874,495
</TABLE>



                                                         F-154
<PAGE>
<TABLE>
<CAPTION>
                                                                                         Makhteshim-Agan Industries Ltd.

Statements of Changes in Shareholders' Equity (cont'd)
----------------------------------------------------------------------------------------------------------------------



                                                                                        Receipts from
                                                               Share         Premium      issuance of         Capital
                                                             capital       on shares          options        reserves
                                                       -------------   -------------    -------------   -------------
                                                       US$ thousands   US$ thousands    US$ thousands   US$ thousands
                                                       -------------   -------------    -------------   -------------

<S>                                                         <C>             <C>                <C>            <C>
Balance as at December 31, 2004                             109,258         417,487            3,009          (2,568)
Employee options exercised                                      416            (416)               -               -
Conversion of convertible debentures into shares              7,807         138,852                -               -
Options exercised                                             2,910          31,014           (3,009)              -
Adjustments deriving from translation of
 financial statements of investee companies                       -               -                -          (2,701)
Realization of treasury stoke (see Note 21C)                      -           2,324                -               -
Acquisition of Company shares (see Note 21D)                      -               -                -               -
Tax benefit from options to employees                             -               -                -           1,554
Dividend                                                          -               -                -               -
Dividend proposed subsequent to the balance sheet date            -               -                -               -
Net income for the year ended December 31, 2005                   -               -                -               -
                                                       -------------   -------------    -------------   -------------
Balance as at December 31, 2005                             120,391         589,261                -          (3,715)
                                                       -------------   -------------    -------------   -------------


Table - continued
<CAPTION>

                                                               Proposed
                                                               dividend                   Company shares
                                                             subsequent                      held by the
                                                             to balance         Retained  Company and by
                                                             sheet date         earnings  a subsidiary              Total
                                                          -------------    -------------   -------------    -------------
                                                          US$ thousands    US$ thousands   US$ thousands    US$ thousands
                                                          -------------    -------------   -------------    -------------
<S>                                                             <C>             <C>             <C>              <C>
Balance as at December 31, 2004                                 12,700          345,841         (11,232)         874,495
Employee options exercised                                           -                -               -                -
Conversion of convertible debentures into shares                     -                -               -          146,659
Options exercised                                                    -                -               -           30,915
Adjustments deriving from translation of
 financial statements of investee companies                          -                -               -           (2,701)
Realization of treasury stoke (see Note 21C)                         -                -           1,524            3,848
Acquisition of Company shares (see Note 21D)                         -                -         (65,661)         (65,661)
Tax benefit from options to employees                                -                -                -           1,554
Dividend                                                       (12,700)         (46,805)               -         (59,505)
Dividend proposed subsequent to the balance sheet date           23,500         (23,500)               -               -
Net income for the year ended December 31, 2005                      -          205,493                -         205,493
                                                          -------------    -------------   -------------    -------------
Balance as at December 31, 2005                                  23,500         481,029         (75,369)       1,135,097
                                                          -------------    -------------   -------------    -------------
</TABLE>

The notes and appendix to the financial statements are an integral part thereof.


                                                       F-155
<PAGE>
<TABLE>
<CAPTION>

                                                                                              Makhteshim-Agan Industries Ltd.

Consolidated Statements of Cash Flows
-----------------------------------------------------------------------------------------------------------------------------


                                                                                   For the year ended December 31
                                                                           --------------------------------------------------
                                                                                    2005              2004               2003
                                                                           -------------     -------------      -------------
                                                                           US$ thousands     US$ thousands      US$ thousands
                                                                           -------------     -------------      -------------

<S>                                                                        <C>                  <C>                 <C>
Cash flows from operating activities
Net income                                                                      205,493           165,527            102,774
Adjustments to reconcile net income to net cash flows
 from operating activities (see A. below)                                       (22,335)           50,126            146,466
                                                                           -------------     -------------      -------------
Net cash provided by operating activities                                       183,158           215,653            249,240
                                                                           -------------     -------------      -------------
Cash flows from investing activities
Acquisition of fixed assets                                                     (50,415)          (38,823)           (33,606)
Investment grant received                                                         1,226               686              1,937
Additions to other assets                                                       (38,270)          (33,749)           (20,463)
Purchase of products and intangible assets                                            -                 -            (50,876)
Short-term investments, net                                                         194              (463)              (241)
Investments in newly consolidated companies (see B. below)                       (8,882)          (72,152)            (3,282)
Proceeds from disposal of fixed and other assets                                    334               574              2,049
Proceeds from sale of long-term investments                                           -             2,819                406
Other long-term investments                                                           -              (828)            (2,963)
Acquisition of minority interest in subsidiaries                                   (970)           (1,056)                 -
                                                                           -------------     -------------      -------------
Net cash used in investing activities                                           (96,783)         (142,992)          (107,039)
                                                                           -------------     -------------      -------------
Cash flows from financing activities
Receipt of long-term loans from banks                                             3,846            24,700             97,693
Repayment of long-term loans and liabilities from banks
 and others                                                                     (85,075)         (227,851)          (148,251)
Issuance of convertible debentures less issuance expenses                             -           147,450                  -
Realization of Company debentures by a subsidiary                                     -                 -              4,301
Increase (decrease) in short-term credit from banks and
 others, net                                                                    119,457             4,222            (84,801)
Proceeds from options exercised                                                  30,915             9,647              1,473
Acquisition of Company shares                                                   (65,661)                -                  -
Dividend to shareholders                                                        (56,647)          (39,900)           (26,100)
Dividend to minority shareholders in subsidiaries                                (2,394)             (301)              (241)
                                                                           -------------     -------------      -------------
Net cash used in financing activities                                           (55,559)          (82,033)          (155,926)
                                                                           -------------     -------------      -------------
Increase (decrease) in cash and cash equivalents                                 30,816            (9,372)           (13,725)

Cash and cash equivalents at beginning of the year                               40,477            49,849             63,574
                                                                           -------------     -------------      -------------

Cash and cash equivalents at end of the year                                     71,293            40,477             49,849
                                                                           =============     =============      =============
</TABLE>


The notes and appendix to the financial statements are an integral part thereof.


                                                          F-156
<PAGE>
<TABLE>
<CAPTION>

                                                                                   Makhteshim-Agan Industries Ltd.

Consolidated Statements of Cash Flows (cont'd)
--------------------------------------------------------------------------------------------------------------------


                                                                         For the year ended December 31
                                                                 --------------------------------------------------
                                                                          2005              2004               2003
                                                                 -------------     -------------      -------------
                                                                 US$ thousands     US$ thousands      US$ thousands
                                                                 -------------     -------------      -------------

A.  Adjustments to reconcile net income to net
    cash flows from operating activities:

<S>                                                                     <C>               <C>               <C>
Revenues and expenses not affecting operating cash flows
Depreciation and amortization                                          95,964            82,624             75,673
Adjustment of long-term liabilities to banks and others                (1,127)            1,791              2,537
Minority interest in income of subsidiaries, net                        4,816             1,020                802
Increase in employee severance benefits, net                            1,533             1,973              4,358
Deferred taxes, net                                                     7,830              (163)             3,233
Amortization of discount on convertible debentures                        497               916                978
Capital loss on disposal of fixed and other assets, net                 1,665               511                858
Provision for loss with respect to options granted to
 employees of subsidiaries                                                 55             2,090                330
Gain on issuance of a subsidiary to a third party                           -              (926)                 -

Changes in operating assets and liabilities
Increase in trade and other receivables                               (17,076)          (53,236)           (48,358)
Increase in inventories                                               (84,322)          (69,345)           (15,323)
Increase (decrease) in trade and other payables                       (32,170)           82,871            121,378
                                                                 -------------     -------------      -------------
                                                                      (22,335)           50,126            146,466
                                                                 =============     =============      =============

B.   Investments in newly consolidated companies

Working capital (excluding cash and cash equivalents)                  (7,158)           (6,485)           (2,777)
Fixed assets, net                                                      (2,040)           (2,258)             (506)
Other assets, net                                                      (8,027)          (63,081)                -
Goodwill created on acquisition                                        (5,264)          (41,851)              (43)
Long-term liabilities                                                   1,240            33,896                44
Exercise of Company shares held by a subsidiary                         3,848             7,500                 -
Minority interest                                                       8,519             6,398                 -
                                                                 -------------     -------------      -------------
                                                                       (8,882)          (65,881)           (3,282)
                                                                 =============     =============      =============
Repayment of liability in respect of investee company
 previously acquired                                                        -            (6,271)                -
                                                                 -------------     -------------      -------------
                                                                       (8,882)          (72,152)           (3,282)
                                                                 =============     =============      =============

C.  Non-cash activities

Acquisition of other assets                                           22,448              6,287              1,516
                                                                 =============     =============      =============
Acquisition of fixed assets on supplier credit                        13,029                  -              3,904
                                                                 =============     =============      =============
Acquisition of subsidiary shares in exchange for
 Company shares                                                        3,848                  -                  -
                                                                 =============     =============      =============
</TABLE>


                                                        F-157
<PAGE>
<TABLE>
<CAPTION>

                                                                                    Makhteshim-Agan Industries Ltd.

Company Statements of Cash Flows
---------------------------------------------------------------------------------------------------------------------


                                                                          For the year ended December 31
                                                                  --------------------------------------------------
                                                                           2005              2004               2003
                                                                  -------------     -------------      -------------
                                                                  US$ thousands     US$ thousands      US$ thousands
                                                                  -------------     -------------      -------------

<S>                                                                    <C>               <C>             <C>
Cash flows from operating activities
Net income                                                             205,493           165,527          102,774
Adjustments to reconcile net income to cash flows from
 operating activities (see A. below)                                  (165,918)         (130,946)         (67,443)
                                                                  -------------     -------------      -------------
Net cash provided by operating activities                               39,575            34,581           35,331
                                                                  -------------     -------------      -------------

Cash flows from investing activities
Investment in investee companies                                        (2,313)           (3,938)          (5,501)
Long-term loans to investee companies                                   (4,669)         (135,582)            (326)
Repayment of long-term loans to investee companies                           -                 -           21,623
Short-term credit to investee companies, net                             5,181            (9,056)           2,850
Acquisition of fixed assets                                               (400)             (431)            (221)
Investment in short-term bank deposits, net                                  -             3,554            3,687
Realization of long-term bank deposits                                   1,900            10,000           25,000
Proceeds from sales of fixed assets                                          -                 8               10
                                                                  -------------     -------------      -------------
Net cash provided by (used in) investing activities                       (301)         (135,445)          47,122
                                                                  -------------     -------------      -------------

Cash flows from financing activities
Issuance of convertible debentures less issuance expenses                    -           147,450                -
Proceeds from options exercised                                         30,915             9,647            1,473
Dividend to shareholders                                               (57,340)          (39,900)         (26,100)
Acquisition of Company shares                                          (65,661)                -                -
Repayment of long-term loans from banks                                      -           (16,875)          (4,500)
Increase (decrease) in short-term credit from banks, net                59,000                 -          (50,684)
                                                                  -------------     -------------      -------------
Net cash provided by (used in) financing activities                    (33,086)          100,322          (79,811)
                                                                  -------------     -------------      -------------

Increase (decrease) in cash and cash equivalents                         6,188              (542)           2,642

Cash and cash equivalents at beginning of the year                       2,649             3,191              549
                                                                  -------------     -------------      -------------

Cash and cash equivalents at end of the year                             8,837             2,649            3,191
                                                                  =============     =============      =============
</TABLE>


The notes and appendix to the financial statements are an integral part thereof.


                                                      F-158
<PAGE>
<TABLE>
<CAPTION>

                                                                                    Makhteshim-Agan Industries Ltd.

Company Statements of Cash Flows (cont'd)
--------------------------------------------------------------------------------------------------------------------


                                                                           For the year ended December 31
                                                                 --------------------------------------------------
                                                                          2005              2004               2003
                                                                 -------------     -------------      -------------
                                                                 US$ thousands     US$ thousands      US$ thousands
                                                                 -------------     -------------      -------------

A.     Adjustments to reconcile net income to net
        cash flows from operating activities

<S>                                                                      <C>              <C>                 <C>
Revenues and expenses not affecting operating cash flows:

Depreciation and amortization                                             663             1,235               741
Capital loss (gain) on disposal of fixed assets                             6                25                (4)
Equity in operating results net of dividend received
 in cash                                                             (153,575)         (122,931)          (74,153)
Increase (decrease) in employee severance benefits, net                  (455)              680             1,660
Amortization of discount on convertible debentures                        497               916               978
Adjustment of long-term investments                                      (160)           (5,333)              731
Deferred taxes, net                                                       968              (749)           (2,507)

Changes in operating assets and liabilities:
Decrease (increase) in other receivables                              (17,016)           (5,143)            2,362
Increase in other payables                                              3,154               354             2,749
                                                                 -------------     -------------      -------------

                                                                     (165,918)         (130,946)          (67,443)
                                                                 =============     =============      =============
</TABLE>

The notes and appendix to the financial statements are an integral part thereof.



                                                     F-159
<PAGE>


                                                 Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 1 - General

         A.       Definitions

         (1)      The Company             -  Makhteshim-Agan Industries Ltd.

         (2)      The Group               -  Makhteshim-Agan Industries Ltd. and
                                             its investees.

         (3)      Subsidiaries            -  Companies, including partnerships,
                                             whose financial statements are
                                             fully consolidated, directly or
                                             indirectly, with the financial
                                             statements of the Company.

         (4)      Proportionately          - Companies, including partnerships,
                  consolidated               whose financial statements are
                  companies                  consolidated, directly or
                                             indirectly, with those of the
                                             Company by the proportionate
                                             consolidation method.

         (5)      Investees               -  Subsidiaries and proportionately
                                             consolidated companies.

         (6)      Related parties         -  As defined in Opinion 29 of the
                                             Institute of Certified Public
                                             Accountants in Israel.

         (7)      Interested parties      -  As defined in Paragraph (1) of the
                                             definition of an "interested party"
                                             in a corporation, in Section 1 of
                                             the Securities Law, 1968.

         (8)      Controlling             -  As defined in the Securities
                                             Regulations (Financial Statement
                                             Presentation of shareholders
                                             Transactions between a Company and
                                             a Controlling Shareholder Therein),
                                             1996.

         (9)      CPI                     -  The Consumer Price Index as
                                             published by the Central Bureau of
                                             Statistics.

         (10)     Dollar                  -  The US dollar.


         B.       Description of the Company and its activity

         1.       The Company is engaged through, its local and foreign investee
                  companies primarily in the manufacture and marketing of
                  pesticides, intermediate materials for other industries and
                  synthetic fragrances, mainly for export. The Company is held
                  by Koor Industries Ltd. (Koor). As at December 31, 2005, Koor
                  holds 30.33% of the Company's shares whereas on December 31,
                  2004, Koor held 38.6% of the Company's shares.

                  The Company was established on December 8, 1997 for the
                  purpose of executing a plan for implementing changes in the
                  holdings in Makhteshim Chemical Works Ltd. (Makhteshim) and
                  Agan Chemical Industries Ltd. (Agan), as described below.


                                     F-160
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 1 - General (cont'd)

         B.       Description of the Company and its activity (cont'd)

         2.       On April 26, 1998, the shareholders of Makhteshim and of Agan
                  approved an exchange arrangement, the substance of which was a
                  change in the structure of holdings in the Makhteshim-Agan
                  Group. Prior to the implementation of the arrangement,
                  Makhteshim was a 67% subsidiary of Koor, Makhteshim held a
                  46.6% interest in Agan and Koor held a 5% direct interest in
                  Agan.

                  On May 4, 1998, the Court approved the arrangement, which was
                  consummated pursuant to the provisions of Section 233 of the
                  Companies Ordinance (New Version). On May 7, 1998, the shares
                  of Makhteshim and of Agan were delisted from the Tel-Aviv
                  Stock Exchange and on May 11, 1998, trading commenced in the
                  shares of the Company.

                  On May 10, 1998, the following actions were taken pursuant to
                  the approved exchange arrangement:

                  -      The Company issued shares to all of the shareholders of
                         Makhteshim and of Agan (except in respect of the shares
                         of Agan held by Makhteshim) in exchange for the
                         transfer to the Company of the shares of Makhteshim and
                         Agan held by them.

                  -      Pursuant to the exchange ratio that was determined
                         based on the opinion of economic appraisers, the
                         shareholders of Makhteshim received 2.446 shares of
                         the Company for each share of Makhteshim, and the
                         shareholders of Agan (excluding Makhteshim) received
                         10.247 shares of the Company for each share of Agan.

                  Following the implementation of the above-mentioned
                  transactions, the Company fully owns and controls Makhteshim
                  and Agan.


Note 2 - Reporting Principles and Accounting Policy

A.       Financial statements in US dollars

         General:

         The Company and its Israeli subsidiaries maintain their current
         accounting records in nominal shekels and dollars using a
         multi-currency system. Since most of the Group's revenues are received
         in dollar and the principal raw materials and fixed assets are
         purchased in dollar, the dollar is the principal currency of the
         economic environment in which the Group operates ("the functional
         currency"). Accordingly, the dollar is the measurement and reporting
         currency in these financial statements. It should not be construed that
         the translated amounts actually represent or can be converted into
         dollars, unless otherwise indicated in these statements.


                                     F-161
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 2 - Reporting Principles and Accounting Policy (cont'd)

         A.       Financial statements in US dollars (cont'd)

         1.       Balance sheet:

                  a)       Non-monetary items (items, the stated amounts of
                           which reflect their historical value upon acquisition
                           or creation) that were acquired in a currency other
                           than the dollar, are translated according to the
                           exchange rate of the dollar on their date of
                           acquisition or creation. The following items are
                           treated as non-monetary items: fixed assets and the
                           related accumulated depreciation, inventory, other
                           assets, deferred expenses and the related accumulated
                           amortization, and shareholders' equity items which
                           derive from funds invested by shareholders.

                           The amounts of the non-monetary assets do not
                           necessarily represent their realizable value or
                           current economic value, rather only the original
                           dollar cost thereof in nominal values.

                  b)       The net asset value of investments in investees and
                           the minority interest in consolidated subsidiaries
                           are determined on the basis of the dollar translated
                           financial statements of those companies.

                  c)       Monetary items (items, the amounts of which as stated
                           in the balance sheet reflect current or realizable
                           values, as at the balance sheet date) are translated
                           into dollars at the exchange rate at the balance
                           sheet date.

         2.       Statement of income:

                  a)       The components of the statement of income reflecting
                           transactions carried out during the year - sales,
                           purchases, labor costs, etc. - in a currency other
                           than the dollar, are translated according to the
                           exchange rate of the dollar on the date of the cash
                           flow or balance sheet date, whichever earlier.
                           Changes in monetary balances denominated in
                           currencies other than the functional currency arising
                           from movement in the exchange rates are included in
                           the specific expense or income items to which they
                           relate.

                  b)       The components of the statement of income relating to
                           non-monetary balance sheet items have been translated
                           according to the same exchange rate used for
                           translating the related balance sheet items (mainly:
                           changes in inventory, depreciation and amortization,
                           capital gains, etc.).

                  c)       The Company's equity in operating results of
                           investees is determined on the basis of the financial
                           statements of those companies.

                  d)       Taxes on income:

                           Current taxes are composed of payments on account
                           during the year, plus amounts due as at the balance
                           sheet date (or net of amounts refundable at the
                           balance sheet date). The payments on account are
                           translated according to the exchange rate of the
                           dollar on the date of each payment, while the amounts
                           due or refundable are included without adjustment.
                           Therefore, current taxes also include the expense or
                           income resulting from the erosion of the payments on
                           account, from the payment date until the balance
                           sheet date.
                           Deferred taxes - see Note 2R and Note 17G.


                                     F-162
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 2 - Reporting Principles and Accounting Policy (cont'd)

         B.       Dividend proposed subsequent to the balance sheet date

         Pursuant to Accounting Standard No. 7, "Events Occurring Subsequent to
         the Balance Sheet Date", a liability which relates to a dividend
         proposed or declared subsequent to the balance sheet date, is reflected
         in the financial statements only in the period declared. In addition,
         separate expression of the amount of the dividend intended for
         distribution is provided as part of the statement of changes in
         shareholders' equity, as stated, against reduction of the retained
         earnings' balance.


         C.       Foreign investee companies

         As of January 1, 2004, the Company applies Accounting Standard No. 13,
         "Effect of changes in Exchange Rates of Foreign Currency". The Standard
         discusses the translation of transactions in foreign currency and the
         translation of financial statements of foreign operations for purposes
         of including them in the financial statements of the reporting entity.
         The Standard provides principles for classifying foreign operations as
         an autonomous foreign investee or as an integrated investee, on the
         basis of the indications described in the standard and the use of
         discretion, and it provides the method for translating the financial
         statements of autonomous foreign investees.

         The financial statements of foreign investees that are integral to the
         Group's operations based on the criteria provided in Accounting
         Standard No. 13, are translated into dollars as follows: non-monetary
         items in the balance sheet are translated at the historical exchange
         rates as at the transaction date whereas monetary balance sheet items
         are translated at the exchange rate in effect on the balance sheet
         date. Items in the statement of income are translated at average
         exchange rates, except for revenues and expenses, translated using
         historical exchange rates due to their relationship to non-monetary
         items that are also were translated based on the historical exchange
         rates. Translation differences are recorded in the statement of income.

         The financial statements of foreign investees that operate as
         "autonomous entities" based on the criteria provided in Accounting
         Standard No. 13, are translated into dollars as follows: monetary and
         non-monetary balance sheet items are translated based on the closing
         exchange rate. Commencing from January 1, 2004, a balance of goodwill
         created on acquisition of an autonomous investee entity overseas is
         treated as an asset of that entity and is translated based on the
         closing rate.

         Items in the statement of income are translated at the exchange rate on
         the transaction date. Translation differences are recorded in the
         statement of income in a separate category in the shareholders' equity
         section ("adjustments deriving from translation of financial statements
         of investee companies") up to the time of realization of the net
         investment.

                                     F-163
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 2 - Reporting Principles and Accounting Policy (cont'd)

         D.       Consolidated financial statements

         (1)      The consolidated financial statements of the group are
                  prepared in conformity with generally accepted accounting
                  principles in Israel and include the financial statements of
                  those companies that it controls. Companies, which are under
                  joint control are consolidated by the proportionate
                  consolidation method.

         (2)      A list of companies whose financial statements are included in
                  the consolidated statements as well as the rate of control and
                  ownership thereof, is presented in the appendix to the
                  financial statements.

         (3)      For purposes of the consolidation, the amounts appearing in
                  the financial statements of the subsidiaries were taken into
                  account, after the adjustments required by the application of
                  the uniform accounting policies used by the Group.

         (4)      The excess of the cost of investments in subsidiaries over the
                  fair value of identified assets, less the identified
                  liabilities (net of taxes in respect of temporary differences)
                  at the date of acquisition, is recorded as goodwill.

                  The goodwill is presented in the consolidated balance sheet in
                  the category "other assets and deferred expenses" and is
                  amortized in the "other expenses" item (regarding the
                  amortization period, see Section M., below).

         (5)      The consolidated financial statements include the share of
                  assets, liabilities, income and expenses of proportionately
                  consolidated subsidiaries, based on the percentage interest
                  held in these companies.

         (6)      Intercompany balances and transactions, including profits on
                  intercompany sales which have not yet been realized outside
                  the Group, are eliminated in consolidation.


         E.       Use of estimates

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


         F.       Cash equivalents

         Cash equivalents include short-term bank deposits with an original
         maturity not exceeding three months.


                                     F-164
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 2 - Reporting Principles and Accounting Policy (cont'd)

         G.       Short-term investments

         Marketable securities held as a short-term investment are stated at
         their market value as of the balance sheet date. Changes in the value
         of the marketable securities are fully recognized on a current basis.


         H.       Allowance for doubtful accounts

         The financial statements include an allowance for specific doubtful
         accounts, which fairly reflects, in Management's estimation, the loss
         expected from receivables the collection of which is doubtful.
         Management determines the allowance, based, in part, on an evaluation
         of credit risk using available information regarding the financial
         position of the debtors, the extent of their activities and evaluation
         of collateral received from them. The financial statements include
         specific allowances for doubtful accounts and, as mentioned in Section
         I., below, with respect to trade receivables included in the framework
         of a subordinated capital note received as part of a securitization
         transaction.

         In addition, the financial statements also include a general allowance
         for doubtful debts, which in the opinion of Management reflects the
         risk included in the debts of its customers beyond the risk for which
         specific allowances were made.


         I.       Sale of financial assets

         The sale of financial assets is recognized as a sale when control over
         the asset is transferred in full to an independent third party, and the
         full amount of the risks and rewards embodied by the asset are
         transferred to an independent third party.


         J.       Inventories

         Inventories are valued at the lower of cost or market, cost being
         determined as follows:

         -        Raw materials, packing materials, purchased products, spare
                  parts and maintenance materials on the "moving average" basis.

         -        Finished products and work in progress on the basis of average
                  production cost including materials, labor and manufacturing
                  overhead expenses.


         K.       Investments in investee companies

         (1)      Investments in investee companies are stated in the Company's
                  balance sheet according to the equity method. In determining
                  the net asset value of the investments in these companies, the
                  amounts taken into account are based on the financial
                  statements of these companies, after making the adjustments
                  thereto required by the application of generally accepted
                  accounting principles.

         (2)      Goodwill amortization - see Note 2M.


                                     F-165
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 2 - Reporting Principles and Accounting Policy (cont'd)

         L.       Fixed assets

         (1)      Fixed assets are presented at cost.

         (2)      The cost of assets includes financing expenses related to the
                  financing of their construction during the pre-operation
                  period. The financing expenses were capitalized as follows:

                  A.       Where the assets under construction are financed by
                           specific credit - the financing expenses relating to
                           such credit.

                  B.       Where the financing is not made by specific credit -
                           by using a rate representing the weighted average
                           cost rate of the credit sources, the cost of which
                           was not otherwise specifically capitalized.

         (3)      The cost of the self-constructed assets includes materials,
                  labor costs and interest during the pre-operation period.

         (4)      The cost of assets with respect to which an investment grant
                  was received is presented after deduction of the investment
                  grant received with respect thereto.

         (5)      Depreciation is computed by the straight-line method over the
                  estimated useful lives of the assets. Annual rates of
                  depreciation are:
                                                                 %
                                                      ------------
                  Leasehold rights and buildings            2 - 4
                  Plant and equipment                         4.5
                  Motor vehicles                          15 - 20
                  Office furniture and equipment           6 - 15   (mainly 7%)
                  Computer and auxiliary equipment        20 - 33


         M.       Other assets and deferred charges

         Other assets and deferred charges are amortized by the straight-line
         method over the expected benefit period as follows:

         -        Product registration and acquisition of intellectual property
                  - mainly eight years.

         -        Goodwill arising on the acquisition of subsidiaries - ten or
                  twenty years (mainly twenty years).

         -        Intangible assets in purchase of products and companies -
                  mainly twenty years.

         -        Marketing rights - five years to ten years.

         -        Debenture issuance expenses - six years.

         -        Non-competition and confidentiality agreement - five years.

         The amortization periods are re-examined, when economic conditions
         require, with the estimated expected benefit period of the assets.

         Licensing and license costs incurred in respect of products that can be
         identified and isolated and that in the Group's estimation will produce
         future economic benefit, are capitalized in the "other assets" category
         and amortized over the period of their expected economic benefit.


                                     F-166
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 2 - Reporting Principles and Accounting Policy (cont'd)

         N.       Debentures convertible into shares

         Debentures convertible into shares are included in the balance sheet
         based on the probability of their conversion, as provided in Opinion 53
         of the Institute of Certified Public Accountants in Israel. Debentures,
         the conversion of which is not probable, are included as a liability at
         their liability amount. Debentures, the conversion of which is
         probable, are stated between the items "long-term liabilities" and
         "shareholders' equity", at the higher of the liability or capital
         value.

         O.       Company shares held by the Company and by a subsidiary

         Company shares held by the Company and by a subsidiary are stated at
         cost, as a deduction from the Company's shareholders' equity.

         P.       Revenue recognition

         Revenues from sales of products are recognized upon shipment to the
         customer and the transfer of the risks involved with ownership of the
         products sold.

         Q.       Research and development costs

         Research and development costs, net of grants and participations, are
         charged to the statement of income as incurred. The net research and
         development expenses are presented separately in the statement of
         income after gross profit.

         R.       Deferred taxes

         In July 2004, the Israeli Accounting Standards Board published
         Accounting Standard No. 19 regarding "Taxes on Income" (hereinafter -
         "the Standard"). The new Standard applies to financial statements for
         periods beginning on January 1, 2005. Adoption of the Standard was made
         by means of a cumulative effect of change in accounting method. The
         transition to Accounting Standard No. 19 amounted to a one-time impact
         on the income of $2 million (decrease) that derived, mainly, from an
         increase in liabilities for deferred taxes relating to lands.

         The Group companies create deferred taxes in respect of temporary
         differences. The temporary differences are differences in the value of
         assets and liabilities for tax purposes and for financial reporting
         purposes. Allocation of the taxes, as stated, is executed with respect
         to the differences applying to assets, the amortization of which is
         deductible for tax purposes. The deferred tax balances (asset or
         liability) are calculated according to the liability approach, i.e.,
         the tax rates expected to be in force when the deferred tax liability
         is utilized, or when the deferred tax asset is realized, as they are
         known proximate to the date of approval of the financial statements.

         In calculating deferred taxes, no account was taken of the taxes, which
         would apply in a case of sale of the investments in the investee
         companies, since it is the intention of the Company to hold these
         investments and not to sell them.

         The Group may be subject to additional tax in a case of distribution of
         dividends between the Group companies. This additional tax was not
         provided for in the financial statements in cases where Group policy is
         not to distribute a dividend that involves additional tax to the Group.


                                     F-167
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 2 - Reporting Principles and Accounting Policy (cont'd)

         S.       Earnings per share

         Earnings per share data are calculated in accordance with opinion No.
         55 of the Institute of Certified Public Accountants in Israel,
         retroactively adjusted for the bonus element in the issuance of rights,
         and taking into consideration the likelihood of the exercise of option
         warrants and convertible debentures issued by the Group.

         T.       Derivative financial instruments

         Gain or losses on derivative financial instruments held to hedge
         existing assets and liabilities are recognized concurrently with the
         results of the hedged assets and liabilities.

         The results of derivative financial instruments held to hedge firm
         commitments are deferred, and are recognized in the same period in
         which the results from the hedged transactions are recognized.

         Derivative financial instruments, which are not designated for hedging
         purposes, are presented in the balance sheet based on their fair value.
         Changes in fair value are recorded in the statement of income in the
         period in which they occur.

         The fair value of derivative financial instruments is determined based
         on their market value, and in the absence of such quoted market price,
         fair value is determined based on a valuation model.

         U.       Environmental costs

         The ongoing cost of maintenance and operation of facilities for the
         prevention of environmental pollution and projected provisions for
         environment rehabilitation costs stemming from current or past
         activities, are charged to expense as incurred. The cost of
         constructing facilities to prevent pollution, which increase the life
         expectancy of a facility or its efficiency, or decrease or prevent
         pollution, are charged to the cost of fixed assets and are depreciated
         according to the usual depreciation rates used by the Group.

         V.       Impairment in value of assets

         The Group applies Accounting Standard No. 15 - Impairment in Value of
         Assets (hereinafter - "the Standard"). The Standard provides procedures
         which a company must apply in order to ensure that its assets in the
         consolidated balance sheet (to which the Standard applies), are not
         presented at an amount which is in excess of their recoverable value,
         which is the higher of the net selling price or the realization value
         (the present value of the estimated future cash flows expected to be
         derived from use and disposal of the asset).

         The Standard applies to all the assets in the consolidated balance
         sheet, except for tax assets and monetary assets. In addition, the
         Standard provides rules for presentation and disclosure with respect to
         assets whose value has declined. Where the value of an asset in the
         balance sheet is greater than its recoverable value, the Group
         recognizes a loss from impairment in value in an amount equal to the
         difference between the book value of the asset and its recoverable
         value. The loss recognized, as stated, will be eliminated only if there
         have been changes in the estimates used in determining the asset's
         recoverable value from the date on which the last loss from impairment
         in value was recognized.

                                     F-168
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 2 - Reporting Principles and Accounting Policy (cont'd)

         W.       Linked balances and balances in foreign currency

         Balances in or linked to foreign currency are included in the financial
         statements at the representative exchange rates on the balance sheet
         date. Balances linked to the Consumer Price Index are included on the
         basis of the index relevant to each linked asset or liability.

         Data regarding the representative exchange rate of the US dollar and
         the Consumer Price Index are as follows:

<TABLE>
<CAPTION>
                                       Consumer      Exchange rate     Exchange rate      Exchange rate
                                          Price   of the US dollar  of the US dollar   of the US dollar
                                          Index        against the       against the        against the
                                       (Points)                NIS    Brazilian real               Euro
                                      ----------  ----------------  ----------------   ----------------
<S>                                      <C>                 <C>               <C>                <C>
         As at
         -----
         December 31, 2005               110.00              4.603             2.341              0.845
         December 31, 2004               107.44              4.308             2.654              0.733

         Changes during the year:
         ------------------------
         2005                             2.39%              6.85%           (11.8%)             15.29%
         2004                             1.21%            (1.62%)           (8.13%)            (7.33%)
         2003                            (1.9%)             (7.5%)           (18.2%)            (16.9%)
</TABLE>

         X.       Segment reporting

         Segment reporting is presented in accordance with the Accounting
         Standard No. 11.

         Y.       Tax benefits in respect of share-based payments to employees

         Tax benefits in respect of share-based payments to employees for which
         the Company did not record expenses, were recorded directly under the
         shareholders' equity in accordance with Clarification 7 of the Israel
         Accounting Standards Board.

         Z.       Disclosure of the effect of new accounting standards in the
                  period prior to their application

         1.       In August 2005, the Israeli Accounting Standards Board
                  published Accounting Standard No. 22, "Financial Instruments:
                  Disclosure and Presentation". The Standard provides the rules
                  for presentation of financial instruments in the financial
                  statements and details the disclosure required in respect
                  thereof. In addition, the Standard provides the method for
                  classifying financial instruments as financial liabilities and
                  as shareholders' equity, for classifying the interest,
                  dividends, losses and gains related thereto and the
                  circumstances in which financial assets and financial
                  liabilities should be offset. The new Standard applies to
                  periods beginning on January 1, 2006 or thereafter. The
                  Standard provides that it is to be adopted on a prospective
                  ("from here on") basis. Accordingly, the comparative data
                  presented in the financial statements for periods beginning on
                  the date the Standard comes into effect will not be restated.

                  The expected impact of the first-time application of the
                  Standard on the Group's financial statements is: separation of
                  convertible debentures into a liability component and a
                  capital component (resulting in an impact on the shareholders'
                  equity, long-term liabilities and financing expenses which in
                  the opinion of management of the Company are immaterial) and
                  elimination of provisions for losses in respect of options to
                  employees in consolidated companies in the amount of
                  approximately $2 million.

                                     F-169
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------

Note 2 - Reporting Principles and Accounting Policy (cont'd)

         Z.       Disclosure of the effect of new accounting standards in the
                  period prior to their application (cont'd)

         2.       In September 2005 the Standards Board published Accounting
                  Standard No. 24, "Stock-Based Compensation". The Standard
                  requires recognition of stock-based compensation transactions
                  in the financial statements, including transactions with
                  employees or other parties that are to be settled with capital
                  instruments, cash or other assets. According to the Standard,
                  stock-based compensation transactions wherein goods or
                  services are received, are to be recognized based on their
                  fair value.

                  The Standard also provides disclosure requirements concerning
                  the substance and scope of stock-based compensation
                  arrangements that existed during the period, and the manner in
                  which the fair value of such arrangements was determined.

                  The Standard will apply to financial statements for periods
                  beginning on January 1, 2006, and early application is
                  recommended. The Standard's provisions are to be applied for
                  each stock-based compensation transaction executed after March
                  15, 2005 that did not fully vest by the date of initial
                  implementation of the Standard.

                  Changes in the terms of stock-based compensation transactions
                  that are settled by means of capital instruments are to be
                  accounted for in accordance with the Standard, and the
                  comparative data relating to periods commencing March 15, 2005
                  is to be restated.

                  The expected impact of the initial application of the Standard
                  on the Group's financial statements is the recording of an
                  expense in respect of benefits granted to employees in the
                  framework of option distribution plans after March 15, 2005.
                  On August 8, 2005, the Group's Board of Directors decided to
                  amend the exercise price of part of the options - see Note
                  21(B)(d). Furthermore, the subsidiary has share-based payment
                  transactions settled in cash regarding which the provisions of
                  the standard should be implemented retroactively.

                  In the opinion of management of the Company and the
                  subsidiary, the expense that will be recorded in 2006 in
                  respect of the aforementioned as an amendment to the
                  comparative figures will be immaterial.

         3.       In February 2006, the Israeli Accounting Standards Board
                  published Accounting Standard No. 21, "Earnings per Share"
                  (hereinafter - "the Standard"). The Standard provides that an
                  entity is to calculate the amounts of the reporting entity's
                  basic earnings per share with respect to income or loss that
                  relate to the reporting entity's ordinary shareholders,
                  including to income or loss from continuing operations that
                  relate to the reporting entity's ordinary shareholders, if
                  such income or loss is reported. The basic earnings per share
                  are to be calculated by dividing net income or loss allocable
                  to the reporting entity's ordinary shareholders (the
                  numerator), by the weighted-average number of ordinary shares
                  outstanding (the denominator) during the period, for
                  calculating diluted earnings per share, an entity is to adjust
                  the income or loss allocable to the reporting entity's
                  ordinary shareholders and the weighted-average number of
                  ordinary shares outstanding, for the impact of all potentially
                  dilutive ordinary shares. The Standard applies to financial
                  statements for periods beginning on January 1, 2006 and
                  thereafter. The Standard's provisions are to be applied
                  retroactively to the comparative earnings per share relating
                  to prior periods.

                  Transition to the Standard will amount to an increase in the
                  basic earnings per share in the amount of $ 0.05 and the
                  amount of $ 0.04 for the years 2005 and 2004, respectively,
                  and an increase in the diluted earnings per share in the
                  amount of $ 0.01 and the amount of $ 0.01 for the years 2005
                  and 2004, respectively.

                                     F-170
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 2 - Reporting Principles and Accounting Policy (cont'd)

         Z.       Disclosure of the effect of new accounting standards in the
                  period prior to their application (cont'd)

         4.       In February 2006, the Israeli Accounting Standards Board
                  published Accounting Standard No. 25, "Revenues" (hereinafter
                  - "the Standard"). The Standard provides the required
                  accounting treatment (rules for recognition, measurement,
                  presentation and disclosure) with respect to revenues deriving
                  from sales of goods, provision of services, and use by others
                  of an entity's assets, which generate interest, royalties and
                  dividends. The Standard provides that an entity is to measure
                  its revenues based on the fair value of the consideration
                  received and/or that it is entitled to receive. The Standard
                  applies to financial statements for periods beginning on
                  January 1, 2006 or thereafter. An entity that in the past did
                  not present its revenues according to the requirements of the
                  Standard regarding the reporting of gross or net revenues, is
                  to apply the Standard's requirements retroactively with
                  respect to its revenues for all the periods reported as
                  comparative figures in the financial statements for periods
                  beginning from the Standard's commencement date. Assets and
                  liabilities included in the financial statements as at
                  December 31, 2005 at amounts different from those that would
                  have been presented if the Standard's provisions had been
                  implemented, are to be adjusted as at January 1, 2006 to the
                  amounts that would have been presented according to the
                  Standard's instructions. The effect of adjusting the amounts
                  of assets and liabilities as at January 1, 2006, as stated, is
                  to be recognized as a cumulative effect of a change in
                  accounting method. Except for that stated above, the
                  comparative figures in the financial statements for periods
                  beginning from the Standard's commencement date, are to be
                  presented as they were reported in the past.

                  In the estimation of Company Management, the initial
                  application of the Standard will have no effect on the Group's
                  financial statements.


                                     F-171
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------

Note 3 - Trade Receivables

         Consolidated

         Composition:
                                                        December 31
                                              --------------------------------
                                                       2005               2004
                                              -------------      -------------
                                              US$ thousands      US$ thousands
                                              -------------      -------------
         Open accounts -
           Foreign                                 337,508            312,711
           Domestic (Israel)                        13,721             14,812
         Checks receivable                           5,801              5,796
         Subordinated capital note and
           receivables related to sale of
           trade receivables in a
           securitization transaction (1)           55,022             60,536
                                              -------------      -------------
                                                   412,052            393,855
         Net of allowance for doubtful debts        28,806             24,646
                                              -------------      -------------
                                                   383,246            369,209
                                              =============      =============


         (1) Sale of trade receivables in a securitization transaction:
             ---------------------------------------------------------

                                                         December 31
                                                ------------------------------
                                                         2005             2004
                                                -------------    -------------
                                                US$ thousands    US$ thousands
                                                -------------    -------------

         Trade receivables included in the
           securitization transaction
           as at the balance sheet date               201,529          202,832
         Less - proceeds in respect of
           such receivables, net (*)                  165,196          146,264
                                                -------------    -------------
         Subordinated capital note                    36,333           56,568
         Trade receivables sold where
            the proceeds in respect thereof
            were received subsequent to the
            balance sheet date, net                   18,689            3,968
                                                -------------    -------------
         Subordinated capital note and
            receivables related to sale of
            trade receivables in a
            securitization transaction                55,022           60,536
                                                =============    =============


         (*)  As at the balance sheet date cash proceeds in the amount of $146.5
              million were received in respect of the sale of trade receivables
              in a securitization transaction (December 31, 2004 - approximately
              $142.2 million).


                                     F-172
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 3 - Trade Receivables (cont'd)

         Consolidated (cont'd)

                  In October 2001, the Company and certain subsidiaries signed
                  an agreement according to which those companies entered into a
                  securitization transaction, under which such companies sold
                  all their trade receivables to foreign companies, which were
                  incorporated for this purpose and which are not owned or
                  controlled by the Makhteshim Agan Industries Group
                  (hereinafter - "the Target Companies"). The purchase of the
                  debts by the purchasing companies was financed by Kitty Hawk
                  Funding Corp., a US corporation of the Bank of America Group.

                  On September 28, 2004, the Company and subsidiaries signed an
                  agreement with Bank of America to end the undertaking in the
                  securitization transaction. On the same date, the Company and
                  certain subsidiaries (hereinafter - "the Companies") entered
                  into a new agreement with Rabobank International for sale of
                  customer receivables in the framework of a securitization
                  transaction, this being in place of the prior agreement with
                  Bank of America. The new agreement is similar in principle to
                  the prior agreement with certain changes including, among
                  others, that in the new agreement additional Company
                  subsidiaries are included in the transaction.
                  Pursuant to the new securitization agreement, the Companies
                  will sell their trade receivables to a foreign company
                  (hereinafter - "the Acquiring Company") which was set up for
                  this purpose and which is not owned or controlled by the
                  Makhteshim Agan Industries Group.
                  Acquisition of the trade receivables by the Acquiring Company
                  will be financed by a U.S. company, Erasmus Capital
                  Corporation, of the Rabobank International Group. At the time
                  of transition from the prior agreement to the new agreement
                  the Acquiring Company purchased the trade receivables that
                  remained in the ownership of the Target Companies. Trade
                  receivables included in the securitization transaction are
                  those who stand in compliance with a number of criteria, as
                  determined in the agreement.

                  The maximum expected volume of the financial means available
                  to the Acquiring Company for the purpose of purchasing the
                  trade receivables of the consolidated subsidiaries, is $250
                  million (as opposed to $150 million in the former
                  securitization agreement) on a current basis, such that the
                  amounts to be collected from customers whose debts were sold,
                  will serve to purchase new trade receivables.

                  In 2005, additional subsidiaries in Australia and in the
                  United States were added to the agreement.

                  The period in which the Companies will sell their trade
                  receivables to the Acquiring Company is one year from the date
                  of the closing of the transaction. The period may be extended,
                  with the consent of both parties, for additional one-year
                  periods, up to a maximum of 4 extensions.

                  The price at which the trade receivables will be sold is the
                  amount of the debt being sold less an amount calculated on the
                  basis of the period anticipated to pass between the date the
                  debt was sold and the repayment date.

                  On the date of purchasing the debt, the acquiring company will
                  pay in cash the major part of the debt price. The balance of
                  the debt price will be embodied in a subordinated capital note
                  to be paid after the debt is collected. The rate of the cash
                  payment will vary in accordance with the composition of the
                  client portfolio and its performance.

                                     F-173
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 3 - Trade Receivables (cont'd)

         (1)      Sale of trade receivables in a securitization transaction:
                  ----------------------------------------------------------
                  (cont'd)

                  The Company shall bear in full losses sustained by acquiring
                  companies due to the non-payment of the trade receivables
                  included in the securitization transaction, up to the amount
                  of the total outstanding balance of the debt included in the
                  subordinated capital note.

                  The Acquiring Company will not have a right of recourse to the
                  Companies with respect to the amounts paid in cash, except in
                  the case of debts in respect of which a commercial dispute
                  arises between the Companies and their customers, namely, a
                  dispute arising from an alleged failure to comply with an
                  obligation of the seller in the supply agreement for the
                  product, such as: failure to supply the correct product,
                  defect in the product, non-compliance with the supply date,
                  etc.

                  The Companies will handle for the Acquiring Company the
                  collection of the sold trade receivables included as part of
                  the securitization transaction.

                  The accounting treatment of the sale of trade receivables in a
                  securitization transaction is the recognition of the sale of
                  only that part of the debt where the risk and control thereof
                  has been finally and absolutely transferred to the buyer.
                  Accordingly, trade receivables sold were deleted where the
                  consideration in respect thereof had been received in cash
                  and/or by a non-deferred liability. With respect of that part
                  of the trade receivables included in the securitization
                  transaction, which was not recognized as a sale, a
                  subordinated capital note receivable was recorded in the
                  amount of the difference between the amount of trade
                  receivables included in the transaction and the amounts of
                  consideration received, as above, and receivables were
                  recorded in respect of the debts sold where the consideration
                  in respect thereof was received subsequent to the balance
                  sheet date.

                  The loss on sale of the trade receivables is recognized at the
                  date of sale and is reflected in the item "other expenses".

                  As part of the agreement, the Company committed to maintain
                  certain financial ratios, mainly, debt to equity and
                  profitability ratios - see Note 20C.

         (2)      During 2005, subsidiaries signed agreements with a bank
                  pursuant to which the subsidiaries sold certain trade
                  receivables to the bank. In the balance sheet as at December
                  31, 2005, the balance of the trade receivables was reduced in
                  respect of the receivables sold, in the amount of $17.3
                  million.

                  The difference between the book value of the receivables sold
                  and the proceeds received from the bank was recorded in the
                  "other expenses" item. In accordance with the agreements, the
                  subsidiaries committed to indemnify the bank in certain cases
                  defined in the agreements, if the receivables sold are not
                  paid.

                                     F-174
<PAGE>
<TABLE>
<CAPTION>

                                                                                               Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
------------------------------------------------------------------------------------------------------------------------------



Note 4 - Other Receivables
                                                                Consolidated                            Company
                                                        --------------------------------     ---------------------------------
                                                                 December 31                          December 31
                                                        --------------------------------     ---------------------------------
                                                                 2005               2004              2005               2004
                                                        -------------      -------------     -------------      --------------
                                                        US$ thousands      US$ thousands     US$ thousands      US$ thousands
                                                        -------------      -------------     -------------      --------------
<S>                                                           <C>               <C>                  <C>                 <C>
         Claims from the government in
          respect of participations and
          tax refunds                                         33,809             28,277                 -                  -
         Advance tax payments, net of
          provisions                                           8,331             11,071                 -                  -
         Employees (1)                                         1,300              1,376                 -                  6
         Deferred taxes (Note 17)                             15,922             17,037               341                325
         Current maturities of long-term
          receivables                                            216                420                 -                  -
         Prepaid expenses and accrued
          income                                              12,219             10,372                72                168
         Dividend receivable                                       -                  -            14,200             11,200
         Other                                                14,617              8,666                 -                  -
                                                        -------------      -------------     -------------      --------------

                                                              86,414             77,219            14,613             11,699
                                                        =============      =============     =============      ==============

         (1)  Includes a non-linked bank deposit
              designated for the purpose of
              granting loans to employees and
              bearing annual interest at the
              rate of 4% - 2.15%                                 295                417                 -                  -
                                                        =============      =============     =============      ==============


Note 5 - Loans to Investee Companies

         Company
                                                                                                      December 31,
                                                                                             ---------------------------------
                                                                                                      2005               2004
                                                                                             -------------      -------------
                                                                                             US$ thousands      US$ thousands
                                                                                             -------------      -------------

         Short-term loans (1)                                                                       25,778            16,056
         Current accounts (2)                                                                       14,102            14,903
                                                                                             -------------      -------------
                                                                                                    39,880            30,959
                                                                                             =============      =============

         (1) The loan is a dollar loan and bears interest of 2.3% - 4.6%.
         (2) The accounts are mainly linked to the US dollar and are non-interest bearing.
</TABLE>


                                                         F-175
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------

Note 6 - Inventories

         Consolidated

                                                         December 31
                                                --------------------------------
                                                         2005               2004
                                                -------------      -------------
                                                US$ thousands      US$ thousands
                                                -------------      -------------

         Finished products                           345,187            263,579
         Work in progress                             47,159             29,117
         Raw materials                               125,064            115,046
         Packing materials                             4,587              4,863
         Spare parts and maintenance materials        12,694             12,820
                                                -------------      -------------
                                                     534,691            425,425
         Purchased products                           31,725             35,445
                                                -------------      -------------
                                                     566,416            460,870
                                                =============      =============


Note 7 - Investments in Investee Companies

         Company

         A.   Composition

                                                        December 31
                                               --------------------------------
                                                        2005               2004
                                               -------------      -------------
                                               US$ thousands      US$ thousands
                                               -------------      -------------
         Subsidiaries -
         Cost of shares                             427,178            424,865
         Company's equity in retained
            earnings and capital reserves
            accumulated from date of
           acquisition, net                         508,202            351,475
         Adjustments deriving from
            translation of
            financial statements
            of investee companies                    (4,126)            (1,425)
                                               -------------      -------------
                                                    931,254            774,915

         Less - investment in Company
            shares held by subsidiary                (9,708)           (11,232)

         Capital reserve from acquisition
           and sale of debentures
           convertible into shares
           of the Company
           by a subsidiary                              399                399
                                               -------------      -------------
                                                    921,945            764,082

         Loans - C(1)                               115,684            242,417
         Capital notes - C(2)                       131,402                  -
         Perpetual loan - C(3)                        2,500              2,500
                                               -------------      -------------
                                                  1,171,531          1,008,999
                                               =============      =============


                                      F-176
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 7 - Investments in Investee Companies (Cont'd)

         Company

         B.       Movement during the year

                                                                           2005
                                                                  -------------
                                                                  US$ thousands
                                                                  -------------

         Balance at beginning of year                                1,008,999
         Company's equity in net earnings
            of investee companies, net                                 217,362
         Adjustments deriving from translation
            of financial statements of investee companies               (2,701)
         Dividend                                                      (63,787)
         Dividend in respect of treasury stock                             696
         Investment in shares                                            2,313
         Realization of Company shares held by a subsidiary              3,848
         Share in other reserve funds                                      132
         Change in loans and capital notes, net                          4,669
                                                                  -------------
         Balance at end of year                                      1,171,531
                                                                  =============

         A list of the investee companies is presented in the Appendix.

         C.       Terms of loans and capital notes

         (1)      The loans bear interest at the LIBOR rate plus a margin that
                  ranges from 0.8% to 2%.

         (2)      NIS capital notes, not linked to the CPI and not bearing
                  interest and the repayment date of which will not be before
                  January 1, 2007.

         (3)      The perpetual loan is non-linked and does not bear interest.

         D.       Additional information

         (1) Acquisition of companies during 2004:

                  a.       In April 2004, the Company, through wholly owned and
                           controlled subsidiaries, signed agreements for
                           acquisition of the ownership and control of a group
                           of three companies: Vegetation Management LLC, Farm
                           Saver. Com LLC, and Nation Ag II LLC - which are
                           engaged in licensing the import and marketing of
                           herbicides from the United States (hereinafter - "the
                           Companies Acquired").

                           The aggregate consideration for the acquisition
                           amounted to approximately $67 million (the
                           consideration is after an amendment to the original
                           agreement made in December 2004). Approximately $7.5
                           million of the aggregate consideration was paid
                           through a transfer of 1,908 of the Company's shares
                           that were held by a subsidiary (the cost of the
                           shares is $4.2 million).

                           The excess cost created on the acquisition date
                           amounted to $51.4 million, of which $28.4 million was
                           attributed to intangible assets (mainly licensing and
                           licenses), $0.5 million was attributed to deferred
                           tax liabilities, $0.6 million was attributed to
                           inventory and the balance, in the amount of $22.9
                           million, was recorded as goodwill.

                           The excess cost attributed to the licensing and the
                           licenses, as well as the goodwill, are being
                           amortized over a period of 20 years that, in the
                           Company's estimation, represents the period of
                           economic benefit to be derived therefrom.


                                     F-177
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 7 - Investments in Investee Companies (cont'd)

         Company

         D.       Additional information (cont'd)

         (1)      Acquisition of companies during 2004: (cont'd)

                  a. (cont'd)

                           The statements of income and cash flows of the
                           Companies Acquired have been included in the
                           financial statements of the Groupas of May 1, 2004.

                           The effect of the first time consolidation of the
                           activities acquired on the consolidated statements of
                           income was an increase in revenues of $24.1 million
                           for the period ended December 31, 2004, and an
                           increase to net income (after amortization of
                           goodwill) of $5.6 million for the same period. The
                           impact on the consolidated balance sheet as at
                           December 31, 2004 is an increase of assets in the
                           amount of $77.5 million.

                  b.       During 2004, the Company signed, through
                           subsidiaries, agreements for the acquisition of three
                           marketing companies, as follows:

                           1)       In June 2004, the Company, through a wholly
                                    owned and controlled subsidiary, signed an
                                    agreement to acquire 45% of the rights in
                                    the U.S. company, Control Solutions Inc.
                                    (hereinafter - "CSI"), which is engaged in
                                    the marketing of pesticides to the
                                    non-agricultural market in the United
                                    States.

                                    Based on the acquisition agreement, so long
                                    as the subsidiary holds 45% of the shares of
                                    CSI, decisions in areas critical to CSI are
                                    to be made jointly by all the shareholders
                                    of CSI. Therefore, CSI has been consolidated
                                    in the financial statements by means of the
                                    proportionate consolidation method.

                                    In addition, the subsidiary was given an
                                    option, which may be exercised at any time
                                    during the next three years, to increase its
                                    share in CSI to 60%, in exchange for a
                                    payment ranging between $1.5 million and
                                    $10.5 million, in accordance with the
                                    earnings of CSI in 2004-2006.

                                    Furthermore, commencing from 2009, both the
                                    subsidiary and the remaining shareholders of
                                    CSI have the right to require the subsidiary
                                    to acquire from the remaining shareholders
                                    of CSI the balance of their shares in CSI in
                                    consideration of an amount to be determined
                                    based on the income of CSI in the three
                                    years preceding the acquisition date.

                                    Regarding exercise of the option for
                                    increasing the Company's share in CSI to 60%
                                    - see Note 7(D)2(c).

                           2)       In July 2004, the Company, through a wholly
                                    owned and controlled subsidiary, signed an
                                    agreement for acquisition of all the shares
                                    and rights of Farmoz PTY Limited, an
                                    Australian company engaged in the marketing
                                    and distribution of pesticides in Australia.

                                     F-178
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 7 - Investments in Investee Companies (cont'd)

         D.       Additional information (cont'd)

         (1)      Acquisition of companies during 2004:

                  b. (cont'd)

                           3)       In August 2004, the Company, through a
                                    subsidiary, signed an agreement for
                                    acquisition of 50.1% of the rights in the
                                    U.S. company, RiceCo LLC, which is engaged
                                    in the development and marketing of
                                    herbicides in the rice sector.

                           The aggregate cost of the acquisition of the
                           marketing companies amounted to $41 million. The
                           excess cost resulting from the acquisitions amounted
                           to $31.1 million, of which $15 million was attributed
                           to intangible assets (mainly licensing and licenses),
                           $3.5 million was attributed to deferred tax
                           liability, $0.7 million was attributed to inventory
                           and the balance, in the amount of $18.9 million, was
                           recorded as goodwill.

                           The excess cost attributed to the licensing and the
                           licenses, as well as the goodwill, are being
                           amortized over a period of 20 years which, in the
                           Company's estimation, represents the period of
                           economic benefit to be derived therefrom.

                           The financial statements of the three marketing
                           companies acquired have been consolidated from the
                           respective dates of their acquisitions. The total
                           effect of the first time consolidation of the
                           aforementioned marketing companies on the
                           consolidated statements of income from the date of
                           their initial consolidation is an increase in
                           revenues of $46.2 million for the period ended
                           December 31, 2004 and a reduction of net earnings
                           (after goodwill amortization) of $0.3 million for
                           that period. The effect on the consolidation on the
                           balance sheet as at December 31, 2004, is an increase
                           of assets in the amount of $72.8 million.

         (2)      Acquisition of companies during 2005:

                  (a)      In January 2005, the Company, through a wholly owned
                           and fully controlled subsidiary, signed an agreement
                           for the acquisition of 49% of the shares of
                           Makhteshim Agan Benelux & Nordic B.V. (hereinafter -
                           Mabeno), which acts as the exclusive distributor of
                           plant protection products in the Benelux area and
                           Scandinavia. Pursuant to the agreement, the
                           consideration was paid in 693 thousand of the
                           Company's shares that were held by the subsidiary.

                           In accordance with the acquisition agreement, two of
                           the three acting directors of Mabeno will be
                           appointed by the subsidiary. Therefore Mabeno was
                           fully consolidated in the financial statements.
                           Furthermore, the subsidiary was granted an option,
                           exercisable at any time, to increase its share in
                           Mabeno to 55%.

                           As from 2008 the other shareholders of Mabeno have
                           the right to demand that the subsidiary purchase
                           their shares in Mabeno. As from 2013 the subsidiary
                           has the right to demand that the other shareholders
                           will sell it their shares in Mabeno.


                                     F-179
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 7 - Investments in Investee Companies (cont'd)

         D.       Additional information (cont'd)

         (2)      Acquisition of companies during 2005 (cont'd)

                  (b)      In April 2005, the Group, through wholly owned and
                           fully controlled subsidiaries, signed an agreement
                           for the purchase of 70% of the shares of Biomark
                           Tradinghouse Co., which engages in the marketing of
                           plant protection materials in Hungary.

                  (c)      In October 2005 a wholly owned subsidiary exercised
                           its option to increase its share in CSI, and thus
                           increased its holdings to 60%. Accordingly the
                           company was fully consolidated as from October 2005.

                  The cost of acquiring the two aforementioned companies,
                  including the cost of exercising the option to increase the
                  rate of holding in CSI ("the acquired companies") amounted to
                  $ 12.6 million. Excess cost in the amount of $ 14.7 million
                  was created upon acquisition, of which $ 9 million was
                  attributed to intangible assets, $ 0.5 million was attributed
                  to inventory, and the balance of $ 5.2 million was attributed
                  to goodwill.

                  The excess cost attributed to the goodwill are amortized over
                  a period of 20 years, which is evaluated by management to be
                  the period over which economic benefits will arise therefrom.

                  The acquired companies' have been included in the Group's
                  consolidated financial statements from the respective dates of
                  their acquisition. The effect of the initial consolidation of
                  the acquired companies on the consolidated statements of
                  income, from the date of their initial consolidation, amounted
                  to an increase in revenues in the amount of $ 52 million for
                  the period ended December 31, 2005 and to a decrease in net
                  earnings (after amortization of goodwill) in the amount of $
                  1.2 million for the same period. The effect on the
                  consolidated balance sheet as at December 31, 2005 is an
                  addition to assets in the amount of $ 49.3 million.

         (3)      With respect to Goodwill on acquisition of investee companies
                  and the unamortized balance thereof - see Note 10.

         (4)      With respect to guarantees for investee companies - see Note
                  19E.

         E.       Convertible securities in investee companies

         (1)      A subsidiary, Lycored - Natural Products Industries Ltd.
                  (hereinafter - "Lycored"), has granted stock options to
                  employees, which, if exercised, will dilute the Company's
                  holding in Lycored to about 91.84%.
                  As at the balance sheet date, exercise of the said options is
                  reasonable and if all of the options are exercised for shares
                  of Lycored, the Company will sustain a loss from decline in
                  its holdings' percentage, in the amount of $ 2,145 thousand.
                  The financial statements include a provision for this amount.

         (2)      On August 23, 2005 the Board of Directors of Lycored decided
                  to approve an additional issuance of options to directors and
                  managers of Lycord - including the Chairman of the Board of
                  Directors, the CEO and two additional officers of the company.
                  The total number of options issued is 2,581,752 options
                  exercisable for 2,581,752 ordinary shares of NIS 1 par value
                  each of Lycored - constituting 18% of Lycored's issued and
                  paid-up share capital. The Chairman of the Board of Directors
                  and the CEO were each issued 176,048 options.


                                     F-180
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 7 - Investments in Investee Companies (cont'd)

         E.       Convertible securities in investee companies (cont'd)

         (3)      On October 28, 2003, the Board of Directors of Luxembourg
                  Medicine Ltd. (hereinafter - "Luxembourg") approved the
                  issuance of options to employees of Luxembourg and its
                  subsidiary. Exercise of the options will dilute the holding of
                  the Company in Luxembourg to about 92%.


Note 8 - Long-Term Investments, Loans and Receivables

         A.       Composition

<TABLE>
<CAPTION>
                                                       Consolidated                            Company
                                               -------------------------------      ------------------------------
                                                 December 31       December 31        December 31      December 31
                                               -------------     -------------      -------------    -------------
                                                        2005              2004               2005             2004
                                               -------------     -------------      -------------    -------------
                                               US$ thousands     US$ thousands      US$ thousands    US$ thousands
                                               -------------     -------------      -------------    -------------
<S>                                                 <C>                 <C>              <C>            <C>
         Long-term investments, loans and
          receivables [B(1)]                         22,460            23,265                  -                -
         Bank deposits [B(2)]                             -                 -             19,176           19,016
                                               -------------     -------------      -------------    -------------
                                                     22,460            23,265             19,176           19,016
         Net of allowance for doubtful debts              -             1,500                  -                -
                                               -------------     -------------      -------------    -------------
                                                     22,460            21,765             19,176           19,016
         Less - current maturities                      216               420                  -                -
                                               -------------     -------------      -------------    -------------
                                                     22,244            21,345             19,176           19,016
         Other investments [B(3)]                       440               725                  -                -
                                               -------------     -------------      -------------    -------------
                                                     22,684            22,070             19,176           19,016
                                               =============     =============      =============    =============


         B.       Additional information

         (1)      Long-term investments, loans and receivables
                  --------------------------------------------

                  A. Linkage terms and interest rates
                                                                                                     Consolidated
                                                                                ---------------------------------
                                                                                   December 31        December 31
                                                                                --------------     --------------
                                                                                         2005               2004
                                                                                --------------     --------------
                                                                                US$ thousands      US$ thousands
                                                                                --------------     --------------

                  In Israeli currency - not linked                                     2,427              2,353
                  In dollars                                                           2,684              1,710
                  In Brazilian reals                                                  13,885             15,715
                  Other foreign currency                                               3,464              3,487
                                                                                --------------     --------------
                                                                                      22,460             23,265
                                                                                ==============     ==============

                  The above investments, loans and receivables are non-interest bearing.
</TABLE>


                                     F-181
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 8 - Long-Term Investments, Loans and Receivables (cont'd)

         B.       Additional information (cont'd)

         (1)      Long-term investments, loans and receivables (cont'd)
                  --------------------------------------------

                  B.       Maturities

                  The investments, loans and receivables mature as follows:

                                                                   US$ thousands
                                                                   -------------

                  First year (current maturities)                           216
                  Second year                                             1,401
                  Third year                                              1,913
                  Fourth year                                             1,464
                  Fifth year                                                 72
                  With no defined repayment date                         17,394
                                                                   -------------
                                                                         22,460
                                                                   =============

         (2)      Bank deposits
                  -------------

                                                             Company
                                   Interest rate  ------------------------------
                                   as at balance     December 31     December 31
                                      sheet date            2005            2004
                                   -------------  --------------   -------------
                                               %   US$ thousands   US$ thousands
                                   -------------  --------------   -------------
                  Dollar deposits              4         10,871          10,711
                  Dollar deposits            5.1          8,305           8,305
                                                  --------------   -------------
                                                         19,176          19,016
                                                  ==============   =============


                  During the years 2002 and 2001, the Company made deposits in a
                  Brazilian bank in the amount of $8,300 thousand and $45,600
                  thousand, respectively, for a five-year period. Such deposits
                  serve as sole security for loans taken out by a subsidiary
                  from the same bank and in the same amounts. The loans are in
                  dollars, bear interest at the rate of 5.3% and 3.5% p.a. and
                  are scheduled to be repaid in 2006. The Company and the
                  subsidiary are able to realize the deposit and make early
                  repayment of the loan on certain dates as provided in the
                  agreement.

                  In September 2003, the amount of $ 25 million was paid out of
                  these deposits and in February 2004 the amount of an
                  additional $10 million was paid out of these deposits.
                  Concurrently, loans were repaid in the same amount.

                  In the consolidated balance sheet, the amounts of the deposits
                  were set-off against the amounts of the loans taken out by the
                  subsidiary (see Note 14A).

         (3)      In 1998, the Company entered into an agreement with the
                  shareholders of Hazera Genetics Ltd. and established a joint
                  venture intended to function as a venture capital fund for the
                  investment in companies which are engaged in the field of
                  agricultural biotechnology. Other investments include the
                  Group's share (50%) in biotechnology companies.


                                     F-182
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------



Note 9 - Fixed Assets

         A.       Composition

         Consolidated
<TABLE>
<CAPTION>
                                           Land and          Plant and             Motor  Office furniture              Total
                                          buildings          equipment          vehicles     and equipment      -------------
                                      US$ thousands      US$ thousands     US$ thousands     US$ thousands      US$ thousands
                                      -------------      -------------     -------------  ----------------      -------------
<S>                                       <C>              <C>                  <C>             <C>                  <C>
         Cost
         Balance as at
          December 31, 2004                130,725            661,322             4,999            27,498           824,544
         Additions, net of
          grants                             9,418             47,030             1,226             3,687             61,361
         Newly consolidated
          companies                          1,144                843               366                 -              2,353
         Disposals                            (848)              (874)           (1,446)             (610)            (3,778)
                                      -------------      -------------     -------------  ----------------      -------------
         Balance as at
          December 31, 2005                140,439            708,321             5,145            30,575            884,480
                                      -------------      -------------     -------------  ----------------      -------------
         Accumulated
          depreciation
         Balance as at the
          beginning of the year             48,037            319,953             2,600            18,215            388,805
         Additions                           5,046             24,927               762             3,588             34,323
         Newly consolidated
          companies                            147                137                29                 -                313
         Eliminated on
          disposals                           (213)              (597)           (1,033)             (484)            (2,327)
                                      -------------      -------------     -------------  ----------------      -------------
         Balance as at
          December 31, 2005                 53,017            344,420             2,358            21,319            421,114
                                      -------------      -------------     -------------  ----------------      -------------
         Net book value

         As at
          December 31, 2005                 87,422            363,901             2,787             9,256            463,366
                                      -------------      -------------     -------------  ----------------      -------------
         As at
          December 31, 2004                 82,688            341,369             2,399             9,283            435,739
                                      =============      =============     =============  ================      =============


                                                                                                      December 31
                                                                                            ---------------------------------
                                                                                                      2005               2004
                                                                                            --------------      -------------
                                                                                             US$ thousands      US$ thousands
                                                                                            --------------      -------------

         Cost of assets includes:
         Buildings and development on freehold land                                                88,604             83,289
         Buildings and development on land held under capitalized leases                           51,835             47,436
         Capitalized financing expenses                                                            19,205             19,019
         Fully-depreciated equipment                                                              109,741            107,741
         Cost of assets is net of grants received                                                 102,329             99,015
</TABLE>


                                     F-183
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------

Note 9 - Fixed Assets (cont'd)

         B.       Additional information

         (1)      Makhteshim's plants are located on land in Ramat Hovav and in
                  Beer-Sheva which is leased from the Israel Lands
                  Administration. The leasehold periods terminate between 2018
                  and 2029 with renewal options. The leasehold rights have not
                  yet been registered in the name of Makhteshim in the Israel
                  Land Registry. (The legal advisors of Makhteshim are attending
                  to the registration).

                  Agan's plant is located on freehold land of approximately 121
                  dunams in Ashdod, of which 90 dunams are registered in the
                  name of Agan in the Land Registry with the remaining area of
                  approximately 30 dunams, which was acquired in 1996, currently
                  undergoing the registration process.

                  Plants of foreign investee companies are constructed on
                  freehold land.

         (2)      Regarding liens - see Note 20.



Note 10 - Other Assets long term and Deferred expenses

         A.       Composition:
<TABLE>
<CAPTION>
         Consolidated
                                                                                 December 31, 2005
                                                                   --------------------------------------------------
                                                                                       Accumulated        Unamortized
                                                                            Cost      amortization            balance
                                                                   -------------    --------------      -------------
                                                                   US$ thousands     US$ thousands      US$ thousands
                                                                   -------------    --------------      -------------

<S>                                                                       <C>               <C>               <C>
         Product registration and acquisition of intellectual
          property                                                      340,622           147,226            193,396
         Goodwill on acquisition of subsidiaries                        165,825            55,576            110,249
         Intangible assets on purchase of products                      281,223            56,303            224,920
         Marketing rights                                                21,273            16,554              4,719
         Debenture issuance expenses                                        997               651                346
         Non-competition and confidentiality agreement                    2,576             1,152              1,424
                                                                   -------------    --------------      -------------
                                                                        812,516           277,462            535,054
                                                                   =============    ==============      =============

                                                                                December 31, 2005
                                                                   --------------------------------------------------
                                                                                       Accumulated        Unamortized
                                                                            Cost      amortization            balance
                                                                   -------------    --------------      -------------
                                                                   US$ thousands     US$ thousands      US$ thousands
                                                                   -------------    --------------      -------------

         Product registration and acquisition of know-how               280,988           105,996            174,992
         Goodwill on acquisition of subsidiaries                        153,963            51,489            102,474
         Intangible assets on purchase of products                      281,223            41,186            240,037
         Marketing rights                                                20,830            14,915              5,915
         Debenture issuance expenses                                      3,730             1,272              2,458
         Non-competition and confidentiality agreement                    2,576             1,032              1,544
                                                                   -------------    --------------      -------------
                                                                        743,310           215,890            527,420
                                                                   =============    ==============      =============
</TABLE>



                                     F-184
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 10 - Other Assets long term and Deferred expenses (cont'd)

         Company

                                             December 31, 2005
                               ------------------------------------------------
                                                   Accumulated      Unamortized
                                        Cost      amortization          balance
                               -------------    --------------    -------------
                               US$ thousands     US$ thousands    US$ thousands
                               -------------    --------------    -------------

         Debenture issuance
            expenses                    997               651              346
                               =============    ==============    =============


                                             December 31, 2005
                               ------------------------------------------------
                                                   Accumulated      Unamortized
                                        Cost      amortization          balance
                               -------------    --------------    -------------
                               US$ thousands     US$ thousands    US$ thousands
                               -------------    --------------    -------------

         Debenture issuance
            expenses                   3,730             1,272            2,458
                               =============    ==============    =============


         B.       Additional details

         1.       In October-November 2002, subsidiaries, which are
                  wholly-controlled by the Company, signed a number of
                  agreements with Bayer Crop Science AG for the acquisition of a
                  number of products, licenses and distribution rights in the
                  area of vegetation protection. The total consideration for
                  such acquisition amounted to $185.3 million, which is
                  presented in the "other assets and deferred expenses"
                  category.
                  Approximately $34.6 million of the consideration was allocated
                  to acquisition of permits and licenses in connection with the
                  products and is amortized over a 20-year period in the
                  "selling and marketing expenses" category, and approximately
                  $144.1 million was allocated to acquisition of the products in
                  the framework of a "going concern", which constitutes goodwill
                  on the acquisitions of products, and which is amortized over a
                  20-year period in the "other expenses" category.

                  The consideration in respect of acquisition of the marketing
                  and distribution rights, in the amount of $6.6 million, is
                  being amortized over a period of 6-8 years.

         2.       In 2001, fully controlled subsidiaries of the Company signed
                  agreements with Aventis and Syngenta A.G. for the purchase of
                  four new agrochemical products as well as the purchase of
                  marketing and distribution rights of a product package in the
                  Scandinavian countries. One of the products which was
                  purchased is still protected by patents which were transferred
                  to the purchasing company.

                  The total price paid for purchase of the four products totaled
                  $105 million, and it is included in "other assets and deferred
                  charges".. Of the amount paid, $20 million was attributed to
                  registration costs and licensing, which are being amortized
                  over a period of 20 years in the "selling and marketing
                  expenses", $2.5 million was attributed to the purchase of
                  agreements with third parties, which is being amortized over a
                  period of 10 years, and the balance of the amount was
                  attributed to the purchase of the product as a going concern
                  which includes: intellectual rights, trade name, brand name,
                  technological know-how, information on customers and suppliers
                  of materials, etc., which constitutes goodwill on the purchase
                  of the products and is being amortized over a period of 20
                  years under other expenses. The price of the marketing and
                  distribution rights was $5 million and is amortized over a
                  period of 9 years.

                                     F-185
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 10 - Other Assets and Deferred Charges (cont'd)

         B.       Additional details (cont'd)

         3.       Regarding goodwill and other assets created in the framework
                  of acquisition of companies during the period of the report,
                  see Note 7D.

         4.       In connection with a non-competition and confidentiality
                  agreement with the former CEO of Milenia, see Note 30A(4).


Note 11 - Short-term Credit from Banks

         A.       Composition
<TABLE>
<CAPTION>

                                                                Consolidated                            Company
                                                        --------------------------------    ---------------------------------
                                                                 December 31                          December 31
                                                        --------------------------------    ---------------------------------
                                                                 2005               2004              2005               2004
                                                        -------------      -------------    --------------     --------------
                                                        US$ thousands      US$ thousands     US$ thousands      US$ thousands
                                                        -------------      -------------    --------------     --------------
<S>                                                         <C>                    <C>             <C>                <C>
         Credit from banks
         Overdrafts                                          119,967             55,613                 -                  -
         Short-term loans                                    109,462             57,366            59,000                  -
                                                        -------------      -------------    --------------     --------------
                                                             229,429            112,979            59,000                  -
         Current maturities of long-term loans                18,609             27,042                 -                  -
                                                        -------------      -------------    --------------     --------------
                                                             248,038            140,021            59,000                  -
                                                        =============      =============    ==============     ==============


         B.       Linkage terms and interest rates


                                                                Consolidated                            Company
                                             Weighted   --------------------------------    ---------------------------------
                                        interest rate            December 31                          December 31
                                           at balance   --------------------------------    ---------------------------------
                                           sheet date            2005               2004              2005               2004
                                       --------------   -------------      -------------    --------------     --------------
                                                    %   US$ thousands      US$ thousands     US$ thousands      US$ thousands
                                       --------------   -------------      -------------    --------------     --------------
         Credit from banks
         Overdrafts:
         In Israeli currency                    7.5               424             2,892                -                   -
         In US dollars                    5.25-7.04            92,302            39,272                -                   -
         In Euro                                6.0            13,618            11,350                -                   -
         In Brazilian currency                 17.7            11,639             1,814                -                   -
         In other currencies                  6-7.2             1,984               285                -                   -
                                                        -------------      -------------    --------------     --------------
                                                              119,967            55,613                -                   -
                                                        -------------      -------------    --------------     --------------
         Short-term loans:
         In dollars (1)                   Libor+0.5           105,953            51,677            59,000                  -
         In other currencies                      6             3,509             5,689                 -                  -
                                                        -------------      -------------    --------------     --------------
                                                              109,462            57,366            59,000                  -
                                                        -------------      -------------    --------------     --------------
                                                              229,429           112,979            59,000                  -
                                                        =============      =============    ==============     ==============
</TABLE>


         C.     Regarding collateral - see Note 20A.



                                     F-186
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------



Note 12 - Trade Payables

         Consolidated
<TABLE>
<CAPTION>
                                                                                                     Consolidated
                                                                                             --------------------------------
                                                                                                      December 31
                                                                                             --------------------------------
                                                                                                      2005               2004
                                                                                             -------------      -------------
                                                                                             US$ thousands      US$ thousands
                                                                                             -------------      -------------
<S>                                                                                               <C>                <C>
         Open accounts                                                                            338,462            325,770
         Checks payable                                                                               136                175
                                                                                             -------------      -------------
                                                                                                  338,598            325,945
                                                                                             =============      =============


Note 13 - Other Payables

                                                                Consolidated                            Company
                                                        --------------------------------    ---------------------------------
                                                                 December 31                          December 31
                                                        --------------------------------    ---------------------------------
                                                                 2005               2004              2005               2004
                                                        -------------      -------------    --------------     --------------
                                                        US$ thousands      US$ thousands     US$ thousands      US$ thousands
                                                        -------------      -------------    --------------     --------------

         Salaries and payroll accruals                        36,290             32,591             4,343              2,627
         Accrued income taxes, net of
          advance payments                                    30,199             38,047             3,178                  -
         Government agencies                                   6,478              5,804                74                142
         Subsidiaries - current account                            -                  -               127                 33
         Liability for securities sold short (1)                   -              5,627                 -                  -
         Derivatives                                           9,074              9,608                 -                  -
         Accrued expenses and deferred
          income                                              60,397             63,672             1,087              3,209
         Payables in respect of acquisition
          of subsidiary                                          957              6,500                 -                  -
         Others                                               53,778             30,556             1,078                749
                                                        -------------      -------------    --------------     --------------
                                                             197,173           192,405              9,887              6,760
                                                        =============      =============    ==============     ==============
</TABLE>

         (1)      In 2004, a subsidiary borrowed marketable debentures from a
                  bank for purposes of the short sale thereof. The borrowing
                  period is three months, which is renewed every three months
                  subject to the lender's agreement.

                  The subsidiary's liability in respect of the bonds borrowed,
                  was presented based on the market value of the bonds.


                                     F-187
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 14 - Long-Term Loans from Banks

         A.       Composition
<TABLE>
<CAPTION>

                                                                     Consolidated
                                                             --------------------------------
                                                                      December 31
                                                             --------------------------------
                                                                      2005               2004
                                                             -------------      -------------
                                                             US$ thousands      US$ thousands
                                                             -------------      -------------
<S>                                                                <C>               <C>
         Loans from banks*                                         54,193            120,065

         Less - current maturities                                 18,609             27,042
                                                             -------------      -------------
                                                                   35,584             93,023
                                                             =============      =============
         * After the deduction of an
             investment in bank deposits (see
             Note 8B2) in the amount of:                           19,176             19,016
                                                             =============      =============


         B.       Linkage terms and interest rates

                                                                     Consolidated
                                                   Weighted   --------------------------------
                                              interest rate            December 31
                                                 at balance   --------------------------------
                                                 sheet date            2005               2004
                                              -------------   -------------      -------------
                                                          %   US$ thousands      US$ thousands
                                              -------------   -------------      -------------

         In US dollars                          4.71-6.55           47,528            103,124
         In Euro                                     3.55            4,999              9,189
         In Israeli currency                      6.1-8.7            1,666              1,548
         In other foreign
          currency                                                       -              6,204
                                                              -------------      -------------
                                                                    54,193            120,065
                                                              =============      =============


         C.       Maturities

                                                                                 Consolidated
                                                                               --------------
                                                                                US$ thousands
                                                                               --------------

         First year - current maturities                                              18,609
         Second year                                                                  13,534
         Third year                                                                   12,861
         Fourth year                                                                   4,189
         Fifth year                                                                    2,000
         Sixth year and thereafter                                                     3,000
                                                                               --------------
                                                                                      54,193
                                                                               ==============
</TABLE>


                                     F-188
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 14 - Long-Term Loans from Banks (cont'd)

         D.      Regarding the commitment of the Company and certain
                 subsidiaries to banks, to maintain certain financial criteria,
                 mainly, debt-equity and profitability ratios - see Note 20C.

         E.      Collaterals - see Note 20A.


Note 15 - Convertible Debentures
<TABLE>
<CAPTION>
         A.       Presented in the "long-term liabilities" category
                  -------------------------------------------------

                                                   Consolidated                            Company
                                           --------------------------------    ---------------------------------
                                                    December 31                          December 31
                                           --------------------------------    ---------------------------------
                                                    2005               2004              2005               2004
                                           -------------      -------------    --------------     --------------
                                           US$ thousands      US$ thousands     US$ thousands      US$ thousands
                                           -------------      -------------    --------------     --------------
<S>                                                 <C>            <C>                    <C>          <C>
                  Debenture principal                 -            150,000                 -           150,000
                                           -============      =============    ==============     ==============


         B.       Presented in a separate category between "long-term liabilities" and "shareholders' equity"
                  -------------------------------------------------------------------------------------------

                                                    Consolidated                            Company
                                            --------------------------------    ---------------------------------
                                                     December 31                          December 31
                                            --------------------------------    ---------------------------------
                                                     2005               2004              2005               2004
                                            -------------      -------------    --------------     --------------
                                            US$ thousands      US$ thousands     US$ thousands      US$ thousands
                                            -------------      -------------    --------------     --------------

                  Debenture principal             41,152             39,474            41,152            39,474
                  Discount balance, net             (673)            (1,152)           (1,086)          (1,565)
                                            -------------      -------------    --------------     --------------
                                                  40,479            38,322             40,066           37,909
                                            =============      =============    ==============     ==============
</TABLE>

                  1.       (1)      In November 2001, convertible debentures
                                    and options were issued pursuant to a
                                    prospectus, as follows:

                                    NIS 270,000,000 par value registered
                                    debentures (Series A) offered at 90% of the
                                    par value, repayable in a lump-sum payment
                                    on November 20, 2007, bearing interest at
                                    the annual rate of 2.5% and linked (interest
                                    and principal) to the representative
                                    exchange rate of the dollar. On any trading
                                    day, commencing with the registration date
                                    of the debentures (Series A) for trading on
                                    the stock exchange and up to and including
                                    October 31, 2007, the debentures (Series A)
                                    are convertible into fully paid-up ordinary
                                    registered shares of NIS 1 par value each,
                                    based on a conversion rate of NIS 10.68 par
                                    value debentures (Series A) for one ordinary
                                    share of NIS 1 par value.

                                    As a result of dividend distributions, the
                                    conversion rate was updated and, as at the
                                    balance sheet date, it stands at NIS 9.61
                                    par value.

                           (2)      18,000,000 registered options (Series 1),
                                    exercisable for 18,000,000 ordinary shares
                                    of NIS 1 par value each of the Company, on
                                    any trading day, commencing with the
                                    registration date thereof for trading on the
                                    stock exchange and up to and including
                                    November 20, 2005, such that every option
                                    (Series 1) may be exercised for one ordinary
                                    share of NIS 1 par value (subject to
                                    adjustments), against a cash payment of the
                                    exercise price of NIS 10.68, linked to the
                                    representative exchange rate of the dollar.
                                    In any case, the exercise price will not be
                                    less than NIS 10.68. An option (Series 1)
                                    which is not exercised up to and including
                                    November 20, 2005, will be invalid and will
                                    not convey to its holder any right vis-a-vis
                                    the Company. On November 20, 2005, the
                                    options expired.


                                     F-189
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 15 - Convertible Debentures (cont'd)

         B.       Presented in a separate category between "long-term
                  ---------------------------------------------------
                  liabilities" and "shareholders' equity" (cont'd)
                  ---------------------------------------

                                    The securities were offered to the public in
                                    1,200,000 units by means of a tender on the
                                    unit price, where the composition of each
                                    unit is NIS 225 par value of debentures
                                    (Series A) at the price of 90% of their par
                                    value (NIS 202.5) and 15 options (Series 1)
                                    for no consideration. The total minimum
                                    price per unit was NIS 202.5.

                                    The price per unit determined as part of the
                                    tender was NIS 220. Taking into account the
                                    economic value of the options (Series 1) the
                                    discount rate with respect to the debentures
                                    (Series A) is 9.3%. The gross consideration
                                    received in the issuance is $62.5 million,
                                    of which $58.5 million was attributed to the
                                    debentures (Series A) and $4.0 million was
                                    attributed to the options (Series 1).

                  2.       In January 2002, the Company issued to investors, as
                           part of a private placement, NIS 133,980 thousand par
                           value convertible debentures (Series A), at a price
                           of NIS 1.015 for NIS 1 par value of debentures
                           (Series A), for an aggregate consideration of $29.5
                           million.
                           The terms of the convertible debentures (Series A)
                           are identical to the terms of the debentures (Series
                           A), issued by the Company, as stated in Section A.,
                           above.

                  3.       In 2003, NIS 57,660,575 par value of debentures
                           (Series A) were converted into 5,565,649 ordinary
                           shares of NIS 1 par value, the majority at a
                           conversion rate of NIS 10.36 par value debentures for
                           one ordinary share of NIS 1 par value. The total
                           share capital issued as a result of the conversion is
                           $1,270 thousand, with a premium of $11,331 thousand.

                           In 2004, NIS 179,607,707 par value of debentures
                           (Series A) were converted into 17,582,221 ordinary
                           shares of NIS 1 par value, at a conversion rate of
                           NIS 10.03-10.36 par value debentures for one ordinary
                           share of NIS 1 par value. The total share capital
                           issued as a result of the conversion is $3,974
                           thousand, with a premium of $35,581 thousand.

                           In 2005, NIS 55,412 thousand par value of debentures
                           (Series A) were converted into 5,687 thousand
                           ordinary shares of NIS 1 par value at a conversion
                           rate of NIS 9.61 par value debentures for ordinary
                           shares of NIS 1 par value. The total share capital
                           issued as a result of the conversion is $1,253
                           thousand, with a premium of $9,756 thousand.

                           Subsequent to December 31, 2005, NIS 1,415 thousand
                           par value of debentures (Series A) were converted
                           into 147 thousand ordinary shares of NIS 1 par value.


                                     F-190
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 15 - Convertible Debentures (cont'd)

         B.       Presented in a separate category between "long-term
                  ---------------------------------------------------
                  liabilities" and "shareholders' equity" (cont'd)
                  ---------------------------------------

                           As of December 31, 2005, conversion of the said
                           debentures is expected and, accordingly, they are
                           presented in the balance sheet in a separate category
                           between the "long-term liabilities" and the
                           "shareholders' equity" sections based on their
                           liability value.

                  4.       In March 2004, the Company issued, as part of a
                           private issuance to institutional investors (mainly
                           overseas), non-marketable convertible debentures, in
                           the amount of $150 million par value (including $5
                           million which was issued to the underwriters in April
                           2005), in exchange for their par value. The period of
                           the debentures is 7 years and they bear annual
                           interest at the rate of 1.75%, which is to be paid
                           once a year, in March. The debentures may be
                           converted into ordinary registered shares of NIS 1
                           par value each, at a conversion rate of NIS 20.5 par
                           value, based on a fixed rate of exchange of US$1 =
                           NIS 4.514. The ordinary shares to be issued as a
                           result of conversion of the debentures shall be
                           registered for trading on the Tel-Aviv Stock
                           Exchange.

                           The owners of the debentures shall have the right to
                           demand payment of the debentures (principal and
                           interest up to that date) on March 22, 2007, by means
                           of advance written notice (which is given 30-60 days
                           prior to March 22, 2007).

                           The Company shall have the right to execute a forced
                           conversion of the debentures commencing on March 22,
                           2007, this being so long as the average price per
                           Company share in the period of 20 business days which
                           preceded its notification of forced conversion, shall
                           be at least 30% higher than the price of the
                           conversion rate of the debentures.

                           The Company committed to the debenture purchasers
                           that it would refrain from creating additional liens
                           on its property, the purpose of which is the
                           guarantee of marketable securities or other
                           securities that the Company intends to register for
                           trading.

                           The total issuance expenses with respect to the
                           aforementioned debentures amounted to $2.5 million.

                           In 2005, $135,650 thousand par value institutional
                           debentures were converted into 29,869 thousand shares
                           of NIS 1 par value, all of which based on a
                           conversion rate of $4.541 par value debentures for
                           one share of NIS 1 par value.

                           The total share capital issued as a result of the
                           conversion is $6,554 thousand at a premium of
                           $129,096 thousand.

                           As of December 31, 2005, conversion of the said
                           debentures is expected and, accordingly, the
                           debentures are presented in the balance sheet in a
                           separate category between the long-term liabilities
                           and the shareholders' equity based on the liability
                           value of the debentures.

                                     F-191
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------

Note 16 - Other Long-Term Liabilities

         Consolidated

         Linkage terms and interest rates


                                      Weighted
                                 interest rate            December 31
                                    at balance   ------------------------------
                                    sheet date            2005             2004
                                 -------------   -------------    -------------
                                             %   US$ thousands    US$ thousands
                                 -------------   -------------    -------------

         Liabilities linked to
           the US dollar                              3,222           9,195
         Liabilities linked to
            another currency                0         1,092             142
                                                 -------------    -------------
                                                      4,314           9,337
                                                 =============    =============

         The liabilities are schedule for repayment in the years 2007 - 2008.


Note 17 - Taxes on Income

         A. Benefits under the Law for the Encouragement of Capital Investments,
            1959

         The plants of the subsidiaries in Israel have been granted "Approved
         Enterprise" status under the Law for the Encouragement of Capital
         Investments, 1959. Part of the income deriving from the approved
         enterprises during the benefit period is subject to tax at the rate of
         25% (the total benefit period is for seven years and in certain
         circumstances ten years, but does not exceed beyond either 14 years
         from the date of the letter of approval or 12 years from the date the
         approved enterprise commenced operations).

         Other plants of subsidiaries in Israel are entitled to a tax exemption
         for periods of between two and six years and a reduced tax rate of 25%
         for the remainder of the benefit period. Should a dividend be
         distributed from the tax-exempt income, the subsidiaries will be liable
         to pay tax on the income from which the dividend was distributed at a
         rate of 25%.

         The benefit period has ended for some of the plants of the subsidiaries
         and the benefit period for others will end during years up to 2014. In
         addition, subsidiaries have other investment programs in progress, or
         for which the benefit period with respect thereto has not yet
         commenced.

         The abovementioned benefits are conditional upon compliance with
         certain conditions specified in the Law and related Regulations, and in
         the letters of approval, in accordance with which the investments in
         the approved enterprises were made. Failure to meet these conditions
         may lead to cancellation of the benefits, in whole or in part, and to
         repayment of any benefits already received, together with interest.
         Management believes that the companies are complying with these
         conditions.

         B.  Benefits under the Law for the Encouragement of Industry (Taxes),
             1969

         Under the Law for the Encouragement of Industry (Taxes) 1969, the
         Company is an industrial holding company and the subsidiaries in Israel
         are "industrial companies". The main benefit under this law is the
         filing of consolidated income tax returns. The Company files a
         consolidated income tax return with Makhteshim.


                                     F-192
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 17 - Taxes on Income (cont'd)

         C.       Taxation under inflationary conditions

         The Company and its subsidiaries in Israel are subject to the Income
         Tax Law (Inflationary Adjustments), 1985. Under this Law, the results
         for tax purposes are adjusted principally for the changes in the
         Consumer Price Index. The financial statements are presented in US
         dollars.

         D.       Benefits for development areas

         A subsidiary is subject to the Income Tax Regulations (Tax Reductions
         in Certain Settlements and Agriculture-based Army Units ("Nahal")),
         1978. Under these Regulations, the subsidiary is entitled to an
         additional deduction, at the rate of 25% of the tax depreciation
         claimed in respect of the plants constructed in Ramat Hovav.
         These Regulations were in effect until December 31, 2003.

         E.       Foreign subsidiaries

         The subsidiaries are assessed according to the tax laws applicable in
         the respective countries where these subsidiaries operate.

         F.       Change in tax rate

                  On June 29, 2004, Income Tax Ordinance Amendment (No. 140 and
                  Temporary Order), 2004 (hereinafter - "the Amendment") passed
                  the second and third reading in the Israeli Knesset. The
                  Amendment provides that the Companies Tax rate shall be
                  gradually reduced, commencing from January 1, 2004 from 36% to
                  30% in the following manner: in 2004 - 35%, in 2005 - 34%, in
                  2006 - 32% and in 2007 and thereafter - 30%.

                  The current taxes and the balances of the deferred taxes as at
                  December 31, 2004, were calculated in accordance with the tax
                  rates in the preceding paragraph. The impact of the reduction
                  in the tax rates on the Company's consolidated results of
                  operations for the year ended December 31, 2004 is tax income
                  in the amount of $4.5 million.

                  On July 25, 2005, the Law for Amendment of the Income Tax
                  Ordinance (No. 147 and Temporary Order), 2005 was passed,
                  pursuant to which the Companies Tax rate will be gradually
                  reduced in the following manner: in the 2006 tax year a tax
                  rate of 31% will apply, in 2007 - 29%, in 2008 - 27%, in 2009
                  - 26%, and in 2010 and thereafter, a tax rate of 25% will
                  apply. In addition, commencing from 2010, upon reduction of
                  the Companies Tax rate to 25%, every real capital gain will be
                  subject to tax at the rate of 25%.

                  The current and deferred taxes as at December 31, 2005, were
                  calculated in accordance with the new tax rates as determined
                  in Amendment No. 147. The impact of the reduction in the tax
                  rates on the consolidated financial statements for the year
                  ended December 31, 2005 is a decrease in the taxes on income
                  in the amount of $4.8 million.

                                     F-193
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------

Note 17 - Taxes on Income (cont'd)

G.       Deferred taxes

<TABLE>
<CAPTION>
                                                                Consolidated                            Company
                                                        --------------------------------    ---------------------------------
                                                                 December 31                          December 31
                                                        --------------------------------    ---------------------------------
                                                                 2005               2004              2005               2004
                                                        -------------      -------------    --------------     --------------
                                                        US$ thousands      US$ thousands     US$ thousands      US$ thousands
                                                        -------------      -------------    --------------     --------------
<S>                                                            <C>                <C>                  <C>                 <C>

         (1)      Movement

                  Balance at beginning
                   of year                                    37,317             33,522            (6,999)            (6,250)
                  Included in statement
                   of income                                   7,830               (163)              968               (749)
                  Charged to capital                          (1,544)                  -           (1,544)                  -
                  Newly consolidated                             276              3,958                 -                  -
                                                        -------------      -------------    --------------     --------------
                  Balance at end of year                      43,879            37,317             (7,575)            (6,999)
                                                        -------------      -------------    --------------     --------------
                  Classified as:

                  Other receivables                          (15,922)           (17,037)             (341)              (325)
                  Long-term liabilities (in the
                   balances of the long-term
                   debt)                                      59,801             54,354            (7,234)            (6,674)
                                                        -------------      -------------    --------------     --------------
                                                              43,879             37,317            (7,575)            (6,999)
                                                        =============      =============    ==============     ==============

         (2)      Composition


                                                                Consolidated                            Company
                                                        --------------------------------    ---------------------------------
                                                                 December 31                          December 31
                                                        --------------------------------    ---------------------------------
                                                                 2005               2004              2005               2004
                                                        -------------      -------------    --------------     --------------
                                                        US$ thousands      US$ thousands     US$ thousands      US$ thousands
                                                        -------------      -------------    --------------     --------------


                  Deferred taxes in respect of:
                  Depreciable assets                          78,831             85,564                  -                 -
                  Carryforward tax losses                    (16,673)           (19,864)           (6,117)            (5,343)
                  Inventories                                (11,760)           (17,615)                 -                 -
                  Employee severance
                   benefits, net                             (10,227)           (11,467)           (1,458)            (1,656)
                  Other temporary
                   differences                                 3,708                699                  -                 -
                                                        -------------      -------------    --------------     --------------
                                                              43,879             37,317            (7,575)            (6,999)
                                                        =============      =============    ==============     ==============

                  In the consolidated balance sheet, deferred taxes are computed at rates ranging between
                  approximately 27% and 35% (Company - 27%).
</TABLE>



                                     F-194
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 17 - Taxes on Income (cont'd)

         H.       Composition of tax expense (benefit)

         Consolidated
<TABLE>
<CAPTION>

                                                                 For the year ended December 31
                                                        ---------------------------------------------------
                                                                  2005              2004               2003
                                                        --------------    --------------     --------------
                                                         US$ thousands     US$ thousands      US$ thousands
                                                        --------------    --------------     --------------

<S>                                                           <C>                   <C>            <C>
         Taxes in respect of the reported period:
         Current                                               28,944            51,228             24,702
         Deferred                                               5,142            (3,034)             3,173
                                                        --------------    --------------     --------------
                                                               34,086            48,194             27,875
                                                        --------------    --------------     --------------
         Taxes in respect of prior years:
         Current                                                3,178             1,269              4,683
         Deferred                                               2,688             2,871                 60
                                                        --------------    --------------     --------------
                                                                5,866             4,140              4,743
                                                        --------------    --------------     --------------
                                                               39,952            52,334             32,618
                                                        ==============    ==============     ==============

         Company

                                                                 For the year ended December 31
                                                        ---------------------------------------------------
                                                                  2005              2004               2003
                                                        --------------    --------------     --------------
                                                         US$ thousands     US$ thousands      US$ thousands
                                                        --------------    --------------     --------------

         Current                                                3,058                 2                 29
         Deferred                                                 968              (749)            (2,507)
                                                        --------------    --------------     --------------
                                                                4,026              (747)            (2,478)
                                                        ==============    ==============     ==============

         I.       Theoretical tax

         Following is a reconciliation between the theoretical tax and the tax expense included in the statement
         of income:

         Consolidated

                                                                    For the year ended December 31
                                                           ---------------------------------------------------
                                                                     2005              2004               2003
                                                           --------------    --------------     --------------
                                                                     34%                35%               36%
                                                           --------------    --------------     --------------
                                                            US$ thousands     US$ thousands      US$ thousands
                                                           --------------    --------------     --------------

         Tax expense computed at regular tax rate                 85,777            76,608             49,030
         Tax benefit for approved enterprises                     (8,469)          (10,203)            (3,727)
         Benefit for plants in development areas                       -                 -             (2,109)
         Difference between financial statement
          measurement of income and tax basis                        207             2,559             (4,868)
         Change in rate of deferred taxes                         (4,793)           (1,912)             2,384
         Income taxable at other tax rates                       (32,630)          (20,732)           (14,490)
         Taxes in respect of previous years                        5,866             4,140              4,743
         Utilization of tax losses for which deferred
           taxes were not created                                 (3,048)                 -                  -
         Nondeductible expenses and other differences             (2,958)            1,874              1,655
                                                           --------------    --------------     --------------
                                                                  39,952            52,334             32,618
                                                           ==============    ==============     ==============
</TABLE>


                                                  F-195
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 17 - Taxes on Income (cont'd)


         I.       Theoretical tax (cont'd)

<TABLE>
<CAPTION>
         Company

                                                   For the year ended December 31
                                        ---------------------------------------------------
                                                  2005              2004               2003
                                        --------------    --------------     --------------
                                                  34%                35%               36%
                                        --------------    --------------     --------------
                                         US$ thousands     US$ thousands      US$ thousands
                                        --------------    --------------     --------------
<S>                                             <C>              <C>                <C>
         Tax expense computed at
             regular tax rate                   71,236           57,673             36,107
         Difference between financial
            statement measurement
            of income and tax basis              3,026              353                166
         Equity in earnings of
            investee companies, net            (73,903)         (57,192)           (37,446)
         Nondeductible expenses
            and other differences                3,667           (1,581)            (1,305)
                                        --------------    --------------     --------------
                                                 4,026             (747)            (2,478)
                                        ==============    ==============     ==============
</TABLE>

         J.     Final assessments

         Makhteshim, Agan and Lycored have received final tax assessments up to
         and including the 2001 tax year. Luxembourg has received final tax
         assessments up to and including 1998.

         K.     Losses and deductions available for carryforward to future years

         As at the balance sheet date, the losses for tax purposes which are
         available for carryforward to future tax years, amount to $57.3
         million.

         The Company has recorded a deferred tax asset with respect to the
         accrued losses, in the amount of US$16.7 million, based on Management's
         estimation it is probable that such losses will be utilized in the
         upcoming years.


         L.     Additional Information

         Regarding fiscal claims against Milenia - see Note 19D(2).


Note 18 - Employee Termination Benefits, Net

         A.       Composition
<TABLE>
<CAPTION>

                                                    Consolidated                            Company
                                            --------------------------------    ---------------------------------
                                                     December 31                          December 31
                                            --------------------------------    ---------------------------------
                                                     2005               2004              2005               2004
                                            -------------      -------------    --------------     --------------
                                            US$ thousands      US$ thousands     US$ thousands      US$ thousands
                                            -------------      -------------    --------------     --------------
<S>                                            <C>                 <C>                 <C>             <C>
         Accrued severance pay and
          retirement grants                    25,898             26,576             4,136              4,591
         Less - deposits in severance
          pay funds                            16,198             15,957                 -                  -
                                            -------------      -------------    --------------     --------------
                                                9,700             10,619             4,136              4,591

         Early retirement pension              15,197             13,248                 -                  -

         Accrual for unutilized sick leave      3,117              2,842                 -                  -
                                            -------------      -------------    --------------     --------------
                                               28,014             26,709             4,136              4,591
                                            =============      =============    ==============     ==============
</TABLE>



                                      F-196
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 18 - Employee Termination Benefits, Net


         B.   Severance pay and retirement grants

         The Company and its subsidiaries in Israel make regular deposits with
         "Nativ" (the Pension Fund of the Workers and Employees of the Histadrut
         Ltd.) and insurance companies. These deposits are intended to provide
         employees with pension rights or severance pay upon reaching retirement
         age. Amounts deposited in the pension fund and insurance companies are
         not included in the balance sheet because they are not under the
         management or control of the companies.

         Employees dismissed before attaining retirement age are eligible for
         severance benefits, computed on the basis of their most recent salary.
         Where the amounts accumulated in the pension fund are not sufficient to
         cover the computed severance benefits, the companies will cover the
         difference. Experience has shown that the majority of salaried
         employees continue to work until retirement age and the companies have
         not been required to cover substantial differences in severance pay to
         employees who retire prior to reaching retirement age. Management of
         the Company and the subsidiaries accordingly believe that it is
         unlikely that it will be necessary to cover such differences and
         therefore no accrual has been made in the financial statements.

         In addition to their abovementioned pension rights, employees are
         entitled to receive retirement grants at the rate of 2.33% of their
         salary at retirement age. The accrual in the balance sheet covers the
         companies' obligations with regard to these retirement grants, as well
         as their liability to pay severance benefits to some of their employees
         for the period prior to the date on which these employees joined the
         pension plan, during which period no deposits had been made in the fund
         in the name of the employee.

         C.   Deposits with severance pay fund and retirement grants

         The deposits in the severance pay funds include accrued linkage
         differences and interest and are made in severance pay funds with banks
         and insurance companies. Withdrawal of the amounts on deposit is
         contingent upon the fulfillment of the provisions set forth in the
         Severance Pay Law.

         D.   Compensation for unutilized sick leave

         The financial statements include an accrual for compensation in respect
         of unutilized sick leave for employees who are 55 and older. No accrual
         is made in respect of employees under the age of 55 as it is uncertain
         as to whether or not they will receive such compensation (by reason of
         utilization of sick leave or early retirement). The accrual is
         computed, using the latest wage rates, on the basis of eight work days
         for each year of employment in which sick leave was not utilized.

         E.   Early retirement pension

         The financial statements include a provision for payment of pension
         benefits to a number of employees whose work was terminated before they
         reached retirement age. The provision was calculated by reference to
         the period from the time their work was terminated until the date
         stipulated in the agreement, on the basis of the present value of the
         pension payments (the interest rate used in the present value
         calculation was 3.6% per annum).

         At the beginning of 2004, the Knesset passed a law according to which
         the Articles of Association for pension funds were changed, such that
         the retirement age will be gradually raised for men from 65 to 67 and
         for women from 60 to 62.

         In the estimation of the subsidiary Management, the above-mentioned law
         will have no effect on the subsidiary's liabilities for early
         retirement in connection with its employees who left prior to reaching
         retirement age.

                                     F-197
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 19 - Commitments and Contingent Liabilities

         A.       Commitments

         (1)      The Articles of Association of the Company and its
                  subsidiaries permit, subject to the governing companies' laws,
                  including the provision of the Companies Law, indemnification
                  and insurance of the responsibilities of directors and
                  officers therein, provided that if the Company decides to
                  provide advance indemnification, the amount of such
                  indemnification shall be limited to 25% of the Company's
                  shareholders' equity as at the date the indemnification is
                  granted.

         (2)      Liability of directors and officers of the Company and its
                  subsidiaries is insured as part of a policy. The limit of the
                  insured responsibility is $100 million. The directors who were
                  insured within the policy include all of the Company's
                  directors as well as the directors of the subsidiaries.

         (3)      Regarding undertakings of the Company and its subsidiaries as
                  part of a securitization transaction - see Note 3(1).

         (4)      Regarding undertakings with interested parties - see Note 30A.

         B.       Contingent liabilities

         (1)      In accordance with the Law for the Encouragement of Capital
                  Investments, 1959, Company subsidiaries received grants from
                  the State of Israel in respect of investments in fixed assets
                  made as part of plant expansion plans approved by the
                  Investments Center. Receipt of the grants is conditional upon
                  fulfillment of the terms of the letter of approval that
                  include, among others, exports at certain rates. If the
                  companies do not comply with the required terms, they will be
                  required to refund the grants amounts, together with interest
                  from the date of their receipt. Management of the subsidiaries
                  believes that they are in compliance with the conditions of
                  the approval.

         (2)      In accordance with the Law for the Encouragement of Research
                  and Development in Industry, 1984, subsidiaries received
                  grants from the State of Israel in respect of their research
                  and development expenses incurred on projects approved by the
                  Industrial Research and Development Administration. Receipt of
                  the grants is conditional upon compliance with the terms of
                  the letter of approval which include, among other things, the
                  payment of royalties to the State at rates of between 2%-3.5%
                  of the sales of products, up to the amount of the State's
                  participation.

                  The balance of the State's participation in the companies'
                  research and development expenses (net of royalties paid in
                  respect thereof), after deduction of participations in
                  expenses of unsuccessful research projects which were
                  abandoned, amounts to approximately $4.6 million.


                                     F-198
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 19 - Commitments and Contingent Liabilities (cont'd)

         B.       Contingent liabilities (cont'd)

         (3)      The Company has undertaken to indemnify the economic
                  consultants who determined the exchange ratio for the
                  Arrangement (see Note 1B) for reasonable expenses that they
                  may be required to pay for legal consultation and
                  representation in the event that legal proceedings are brought
                  against them in connection with their opinion. In addition,
                  the Company will indemnify the economic consultants for any
                  damages payable in consequence of legal proceedings which
                  exceed $1.5 million. The Company shall not be liable to
                  indemnify the economic consultants if it is determined that
                  they acted with gross negligence or willful misconduct in
                  connection with their opinion.

         (4)      A subsidiary has an agreement pursuant to which it will pay
                  royalties at the rate of 4% of sales, with certain reductions
                  stated in the agreement, with respect to a product whose
                  development rights were acquired by the subsidiary, for a
                  period of 10 years beginning from the year 2000, the date on
                  which sales of the product to outsiders reached the level of
                  sales stipulated in the agreement. Under certain conditions,
                  the royalties may be reduced to a rate of not less than 2%.

         (5)      In Israel the Stamp Duty on Documents Law - 1961 (hereinafter
                  - the Law) applies to various documents at various rates,
                  according to the type of the document and the amount specified
                  or not specified in it. In June 2003 Section 15A of the Law
                  regarding the identity of those required to pay stamp duty was
                  amended.

                  Beginning from June 2003 the Israeli Tax Authorities increased
                  enforcement of the law. The amendment to the Law and the
                  enforcement measures taken by the Tax Authorities were raised
                  for discussion at the Supreme Court, which has not yet
                  established its opinion on the matter.

                  In August 2004 the Customs and VAT Department requested from a
                  subsidiary to produce documents the company had signed after
                  June 1, 2003. The Customs and VAT Department contends that the
                  Law requires the payment of stamp duty on the requested
                  documents. Furthermore, the company was issued a stamp duty
                  notice with respect to a document it had signed with a third
                  party.

                  On December 12, 2005, the Knesset Finance Committee approved
                  The Stamp Tax on Documents Order (Cancellation of Addendum A
                  to the Law) (Amendment, 2005), pursuant to which the liability
                  for Stamp Tax will be cancelled with respect to documents that
                  are signed commencing January 1, 2006 and thereafter.

                  In the opinion of management of the Company, which is based on
                  the opinion of its legal counsel, the Company has no material
                  exposure in respect of any demand arising from the Stamp Duty
                  Law.

                                     F-199
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------

Note 19 - Commitments and Contingent Liabilities (cont'd)

         C.       Environmental quality

         (1)      The operations of the Company and of its investee companies
                  are exposed to risks related to environmental contamination,
                  since they produce, store and sell chemicals. The Group
                  invests substantial sums in order to comply with environmental
                  laws and regulations, and management believes that the Group
                  companies are in compliance with those laws. In accordance
                  with the estimate of the Company's insurance advises, the
                  Group insurance policies cover any sudden, unexpected
                  environmental contamination caused in Israel and the rest of
                  the world, subject to the conditions of the relevant policies.
                  As at December 31, 2005, the Group did not have any coverage
                  against ongoing environmental contamination. Such insurance is
                  difficult to obtain, and in cases when it can be obtained,
                  Company Management believes that the terms of the policy,
                  including the amount of the insurance coverage, do not
                  presently justify obtaining such a policy.

         (2)      Pursuant to an agreement with the Ministry of Environmental
                  Protection, subsidiaries decided to construct facilities for
                  the biological treatment of waste. Construction of the
                  facility will take approximately 3 years. In the estimation of
                  the subsidiary's management, the aggregate construction cost
                  will be between $30 million and $40 million.

         (3)      One of the subsidiary's plants, together with other chemical
                  plants, was constructed in Ramat Hovav, since the Government
                  of Israel determined that the location was suitable for
                  chemical plants as it was assumed that the layers of the soil
                  in that area were absolutely sealed against penetration by
                  liquid discharges or contamination. The Ministry of
                  Environmental Protection conducted tests as a result of which
                  it was reported that data exist indicating subterranean
                  contamination in Ramat Hovav. The inspectors recommended that
                  steps be taken to prevent further leakage from active and
                  dormant installations that are likely to constitute a source
                  of contamination of the subterranean water in the region.

                  The subsidiary may be required to clean up the relevant areas
                  or subterranean layers if and when it is found that the
                  subsidiary is responsible for the contamination. Over the past
                  several years various tests have been performed by different
                  agencies to test the ground contamination in the Ramat Hovav
                  area as well as the area surrounding the subsidiary's premises
                  in Be'er Sheva. Based on studies performed by researchers,
                  including foreign research institutes, there is no effective
                  process for cleaning the contaminated soil. The only
                  remediation available is the natural cleansing processes which
                  will clean the land over a period of 80 years. In the opinion
                  of Company Management, no material consequences on the
                  financial statements are expected due to application of the
                  recommendations deriving from the said examinations.

         (4)      In May 2004, a subsidiary and other factories in the Ramat
                  Hovav area received a notification of a change in the terms of
                  the license, according to which the factories will be required
                  to treat their waste, in contrast with the current treatment,
                  independently and through application of evaporation
                  procedures, in the framework of which the factories are
                  required to perform within a short time, research and
                  development for purposes of conformance of the procedures to
                  the composition of each factory's waste, and later on to
                  construct an appropriate facility, as well as application of
                  formulation procedures, in the framework of which the
                  factories are required to present research and development
                  plans to the Ministry for purposes of application of the
                  procedures with respect to the waste. At the same time, the
                  Ministry of Environmental Protection set a date by which the
                  factories are required to treat their waste in the required
                  format and to stop the flow of waste into the evaporation
                  pools and waste treatment facilities of the Council of Ramat
                  Hovav.

                                     F-200
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 19 - Commitments and Contingent Liabilities (cont'd)

         C.       Environmental quality (cont'd)

         (4)      (cont'd)

                  On October 10, 2004, the subsidiary, together with the Israeli
                  Union of Industrialists and other companies, filed an
                  administrative petition with the District Court of Be'er Sheva
                  against the Ministry of Environmental Protection. The subject
                  of the petition is in respect of the additional conditions for
                  receipt of a business license that were imposed on the
                  petitioning factories in May 2004 that deal with treatment and
                  removal of waste accumulated as a result of their operations.

                  As part of the petition, the Court was requested to issue an
                  order declaring that the additional conditions are null and
                  void.

                  On March 3, 2005, the Court approved the Parties' consent to
                  attempt to settle the dispute through "out of court"
                  mediation. In the framework of the mediation, the Ministry of
                  Environmental Protection hired the services of a Dutch company
                  having expertise with respect to the matter. The Dutch
                  company's conclusions supported the Company's position that
                  there is no treatment method of pressurized ventilation and
                  crystallization for the type of waste material produced by the
                  Ramat Hovav factories and it recommended to remain in the
                  Ramat Hovav pools while improving the quality of the waste
                  material and preventing the escape of odors and pollution into
                  the environment. The matter is currently in the mediation
                  process. Agreement regarding the proposed method will also
                  update the conditions of the business license accordingly.

                  In the estimation of Company Management, based on the advice
                  of its legal advisors, in light of the early stage of the
                  proceedings, it is not possible at this stage to predict the
                  chances of the administrative petition succeeding.

                  In the Company's estimation, if the petition is rejected, such
                  rejection will have a material impact on the activities of the
                  factory in Ramat Hovav and/or investments will be required,
                  the scope of which the Company is unable to estimate at this
                  point.

         (5)      On November 28, 2004, a Government decision was received that
                  approves a plan in connection with reduction of damaging air
                  and water pollution agents deriving from the Ramat Hovav area.

                  A.   Treatment of Factory Waste
                       --------------------------

                  1.   By June 30, 2006, flow of the untreated waste into the
                       joint biological treatment facility will be discontinued,
                       and every factory will treat its waste up to the quality
                       level determined by the Ministry of Environmental
                       Protection (as determined in additional terms of the
                       business license from May 2004).

                  2.   By December 31, 2007, flow of the runoff into the
                       existing evaporation pools will be discontinued, and
                       every factory will treat its runoff up to the quality
                       level determined by the Ministry of Environmental
                       Protection (as determined in additional terms of the
                       business license from May 2004).


                                     F-201
<PAGE>

Note 19 - Commitments and Contingent Liabilities (cont'd)

         C.       Environmental quality (cont'd)

                  B.   Rehabilitation of the Existing Evaporation Pools
                       ------------------------------------------------

                  1.   From January 1, 2005, the Ramat Hovav Industrial Council
                       will commence activities to dry out and rehabilitate the
                       area of the evaporation pools spanning an area of about
                       1,500 dunams, in an attempt to complete such drying out
                       and rehabilitation activities no later than the end of
                       2012.

                  2.   The Ramat Hovav Industrial Council will submit a detailed
                       plan along with timetables for the drying out and
                       rehabilitation of the area of the evaporation pools for
                       approval by the Ministry of Environmental Protection by
                       December 31, 2004.

                C.     Treatment of Air Pollution
                       --------------------------

                The Ministry of Environmental Protection will formulate and
                operate a plan for prevention of exceptional emissions of
                dangerous substances into the air in the Ramat Hovav Industrial
                Area.

                Regarding the possible consequences of the said Government
                decision on the Company's activities, see Section 4, above.


         D.     Claims against subsidiaries

         (1)    In 1995, a claim was submitted against Milenia and a number of
                other parties for a total amount of approximately $45 million
                by a group that purchased the rights of two banks which went
                bankrupt. The remainder of the claim is being submitted
                against Milenia in its capacity as a guarantor for
                agricultural cooperatives, which were its former shareholders.

                Milenia's position is that it was excluded from the guarantee
                agreement by a later agreement between the bank, the former
                shareholders and the other subsidiary of the former
                shareholders. A provision of approximately $1.6 million was
                recorded in the financial statements for this claim, based on
                a possibility of settlement in due course. Milenia's position,
                based on an analysis by their legal advisors, is that, the
                provision recorded is sufficient to cover any probable losses
                it may have on this case.

         (2)    Administrative proceedings as well as civil and other fiscal
                claims have been submitted against Milenia totaling
                approximately $63.9 million. Milenia's management believes
                based on, inter alia, the opinion of its legal advisors, that
                its chances of winning in the administrative proceedings and
                successfully defending against the aforesaid claims and
                demands, are probable and the provisions included in the
                financial statements are sufficient to cover any losses, which
                may be incurred as a result of these claims.

                                     F-202
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------

Note 19 - Commitments and Contingent Liabilities (cont'd)

         D.       Claims against subsidiaries (cont'd)

         (3)      During 2003, a criminal complaint has been filed against
                  Makhteshim and one of its managers by the Man, Nature and Law
                  Amuta (Society). In the charge sheet, it is stated that in a
                  number of cases during 1999-2003, discharges of materials were
                  measured in the exhaust vents in Makhteshim's factory in Ramat
                  Hovav in forbidden concentrations that created strong
                  pollution. Makhteshim does not admit to the allegations stated
                  in the complaint. In the estimation of Makhteshim and its
                  legal advisors, it is not possible to predict the results of
                  the complaint but on the basis of the presently accepted
                  degrees of punishment it is highly probable that even if the
                  Company is convicted this will not have a material effect on
                  the Company, therefore, no provision has been recorded in the
                  books in respect thereof.

         (4)      A number of other claims have been filed against Agan, the
                  total amount of which is $3.5 million, in respect of damages
                  which, according to the plaintiffs, were caused due to use of
                  Agan's products, breach of agreement to market a product,
                  supply of a faulty product, as well as in connection with
                  additional claims.
                  In Agan's estimation, based on the opinion of its legal
                  advisors, with respect to some of these claims the chances of
                  defense are good, while regarding some of the claims it is not
                  possible, at this stage, to predict their outcome.
                  Accordingly, no provisions have been recorded on the books in
                  connection with these claims.

         (5)      A number of other claims have been filed against Makhteshim,
                  the total amount of which is $3.3 million, in respect of
                  damages which, according to the plaintiffs, were caused by,
                  among other reasons, use of its products as well as a claim of
                  a supplier which provided the planning work with respect to
                  construction of the plant in Ramat Hovav. In Makhteshim's
                  estimation, based on the opinion of its legal advisors, with
                  respect to some of these claims the chances of defense are
                  good or the provisions included in the books are adequate.
                  With respect to claims regarding which it is not possible, at
                  this stage, to predict their outcome, no provisions have been
                  included in the financial statements.

         (6)      In April 2005, the subsidiary received a notice that an
                  international chemical company had started an international
                  arbitration proceeding against the Company in connection with
                  a license and supply agreement signed in 1998. According to
                  the notice, the amount of the claim is $10.6 million.
                  Subsidiary recorded an appropriate provision in its books
                  based on the opinion of its legal advisors.


         E.       Guarantees

         (1)      The Company has guaranteed the liabilities to banks of a
                  subsidiary without any limitation as to amount. As at the
                  balance sheet date, the outstanding liabilities of the
                  subsidiary to the banks totaled $66.6 million.

         (2)      The Company has guaranteed the liabilities to banks and
                  suppliers of subsidiaries, the amount of which as at the
                  balance sheet date totaled $33.3 million.

         (3)      Makhteshim and Agan have guaranteed the liabilities to banks
                  of subsidiaries in the amount of $28.6 million.

                                     F-203
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------

Note 19 - Commitments and Contingent Liabilities (cont'd)

         (4)      Foreign suppliers and banks have provided credit lines in the
                  approximate amount of $97.6 million to foreign subsidiaries
                  and to one subsidiary in Israel relying upon, among other
                  things, the commitments of Makhteshim and Agan as to their
                  proper fiscal management and the policies of Makhteshim and
                  Agan to take steps that will enable those companies to meet
                  their obligations. The amount of the credit lines utilized as
                  at December 31, 2005, amounted to approximately $27.2 million.

         (5)      The Company and Milenia committed to indemnify financial
                  institutions, upon the existence of certain conditions, in
                  respect of credit received by Milenia's customers from those
                  financial institutions, which were used for repayment of the
                  debts of such customers to Milenia in respect of its sales to
                  those customers. The amount of the commitment for
                  indemnification, as at the balance sheet date, was
                  approximately $76 million, of which approximately $59.1
                  million was a commitment for indemnification of Milenia and
                  approximately $16.9 million was a commitment for
                  indemnification of the Company and Milenia (December 31, 2004
                  - approximately $98 million, of which approximately $80
                  million was a commitment for indemnification of Milenia and
                  approximately $18 million was a commitment for indemnification
                  of the Company and Milenia).

         (6)      Subsidiaries have undertaken to indemnify the bank in the
                  framework of the transaction for sale of trade receivables in
                  certain cases that are defined in the agreements, if debts
                  sold are not paid. See Note 3(B).


Note 20 - Liens and Collaterals

         A.       Following are details of collateralized liabilities to banks:

                                                                December 31
                                                                       2005
                                                              -------------
                                                              US$ thousands
                                                              -------------
          Long-term liabilities
            (including current maturities)                          37,600
                                                              =============


         As collateral for the above liabilities, a subsidiary has registered a
         mortgage on land and buildings, and other subsidiaries have registered
         a first-degree charge on assets including machinery and equipment,
         share capital and intangible assets.

         -    The Company and its Israeli subsidiaries have made commitments to
              banks not to register charges on their assets in favor of other
              parties, except specific liens for acquisition of an asset for the
              benefit of the party financing the acquisition on certain terms
              and subject to the giving of notification to the bank, and except
              for creation of liens related to receipt of investment grants, as
              stated in Section B, below.

                                     F-204
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------

Note 20 - Liens and Collaterals (cont'd)

         A.       Following are details of collateralized liabilities to banks
                  (cont'd):

                  In addition, the Company committed not to transfer or sell any
                  one of its assets (except for sales in the Company's ordinary
                  course of business and at customary market terms, including
                  sale of trade receivables), without obtaining the bank's
                  written consent in advance, except for the following:

                  (a)      Transfer to a subsidiary which did not create and
                           will not create general liens and which commits not
                           to pledge or sell the pledged assets without
                           obtaining the bank's consent in advance.

                  (b)      Sale or transfer of assets, the value of the
                           Company's interest in which does not exceed US$20
                           million for any particular year and provided that the
                           cumulative value of the total assets to be
                           transferred or sold will not exceed US$ 60 million.

         -        Regarding bank deposits which serve as the sole security for
                  repayment of loans taken by a subsidiary from that bank - see
                  Note 8B(2).


         B.       As collateral for the fulfillment of the requirements in
                  respect of investment grants received (see Note 17A), the
                  Company and its subsidiaries have registered floating charges
                  in unlimited amounts on all of their assets and have provided
                  an unlimited guarantee in favor of the State of Israel.


         C.       The Company and it's subsidiary have committed to banks to
                  maintain financial criteria, the main ones of which are as
                  follows:

                  -    The ratio of the interest-bearing financial
                       liabilities to shareholders' equity shall not exceed
                       1.5.

                  -    The ratio of the interest-bearing financial
                       liabilities to income before financing expenses,
                       taxes, depreciation and amortization (EBITDA) shall
                       not exceed 3.3 (in subsidiary - 4).

                  -    The shareholders' equity will not be less than US$
                       720 million.

                  As at the balance sheet date the Company and it's subsidiary
                  are in compliance with the aforementioned financial ratios.


                                     F-205
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------

Note 21 - Shareholders' Equity

         A.   Share capital

<TABLE>
<CAPTION>

                                                               December 31                         December 31
                                                      -----------------------------      ------------------------------
                                                              2005             2004              2005              2004
                                                      ------------    -------------      ------------      ------------
                                                             Number of shares                  Number of shares
                                                      -----------------------------      ------------------------------
                                                               Authorized                      Issued and paid-up
                                                      -----------------------------      ------------------------------
<S>                                                    <C>              <C>               <C>              <C>
         Ordinary shares of NIS 1 par value            750,000,000      500,000,000       452,918,621      402,088,045

</TABLE>

         All of the shares are registered for trading on the Tel Aviv Stock
         Exchange.

         On August 8, 2005, the Company's Board of Directors decided to increase
         the Company's authorized share capital from NIS 500 million divided
         into 500 million ordinary shares of NIS 1 par value each to NIS 750
         million divided into 750 million ordinary shares of NIS 1 par value
         each.

         B.       Employee stock options

         1.       On April 23, 2001 (hereinafter - the determining date), the
                  Company's Board of Directors resolved to grant options to
                  employees of the Company and to employees of its subsidiaries
                  (hereinafter - plan 2001). In accordance with this plan, the
                  said employees can be allotted upto 17,400,000 option warrants
                  which are exercisable for up to 17,400,000 ordinary shares of
                  a par value of NIS 1 each, of the Company, at an exercise
                  price of $ 1.749 as at the balance sheet date after
                  adjustments made to all options due to a dividend distribution
                  (the market value of a share as of April 22, 2001 was NIS
                  8.12).

                  All options warrants are required to be issued to a trustee
                  pursuant to plan 2001. The options were issued in accordance
                  with Section 102 of the Income Tax Ordinance and the shares to
                  be issued on the exercise thereof will be held by the trustee
                  for a period of at least two years from the date of issuance
                  of the options.

                  Eligibility to receive the option warrants, subject to the
                  terms of the plan, is in three portions, as follows: One third
                  on the determining date, an additional third one year after
                  the determining date and the balance two years after the
                  determining date.

                  The options of each portion can be exercised one year after
                  the date of entitlement, and they expire after five years from
                  the date of the beginning of the exercise period of each
                  portion.

                  Pursuant to option plan 2001, at the time of exercise of the
                  options the Company will issue shares in a number that
                  reflects the amount of the monetary benefit inherent in the
                  option, that is, the difference between the regular price of a
                  Company share on the exercise date and the exercise price of
                  the option.

                  Under this plan, the CEO of the Company was allotted 1,400,000
                  option warrants exercisable into 1,400,000 ordinary shares of
                  a par value of NIS 1 each of the Company, which constitute 8%
                  of the total amount of options to be granted under the plan.

                  In 2003, 7,361,923 options were exercised by Company employees
                  for 2,551,236 of the Company's ordinary shares of NIS 1 par
                  value each.

                  In 2004, 4,519,791 options were exercised by Company employees
                  for 2,505,937 of the Company's ordinary shares of NIS 1 par
                  value each.

                                     F-206
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------

Note 21 - Shareholders' Equity (cont'd)

         B.       Employee stock options (cont'd)

                  In 2005 approximately 2,531,914 thousand options were
                  exercised by Company employees for 1,736,805 thousand of the
                  Company's ordinary shares of NIS 1 par value each.

                  Subsequent to the balance sheet date and up to a time
                  proximate to the signing date of the financial statements,
                  approximately 455,001 thousand options were exercised by
                  Company employees for 319,763 thousand of the Company's
                  ordinary shares of NIS 1 par value each.

         2.       On April 14, 2003 (hereinafter - "the determination date"),
                  the Company's Board of Directors resolved to adopt an employee
                  compensation plan for the employees of the Company and its
                  subsidiaries and for their directors (hereinafter - "Plan
                  2003"), pursuant to which 17,000,000 options will be issued to
                  the employees, which are exercisable for up to 17,000,000 of
                  the Company's ordinary shares of NIS 1 par value each, at an
                  exercise price of NIS 7.72 as at the balance sheet date after
                  adjustments made due to a dividend distribution (the closing
                  share price of the Company's shares on the stock exchange on
                  the Determination Date, was NIS 9.13 per share).

                  All of the options will be issued under Section 102 of the
                  Income Tax Ordinance. The options issued and the shares issued
                  upon the exercise thereof will be held by a trustee for a
                  period of at least two years from the end of the year in which
                  the options are issued.

                  In accordance with Plan 2003, at the time of exercise of the
                  options, the Company will issue shares in an amount which
                  reflects the amount of the monetary benefit implicit in the
                  options, that is, the difference between the price of an
                  ordinary share of the Company on the exercise date and the
                  exercise price of the option.

                  In the framework of Plan 2003, Company employees who were
                  issued options under the Company's prior employee compensation
                  plan 2001, were offered the opportunity to convert the options
                  issued to them under the Plan 2001 into 12,180,000 options
                  under the plan 2003. The offer was not accepted by any of the
                  Company's employees.

                  The right to exercise the options, with respect to offerees
                  who are not included with those who received options under the
                  plan 2001 and are converting them to options issued under the
                  plan 2003, is in three increments, as follows: one-third at
                  the end of one year from the Determination Date, an additional
                  one-third at the end of two years from the Determination Date
                  and the balance at the end of three years from the
                  Determination Date. The expiration date of the options is five
                  years from the beginning of the exercise period of each
                  increment.

                  In addition, in the framework of the plan 2003, the Company's
                  CEO was issued 1,600,000 options which are exercisable for up
                  to 1,600,000 of the Company's ordinary shares of NIS 1 par
                  value each and which constitute 9.4% of the total options
                  issued in the framework of the Plan.

                                     F-207
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 21 - Shareholders' Equity (cont'd)

         B.       Employee stock options (cont'd)

         2.       (cont'd)

                  In addition, in the framework of the Plan, the Company's
                  directors were issued a total of 1,800,000 that which
                  constitute 10% of the total options issued in the framework of
                  the Plan.

                  On March 8, 2004, the Company's Board of Directors decided to
                  make an additional issuance under plan 2003 of 1,420,000
                  options to the directors (that did not serve at the time of
                  prior issuance to the directors) and to Company employees, the
                  options were distributed during 2004.

                  In 2004, 105,663 options were exercised by Company employees
                  for 64,746 of the Company's ordinary shares of NIS 1 par
                  value.

                  In 2005 Company employees exercised 219,996 options for
                  156,868 of the Company's ordinary shares of NIS 1 par value.

                  Subsequent to the balance sheet date and proximate to the
                  signing date of the financial statements, 1,044,187 options
                  were exercised by Company employees for 764,389 ordinary
                  shares of NIS 1 par value.

         3.       On March 13, 2005, the Company's Board of Directors resolved
                  to adopt a new stock option plan for the officers and
                  employees of the Company and its subsidiaries (hereinafter:
                  plan 2005). Pursuant to plan 2005, on March 14, 2005,
                  14,900,000 options exercisable into up to 14,900,000 of the
                  Company's ordinary shares of NIS 1 par value each were issued
                  - 800,000 options were issued to the Company's CEO, 11,600,000
                  were issued to employees of the Company and subsidiaries in
                  Israel and overseas and the balance of 2,500,000 were issued
                  to a trustee for purposes of future issuances.
                  The options are offered to the offerees at no cost.

                  The exercise price of the options is as follows:

                  Regarding the options issued to the Company's CEO and 7
                  additional employees (hereinafter - "Group A") the exercise
                  price will be equal to the opening price of the Company's
                  shares on April 15, 2006, and if there is no trading on that
                  date - on the first trading day thereafter.

                  Regarding the options issued to the other offerees
                  (hereinafter - "Group B") the exercise price will be equal to
                  NIS 25.10 (subject to adjustments in respect of dividend
                  distributions), which is equal to the opening price of the
                  Company's share on the stock exchange when the decision was
                  made by the Company's Board of Directors (March 13, 2005).

                                     F-208
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 21 - Shareholders' Equity (cont'd)

         B.   Employee stock options (cont'd)

         3.   (cont'd)

              Regarding offerees who will be issued options in the future, as
              stated above, (hereinafter - "Group C") the exercise price will be
              equal to the closing price of the Company's shares on the eve of
              the decision to issue options to them.

              The right to exercise the options subject to the terms of the plan
              is in three portions, as follows: one-third at the end of two
              years from the determination date, an additional third at the end
              of three years from the determination date and the balance at the
              end of four years from the determination date. The expiration date
              of each portion is 5 years from the beginning of its exercise
              period.

              The determination date for Group A was fixed as April 14, 2006
              (which is the end of the third and final vesting period of the
              employee options' plan from 2003) and for Group B and Group C, the
              determination date is March 13, 2005 (the approval date of the
              plan).

              On August 8, 2005, the Company's Board of Directors decided to
              revise the exercise price of the options issued to Group A such
              that the exercise price of these options will be equal to the
              exercise price determined for options issued to Group B. As at the
              balance sheet date, the exercise price after adjustments, as
              stated above, is NIS 24.62.

              The options under plan 2005 will be issued to the offerees
              pursuant to the provisions of Section 102 of the Income Tax
              Ordinance under the capital track.

              On March 8, 2006 the Company's board of directors decided to issue
              the balance of 2,500,000 options to employees (Group C).


         C.   Purchase of Company shares by a subsidiary

         In March 2004 a subsidiary transferred to a third party, off the stock
         exchange, 7 million of its shares in the Company (hereinafter - the
         transferred shares). In accordance with the agreement, the
         consideration will be paid within one year from the date of transfer
         either in cash, linked to the price of the share on the stock exchange
         as at that date, or in shares of the Company plus 0.5% of the price of
         the shares on the stock exchange.

         In the second quarter of 2004, 1,908 thousand of the aforementioned
         shares were returned in order to pay the consideration for purchasing a
         group of companies in the USA as mentioned in Note 7D(1)a.

         In the first quarter of 2005, 693 thousand of the aforementioned shares
         were returned in order to pay the consideration for purchasing Mabeno,
         see Note 7D(2)a.

         In the third quarter of 2005 the rest of the transferred shares
         were returned to the subsidiary.

         As at balance sheet date the subsidiary holds 4,415 thousand par value
         of the company's shares which constitute about 1% of the issued and
         paid up share capital of the company.

                                     F-209
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------

Note 21 - Shareholders' Equity (cont'd)

         D.   Buy-Back of Shares

         On November 14, 2005, the Company's Board of Directors decided to adopt
         a policy according to which the Company will act to buy back its own
         shares in the amount of $150 million.

         The decision of the Board of Directors provides different parameters
         for acquisition of the shares as stated above including, among others,
         acquisition in response to supply without creation of demand,
         limitations on the scope of daily acquisitions, price criteria and
         execution of off-market transactions.

         The shares acquired will become dormant shares as long as they are held
         by the Company.

         As at the balance sheet date, the Company holds 12,018,603 of its own
         shares, constituting approximately 2.6% of its total issued and paid-up
         share capital in the amount of $65.6 million. As at March 6, 2006, the
         Company holds 15,200,909 shares.

         E.   Dividend distribution policy

         On April 23, 2001, the Company's Board of Directors resolved to adopt a
         dividend policy at rates of between 15% and 30% of annual net income,
         beginning from 2001. In accordance with this policy, an interim
         quarterly dividend will be distributed. The amount of the dividend will
         be calculated according to the net income for the quarter and will be
         within the limits specified above. This interim dividend will be
         considered as an advance on account of the annual dividend.

         Application of policy is subject to there being sufficient income for
         distribution on the relevant dates, to the provisions of any law
         regarding dividend distribution, to specific decisions of the Company's
         Board of Directors in respect of each distribution and to any other
         decision the Board of Directors is permitted to make at any time,
         including regarding a different designation of the Company's earnings
         and a change in this policy.

         On March 8, 2006, the Company's Board of Directors decided to make a
         change regarding the dividend distribution policy, such that commencing
         with the fourth quarter of 2005, a dividend will be distributed at the
         rate of 50% of the net earnings for the period.

         In March 2005, the Company's Board of Directors decided to distribute a
         dividend in respect of the earnings of 2004, in the amount of $12,700
         thousand.

         During 2005, the Company's Board of Directors decided to make four
         interim dividend distributions, in the total amount of US$ 60,200
         thousand.

         Subsequent to the balance sheet date, the Company's Board of Directors
         resolved to distribute a dividend in respect of the earnings of the
         fourth quarter of 2005, in the amount of $23,500 thousand.

         F. Convertible debentures and options (Series 1)

         Regarding the convertible debentures and the options (Series 1) issued
         in the framework of a prospectus from November 2001 - see Note 15B.

         In 2005, 13,379,572 options (Series 1) were converted into 13,379,572
         ordinary shares of NIS 1 par value for an average exercise price of NIS
         9.61 per share. The total share capital issued as a result of the
         conversion was $2,910 thousand, at a premium of $31,014 thousand.

         On November 20, 2005, the balance of the unexercised options expired.

         Regarding conversion of the debentures - see Note 15B(4).

                                     F-210
<PAGE>
<TABLE>
<CAPTION>


                                                                                             Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
----------------------------------------------------------------------------------------------------------------------------


Note 22 - Linkage Terms of Monetary Balances

Consolidated

                                 In or linked         In Euro    In Brazilian   In or linked       In Israel          Total
                                        to US                           reals     to another       currency
                                      dollars                                       currency
                                -------------   -------------   -------------   ------------   -------------   -------------
                                US$ thousands   US$ thousands   US$ thousands   US$thousands   US$ thousands   US$ thousands
                                -------------   -------------   -------------   ------------   -------------   -------------
<S>                                   <C>             <C>              <C>            <C>              <C>            <C>

DECEMBER 31, 2005
Assets:
Cash and cash equivalents             21,614          13,408           9,754          23,062           3,455          71,293
Short-term investments                     -             561               -               -             708           1,269
Trade and other receivables          160,869          75,585         130,374          51,097          27,635         445,560
Long-term investments,
 loans and other receivables           2,204           2,562          13,885           1,124           2,469          22,244
                                -------------   -------------   -------------   ------------   -------------   -------------
                                     184,687          92,116         154,013          75,283          34,267         540,366
                                =============   =============   =============   ============   =============   =============
Liabilities:
Credit from banks (not
 including current
 maturities)                         197,864          13,624          11,639           5,433             478         229,038
Trade and other payables             236,591         100,305          71,147          43,714          82,256         534,013
Proposed dividend                     14,058               -               -               -               -          14,058
Long-term bank loans and
 other (including current
 maturities) and long-term
 liabilities                          88,398           4,999           3,222           1,091           1,666          99,376
Liability for employee
 severance benefits, net                 126             538             640             227          26,483          28,014
                                -------------   -------------   -------------   ------------   -------------   -------------
                                     537,037         119,466          86,648          50,465         110,883         904,499
                                =============   =============   =============   ============   =============   =============

DECEMBER 31, 2004
Assets:
Cash and cash equivalents
(not including current
maturities)                           10,751          14,799           3,418          10,624             885          40,477
Short-term investments                     -             603               -             160             800           1,563
Trade and other receivables          126,638          74,775         136,831          51,673          32,820         422,737
Long-term investments,
 loans and other receivables           1,710             328          15,715           1,239           2,353          21,345
                                -------------   -------------   -------------   ------------   -------------   -------------
                                     139,099          90,505         155,964          63,696          36,858         486,122
                                =============   =============   =============   ============   =============   =============
Liabilities:
Credit from banks                     90,949          11,350           1,814           5,974           2,892         112,979
Trade and other payables             158,430         146,850          64,328          54,287          90,527         514,422
Proposed dividend                     11,200               -               -               -               -          11,200
Long-term bank loans and
 other (including current
 maturities) and long-term
liabilities                          112,319           9,331               -           6,204           1,548         129,402
Liability for employee
 severance benefits, net                  78             481             310             105          25,735          26,709
                                -------------   -------------   -------------   ------------   -------------   -------------
                                     372,976         168,012          66,452          66,570         120,702         794,712
                                =============   =============   =============   ============   =============   =============
</TABLE>


With respect to futures transactions in foreign currency, see Note 32.

                                     F-211
<PAGE>
<TABLE>
<CAPTION>

                                                                    Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements
--------------------------------------------------------------------------------------------------



Note 23 - Revenues

         Consolidated
                                                        For the year ended December 31
                                                 -------------------------------------------------
                                                         2005              2004               2003
                                                 ------------     -------------      -------------
                                                 S$ thousands     US$ thousands      US$ thousands
                                                 ------------     -------------      -------------
<S>                                                <C>               <C>                <C>
         Foreign sales -
           Industrial                              1,465,333         1,351,450          1,001,435
           Commercial                                165,221            85,007             89,303
                                                 ------------     -------------      -------------
                                                   1,630,554         1,436,457          1,090,738
                                                 ------------     -------------      -------------
         Domestic sales -
           Industrial                                 48,678            47,461             40,268
           Commercial                                 61,485            55,784             46,249
                                                  ------------     -------------      -------------
                                                    110,163           103,245             86,517
                                                 ------------     -------------      -------------

                                                   1,740,717         1,539,702          1,177,255
                                                 ============     =============      =============
         Foreign sales by geographic area:
         Latin America                               422,777           428,638            308,628
         Europe                                      700,912           649,859            525,851
         North America                               308,798           198,035            142,280
         Far East                                     59,120            55,467             41,398
         Rest of the world                           138,947           104,458             72,581
                                                 ------------     -------------      -------------
                                                   1,630,554         1,436,457          1,090,738
                                                 ============     =============      =============


Note 24 - Cost of Sales

        Consolidated
                                                        For the year ended December 31
                                                 -------------------------------------------------
                                                         2005              2004               2003
                                                 ------------     -------------      -------------
                                                 S$ thousands     US$ thousands      US$ thousands
                                                 ------------     -------------      -------------
         Industrial:
         Materials                                   766,681           674,675            443,565
         Labor                                        76,147            71,534             63,606
         Subcontractors                               10,720             5,822              6,286
         Other manufacturing expenses                115,182           111,624             83,611
         Depreciation                                 29,369            25,891             24,571
                                                 ------------     -------------      -------------
                                                     998,099           889,546            621,639

         Less - expenses capitalized
           to fixed assets (mainly
           engineering salaries)                        (866)             (848)              (958)
         Change in work in progress
           and finished
           products inventories                      (96,162)          (43,246)            (7,528)
                                                 ------------     -------------      -------------
                                                     901,071           845,452            613,153
         Commercial:
         Cost of merchandise sold                    158,644            98,456            117,152
                                                 ------------     -------------      -------------

                                                   1,059,715           943,908            730,305
                                                 ============     =============      =============
</TABLE>

                                          F-212
<PAGE>
<TABLE>
<CAPTION>

                                                                                             Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements
----------------------------------------------------------------------------------------------------------------------------


Note 25 - Research and Development Expenses, Net

         Consolidated
                                                                                  For the year ended December 31
                                                                          --------------------------------------------------
                                                                                   2005               2004              2003
                                                                          -------------      -------------     -------------
                                                                          US$ thousands      US$ thousands     US$ thousands
                                                                          -------------      -------------     -------------
<S>                                                                              <C>               <C>                 <C>
         Payroll and related expenses                                           11,627            10,508              9,868
         Materials                                                                 351               267              1,210
         Other expenses                                                          9,093             9,758              6,738
                                                                          -------------      -------------     -------------
                                                                                21,071            20,533             17,816
         Less -
         Government participation in R&D expenses                                 (443)           (1,053)              (996)
                                                                          -------------      -------------     -------------

                                                                                20,628            19,480             16,820
                                                                          =============      =============     =============


Note 26 - Selling and Marketing Expenses

         Consolidated
                                                                                  For the year ended December 31
                                                                          --------------------------------------------------
                                                                                   2005               2004              2003
                                                                          -------------      -------------     -------------
                                                                          US$ thousands      US$ thousands     US$ thousands
                                                                          -------------      -------------     -------------

         Payroll and related expenses                                            64,480            52,460             37,678
         Commissions and delivery costs                                          75,121            70,480             51,268
         Advertising                                                             20,933            14,049              9,957
         Depreciation and amortization                                           32,936            24,685             20,916
         Registration                                                            21,753            11,504              7,568
         Professional services                                                    7,035             6,263              6,069
         Insurance                                                                7,929             6,474              5,746
         Royalties to the Chief Scientist                                         3,894             4,758              2,802
         Other                                                                   33,837            29,539             21,832
                                                                          -------------      -------------     -------------

                                                                                267,918           220,212            163,836
                                                                          =============      =============     =============


Note 27 - General and Administrative Expenses

         Consolidated
                                                                                   For the year ended December 31
                                                                          --------------------------------------------------
                                                                                   2005               2004              2003
                                                                          -------------      -------------     -------------
                                                                          US$ thousands      US$ thousands     US$ thousands
                                                                          -------------      -------------     -------------

         Payroll and related expenses                                           24,992             24,743            22,549
         Administrative services and directors' fees to Koor                     2,548              2,557             2,676
         Depreciation and amortization                                           4,563              3,359             3,446
         Bad and doubtful accounts                                               5,909             11,481             7,752
         Professional services                                                   8,550             12,058             6,756
         Insurance                                                               2,903              1,925               950
         Other                                                                  11,921             10,792             9,770
                                                                          -------------      -------------     -------------
                                                                                61,386             66,915            53,899
                                                                          =============      =============     =============
</TABLE>

                                              s    F-213


<PAGE>
<TABLE>
<CAPTION>

                                                                                             Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements
----------------------------------------------------------------------------------------------------------------------------

Note 27 - General and Administrative Expenses (cont'd)

         Company

                                                                                    For the year ended December 31
                                                                          --------------------------------------------------
                                                                                   2005               2004              2003
                                                                          -------------      -------------     -------------
                                                                          US$ thousands      US$ thousands     US$ thousands
                                                                          -------------      -------------     -------------
<S>                                                                             <C>                <C>                <C>
         Payroll and related expenses                                           5,333              6,073              7,401
         Administrative services and directors' fees to Koor                    2,548              2,557              2,676
         Depreciation and amortization                                            226                269                276
         Professional services                                                  2,109              3,607              1,234
         Other                                                                  2,774              2,865              2,340
                                                                          -------------      -------------     -------------
                                                                               12,990             15,371             13,927
                                                                          =============      =============     =============



Note 28 - Financing Expenses (Income), Net

         Consolidated

                                                                                    For the year ended December 31
                                                                          --------------------------------------------------
                                                                                   2005               2004              2003
                                                                          -------------      -------------     -------------
                                                                          US$ thousands      US$ thousands     US$ thousands
                                                                          -------------      -------------     -------------

         In respect of long-term liabilities, net                                6,646             17,885            17,604
         In respect of short-term liabilities and credit, net                   27,927              9,686            20,352
                                                                          -------------      -------------     -------------
         Financing expenses, net                                                34,573             27,571            37,956
                                                                          =============      =============     =============


         Company

                                                                                   For the year ended December 31
                                                                          --------------------------------------------------
                                                                                   2005               2004              2003
                                                                          -------------      -------------     -------------
                                                                          US$ thousands      US$ thousands     US$ thousands
                                                                          -------------      -------------     -------------
         Expenses:
         In respect of long-term liabilities                                    11,607              5,193             3,815
         In respect of short-term liabilities and credit                           245                  -               936
                                                                                 11,852             5,193             4,751
         Less:
         Financing income                                                       (2,797)           (10,229)           (5,349)
                                                                          -------------      -------------     -------------
         Financing expenses (income), net                                        9,055             (5,036)             (598)
                                                                          =============      =============     =============
</TABLE>

                                                   F-214
<PAGE>
<TABLE>
<CAPTION>

                                                                                             Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements
----------------------------------------------------------------------------------------------------------------------------


Note 29 - Other Expenses, Net

         Consolidated

                                                                                   For the year ended December 31
                                                                          --------------------------------------------------
                                                                                   2005               2004              2003
                                                                          -------------      -------------     -------------
                                                                          US$ thousands      US$ thousands     US$ thousands
                                                                          -------------      -------------     -------------
<S>                                                                              <C>               <C>                <C>
         Expenses in respect of early retirement of employees
          and payment of early pension benefits                                  5,936             4,802              6,721
         Expenses relating to sale of trade receivables
          as part of securitization transaction                                    150             1,825                  -
         Loss on sale of trade receivables as part
          securitization transaction                                             6,839             4,374              3,850
         Loss on sale of fixed assets and other, net                             1,665             1,099                858
         Provision for loss with respect to options granted to
          employees of subsidiaries                                                  55             2,090                330
         Amortization of goodwill in investee companies                           9,870            14,396              9,826
         Amortization of goodwill on acquisition of products                     11,533            10,164             11,782
         Amortization of other assets                                             7,054             2,555              2,667
         Sundry expenses, net                                                     1,109             1,430              2,211
                                                                          -------------      -------------     -------------
                                                                                 44,211            42,735             38,245
                                                                          =============      =============     =============
</TABLE>


Note 30 - Transactions and Balances with Related and Interested Parties

         A.       Transactions with interested parties

         (1)      In the ordinary course of business, Group companies conduct
                  transactions with entities that are related parties
                  (principally, sales of the companies' products and purchases
                  of raw materials and services). Up to and including 2004, the
                  Securities Authority has exempted the Company from providing
                  details of immaterial transactions involving acquisitions and
                  sales of goods and services at market value that the Company
                  is likely to execute in the normal course of its business with
                  Bank Leumi LeIsrael Ltd., Bank Hapoalim Ltd. and their
                  investee companies. In any event, the Company is required to
                  disclose any unusual transactions.

                  On October 31, 2005, an amendment was published to the
                  Securities Regulations (Preparation of Annual Financial
                  Statements), 1993, pursuant to which the Securities Authority
                  does not have exemption authority with respect to this matter.

         (2)      On April 1, 2000, the Company signed an agreement with Koor
                  according to which the Company will pay Koor $2.5 million per
                  year for consulting and management services to be rendered by
                  Koor to the Company. The agreement was effective up to May
                  2003. The agreement was extended for additional three years,
                  effective from May 2003.

                  In addition, the Company pays directors' fees to Koor
                  Industries Ltd. in amounts identical to those paid to public
                  directors, see B., below. Regarding payments made to Koor -
                  see Section A(9), below.

                                     F-215
<PAGE>

                                                 Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements
-------------------------------------------------------------------------------

Note 30 - Transactions and Balances with Related and Interested Parties (cont'd)

         A.       Transactions with interested parties (cont'd)

         (3)      The Company has an agreement covering management fees with
                  Agan and Makhteshim according to which Agan and Makhteshim
                  paid management fees at the rate of 1.8% of the annual
                  revenues. In 2005, Makhteshim and Agan paid management fees to
                  the Company amounting to US$ 14.2 million (2004 - US$ 13.5
                  million, 2003 - US$ 10.0 million).

         (4)      The Company entered in an agreement with the former CEO of
                  Milenia (who is a director of the Company), covering
                  non-competition and confidentiality, pursuant to which on
                  April 30, 2002 (shortly after the termination of his service
                  as Milenia's CEO), he received 1,000,000 of the Company's
                  shares in consideration for his agreement not to compete with
                  the Company and to protect all the Company's confidential
                  information.

                  The agreement is valid for a period up to the later of July
                  2007 or the end of 3 years from the date on which he ceases to
                  serve as CEO, director or other position in the one of the
                  Group companies.

         (5)      In November 2002, the Company's Board of Directors appointed a
                  new CEO who took up his position in May 2003.

                  The Company entered into an employment agreement with the new
                  CEO, pursuant to which the CEO will serve in his position for
                  an unlimited period, unless one of the parties gives notice of
                  its wish that the employment shall not be continued, by means
                  of an advance notice of three months.

         (6)      A subsidiary has an agreement with STIM Holdings (1991) Ltd.,
                  a company owned by a shareholder who served as a director of
                  the Company until September 2003, which was extended up to
                  September 30, 2006, according to which his company will supply
                  to the subsidiary management and business organization
                  services, for a consideration of NIS 60,000 per month plus
                  linkage differences based on the CPI for December 2001. In
                  July 2004, the aforesaid shareholder ceased being an
                  interested party.

         (7)      A subsidiary has an agreement with S.H.M. Ltd., a company
                  owned by a shareholder who served as a director of the Company
                  until September 2003, which was extended up to September 30,
                  2006, according to which his company will supply to the
                  subsidiary management and business organization services, for
                  a consideration of NIS 60,000 per month plus linkage
                  differences based on the CPI for December 2002. In July 2004,
                  the aforesaid shareholder ceased being an interested party.

                                     F-216
<PAGE>

                                                 Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements
-------------------------------------------------------------------------------


Note 30 - Transactions and Balances with Related and Interested Parties (cont'd)

         A.       Transactions with interested parties (cont'd)

         (8)      Regarding insurance and indemnification of interested parties
                  - see Note 19(A)(1) and (2).

         (9)      Transactions between Makhteshim and Agan with Koor and its
                  subsidiaries, are made in the regular course of business and
                  on usual business terms. Bank Hapoalim Ltd. is interesting
                  party of the Groupdue to its holdings in the Company through
                  mutual funds and provident funds that it manages. Financing
                  transactions with Bank Hapoalim is conducted in the ordinary
                  course of business under normal commercial terms. Set forth
                  below are details of the transactions:
<TABLE>
<CAPTION>
         Consolidated
                                                       For the year ended December 31
                                              --------------------------------------------------
                                                       2005               2004              2003
                                              -------------      -------------     -------------
                                              US$ thousands      US$ thousands     US$ thousands
                                              -------------      -------------     -------------
<S>                                                  <C>               <C>                <C>

         Management services to Koor                2,500               2,500              2,500
                                              =============      =============     =============

         Other related parties:
         Revenues -                                 6,368               5,638              7,542
                                              =============      =============     =============
         Expenses -
          Selling                                   1,303               1,863              1,593
                                              =============      =============     =============
          Financing Bank Hapoalim                     843                   *                  *
                                              =============


         *   See Note A(1) regarding cancellation of the exemption


         B.       Benefits to interested parties

                                                       For the year ended December 31
                                              --------------------------------------------------
                                                       2005               2004              2003
                                              -------------      -------------     -------------
                                              US$ thousands      US$ thousands     US$ thousands
                                              -------------      -------------     -------------

         Fees to interested parties
            employed by the Group (*)                1,152            1,147             *3,656
                                              =============      =============     =============
         Number of interested parties                    1              **4                  5
                                              =============      =============     =============
         Fees to directors appointed
            by Koor Industries Ltd.                     47               57                176
                                              =============      =============     =============
         Number of directors                          ***5                4                  5
                                              =============      =============     =============
         Fees to other directors                        77               75                 57
                                              =============      =============     =============
         Number of directors                             6                6                  5
                                              =============      =============     =============

         (*)      Including settlements in respect of employee severance
                  benefits with the Company's former CEO. Regarding options
                  issued to the Company's present and former CEOs, see Note 21B.
         (**)     In July 2004, two of the four directors ceased being
                  interested parties - see paragraphs A6 and A7 above.
         (***)    During the year, a director on behalf of Koor was replaced.
</TABLE>

                                     F-217
<PAGE>

                                                 Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements
-------------------------------------------------------------------------------


Note 30 - Transactions and Balances with Related and Interested Parties (cont'd)

         C.       Balances with related and interested parties
<TABLE>
<CAPTION>
         Consolidated
                                                                             December 31       December 31
                                                                                    2005              2004
                                                                           -------------     -------------
                                                                           US$ thousands     US$ thousands
                                                                           -------------     -------------
<S>                                                                               <C>              <C>
         Trade receivables (1) -
          Related parties                                                         4,134            3,403
                                                                           =============     =============

         Trade payables -
          Related parties                                                           267              445
                                                                           =============     =============

         Loans Bank Hapoalim                                                     30,680                *
                                                                           =============     =============

         Cash and cash equivalents Bank Hapoalim                                  3,069                *
                                                                           =============     =============

         Other payables
          Koor Industries Ltd.                                                      748              748
                                                                           =============     =============

         Severance pay fund administered by related companies                     2,772            2,331
                                                                           =============     =============

         (1)  Highest balance during the year - trade receivables                 5,205            3,403
                                                                           =============     =============

         *   See Note A(1) regarding cancellation of the exemption


Note 31 - Earnings per Share

         Share capital and net income used as the basis for the computation of
         basic earnings per share are as follows:
                                                                         For the year ended December 31
                                                                --------------------------------------------------
                                                                         2005               2004              2003
                                                                -------------      -------------     -------------
         Weighted-average par value of share capital
          (in thousands)                                              466,423           432,776            410,373
                                                                =============      =============     =============

         Net income used for the computation
          (US$ thousands)                                             207,406           166,900            105,809
                                                                =============      =============     =============

         Interest rates used in computing earnings per share
          (linked to the US dollar)                                      4.5%              2.5%               1.0%
                                                                =============      =============     =============

</TABLE>


                                     F-218
<PAGE>


                                                 Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements
-------------------------------------------------------------------------------


Note 31 - Earnings per Share (cont'd)

         Share capital and net income used as the basis for the computation of
         fully diluted earnings per share are as follows:
<TABLE>
<CAPTION>
                                                                           For the year ended December 31
                                                                --------------------------------------------------
                                                                         2005               2004              2003
                                                                -------------      -------------     -------------
<S>                                                                   <C>               <C>                <C>
         Weighted-average par value of share capital
          (in thousands)                                              467,302           457,548            427,772
                                                                =============      =============     =============

         Net income used in computing earnings per share
          (US$ thousands)                                             207,631           168,817            106,118
                                                                =============      =============     =============

         Interest rates used in computing earnings per share
          (linked to the US dollar)                                       4.5%             2.5%               1.0%
                                                                =============      =============     =============

</TABLE>


Note 32 - Financial Instruments and Risk Management

         A.       General

         The Group has extensive international operations, and, therefore, it is
         exposed to risks that derive from exchange rate fluctuations, and to
         changes in interest rates, in respect of credit received. In order to
         reduce the overall exposure to those risks, the Group uses financial
         instruments, including derivative instruments and options (hereinafter
         - "the Derivatives"). The Group does not hold financial instruments for
         trading purposes.

         Transactions in derivatives are undertaken with major financial
         institutions in Israel and abroad and, therefore, in the opinion of
         Group Management the credit risk in respect thereof is low.


         B.       Exchange rate risk management

         The Group uses foreign currency derivatives - forward transactions and
         option contracts - in order to hedge the risk that the dollar cash
         flows, which derive from existing assets and liabilities and
         anticipated sales and costs, may be affected by exchange rate
         fluctuations.


                                     F-219
<PAGE>

                                                 Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements
-------------------------------------------------------------------------------


Note 32 - Financial Instruments and Risk Management (cont'd)

         B.       Exchange rate risk management (cont'd)

         As of December 31, 2005, the Company and its subsidiaries had open
         forward exchange contracts, which are intended to hedge exposure with
         respect to assets and liabilities in foreign currency, as described
         below:

                                                            Foreign-   Foreign-
                                                            currency   currency
                                               Futures       options    options
                                          transactions     purchased       sold
                                          ------------   -----------  ---------

         Acquisition of dollars
            in exchange for:
         Shekels                                    -             -        10
         Pounds sterling                          5.9          46.7      49.1
         Euro                                     4.9         185.2     197.2
         Brazilian reals                        100.3            37         -
         South African rands                      4.9             -       0.5
         Japanese yens                            0.4           3.9       4.2
         Australian dollars                      13.5          33.3      39.2
         Polish zloty                            17.8          23.6      30.5
         Swedish krona                            1.5           1.2       1.3
                                         ------------   -----------  ---------

                                                149.2         330.9       332
                                         ============   ===========  =========



                                                            Foreign-   Foreign-
                                                            currency   currency
                                               Futures       options    options
                                          transactions     purchased       sold
                                          ------------   -----------  ---------

         Sale of dollars in exchange for:
         Shekels                                20.5            61        61
         Pounds sterling                           1           5.4      10.9
         Euro                                      -             5      30.7
         South African rands                     1.6           0.5       0.4
         Japanese yens                             -             -       1.8
         Australian dollars                        -             5       4.2
         Brazilian reals                          35            52        15
         Polish zloty                            2.7           7.2      11.4
         Korean Yuan                               -            17        17
                                         ------------   -----------  ---------

                                                60.8         153.1     152.4
                                         ============   ===========  =========


                                     F-220
<PAGE>

                                                 Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements
-------------------------------------------------------------------------------


Note 32 - Financial Instruments and Risk Management (cont'd)

         C.   Credit risks

         General
         -------

         The Group's revenues are derived from a large number of
         geographically-dispersed customers in many different countries.
         Customers include multi-national companies and manufacturing companies,
         as well as distributors, agriculturists and agents of plant protection
         chemicals manufacturers who purchase the products either as finished
         goods or as intermediate products in relation to their own
         requirements.

         The agricultural sector to which most of the Group's products are
         directed, is characterized by lengthy periods of credit.

         The financial statements contain specific provisions for doubtful
         debts, which properly reflect in management's estimate, the loss
         inherent in debts, the collection of which is in doubt and general
         allowance, see also note 2(H). In addition, up to June 2004, the
         Company insured its trade receivables by means of credit insurance in a
         joint policy with the entire Makhteshim-Agan Group. Pursuant to the
         policy, the aggregate amount of credit insurance for the entire Group
         is an annual cumulative amount of US$ 25 million. The insurance
         indemnification is limited to 90% of the debt per event. The terms of
         the insurance policy require the implementation of a credit control
         system for the entire Group which is required to operate in accordance
         with procedures stipulated in the insurance policy. In July 2004, the
         Company discontinued the said insurance because of it not being
         worthwhile.

         In April 2005, the Company renewed the said policy after changing the
         insurance amount to approximately $30 million and increasing the
         deductible to $7.5 million.

         D.   Currency risks

         As at December 31, 2005, monetary assets in excess of monetary
         liabilities in Brazilian reals amounted to approximately US$ 67.4
         million, monetary assets in Israeli shekels in excess of monetary
         liabilities in Israeli shekels amounted to approximately US$ 76.6
         million, and monetary liabilities in excess of monetary assets in Euro
         amounted to approximately US$ 27.4.

         The Group has taken measures to reduce the exposure in respect to this
         excess as described in Note B. above.

         Regarding the linked balance sheet covering monetary balances - see
         Note 22.

         E.   Fair value of financial instruments

         The Group's financial instruments consist of mainly non-derivative
         assets and liabilities, e.g.: cash and cash equivalents, investments in
         deposits, other receivables, long-term investments, short-term credit,
         payables, loans and other long-term liabilities, as well as
         derivatives.

         In view of their nature, the fair value of financial instruments
         included in working capital is usually identical or close to their
         carrying amount. Also the fair value of deposits and long-term
         receivables and loans and other long-term liabilities is close to their
         fair value, as these financial instruments bear interest at rates which
         are close to the prevailing market rates.

                                     F-221
<PAGE>

                                                 Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements
-------------------------------------------------------------------------------


Note 33 - Segment Information

         A.   Geographical segments according to location of assets

<TABLE>
<CAPTION>
         For the year ended December 31, 2005

                                             Israel      Latin America            Europe       Adjustments       Consolidated
                                      -------------      -------------     -------------     -------------      -------------
                                      US$ thousands      US$ thousands     US$ thousands     US$ thousands      US$ thousands
                                      -------------      -------------     -------------     -------------      -------------
<S>                                      <C>                  <C>               <C>              <C>               <C>
         Income
         Revenues from
          external sources               1,057,261            369,489           313,967                 -          1,740,717
         Inter-segment
          revenues                          73,234             16,983            19,535          (109,752)                 -
                                      -------------      -------------     -------------     -------------      -------------

         Total revenues                  1,130,495            386,472           333,502          (109,752)         1,740,717
                                      =============      =============     =============     =============      =============

         Segment results*                  195,838             49,600            67,403            (3,183)           309,658
                                      =============      =============     =============     =============      =============

         Additional
          information
         Assets utilized by
          the segment                    1,289,052            464,403           376,287                 -          2,129,742
                                      =============      =============     =============     =============      =============

         Liabilities of the
          segment                          471,831            274,089           220,139                 -            966,059
                                      =============      =============     =============     =============      =============

         Capital
          investments                      105,982              9,714            11,725                 -            127,421
                                      =============      =============     =============     =============      =============

         Depreciation and
          amortization                      75,100              7,871            12,993                 -             95,964
                                      =============      =============     =============     =============      =============

         *  Includes amortization of goodwill on the acquisition of products and amortization of goodwill and other
            assets arising on the acquisition of subsidiaries.
</TABLE>

                                     F-222
<PAGE>

                                                 Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements
-------------------------------------------------------------------------------


Note 33 - Segment Information (cont'd)

         A. Geographical segments according to location of assets (cont'd)

<TABLE>
<CAPTION>
         For the year ended December 31, 2004

                                             Israel      Latin America            Europe       Adjustments       Consolidated
                                      -------------      -------------     -------------     -------------      -------------
                                      US$ thousands      US$ thousands     US$ thousands     US$ thousands      US$ thousands
                                      -------------      -------------     -------------     -------------      -------------
<S>                                      <C>                  <C>               <C>              <C>               <C>
         Income
         Revenues from
          external sources                 937,769            337,123           264,810                 -          1,539,702
         Inter-segment
          revenues                          95,558             13,084            25,722          (134,364)                 -
                                      -------------      -------------     -------------     -------------      -------------

         Total revenues                  1,033,327            350,207           290,532          (134,364)         1,539,702
                                      =============      =============     =============     =============      =============

         Segment results*                  146,996             56,764            61,260              (393)           264,627
                                      =============      =============     =============     =============      =============

         Additional
          information
         Assets utilized by
          the segment                    1,148,344            414,428           371,795                 -          1,934,567
                                      =============      =============     =============     =============      =============

         Liabilities of the
          segment                          499,168            255,637           286,511                 -          1,041,316
                                      =============      =============     =============     =============      =============

         Capital
          investments                      139,031              8,631             7,823                 -            155,485
                                      =============      =============     =============     =============      =============

         Depreciation and
          amortization                      60,437              9,352            12,835                 -             82,624
                                      =============      =============     =============     =============      =============


         *   Includes amortization of goodwill on the acquisition of products and amortization of goodwill and other
             assets arising on the acquisition of subsidiaries.
</TABLE>

                                     F-223
<PAGE>

                                                 Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements
-------------------------------------------------------------------------------


Note 33 - Segment Information (cont'd)

         A.   Geographical segments according to location of assets (cont'd)

<TABLE>
<CAPTION>
         For the year ended December 31, 2004

                                             Israel      Latin America            Europe       Adjustments       Consolidated
                                      -------------      -------------     -------------     -------------      -------------
                                      US$ thousands      US$ thousands     US$ thousands     US$ thousands      US$ thousands
                                      -------------      -------------     -------------     -------------      -------------
<S>                                      <C>                  <C>               <C>              <C>               <C>
         Income
         Revenues from
          external sources                 684,619            246,757           245,879                 -          1,177,255
         Inter-segment
          revenues                          57,431             18,360                 -           (75,791)                 -
                                      -------------      -------------     -------------     -------------      -------------

         Total revenues                    742,050            265,117           245,879           (75,791)         1,177,255
                                      =============      =============     =============     =============      =============

         Segment results*                   92,520             47,466            48,326             2,475            190,787
                                      =============      =============     =============     =============      =============

         Additional
          information
         Assets utilized by
          the segment                      977,530            342,542           334,832             6,461          1,661,365
                                      =============      =============     =============     =============      =============

         Liabilities of the
          segment                          417,921            211,166           288,523            43,778            961,388
                                      =============      =============     =============     =============      =============

         Capital
          investments                       47,685              9,300             6,316                 -             63,301
                                      =============      =============     =============     =============      =============

         Depreciation and
          amortization                      51,022             12,413            12,238                 -             75,673
                                      =============      =============     =============     =============      =============

         *    Includes amortization of goodwill on the acquisition of products and amortization of goodwill and other
              assets arising on the acquisition of subsidiaries.

         -    Regarding breakdown of the sales based on targets - see Note 23.
</TABLE>

                                     F-224
<PAGE>

                                                 Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements
-------------------------------------------------------------------------------


Note 33 - Segment Information (cont'd)

         B.       Business segments
<TABLE>
<CAPTION>
                                                                                        Year ended December 31
                                                                                    2005              2004               2003
                                                                           -------------     -------------      -------------
                                                                           US$ thousands     US$ thousands      US$ thousands
                                                                           -------------     -------------      -------------
<S>                                                                           <C>               <C>                <C>
         Sales by products

         Plant protection products                                            1,542,859         1,357,913          1,034,702

         Others (non-plant protection
          products)                                                             197,858           181,789            142,553
                                                                           -------------     -------------      -------------

                                                                              1,740,717         1,539,702          1,177,255
                                                                           =============     =============      =============




                                                                       December 31, 2005                    December 31, 2004
                                                               Assets                               Assets
                                                          utilized by            Capital       utilized by            Capital
                                                                  the                                  the
                                                               sector        investments            sector        investments
                                                        -------------      -------------     -------------      -------------
                                                        US$ thousands      US$ thousands     US$ thousands      US$ thousands
                                                        -------------      -------------     -------------      -------------

         Segment assets and capital
          investments

         Plant protection products                          1,889,027           112,326         1,722,458            133,188

         Others (non-plant protection
          products)                                           240,715            15,095           212,109             22,297
                                                        -------------      -------------     -------------      -------------

                                                            2,129,742           127,421         1,934,567            155,485
                                                        =============      =============     =============      =============

</TABLE>

                                     F-225
<PAGE>

                                                 Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements
-------------------------------------------------------------------------------


Note 34 - Material Differences Between Israeli and US GAAP and their Effect
          on the Financial Statements

         A.       Material Differences between Israeli GAAP and US GAAP

         The Company's consolidated financial statements conform with Israeli
         generally accepted accounting principles ("Israeli GAAP"), which vary
         in certain significant respects from generally accepted accounting
         principles in the United States of America ("US GAAP") as described
         below:

         1.       Deferred taxes

         a)       Measurement differences

                  In accordance with Israeli GAAP:

                  Deferred taxes should be recognized in respect of differences
                  related to assets and liabilities that result from translation
                  of the local currency into the functional currency using
                  historical exchange rates and that result from (1) changes in
                  exchange rates or (2) indexing for tax purposes.

                  In accordance with US GAAP:

                  According to paragraph 9(f) of FAS No. 109, deferred tax
                  liabilities or assets are not provided for differences related
                  to assets and liabilities that are remeasured from the local
                  currency into the functional currency and that result from (1)
                  changes in exchange rates or (2) indexing for tax purposes.

                  Following the initial implementation of Accounting Standard
                  No. 19, "Taxes on Income", the Company recorded in 2005 in
                  accordance with Israeli GAAP a deferred tax liability in
                  respect of land by means of a cumulative effect (see Note 2R).
                  In accordance with US GAAP, this liability was recorded in
                  prior period.

         b)       Earnings from "Approved Enterprises"

                  Under the Israeli Law for the Encouragement of Capital
                  Investments, 1959, an "approved enterprise" which chooses the
                  "alternative benefits" track is exempt from income tax on
                  undistributed profits.
                  In the event that a dividend is distributed out of tax-exempt
                  earnings of the "approved enterprise" under the "alternative
                  benefits" track, the distributing company will be subject to a
                  25% tax on the distributed earnings. Furthermore, the
                  shareholders will be liable for tax at the rate of 15%.
                  However, if the shareholder is a company, that shareholder
                  will be entitled to a 15% tax credit, if and when such
                  dividend out of "approved enterprise" earnings is distributed
                  to its shareholders.

                  In accordance with Israeli GAAP:

                  Deferred taxes should not be provided in respect of the
                  undistributed tax-exempt earnings of an "approved enterprise"
                  of subsidiaries, whose earnings have been reinvested and will
                  not be distributed to their shareholders.

                  The Company has not provided deferred taxes in respect of
                  undistributed tax-exempt earnings attributed to the "approved
                  enterprise" of subsidiaries, which may be distributed, since
                  it is the Group's policy not to initiate such a dividend
                  distribution.

                  In accordance with US GAAP:

                  The company provided deferred taxes on the excess of the
                  financial statement carrying value over the tax basis of an
                  investment in domestic subsidiary as the company does not have
                  any means under local tax law to recover this difference in a
                  tax-free manner.

                                     F-226
<PAGE>

                                                 Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------



Note 34 -  Material Differences Between Israeli and US GAAP and their Effect
           on the Financial Statements (cont'd)

         A. Material Differences between Israeli GAAP and US GAAP (cont'd)

         2. Share-based payments to employees

         In accordance with Israeli GAAP:

         No expense is recorded with respect to options granted to employees of
         the Company.

         In accordance with US GAAP:

         The Company issued stock appreciation rights that under APB 25 and FIN
         28 should be accounted as variable options to employees relating to the
         future performance of work or services. In such cases, the benefit is
         charged to salary expense in the statement of income. The "benefit
         component" is measured as the difference between the market price of
         the share and the exercise price of the option at the end of each
         reporting period, and the proportional part of the period which has
         passed, in relation to amounts previously recorded at the beginning of
         that reporting period.

         3.       Financial derivatives

         In accordance with Israeli GAAP:

         The Company applies FAS 52, FAS 80 and EITF 90-17 to account for
         derivatives. Accordingly, the gains and losses on derivative
         instruments held for hedging purposes are recognized in the statement
         of income concurrently with gains or losses on the hedged assets.
         Certain derivative financial instruments, which are not intended for
         hedging purposes are presented in the balance sheet at their fair
         value. Changes in fair value are included in the statement of income in
         the period in which they occur.

         In accordance with US GAAP:

         All derivative instruments are recognized as either assets or
         liabilities in the balance sheet and are measured at fair value.
         Changes in the fair values of derivative instruments are recognized
         currently in earnings since the specific hedge accounting criteria are
         not met.

         4.       Goodwill

         In accordance with Israeli GAAP:

         Goodwill is amortized over its economic life but not more than 20
         years. Goodwill is examined for a decrease in value where there are
         indications that there has been a permanent decrease in the value of
         the goodwill.

         In accordance with US GAAP:

         Goodwill is not amortized but is examined by means of an impairment
         test carried out at least once a year on a fixed date in accordance
         with the directives in FAS 142.

                                     F-227
<PAGE>

                                                 Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 34 -  Material Differences Between Israeli and US GAAP and their Effect
           on the Financial Statements (cont'd)

         A       Material Differences between Israeli GAAP and US GAAP (cont'd)

         4.      Goodwill (cont'd)

         In accordance with US GAAP: (cont'd)

         A two-step impairment test is used to identify potential goodwill
         impairment and measure the amount of a goodwill impairment loss to be
         recognized (if any). The first step of the goodwill impairment test,
         used to identify potential impairment, compares the fair value of a
         reporting unit with its carrying amount, including goodwill. If the
         carrying amount of a reporting unit exceeds its fair value, the second
         step of the goodwill impairment test shall be performed to measure the
         amount of impairment loss, if any.
         The second step of the goodwill impairment test, used to measure the
         amount of impairment loss, compares the implied fair value of reporting
         unit goodwill with the carrying amount of that goodwill. If the
         carrying amount of reporting unit goodwill exceeds the implied fair
         value of that goodwill, an impairment loss shall be recognized in an
         amount equal to the excess.

         5.      Stock options issued by investee companies

         In accordance with Israeli GAAP:

         The Investor is required to create a provision for losses, which it may
         incur from the dilution of its holdings in investee companies, when it
         is probable that the securities will be converted.

         In accordance with US GAAP:

         A loss of the parent company resulting from the dilution of its
         holdings, because of securities being converted is recorded only at the
         time of the conversion.

         6.      Capitalization of licensing costs

         In accordance with Israeli GAAP:

         Certain costs incurred by the Company in connection with the
         registration process to obtain licenses to sell products in various
         jurisdictions are capitalized. In addition, amounts which are paid by
         the Company to the original registrant as data compensation costs only
         after the EPA issues a registration to the Company are also
         capitalized. The capitalized licensing costs are amortized over the
         expected benefit period.

         In accordance with U.S. GAAP:

         The costs incurred by the Company in connection with the registration
         process to obtain licenses to sell products in various jurisdictions
         are deemed development costs under U.S. GAAP and are expensed as
         incurred.
         The amounts paid by the Company to the original registrant as data
         compensation costs only after the EPA issues a registration to the
         Company are capitalized and amortized over the expected benefit period.

                                     F-228
<PAGE>

                                                 Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 34 -  Material Differences Between Israeli and US GAAP and their Effect
           on the Financial Statements (cont'd)


         A.       Material Differences between Israeli GAAP and US GAAP (cont'd)

         7.       Dividend Declared after the Balance Sheet Date

         In accordance with Israeli GAAP:

         Dividends declared subsequent to the balance sheet date are reflected
         as a reduction of retained earnings.

         In accordance with US GAAP:

         Dividends declared subsequent to the balance sheet date are deducted
         from retained earnings in the period in which the dividend was
         declared.


         8.       Liabilities for employee severance benefits

         In accordance with Israeli GAAP:

         Amounts funded by purchase of insurance policies and by deposits with
         recognized severance pay funds are deducted from the related severance
         pay liability, which is then presented at a net amount.

         In accordance with US GAAP:

         The amounts funded are presented as other long-term assets and the
         amount of the liability is presented under long-term liabilities.


         9.       Convertible debentures

         In accordance with Israeli GAAP:

         If a conversion of the debentures is expected, the debentures are
         presented in the balance sheet in a separate category between
         "long-term liabilities" and "shareholders' equity", whereas, if the
         conversion of the debentures is not expected they are presented in the
         balance sheet as part of "long-term liabilities".

         In accordance with US GAAP:

         All convertible debentures are presented in the balance sheet as part
         of "long-term liabilities".


         10.      Contingent consideration

         In accordance with Israeli GAAP:

         Contingent consideration in respect of acquisition of interests in
         investee companies is recorded as part as the purchase cost when it is
         expected to be paid.

         In accordance with US GAAP:

         Contingent consideration is recorded as part of the purchase cost only
         when the payment probability is beyond any reasonable doubt, which
         generally is the date that the contingency is resolved.

                                     F-229
<PAGE>

                                                 Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 34 -  Material Differences Between Israeli and US GAAP and their Effect
           on the Financial Statements (cont'd)


         A.       Material Differences between Israeli GAAP and US GAAP (cont'd)

         11.      Earnings per share

         In accordance with Israeli GAAP:

         In accordance with Opinion No. 55 of the Institute of Certified Public
         Accountants in Israel, the dilutive effect of share options and
         convertible debentures is included in the computation of basic earnings
         per share only if their exercise or conversion is considered to be
         probable. Calculation of the probability is based on the ratio between
         the market price of the shares and the present value of the price of
         exercising the stock options into shares or the present value of the
         payments for conversion of the debentures into shares.

         In accordance with US GAAP:

         In accordance with FAS 128 "earnings per share" - basic earnings per
         share are computed on the basis of the weighted average number of
         shares outstanding during the year. Diluted earnings per share are
         computed on the basis of the weighted-average number of shares
         outstanding during the year, plus the potential dilutive effect of
         ordinary share options and other potentially dilutive securities
         considered to be outstanding during the year using the treasury stock
         method.


         12.      Comprehensive income

         In accordance with Israeli GAAP:

         Presentation of comprehensive income and other comprehensive income is
         not required.

         In accordance with US GAAP:

         An enterprise (a) classifies items of other comprehensive income by
         their nature in the financial statements and (b) presents the
         accumulated balance of other comprehensive income separately from
         retained earnings and additional paid-in capital in the equity section
         of the balance sheet.


         13.      Purchase of minority shares of Agan

         In accordance with Israeli GAAP:

         The purchase of minority shares of Agan in May 1998 (Note 1B) was
         accounted according to recorded amounts.

         In accordance with US GAAP:

         Under FTB 85-5 the purchase of the minority shares was accounted at
         fair value.

                                     F-230
<PAGE>

                                                 Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 34 -  Material Differences Between Israeli and US GAAP and their Effect
           on the Financial Statements (cont'd)

         A.     Material Differences between Israeli GAAP and US GAAP (cont'd)

         14.    Statements of cash flows

         (a)    Translation differences in respect of cash and cash equivalents

                In accordance with Israeli GAAP:

                The statements shall report the effect of exchange rate changes
                on cash and cash equivalents balances held in foreign
                currencies, only in "autonomous foreign entities" in a separate
                part of the reconciliation of the change in cash and cash
                equivalents during the period.

                In accordance with US GAAP:

                The statements shall report the effect of exchange rate changes
                on all cash and cash equivalents balances held in foreign
                currencies as a separate part of the reconciliation of the
                change in cash and cash equivalents during the period.

         (b)    Securitization transaction (see Note 3)

                In accordance with Israeli GAAP:

                The securitization transaction was classified as a sale of trade
                receivables. Thus, cash flows, derived from that transaction,
                were classified as cash flows from operating activities.

                In accordance with US GAAP:

                Until June 30, 2003 the securitization transaction did not meet
                the criteria set out by FAS 140 for the classification as a sale
                of trade receivables and was classified as a secured borrowing.
                Therefore, cash flows derived from this transaction until June
                30, 2003 were classified as cash flows from financing
                activities.

                                     F-231
<PAGE>

                                                 Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 34 -  Material Differences Between Israeli and US GAAP and their Effect
           on the Financial Statements (cont'd)

         B.       The effect of the material differences between Israeli and US
                  GAAP on the financial statements

         1.       Statements of income:

                  a) Net income:
<TABLE>
<CAPTION>
                                                                                          Year ended December 31
                                                                           ---------------------------------------------------
                                                                                  2005               2004              2003
                                                                           ------------     --------------       -------------
                                                                                              US$ thousands
                                                                           ---------------------------------------------------
<S>                                                                           <C>                <C>                <C>

                  Net income as reported, according to
                   Israeli GAAP                                               205,493            165,527            102,774

                  Deferred taxes (A1)                                             595            (15,861)           (21,171)
                  Share-based payments to employees (A2)                      (12,213)           (26,185)           (28,004)
                  Financial derivatives (A3)                                   19,530            (10,374)            (2,030)
                  Amortization of goodwill (A4)                                 9,149             10,569              5,277
                  Provision for loss in respect of convertible
                  securities in investee companies (A5)                            55              1,760                330
                  Capitalization of licensing costs (A6)                        2,241             (5,325)            (3,835)
                  Cancallation of cumulative effect of
                   change in accounting method (A1)                             2,025                  -                  -
                  Other                                                          (223)                 -                  -
                                                                           ------------     --------------       -------------
                                                                              226,652            120,111             53,341
                  Income tax in respect of the above differences               (1,300)             3,736              2,790
                  Minority interest in respect of the
                   above differences                                              748               (109)               (60)
                                                                           ------------     --------------       -------------

                  Net income according to US GAAP                             226,100            123,738             56,071
                                                                           ============     ==============       =============


                  b) Earnings per ordinary share

                 Basic earnings per ordinary share:
                 As reported according to Israeli GAAP                             0.44             0.39              0.26
                                                                           ============     ==============       =============
                 As reported according to US GAAP                                  0.54             0.32              0.15
                                                                           ============     ==============       =============
                 Weighted average of number of shares and
                  share equivalents according to US GAAP                        421,879          383,907           363,308
                                                                           ============     ==============       =============
                 Fully diluted earnings per ordinary share:
                 As reported according to Israeli GAAP                             0.44             0.37              0.25
                                                                           ============     ==============       =============
                 As reported according to US GAAP                                  0.51             0.28              0.14
                                                                           ============     ==============       =============
                 Weighted average of number of shares and
                  equivalents according to US GAAP                              441,983          446,098           401,109
                                                                           ============     ==============       =============
</TABLE>


                                     F-232
<PAGE>

                                                 Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 34 -  Material Differences Between Israeli and US GAAP and their Effect
           on the Financial Statements (cont'd)

         B.       The effect of the material differences between Israeli and US
                  GAAP on the financial statements (cont'd)

         2.       Balance sheet:
<TABLE>
<CAPTION>
                                               December 31, 2005                               December 31, 2004
                                  -------------------------------------------    -------------------------------------------
                                  As reported     Adjustments         US GAAP    As reported     Adjustments         US GAAP
                                  -----------     -----------     -----------    -----------     -----------     -----------
                                                US$ thousands                                   US$ thousands
                                  -------------------------------------------    -------------------------------------------
<S>                                   <C>             <C>            <C>              <C>             <C>            <C>
Other receivables(1)(5)               86,414          18,659         105,073          77,219          5,323          82,542

Long-term
investments, loans
and receivables (4)                   22,684          15,758          38,442          22,070         15,957          38,027

Intangible assets
after                                535,054          39,337         574,391         527,420         26,161         553,581
amortization(2)(3)(6)(10)

Other payables(3)(5)(8)              197,173           2,718         199,891         192,405         14,685         207,090

Deferred taxes, net(1)                59,801          20,526          80,327          54,354          8,674          63,028

Employee severance
 benefits, net(4)                     28,014          16,198          44,212          26,709         15,957          42,666

Minority interest(7)(12)              28,586          (2,256)         26,330          18,756         (1,981)         16,775

Capital reserve(8)(9)(10)             (3,715)        134,848         131,133          (2,568)       128,993         126,425

Proposed dividend
 subsequent to balance
 sheet date(11)                       23,500         (23,500)              -          12,700        (12,700)              -

Retained earnings((1)2)               481,029        (74,780)        406,249         345,841       (106,187)        239,654

Shareholders' equity               1,135,097          36,568       1,171,665         874,495         10,106         884,601

</TABLE>


(1)  Change in deferred taxes.
(2)  Reversal of systematic amortization related to goodwill.
(3)  Reconciliation of additional goodwill related to contingent consideration.
(4)  Reconciliation of deposits funded in respect of severance pay.
(5)  Recognition of all derivatives at fair value.
(6)  Capitalization of licensing costs.
(7)  Elimination of provisions for potential losses resulting from dilution of
     holding in investee companies.
(8)  Share options issued to employees.
(9)  Cumulative foreign currency translation adjustments with respect to GAAP
     differences.
(10) Purchase of minority shares of Agan.
(11) Dividend declared subsequent to balance sheet date.
(12) Effects of the reconciliation to US GAAP.

                                     F-233
<PAGE>

                                                 Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 34 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)


         B.    The effect of the material differences between Israeli and US
               GAAP on the financial statements (cont'd)

         3.    Comprehensive income

         Comprehensive income includes two components - net income and other
         comprehensive income. Net income is the earning stated in the statement
         of operations and other comprehensive income include amounts recorded
         directly to shareholders' equity that do not derive from transactions
         with shareholders or from distribution of income to shareholders.
<TABLE>
<CAPTION>
                                                                                          Year ended December 31
                                                                           ---------------------------------------------------
                                                                                  2005               2004              2003
                                                                           ------------     --------------       -------------
                                                                                              US$ thousands
                                                                           ---------------------------------------------------
<S>                                                                           <C>                <C>                <C>
        Net income according to US GAAP                                         226,100          123,738            56,071

        Other comprehensive income, net of nil tax:
        Adjustments from translation of financial statements
         of investee companies                                                   (2,701)           2,825             1,886
                                                                           ------------     --------------       -------------

        Total comprehensive income                                              223,399           126,563            57,957
                                                                           ============     ==============       =============


         4.       Statement of cash flows:
                                                                                          Year ended December 31
                                                                           ---------------------------------------------------
                                                                                  2005               2004              2003
                                                                           ------------     --------------       -------------
                                                                                              US$ thousands
                                                                           ---------------------------------------------------

                Net cash flows generated by operating activities:
                According to Israeli GAAP                                     183,158            215,653           249,240
                Effect of change in exchange rate on cash
                 (A14a)                                                         3,091             (1,997)           (5,434)
                Classification of securitization transaction
                 (A14b)                                                             -                  -           (48,226)
                                                                           ------------     --------------       -------------

                According to US GAAP                                          186,249            213,656           195,580
                                                                           ============     ==============       =============

                Net cash flows generated by financing activities:
                According to Israeli GAAP                                     (55,559)           (82,033)         (155,926)
                Classification of securitization transaction
                 (A14b)                                                             -                  -            48,226
                                                                           ------------     --------------       -------------

                According to US GAAP                                          (55,559)           (82,033)         (107,700)
                                                                           ============     ==============       =============
</TABLE>



                                     F-234
<PAGE>


                                                 Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2005
-------------------------------------------------------------------------------


Note 34 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)


         B.    The effect of the material differences between Israeli and US
               GAAP on the financial statements (cont'd)

         4.    Statement of cash flows: (cont'd)

         Translation differences in respect of cash balances of autonomous
         foreign investee companies:
<TABLE>
<CAPTION>
                                                                                          Year ended December 31
                                                                           ---------------------------------------------------
                                                                                  2005               2004              2003
                                                                           ------------     --------------       -------------
                                                                                              US$ thousands
                                                                           ---------------------------------------------------
<S>                                                                           <C>                <C>                <C>
                Translation differences in respect of cash balances:
                According to Israeli GAAP                                           -                  -                 -
                Effect of change in exchange rate on cash
                 (A14a)                                                        (3,091)             1,997             5,434
                                                                           ------------     --------------       -------------

                According to US GAAP                                           (3,091)             1,997             5,434
                                                                          ============     ==============       =============
</TABLE>


                                     F-235
<PAGE>
<TABLE>
<CAPTION>


                                                                                              Makhteshim-Agan Industries Ltd.

Appendix to the Financial Statements
-----------------------------------------------------------------------------------------------------------------------------



Rate of Control and Ownership in Subsidiaries as at December 31, 2005

A.       Domestic consolidated subsidiaries
                                                                                                                  Control and
                                                                                                                    ownership
                                                                                                                   of holding
Holding company                                  Investee company                                                     company
---------------                                  ----------------                                               -------------
                                                                                                                            %
                                                                                                                -------------

<S>                                              <C>                                                                     <C>
Makhteshim-Agan Industries Ltd.                  Makhteshim Chemical Works Ltd. (Makhteshim)                             100
                                                 Agan Chemical Manufacturers Ltd. (Agan)                                 100
                                                 Lycored - Natural Products Industries Ltd. (Lycored)                     98
                                                 Luxembourg Medicine Ltd.                                                100

Makhteshim                                       Prisma Industries Ltd.                                                  100
                                                 Negev Peroxide - Registered Partnership                                 100

Agan                                             Agan Aroma Chemicals Ltd.                                               100
                                                 Agan Chemical Marketing Ltd.                                            100

Lycored                                          Bio-Dar Ltd.                                                            100
                                                 Dalidar Pharma Israel (1995) Ltd.                                       100

Luxembourg Medicine Ltd.                         Isramedcom Ltd                                                          100
                                                 Luxvision Ltd. (formerly Curex Ltd.)                                    100

B.       Foreign consolidated subsidiaries

Makhteshim                                       Celsius Property B.V. (Celsius)                                         100

Agan                                             Fahrenheit Holding B.V. (Fahrenheit)                                    100

Lycored                                          Nutriblend International Sarl                                           100
                                                 ALB Holdings UK                                                         100

ALB Holdings UK                                  Nutriblend Ltd.                                                         100

Makhteshim and Agan  in equal parts              Makhteshim Agan Holding B.V.                                            100

Celsius                                          Irvita Plant Protection N.V.                                            100

Irvita Plant Protection N.V.                     White Rock Insurance Company PCC Limited/Macell                         100

Fahrenheit                                       Quena Plant Protection N.V.                                             100

Celsius and Fahrenheit in equal parts            Magan HB B.V.                                                           100
                                                 Aragonesas Agro S.A.                                                    100
                                                 Magan Argentina S.A.                                                    100
                                                 Makhteshim Agan Hungaria K.F.T                                          100
                                                 Proficol S.A.                                                          57.5
                                                 Proficol Andina N.V.                                                   57.5

Magan HB B.V.                                    MAB Participacoes S/C Ltd.                                              100

MAB Participacoes S/C Ltd.                       Milenia Participacoes S.A                                               100

Milenia Participacoes S.A.                       Milenia Paraguay S.A.                                                   100
                                                 Emerald Agrochemical Company AVV                                        100
                                                 Milenia Biotechnologia e Genetica Ltd.                                   55
                                                 Milenia Agro Ciencias S.A.                                              100
                                                 Defensa S.R.L.                                                          100
</TABLE>

                                     F-236
<PAGE>
<PAGE>
<TABLE>
<CAPTION>


                                                                                              Makhteshim-Agan Industries Ltd.

Appendix to the Financial Statements
-----------------------------------------------------------------------------------------------------------------------------


B.       Foreign consolidated subsidiaries (Cont'd)
                                                                                                                  Control and
                                                                                                                    ownership
                                                                                                                   of holding
Holding company                                  Investee company                                                     company
---------------                                  ----------------                                               -------------
                                                                                                                            %
                                                                                                                -------------
<S>                                              <C>                                                                     <C>
Makhteshim Agan Hungrria K.F.T                   Biomark Trading House K.f.t                                              70

Proficol S.A.                                    Proficol Venezuela S.A.                                                 100

Proficol Andina N.V.                             Rice Co. LLC (USA)                                                     50.1

Makhteshim Agan Holding B.V                      Makhteshim Agan Costa Rica S.A.                                         100
                                                 Makhteshim Agan Espana S.A.                                             100
                                                 Makhteshim Agan of North America Inc.                                   100
                                                 Makhteshim Agan France S.A.R.L.                                         100
                                                 Makhteshim Agan (UK) Ltd.                                               100
                                                 Makhteshim Agan Romania S.R.L.                                          100
                                                 Makhteshim Agan (Thailand) Ltd.                                         100
                                                 Agricur Defensivos Agricolas Ltd.                                       100
                                                 Makhteshim Agan Italia S.R.L.                                            95
                                                 Makhteshim Agan South Africa PTY Ltd.                                   100
                                                 Magan Korea Co. Ltd.                                                    100
                                                 Makhteshim Agan India Private Ltd.                                      100
                                                 Makhteshim Agan Poland SP. zo.o                                         100
                                                 Magan Holding Germany GmbH                                              100
                                                 Makhteshim Agan Sweden AB                                               100
                                                 Makhteshim Agan Portugal Ltd.                                           100
                                                 Magan Japan Co. Ltd.                                                    100
                                                 Magan Italia S.R.L                                                      100
                                                 MA U.S. Holding Inc. (USA)                                              100
                                                 Agronica Australasia Pty Limited Australia                              100
                                                 Makhteshim Agan Benalux and Nordik B.V.                                  49

Magan Holding Germany GmbH                       Feinchemie Schwebda GmbH                                                100
                                                 Makhteshim Agan Deutschland GmbH                                        100

Feinchemi Schwebdan GmbH                         FCS France S.A                                                          100
                                                 Feinchemi (UK) Ltd.                                                     100

MA U.S. Holding Inc. (USA)                       Farm Saver Group                                                        100
                                                 Control Solutions Inc.                                                   60

Agronica Australasia Pty
 Limited Australia                               Farmoz Pty Limited                                                      100


C.   Companies Proportionately Consolidated

Makhteshim Agan Industries                       Biotec M.A.H. Management Ltd                                             50
                                                 Biotec M.A.H. - Registered Partnership                                   50

Biotec M.A.H -
Registered Partnership                           Biotec Agro Ltd.                                                        100

Makhteshim Agan Holdings B.V.                    Alfa Agricultural Supplies S.A.                                          49

Fahrenheit                                       InnovAroma S.A.                                                          50


D.   Affiliated companies

Makhteshim                                       Fibertec Fiberglass Ltd.                                               45.5

Makhteshim and Agan hold shares in other foreign companies which retain
registration rights to certain products sold outside of Israel.

</TABLE>

                                                         F-237
<PAGE>


                                               ECI Telecom Ltd. and Subsidiaries

Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Contents


                                                                            Page


Report of Independent Registered Public Accounting Firm                    F-239


Consolidated Balance Sheets as of
 December 31, 2005 and 2004                                                F-240


Consolidated Statements of Operations for the Years
 ended December 31, 2005, 2004 and 2003                                    F-242


Consolidated Statements of Comprehensive Income (Loss) for the
 Years ended December 31, 2005, 2004 and 2003                              F-243


Consolidated Statements of Changes in Shareholders' Equity
 for the Years ended December 31, 2005, 2004 and 2003                      F-244


Consolidated Statements of Cash Flows for the
 Years ended December 31, 2005, 2004 and 2003                              F-246

Notes to the Consolidated Financial Statements                             F-249


                                     F-238

<PAGE>

       [Letterhead of Somekh Chaikin, a Member Firm of KPMG International]


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders
ECI Telecom Ltd.


We have audited the accompanying consolidated balance sheets of ECI Telecom Ltd.
and its subsidiaries ("the Company") as of December 31, 2005 and 2004, and the
related consolidated statements of operations, comprehensive income (loss),
changes in shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 2005. These consolidated financial
statements are the responsibility of the Company's Board of Directors and its
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Board of Directors and management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2005 and 2004, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2005, in
conformity with U.S. generally accepted accounting principles.


/s/ Somekh Chaikin
Somekh Chaikin
Certified Public Accountants (Isr.)
Member firm of KPMG International

Tel-Aviv, Israel
March 9, 2006

                                     F-239
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets as of December 31
-----------------------------------------------------------------------------------------------------



                                                                               2005              2004
                                                            Note     $ in thousands    $ in thousands
                                                        --------     --------------    --------------
<S>                                                          <C>            <C>               <C>
Assets

Current assets
Cash and cash equivalents                                    17A            63,828            74,182
Short-term investments                                     2,17B            41,304            24,714
Receivables:
 Trade, net                                                  17C           152,805           142,928
 Other                                                       17D            24,751            23,441
Prepaid expenses                                                             3,617             5,982
Work in progress                                                             2,937             3,244
Inventories                                                    3           146,963           175,065
                                                                     --------------    --------------

Total current assets                                                       436,205           449,556
                                                                     --------------    --------------


Long-term receivables, net                                     4             8,273            89,975
                                                                     --------------    --------------

Long-term deposits and marketable securities                   2           139,964           119,359
                                                                     --------------    --------------

Assets held for severance benefits                            10            25,931            25,182
                                                                     --------------    --------------

Investments                                                    5            19,787            26,766
                                                                     --------------    --------------


Property, plant and equipment                                  6
Cost                                                                       265,446           259,318
Less - accumulated depreciation                                            145,855           139,965
                                                                     --------------    --------------
                                                                           119,591           119,353
                                                                     --------------    --------------

Software development costs, net                                7            11,999            14,435
                                                                     --------------    --------------

Goodwill,                                                      8            39,329             1,039
                                                                     --------------    --------------

Other assets, net                                              9            47,656             9,144
                                                                     --------------    --------------

Total assets                                                               848,735           854,809
                                                                     ==============    ==============


/s/ Shlomo Dovrat                                            /s/ Rafi Maor
---------------------------------                            -----------------------------------
Shlomo Dovrat                                                Rafi Maor
Chairman of the Board                                        President, Chief Executive Officer

March 9, 2006
</TABLE>

                                     F-240
<PAGE>
<TABLE>
<CAPTION>
                                                                    ECI Telecom Ltd. and Subsidiaries

-----------------------------------------------------------------------------------------------------


                                                                               2005              2004
                                                            Note     $ in thousands    $ in thousands
                                                        --------     --------------    --------------
<S>                                                          <C>            <C>               <C>
Liabilities and Shareholders' Equity

Current liabilities
Current maturities of long-term debts                        17E                -             30,000
Trade payables                                                             56,451             68,364
Other payables and accrued liabilities                       17F          120,538            149,648
                                                                     --------------    --------------

Total current liabilities                                                 176,989            248,012
                                                                     --------------    --------------

Long-term liabilities

Other liabilities                                                             157                  -
Liability for employee severance benefits                     10           48,340             50,943
                                                                     --------------    --------------

Total long-term liabilities                                                48,497             50,943
                                                                     --------------    --------------

Total liabilities                                                         225,486            298,955
                                                                     --------------    --------------

Minority interest                                                           4,120              4,086
                                                                     --------------    --------------

Commitments and contingencies                                 11

Shareholders' equity                                          12
Ordinary shares NIS 0.12 par value per share, authorized
 200,000,000 shares; Issued and outstanding 111,827,822
 shares as of December 31, 2005 and 109,391,828 shares
 as of December 31, 2004                                                    6,262              6,198
Capital surplus                                                           648,532            642,222
Accumulated other comprehensive income (loss)                               8,486            (12,637)
Accumulated deficit                                                       (44,151)           (84,015)
                                                                     --------------    --------------

Total shareholders' equity                                                619,129            551,768
                                                                     --------------    --------------

Total liabilities and shareholders' equity                                848,735           854,809
                                                                     ==============    ==============


The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                     F-241
<PAGE>
<TABLE>
<CAPTION>

                                                                                          ECI Telecom Ltd. and Subsidiaries

Consolidated Statements of Operations for the Year Ended December 31
----------------------------------------------------------------------------------------------------------------------------


                                                                                     2005              2004             2003
                                                                               ----------        ----------       ----------
                                                                    Note       $ in thousands, except per share amounts
                                                               ---------       ---------------------------------------------

<S>                                                                <C>           <C>               <C>              <C>
Revenues                                                           17G           629,918           496,712          392,567
Cost of revenues                                                   17H           367,779           300,971          239,298
                                                                               ----------        ----------       ----------
Gross profit                                                                     262,139           195,741          153,269

Research and development costs, net                                17I            87,289            64,870           62,041
Selling and marketing expenses                                     17J            95,826            78,423           73,643
General and administrative expenses                                17K            41,976            35,491           38,956
Recovery of doubtful debt                                         4C(5)          (10,356)                -                -
Amortization of acquisition-related intangible assets                              2,902                 -            1,773
Impairment of assets                                                21                -                  -              667
Impairment of loans                                                 21            3,000                  -                -
Acquired in-process research and development                        19B             890                  -                -
Restructuring expenses                                              20                 -             2,585            8,394
                                                                               ----------        ----------       ----------
Operating income (loss)                                                           40,612            14,372          (32,205)
Financial expenses                                                 17L            (3,656)           (6,562)          (8,645)
Financial income                                                   17L             8,857             9,169            7,902
Other income (expenses), net                                       17M             1,917             2,693           (5,376)
                                                                               ----------        ----------       ----------
Income (loss) from continuing operations
before company's equity in results of investee
companies, minority interest and taxes on income                                  47,730            19,672          (38,324)
Taxes on income                                                     15            (3,454)           (1,924)          (2,141)
                                                                               ----------        ----------       ----------
Income (loss) from continuing operations before
company's equity in results of investee companies
and minority interest                                                             44,276            17,748          (40,465)
Company's equity in results of investee
 companies                                                                        (4,285)           (3,387)          (4,334)
Minority interest                                                                   (127)             (305)              76
                                                                               ----------        ----------       ----------
Income (loss) from continuing operations                                          39,864            14,056          (44,723)

Loss on discontinued operations, net of income tax
 (tax benefit) of ($55
 thousand) and $38 thousand
 for the years ended December 31,
 2004 and 2003, respectively                                         22                -            (3,903)         (26,317)
                                                                               ----------        ----------       ----------
Net income (loss)                                                                 39,864            10,153          (71,040)
                                                                               ==========        ==========       ==========

Earnings (loss) per ordinary share 17O
Basic earnings (loss) per ordinary share:
Continuing operations                                                               0.36             0.13              (0.41)

Discontinued operations                                                                -            (0.04)             (0.24)
                                                                               ----------        ----------       ----------
Net earnings (loss) per ordinary share                                              0.36             0.09              (0.65)
                                                                               ==========        ==========       ==========


Diluted earnings (loss) per ordinary share:
Continuing operations                                                               0.34             0.12              (0.41)

Discontinued operations                                                                -            (0.03)             (0.24)
                                                                               ----------        ----------       ----------
Net earnings (loss) per ordinary share                                              0.34             0.09              (0.65)
                                                                               ==========        ==========       ==========


The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                     F-242
<PAGE>
<TABLE>
<CAPTION>

                                                                                          ECI Telecom Ltd. and Subsidiaries

Consolidated Statements of Operations for the Year Ended December 31
----------------------------------------------------------------------------------------------------------------------------



                                                                                    2005              2004               2003
                                                                          --------------    --------------     --------------
                                                                          $ in thousands    $ in thousands     $ in thousands
                                                                          --------------    --------------     --------------

<S>                                                                              <C>               <C>               <C>
Net income (loss)                                                                39,864            10,153            (71,040)
Other comprehensive income (loss):
Changes in fair value of financial instruments, net of taxes (nil)               19,226            (8,303)            (4,843)
Realization of gain on available for sale securities, net of taxes (nil)              -            (1,282)                 -
Unrealized holding gains on available for sale
 securities arising during the year, net of taxes (nil)                           1,897             2,341              1,282
                                                                          --------------    --------------     --------------

Total other comprehensive income (loss)                                          21,123            (7,244)            (3,561)
                                                                          --------------    --------------     --------------

Comprehensive income (loss)                                                      60,987             2,909            (74,601)
                                                                          ==============    ==============     ==============


The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>


                                     F-243
<PAGE>
<TABLE>
<CAPTION>

                                                                                              ECI Telecom Ltd. and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity
---------------------------------------------------------------------------------------------------------------------------------



                                               Number       Share       Capital      Accumulated     Accumulated            Total
                                         of shares(1)     capital       surplus            other        earnings    shareholders'
                                                                                   comprehensive       (deficit)          equity
                                                                                    income (loss)    (Note 15A2)
                                        -------------   ---------   -----------    -------------    ------------    -------------
<S>                                      <C>               <C>         <C>               <C>            <C>              <C>
Balance at January 1, 2003               107,512,612       6,152       658,425           (1,832)        (23,128)         639,617

Changes during 2003 -
Net loss for the year
   ended December 31, 2003                         -           -             -                -         (71,040)         (71,040)
Share issuance to employees                  424,633           8           647                -               -              655
Employees stock options
   exercised and paid                        100,818           3           263                -               -              266
Amortization of deferred
   compensation expenses                           -           -         3,568                -               -            3,568
Net unrealized gain on available
   for sale securities                             -           -             -            1,282               -            1,282
Changes in fair value of
   financial instruments                           -           -             -           (4,843)              -           (4,843)
                                        -------------   ---------   -----------    -------------    ------------    -------------

Balance at December 31, 2003             108,038,063       6,163       662,903           (5,393)        (94,168)         569,505

Changes during 2004 -
Net income for the year
   ended December 31, 2004                         -           -             -                -          10,153           10,153
Employees stock options
   exercised and paid                      1,353,765          35         2,445                -               -            2,480
Amortization of deferred
   compensation expenses                           -           -         1,650                -               -            1,650
Net unrealized gain on
   available for sale securities                   -           -             -            2,341               -            2,341
Realization of gain on
   available for sale securities                   -           -             -           (1,282)              -           (1,282)
Changes in fair value of
   financial instruments                           -           -             -           (8,303)              -           (8,303)
Distribution of shares of a
   subsidiary as dividend in kind
   (see Note 1A(4))                                -           -       (24,776)               -               -          (24,776)
                                        -------------   ---------   -----------    -------------    ------------    -------------

Balance at December 31, 2004             109,391,828       6,198       642,222          (12,637)        (84,015)         551,768
                                        =============   =========   ==========     =============    ============    =============


(1)  Issued and outstanding

The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>



                                     F-244
<PAGE>

<TABLE>
<CAPTION>

                                                                                              ECI Telecom Ltd. and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity (cont'd)
---------------------------------------------------------------------------------------------------------------------------------



                                               Number       Share       Capital      Accumulated     Accumulated            Total
                                         of shares(1)     capital       surplus            other        earnings    shareholders'
                                                                                   comprehensive       (deficit)          equity
                                                                                    income (loss)    (Note 15A2)
                                        -------------   ---------   -----------    -------------    ------------    -------------
<S>                                      <C>               <C>         <C>                  <C>            <C>            <C>
Balance at January 1, 2005                109,391,828       6,198       642,222          (12,637)       (84,015)         551,768

Changes during 2005 -
Net income for the year
  ended December 31, 2005                          -            -             -                -         39,864           39,864
Employees stock options
  exercised and paid                       1,697,867           45         4,254                -              -            4,299
Restricted shares issuance                   742,776           19           (19)                                               -
Restricted shares forfeited                   (9,557)           -             -                -              -                -
Share issuance                                 4,908             -           35                -              -               35
Amortization of deferred
  compensation expenses                            -            -        2,040                -              -            2,040
Net unrealized gain on
  available for sale securities                    -            -             -           1,897              -            1,897
Changes in fair value of
  financial instruments                            -            -             -          19,226              -           19,226
                                        -------------   ---------   -----------    -------------    ------------    -------------

Balance at December 31, 2005             111,827,822        6,262       648,532           8,486        (44,151)         619,129
                                        =============   =========   ==========     =============    ============    =============

(1)  Issued and outstanding





The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>


                                     F-245
<PAGE>
<TABLE>
<CAPTION>

                                                                                            ECI Telecom Ltd. and Subsidiaries
Consolidated Statements of Cash Flows for the Year Ended December 31
-----------------------------------------------------------------------------------------------------------------------------



                                                                                    2005              2004               2003
                                                                          --------------    --------------     --------------
                                                                                                 * Revised
                                                                          --------------    --------------     --------------
                                                                          $ in thousands    $ in thousands     $ in thousands
                                                                          --------------    --------------     --------------
<S>                                                                              <C>               <C>               <C>
Cash flows from operating activities

Net income (loss)                                                                39,864            10,153            (71,040)
Adjustments to reconcile net income (loss) to cash provided by
 operating activities:

Depreciation and amortization                                                    36,665            35,827             41,622

Amortization of share based compensation                                          2,040             1,650              3,568

Loss (gain) on sale of property and equipment                                    (2,398)             (716)             1,362

Impairment of assets                                                                  -                 -              6,686

Impairment of loans                                                               3,000                 -                  -

Capital losses (gains), net                                                      (2,096)            6,419              4,862

Gain from sale of operation                                                           -           (24,186)                 -

Acquired In-process research and development costs                                  890                 -                  -

Other - net                                                                       1,723              (468)             7,066

Company's equity in results of investee companies                                  4,285            3,387              4,334

Minority interest                                                                   127               562            (16,956)

Loss (gain) from marketable securities                                            1,648            (1,482)              (111)

Decrease in trade receivables (including
 non-current maturities of trade receivables)                                    78,056            19,395             69,069

Decrease (increase) in other receivables                                          3,565            (6,196)             9,531

Decrease (increase) in prepaid expenses                                           3,325              (947)            (1,410)

Decrease in work in progress                                                        308             7,254              3,192

Decrease (increase) in inventories                                               38,127           (57,010)            24,149

Increase (decrease) in trade payables                                           (16,759)           13,986             14,413

Increase (decrease) in other payables and accrued liabilities                   (16,068)           32,706            (23,500)

Decrease in other long-term liabilities                                               -            (5,015)            (2,364)

Decrease in liability for employee severance benefits                            (2,602)             (779)                 -
                                                                          --------------    --------------     --------------

Net cash provided by operating activities                                       173,700            34,540             74,473
                                                                          --------------    --------------     --------------




The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>


                                     F-246
<PAGE>
<TABLE>
<CAPTION>

                                                                                            ECI Telecom Ltd. and Subsidiaries
Consolidated Statements of Cash Flows for the Year Ended December 31 (cont'd)
-----------------------------------------------------------------------------------------------------------------------------



                                                                                    2005              2004               2003
                                                                          --------------    --------------     --------------
                                                                                                 * Revised
                                                                          --------------    --------------     --------------
                                                                          $ in thousands    $ in thousands     $ in thousands
                                                                          --------------    --------------     --------------
<S>                                                                              <C>               <C>               <C>
Cash flows used in investing activities

Investments in deposits, net                                                      2,368             4,454            (22,563)
Software development costs capitalized                                           (8,014)          (11,151)           (11,364)
Investment in property, plant and equipment                                     (21,499)          (24,293)           (11,347)
Proceeds from sale of property, plant and equipment                               7,131             1,487                878
Purchase of technology                                                                -                 -               (869)
Acquisition of investee companies                                                  (559)           (1,212)              (203)
Long-terms loans granted                                                              -            (6,000)                 -
Proceeds from realization of an investee company                                  2,350                 -                   -
Investment in marketable securities                                             (37,838)          (41,382)           (80,317)
Changes in assets held for severance benefits                                    (1,006)             (751)               537
Repayment of convertible notes                                                        -             5,400                  -
Acquisition of operations (A)                                                   (13,605)                -                  -
Acquisition of newly consolidated subsidiary (B)                                (85,923)                -                  -
Proceed from realization of consolidated subsidiary and operations                    -            35,000              9,100
                                                                          --------------    --------------     --------------

Net cash used for investing activities                                         (156,595)          (38,448)          (116,148)
                                                                          --------------    --------------     --------------

Cash flows used in financing activities

Repayment of loans from banks                                                   (30,000)          (30,000)          (100,000)
Decrease in short-term credit, net                                                    -                 -            (70,012)
Share issuance                                                                       35                 -                  -
Exercise of stock options                                                          4,299             2,480                921
Disposition of a consolidated subsidiary as dividend in kind                           -          (39,981)                 -
                                                                          --------------    --------------     --------------

Net cash used in financing activities                                           (25,666)          (67,501)          (169,091)
                                                                          --------------    --------------     --------------

Effect of change in exchange rate on cash                                        (1,793)              216               (508)
                                                                          --------------    --------------     --------------

Net decrease in cash and cash equivalents                                       (10,354)          (71,193)          (211,274)
                                                                          --------------    --------------     --------------

Cash and cash equivalents at beginning of year                                   74,182         **145,375            356,649
                                                                          --------------    --------------     --------------

Cash and cash equivalents at end of year                                         63,828            74,182         ** 145,375
                                                                          ==============    ==============     ==============

Supplemental disclosures:

Income taxes paid, net of tax refunds                                             2,897               282              7,158
                                                                          ==============    ==============     ==============

Interest paid                                                                       154             1,518              2,479
                                                                          ==============    ==============     ==============

*     The consolidated cash flow statement for the year ended December 31, 2004 has been revised to
      combine cash flows from discontinued operations with cash flows from continuing operations
      within each category (previously, all cash flows from discontinued operations were presented,
      net in one line, within the operating cash flows category).

**    Include $ 18,964 thousand related to discontinued operations.

The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>


                                     F-247
<PAGE>
<TABLE>
<CAPTION>

                                                                                            ECI Telecom Ltd. and Subsidiaries
Consolidated Statements of Cash Flows for the Year Ended December 31 (cont'd)
-----------------------------------------------------------------------------------------------------------------------------


A.       Acquisition of operations (see Note 19)

                                                                                    2005              2004               2003
                                                                          --------------    --------------     --------------
                                                                          $ in thousands    $ in thousands     $ in thousands
                                                                          --------------    --------------     --------------
<S>                                                                              <C>               <C>               <C>

Net current assets                                                               5,216                  -                 -
Liability for unpaid consideration                                                (250)                 -                 -
Property, plant and equipment                                                      580                  -                 -
Core Technology                                                                  4,349                  -                 -
Goodwill                                                                         1,230                  -                 -
Other intangible assets                                                          2,480                  -                 -
                                                                          --------------    --------------     --------------
                                                                                13,605                  -                 -
                                                                          ==============    ==============     ==============


B.       Acquisition of newly consolidated subsidiary (see Note 19)

                                                                                    2005              2004               2003
                                                                          --------------    --------------     --------------
                                                                          $ in thousands    $ in thousands     $ in thousands
                                                                          --------------    --------------     --------------
Net current assets (other than cash)                                             11,055                 -                 -
Property, plant and equipment                                                     3,155                 -                 -
Long-term liabilities                                                              (157)                -                 -
Core Technology                                                                  33,820                 -                 -
In-process research and development                                                 890                 -                 -
Backlog                                                                             100                 -                 -
Goodwill                                                                         37,060                 -                 -
                                                                          --------------    --------------     --------------
                                                                                 85,923                 -                 -
                                                                          ==============    ==============     ==============


C.       Non-cash activities

Purchase of fixed assets                                                          3,049                  -                 -
                                                                          --------------    --------------     --------------

Sale of fixed assets in return for shares in investee company                         -                  -             1,053
                                                                          ==============    ==============     ==============





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

</TABLE>

                                               F-248
<PAGE>


                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------



Note 1 - Significant Accounting Policies

         Significant accounting policies, applied on a consistent basis are as
         follows:

         A.       General

         1.       ECI Telecom Ltd. (an Israeli corporation) and subsidiaries
                  ("ECI" or the "Company") provide network and access solutions
                  for digital telecommunications networks. ECI designs,
                  develops, manufactures, markets and supports digital
                  telecommunications solutions for evolving services, including
                  voice, data, video and multimedia, and for building next
                  generation converging networks. ECI's products and platforms
                  are designed to create and manage bandwidth, maximize revenues
                  for network operators, reduce operating expenses, expand
                  capacity, improve performance and enable new revenue-producing
                  services.

                  The Company focuses its activities on three core businesses,
                  which are organized in three divisions: Broadband Access
                  Division (formerly - Inovia), Optical Networks Division
                  (formerly - Lightscape and Enavis) and Data Networking
                  Division (formerly - Laurel Networks). (For segment reporting,
                  see Note 17G).

         2.       In December 2002, the Company transferred part of the NGTS
                  activities to a new company subsequently called Veraz Networks
                  Inc., which was set up with third parties and in which the
                  Company holds approximately 41.5 % of the share capital (33 %
                  on a fully diluted basis).

         3.       In April 2003, the Company sold the activities of InnoWave.
                  Accordingly, the results of InnoWave for all periods reported
                  were reclassified as discontinued operation and presented as a
                  single-line item, net of income tax in the statement of
                  operations following the results from continuing operations
                  (see Note 22B).

         4.       On March 9, 2004, the Board of Directors of ECI decided, in
                  principle, that ECI would distribute 7.6 million of its shares
                  in ECtel Ltd. ("ECtel") to ECI's shareholders.

                  On April 28, 2004, after the Company obtained court approval
                  and the consent of its banks, the Board of Directors declared
                  a distribution of 7.6 million shares of ECtel to the Company's
                  shareholders of record on May 5, 2004. The shares were
                  distributed on May 10, 2004. Before distribution, ECI held
                  approximately 10.5 million, or 58%, of ECtel's shares. After
                  distribution of the shares, ECI holds approximately 16% of
                  ECtel's outstanding shares that are presented in the
                  consolidated balance sheet as an available for sale
                  securities. (see Note 1D).

                  Accordingly, the results of ECtel for all periods reported
                  were reclassified as discontinued operations and presented as
                  a single-line item, net of income tax in the statement of
                  operations following the results from continuing operations
                  (see Note 22B).

         5.       On June 3, 2005, the Company acquired 100% of the outstanding
                  common shares of Laurel Networks, Inc. ("Laurel Networks") The
                  results of Laurel Networks' operations have been included in
                  the consolidated financial statements since that date. Laurel
                  Networks is a provider of Next-Generation IP/MPLS Multi
                  Service Edge Routers. After the transaction Laurel Networks
                  became the Data Networking Division of ECI (see Note 19B).

                                     F-249
<PAGE>


                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------



Note 1 - Significant Accounting Policies (cont'd)

         A.       General (cont'd)

         6.       The financial statements have been prepared in conformity with
                  generally accepted accounting principles (GAAP) in the United
                  States of America.

         7.       The currency of the primary economic environment in which the
                  operations of the Company and its subsidiaries are conducted
                  is the U.S. dollar ("dollar").

                  Most of the Company's sales are made outside of Israel, in
                  dollars and other non-Israeli currencies (see Note 17G as to
                  geographical distribution). Most purchases of materials and
                  components, as well as most selling and other expenses
                  incurred outside Israel, are in dollars. In view of the
                  foregoing, the dollar has been determined to be the Company's
                  functional currency.

                  Transactions and balances denominated in dollars are presented
                  at their original amounts. Non-dollar transactions and
                  balances have been remeasured into dollars in accordance with
                  the principles set forth in Statement of Financial Accounting
                  Standards ("SFAS") No. 52 "Foreign Currency Translation" of
                  the Financial Accounting Standards Board (FASB).

                  All exchange gains and losses from remeasurement of monetary
                  balance sheet items denominated in non-dollar currencies are
                  reflected in the consolidated statement of operations when
                  they arise. Such foreign exchange gains and losses are
                  included in the same statement of operations items as those in
                  which the related transactions are included.

         8.       The preparation of financial statements in conformity with
                  generally accepted accounting principles requires management
                  to make estimates and assumptions that affect the reported
                  amounts of assets and liabilities and disclosure of contingent
                  assets and liabilities at the date of the financial statements
                  and the reported amounts of revenues and expenses during the
                  reporting period. These are management's best estimates based
                  on experience and other relevant data, however, actual results
                  could differ from these estimates.


         B.       Principles of consolidation

         The consolidated financial statements include those of the Company and
         all of its subsidiaries. All intercompany transactions and balances
         have been eliminated in consolidation.


         C.       Cash and cash equivalents

         The Company considers all highly liquid investments with a maturity of
         three months or less at date of purchase, to be cash equivalents
         (except for held to maturity debt investments).


                                     F-250
<PAGE>


                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 1 - Significant Accounting Policies (cont'd)

         D.       Investments

         1.       Investee companies

                  Investments in investee companies, in which the Company has
                  significant influence (affiliated companies) are presented
                  under the equity method, that is, at cost plus the Company's
                  share of the post-acquisition income or losses.

                  Investment in entities in which the Company does not have
                  significant influence ("other companies"), are stated as
                  follows:

                  -    Marketable securities - as stated in 2 below.

                  -    Non-marketable securities - at cost, less any decline
                       in value which is other than temporary.

         2.       Marketable securities

                  The Company classifies its debt securities in one of three
                  categories: Trading, available for sale or held to maturity
                  and its equity securities as trading or available for sale.
                  Trading securities are bought and held principally for the
                  purpose of selling them in the near term. Held-to-maturity
                  debt securities are those securities in which the Company has
                  the ability and intent to hold the security until maturity.
                  All debt securities not included in trading or held to
                  maturity are classified as available for sale.

                  Trading, and available-for-sale securities are recorded at
                  fair value. Held-to-maturity debt securities are recorded at
                  amortized cost, adjusted for the amortization or accretion of
                  premiums or discounts. Unrealized holding gains and losses,
                  net of the related tax effect, on available-for-sale
                  securities are excluded from earnings and are reported as a
                  separate component of other comprehensive income until
                  realized. Realized gains and losses from the sale of
                  available-for-sale securities are determined on a
                  specific-identification basis.

                  A decline in the market value of any available-for-sale or
                  held-to-maturity security below cost, that is deemed to be
                  other than temporary, is recognized as a reduction in carrying
                  amount to fair value. The impairment is charged to earnings
                  and a new cost basis for the security is established.

                  Premiums and discounts are amortized or accreted over the life
                  of the related held-to-maturity or available-for-sale security
                  as an adjustment to yield, using the effective-interest
                  method. Dividend and interest income are recognized when
                  earned.


         E.       Inventories

         Inventories are stated at the lower of cost or market. Cost is
         determined on the moving average basis.

                                     F-251
<PAGE>


                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 1 - Significant Accounting Policies (cont'd)

         F.       Property, plant and equipment

         1.       Assets are stated at cost, less accumulated depreciation.

         2.       Depreciation is computed using the straight-line method, over
                  the estimated useful economic life of the assets.

                  Annual rates of depreciation are as follows:

                  Buildings                               2.5%
                  Machinery and equipment                 10% - 33% (mainly 10%)
                  Information technology                  20% - 33%
                  Office furniture and equipment          7% - 10%

                  Leasehold improvements are amortized by the straight-line
                  method over the lesser of the lease term or the estimated
                  useful economic life.

         3.       Major renewals and improvements are capitalized, while repairs
                  and maintenance are expensed as incurred.

         4.       Upon the sale or retirement of equipment and leasehold
                  improvements, the cost and related accumulated depreciation
                  and amortization are eliminated from the respective accounts
                  and the resulting gain or loss is reflected in the
                  consolidated statements of operations.


         G.       Accrued warranty costs

         Accrued warranty costs are calculated in respect of products sold and
         work performed are recognized based on prior experience, and other
         relevant factors, (See also Note 17F).


         H.       Allowance for doubtful debts

         The financial statements include an allowance for loss from receivables
         for which collection is in doubt. In determining the adequacy of the
         allowance consideration is given the historical experience, aging of
         the receivable and to information available about specific debtors,
         including their financial situation, the volume of their operations,
         and evaluation of the security received from them or their guarantors
         (see also Note 17C).

         I.       Software development costs

         The Company capitalizes certain software development costs in
         accordance with SFAS No. 86 "Accounting for Costs of Computer Software
         to be Sold, Leased or Otherwise Marketed". Capitalization of software
         development costs begins upon the determination of technological
         feasibility as defined in the Statement and continues up to the time
         the software is available for general release to customers, at which
         time capitalized software costs are amortized to research and
         development costs on a straight-line basis over the expected life of
         the related product, generally one to two years. (for 2003 - generally
         two to three years).

                                     F-252
<PAGE>


                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 1 - Significant Accounting Policies (cont'd)

         I.       Software development costs (cont'd)

         Software development costs include costs that relate principally to
         projects which have recently been released or are not yet available for
         release to customers. Management believes that future revenues related
         to these projects will be sufficient to realize the amounts capitalized
         at December 31, 2005, and as such these amounts will be recovered over
         the lives of the related projects. It is possible, however, that those
         estimates of future revenues could be adversely impacted if these
         projects are not finally completed and released in the future or if
         market acceptance of related technology is not as anticipated by
         Management. As a result, the recovery of these capitalized software
         development costs through future revenues could be reduced materially.
         In such event, the related capitalized software development costs will
         be written-off.


         J.       Business combinations

         SFAS No. 141 "Business Combinations" requires that the purchase method
         be used for all business combinations. Under the purchase method, the
         cost of an acquisition is allocated to the assets acquired, including
         identifiable intangible assets and liabilities assumed based on their
         estimated fair values with the excess of total cost over such aggregate
         fair value being recognized at goodwill.

         K.       Goodwill and other intangible assets

         The Company follows SFAS No. 142 "Goodwill and Other Intangible
         Assets", under to SFAS No. 142, goodwill and intangible assets that
         have indefinite useful lives are not subject to amortization, but
         instead tested at least annually for impairment. Intangible assets that
         have finite useful lives are amortized over their expected useful
         lives.


         L.       Revenue recognition

         1.       Revenues from products are recognized when the product has
                  been delivered and when title to the system and risk of loss
                  have been substantially transferred to the customer, provided
                  that collection is reasonably assured. When the sale
                  arrangement includes customer acceptance provisions with
                  respect to network interoperability, revenue is not recognized
                  before the Company has demonstrated that the criteria
                  specified in the acceptance provisions have been satisfied.

                                     F-253
<PAGE>


                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 1 - Significant Accounting Policies (cont'd)

         L.       Revenue recognition (cont'd)

                  When a sale involves multiple elements, such as sales of
                  products that include installation and integration services,
                  the entire fee from the arrangement is evaluated under
                  Emerging Issues Task Force ("EITF") 00-21, "Revenue
                  Arrangements with Multiple Deliverables". In such
                  arrangements, the arrangement consideration is allocated to
                  each respective element based on its relative fair value and
                  recognized when all the following revenue recognition criteria
                  for each element are met: (1) the delivered items have value
                  to the customer on a standalone basis, (2) there is objective
                  and reliable evidence of the fair value of the undelivered
                  items, (3) if the arrangement includes a general right of
                  return, delivery or performance of the undelivered items is
                  probable and substantially in the control of the Company.

         2.       The Company makes certain sales through resellers. The Company
                  recognizes revenues from sales to resellers, assuming all
                  other criteria for revenue recognition are met and provided
                  that there is no contractual right of return, either (i) when
                  it receives adequate collateral (which in almost every case is
                  a Letter of Credit) from the reseller to secure payment to the
                  Company, or (ii) in certain instances where the Company has an
                  established ongoing relationship with the reseller and a
                  proven track record of payments, when it receives written
                  evidence of the identity of the end-user and the existence of
                  an agreement by the end-user to purchase the product from the
                  reseller (e.g. a copy of a purchase order) or (iii) in
                  instances where the reseller is a major internationally known
                  corporation and the Company has an established ongoing
                  relationship with such reseller and a proven track record of
                  payments, upon delivery of the products to the reseller. When
                  the collectability from the reseller is not reasonably assured
                  or when the right of return exists, revenue is recognized on a
                  cash basis, provided that the reseller has ultimately sold the
                  products to an end-user or the return privilege has
                  substantially expired.

         3.       Revenues from sales involving long-term credit arrangements at
                  less than accepted interest rates are recorded at the present
                  value of the related future cash flows. The difference between
                  the amounts receivable and their present value is recognized
                  as interest income over the period of the receivable by the
                  interest method.

         4.       Revenue from software license is generally recognized at the
                  time the software is delivered to the customer, if collection
                  is probable, the fee is fixed or determinable, the Company has
                  no significant obligations remaining under the sales or
                  licensing agreement and no significant customer acceptance
                  requirements exist subsequent to software delivery.

         5.       Service revenues from product maintenance contracts and
                  separately priced extended warranty contracts are generally
                  recognized ratably over the contract period, while revenue
                  from software services generally is recognized as the services
                  are performed or, if no pattern of performance is evident,
                  ratably over the period during which such services are
                  performed.

         6.       The percentage of completion method of accounting, in
                  accordance with Statement of Position ("SOP") 81-1 "Accounting
                  for Performance of Construction Type and Certain Production
                  Type Contracts" is used for sales generated from certain
                  contracts, primarily those related to customized network
                  solutions and network build-outs with durations of at least
                  six months. The units-of-delivery method or units-of-work
                  performed method is used to measure progress on each contract.
                  Revenue and cost estimates are revised periodically based on
                  changes in circumstances. Any expected losses on contracts are
                  recognized immediately upon contract signing or as soon
                  thereafter as identified.

                                     F-254
<PAGE>


                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 1 - Significant Accounting Policies (cont'd)

         M.       Research and development

         Research and development costs, net of any grants, are charged to the
         consolidated statements of operations as incurred. Royalties paid and
         accrued in respect of the said grants are classified as cost of
         revenues.


         N.       Reclassification

         Certain amounts in prior years' financial statements have been
         reclassified to conform to the current year's presentation. (See also
         Note 22).


         O.       Income taxes

         1.       The Company accounts for income taxes under SFAS No. 109
                  "Accounting for Income Taxes".

                  Under SFAS 109, deferred tax assets or liabilities are
                  recognized in respect of temporary differences between the tax
                  bases of assets and liabilities and their financial reporting
                  amounts, as well as in respect of tax losses and other
                  deductions which may be deductible for tax purposes in future
                  years, based on tax rates applicable to the periods in which
                  such deferred taxes are expected to be realized. Valuation
                  allowances are established when necessary to reduce deferred
                  tax assets to the amount considered more likely than not to be
                  realized. Deferred tax assets and liabilities are classified
                  as current or non current items in accordance with the nature
                  of the assets or liabilities to which they relate. When there
                  is no underlying assets or liabilities the deferred tax assets
                  and liabilities are classified in accordance with the period
                  of expected reversal.

                  Deferred taxes have not been recorded in respect of the
                  following  matters -

                  o    Certain undistributed earnings of foreign
                       consolidated subsidiaries which are taxable upon
                       distribution by way of dividend, as no such dividend
                       distribution intention exists.

                  o    Differences between the financial carrying amounts of
                       non monetary assets and liabilities and their tax
                       basis attributable to the rate of change in Israeli
                       Consumer Price Index (which serves as a basis for
                       measurement for tax purposes) and the rate of change
                       in the NIS/US dollar exchange rate, in accordance
                       with paragraph 9 (f) of SFAS 109.


         2.       Income tax expense represents the tax payable for the period
                  and the change during the period in deferred tax assets and
                  liabilities.


                                     F-255
<PAGE>


                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 1 - Significant Accounting Policies (cont'd)

         P.       Derivative financial instruments

         SFAS No. 133, "Accounting for Derivative Instruments and Certain
         Hedging Activities" and SFAS No. 138, "Accounting for Certain
         Derivative Instruments and Certain Hedging Activity, an Amendment of
         SFAS 133" require that all derivative instruments be recorded on the
         balance sheet at their respective fair values.

         The Company has significant international sales transactions in foreign
         currencies and has a policy of hedging forecasted and actual foreign
         currency risk with forward foreign exchange contracts and foreign
         exchange options. The Company's forward foreign exchange contracts are
         primarily denominated in Euro, Pounds Sterling and NIS and are for
         periods consistent with the terms of the underlying transactions,
         generally one year or less. Derivative instruments are employed to
         eliminate or minimize certain foreign currency exposures that can be
         identified and quantified.

         On the date a derivative contract is entered into, the Company
         designates the derivative as either a hedge of the fair value of a
         recognized asset or liability or of an unrecognized firm commitment
         (fair value hedge), or a hedge of a forecasted transaction or the
         variability of cash flows to be received or paid related to a
         recognized asset or liability (cash flow hedge), or a foreign-currency
         fair-value or cash-flow hedge (foreign currency hedge). For all hedging
         relationships the Company formally documents the hedging relationship
         and its risk-management objective and strategy for undertaking the
         hedge, the hedging instrument, the hedge item, the nature of the risk
         being hedged, how the hedging instrument's effectiveness in offsetting
         the hedged risk will be assessed, and a description of the method of
         measuring ineffectiveness. This process includes linking all
         derivatives that are designated as fair-value, cash-flow, or
         foreign-currency hedges to specific assets and liabilities on the
         balance sheet or to specific firm commitments or forecasted
         transactions. The Company also formally assesses, both at the hedge's
         inception and on an ongoing basis, whether the derivatives that are
         used in hedging transactions are highly effective in offsetting changes
         in fair values or cash flows of the hedged items.

         Changes in the fair value of a derivative that is highly effective and
         that is designated and qualifies as a fair-value hedge, along with the
         loss or gain on the hedged asset or liability or unrecognized firm
         commitment of the hedged item that is attributable to the hedged risk,
         are recorded in operations. Changes in the fair value of a derivative
         that is highly effective and that is designated and qualifies as a
         cash-flow hedge are recorded in other comprehensive income (loss) to
         the extent that the derivative is effective as a hedge, until
         operations are affected by the variability in cash flows of the
         designated hedged item. Changes in the fair value of derivatives that
         are highly effective as hedges and that are designated and qualify as
         foreign-currency hedges are recorded in either operations or other
         comprehensive income (loss), depending on whether the hedge transaction
         is a fair-value hedge or a cash-flow hedge. The ineffective portion of
         the change in fair value of a derivative instrument that qualifies as
         either a fair-value hedge or a cash-flow hedge is reported in
         operations. Changes in the fair value of derivative trading instruments
         are reported in current period operations.

         The Company discontinues hedge accounting prospectively when it is
         determined that the derivative is no longer effective in offsetting
         changes in the fair value or cash flows of the hedged item, the
         derivative expires or is sold, terminated, or exercised, or the
         derivative is de-designated as a hedging instrument, because it is
         unlikely that a forecasted transaction will occur, a hedged firm
         commitment no longer meets the definition of a firm commitment, or
         management determines that designation of the derivative as a hedging
         instrument is no longer appropriate.

                                     F-256
<PAGE>


                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 1 - Significant Accounting Policies (cont'd)

         P.       Derivative financial instruments (cont'd)

         When hedge accounting is discontinued because it is determined that the
         derivative no longer qualifies as an effective fair-value hedge, the
         Company continues to carry the derivative on the balance sheet at its
         fair value and no longer adjusts the hedged asset or liability for
         changes in fair value. The adjustment of the carrying amount of the
         hedged asset or liability is accounted for in the same manner as other
         components of the carrying amount of that asset or liability. When
         hedge accounting is discontinued because the hedged item no longer
         meets the definition of a firm commitment, the Company continues to
         carry the derivative on the balance sheet at its fair value, removes
         any asset or liability that was recorded pursuant to recognition of the
         firm commitment from the balance sheet, and recognizes any gain or loss
         in operations. When hedge accounting is discontinued because it is
         probable that a forecasted transaction will not occur, the Company
         continues to carry the derivative on the balance sheet at its fair
         value with subsequent changes in fair value included in operations, and
         gains and losses that were accumulated in other comprehensive income
         are recognized immediately in operations. In all other situations in
         which hedge accounting is discontinued, the Company continues to carry
         the derivative at its fair value on the balance sheet and recognizes
         any subsequent changes in its fair value in operations.


         Q.       Comprehensive income

         The Company adopted SFAS No. 130, "Reporting Comprehensive Income",
         which establishes standards for reporting and presentation of
         comprehensive income and its components in a full set of financial
         statements. Comprehensive income consists of net income (loss) and net
         unrealized gains (losses) on available for sale securities and on the
         change in the fair value of financial instruments that are used for
         cash flow hedging, and is presented in the consolidated statement of
         comprehensive income (loss).


         R.       Stock option and restricted shares plans

         The Company applies the intrinsic value-based method of accounting
         prescribed by Accounting Principles Board ("APB") Opinion No. 25,
         "Accounting for Stock Issued to Employees", and related
         interpretations, including FASB Interpretation No. 44, "Accounting for
         Certain Transactions Involving Stock Compensation an Interpretation of
         APB Opinion No. 25" issued in March 2000, to account for its fixed plan
         stock options. Under this method, compensation cost is recognized only
         if the market price of the underlying stock at the date of the grant
         exceeds the exercise price. Any such cost so determined is allocated to
         compensation expense over the vesting period of the award.

         SFAS No. 123, "Accounting for Stock-Based Compensation", established
         accounting and disclosure requirements using a fair value-based method
         of accounting for stock-based employee compensation plans. As allowed
         by SFAS No. 123, the Company has elected to continue to apply the
         intrinsic value-based method of accounting described above, and has
         adopted the disclosure requirements of SFAS No. 123. (See Note 12E and
         18A).

                                     F-257
<PAGE>


                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 1 - Significant Accounting Policies (cont'd)

         R.       Stock option and restricted shares plans (cont'd)

         Had compensation expenses for stock options granted under the Company's
         stock option plan been determined based on the fair value at the grant
         dates consistent with the fair value accounting method of SFAS No. 123,
         the Company's net income (loss) and net income (loss) per ordinary
         share would have been as follows:
<TABLE>
<CAPTION>
                                                                              For the year ended December 31
                                                                     -----------------------------------------------
                                                                           2005              2004               2003
                                                                     ----------        ----------         ----------
                                                                        $ in thousands, except per share amounts
                                                                     -----------------------------------------------

<S>                                                                     <C>               <C>               <C>
         Net income (loss), as reported                                 39,864            10,153            (71,040)
         Add:     Stock-based employee compensation
                   expenses included in reported net
                   income (loss), net of related tax effects (nil)       2,040             1,650              3,568
         Deduct:  Total stock-based employee compensation
                   expense determined under the fair value
                   method for all awards, net of
                   related tax effects (nil)                           (10,267)          (10,072)           (23,450)
                                                                     ----------        ----------         ----------

         Pro Forma net income (loss)                                    31,637             1,731            (90,922)
                                                                     ==========        ===========        ==========

         Basic earnings (loss) per ordinary share ($):
          - as reported                                                   0.36              0.09             (0.65)
          - pro forma                                                     0.29              0.02             (0.84)
         Diluted earnings (loss) per ordinary share($):
          - as reported                                                   0.34              0.09             (0.65)
          - pro forma                                                     0.27              0.01             (0.84)
</TABLE>


         S. Acquired in-process research and development costs (IPR&D).

         Acquired in-process research and development represents the value
         assigned in a purchase business combination to research and development
         projects of the acquired business that were commenced, but not yet
         completed, at the date of acquisition, for which technological
         feasibility has not been determined and which have no alternative
         future use in research and development activities or otherwise. In
         accordance with SFAS No. 2, "Accounting for Research and Development
         Costs", as interpreted by FASB Interpretation No. 4 "Applicability of
         FASB Statement No. 2 to Business Combinations Accounted for by the
         Purchase Method" "amounts assigned to acquired in-process research and
         development meeting the above criteria are charged to expense at the
         date of consummation of the purchase business combination".

                                     F-258
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 1 - Significant Accounting Policies (cont'd)

         T.       Impairment or disposal of long-lived assets

         SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
         Assets", requires that long-lived assets be reviewed for impairment
         whenever events or changes in circumstances indicate that the carrying
         amount of an asset may not be recoverable. Recoverability of assets to
         be held and used is measured by a comparison of the carrying amount of
         an asset to future cash flows expected to be generated by the asset or
         used in its disposal. If the carrying amount of an asset exceeds its
         estimated future cash flows, an impairment charge is recognized. Assets
         to be disposed of are reported at the lower of the carrying amount or
         fair value less costs to sell. SFAS No 144 requires companies to
         separately report discontinued operations and extends that reporting to
         a component of an entity that either has been disposed of (by sale,
         abandonment, or in a distribution to owners) or is classified as held
         for sale (See also Notes 21and 22).

         U.       Sale of financial assets

         SFAS No. 140 - "Accounting for Transfers and Servicing of Financial
         Assets and Extinguishments of Liabilities", requires that a transfer of
         financial assets in which control is surrendered, is accounted for as a
         sale to the extent that consideration other than beneficial interests
         in the transferred assets is received in exchange. (See Note 17P).

         V.       Earnings (loss) per Ordinary Share

         Basic and diluted earnings (loss) per Ordinary Share are presented in
         conformity with SFAS No. 128, "Earnings Per Share". Basic earnings
         (loss) per Ordinary Share are calculated by dividing the net earning
         (loss) attributable to Ordinary Shares, by the weighted average number
         of Ordinary Shares outstanding. For purposes of determining diluted
         earnings per share, potential common stock includes the effects of
         dilutive stock options. The effect on the number of shares of such
         potential common stock is computed using the treasury stock method.
         Diluted earnings per share excludes the impact of anti dilutive
         securities, which are those securities resulting in an increase in
         earnings per share or a decrease in loss per share.

         W.       Commitments and contingencies

         Liabilities for loss contingencies arising from claims, assessments,
         litigation, fines and penalties and other sources are recognized when
         it is probable that a liability has been incurred and the amount of the
         assessment can be reasonably estimated.

         X        Impairment of loans

         The Company applies the provisions of SFAS No. 114 "Accounting by
         Creditors for Impairment of a Loan" as amended by SFAS No. 118
         "Accounting by Creditors for Impairment of a Loan - Income Recognition
         and Disclosures" These standards apply to loans, which are restructured
         in a troubled debt restructuring, involving modifications of terms of
         the loans, including those involving a receipt of assets in partial
         satisfaction of a receivable.

         In accordance with SFAS No. 114, a loan is impaired when it is
         probable, based on current information and events, that the creditor
         will be unable to collect all amounts (contractual interest and
         principle payments) due according to the contractual terms of the loan
         agreement. Impaired loans are written down to the present value of
         their expected future cash flows, discounted at the loan's effective
         interest rate or, alternatively, based on the observable market price
         of the loan or the fair value of the collateral, if the loan is
         collateral-dependent.

                                     F-259
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------



Note 1 - Significant Accounting Policies (cont'd)

         Y.       Employee Severance Benefits

         Under Israeli law and labor agreements, the Company is required to make
         severance and pension payments to their retired or dismissed employees
         and to employees leaving employment in certain other circumstances. The
         liability for Employee Severance Benefits is based on salary components
         as prescribed in the existing labor agreement. The liability for
         severance pay is calculated on the basis of the latest salary paid to
         each employee multiplied by the number of years of employment. The
         liability is covered by the amounts deposited including accumulated
         income thereon as well as by the unfunded provision.

         The US subsidiaries sponsor a section 401(k) defined contribution plan
         or 401(a) plan which permits its employees to invest up to certain
         amounts of their compensation (subject to limitation by Internal
         Revenue Service Regulations) on a pretax basis in certain self-directed
         investment programs. The subsidiaries may, at the discretion of the
         Board of Directors, make contributions to the plan.

         The provision for severance pay includes amounts related to employees
         in countries other than Israel and the U.S. and are calculated in
         accordance with the rules of the country in which they operate.


                                     F-260


<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------



Note 2 - Investment Securities and Deposits
                                                  December 31        December 31
                                                         2005               2004
                                               $ in thousands     $ in thousands
                                               --------------     --------------


         Short-term:
          Short-term deposits (see Note 17B.)          1,540              5,628

          Marketable securities:
          Available for sale securities*               4,699                  -
          Held to maturity securities                 35,065             19,086
                                               --------------     --------------

                                                      41,304             24,714
                                               ==============     ==============
         Long-term:
          Long-term deposits                          12,762             11,659
          Available for sale securities*              37,707             10,694
          Held to maturity securities                 89,495             97,006
                                               --------------     --------------

                                                     139,964            119,359
                                               ==============     ==============


         *    As of December 31, 2005 and 2004, the Company had net unrealized
              gains on Available for Sale Securities of $ 4,238 and $ 2,341
              thousand, respectively.

         The amortized cost, gross unrealized holding gains (loss), and fair
         value of held-to-maturity securities by major security type at December
         31, 2005, were as follows:
<TABLE>
<CAPTION>

                                                                  Gross              Gross
                                                             Unrealized         Unrealized
                                            Amortized           Holding            Holding              Fair
                                                 Cost             Gains             Losses             Value
                                       --------------    --------------     --------------    --------------
                                       $ in thousands    $ in thousands     $ in thousands    $ in thousands
                                       --------------    --------------     --------------    --------------
<S>                                          <C>                    <C>            <C>              <C>
         Held to maturity
          U.S. Government agencies            46,919                 -               (648)           46,271
          Corporate debt securities           44,844                20               (610)           44,254
          Other                               32,797                35                  -            32,832
                                       --------------    --------------     --------------    --------------

                                             124,560                55             (1,258)          123,357
                                       ==============    ==============     ==============    ==============
</TABLE>


                                     F-261
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 2 - Investment Securities and Deposits (cont'd)

         The amortized cost, gross unrealized holding gains (loss), and fair
         value of held-to-maturity securities by major security type at December
         31, 2004, were as follows:
<TABLE>
<CAPTION>
                                                                  Gross              Gross
                                                             Unrealized         Unrealized
                                            Amortized           Holding            Holding              Fair
                                                 Cost             Gains             Losses             Value
                                       --------------    --------------     --------------    --------------
                                       $ in thousands    $ in thousands     $ in thousands    $ in thousands
                                       --------------    --------------     --------------    --------------
<S>                                          <C>                   <C>            <C>              <C>
         Held to maturity
          U.S. Government agencies            46,925                 -              (423)            46,502
          Corporate debt securities           43,338                 -              (525)            42,813
          Other                               25,829                35                 -             25,863
                                       --------------    --------------     --------------    --------------

                                             116,092                35              (948)           115,178
                                       ==============    ==============     ==============    ==============



         Maturities of debt securities classified as held-to-maturity were as follows at December 31, 2005:

                                                                                 Amortized              Fair
                                                                                      Cost             value
                                                                            $ in thousands    $ in thousands
                                                                            --------------    --------------

         Held to maturity:
          First year                                                               35,065            34,693
          Due after one year through five years                                    88,100            87,223
          Due after five years through ten years                                    1,396             1,441
                                                                            --------------    --------------

                                                                                  124,560           123,357
                                                                            ==============    ==============
</TABLE>


                                     F-262
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------



Note 2 - Investment Securities and Deposits (cont'd)

         The following table shows the fair value of the Company's investments
         in marketable securities with unrealized losses that are not deemed to
         be other-than-temporarily impaired, and their underlying gross
         unrealized losses aggregated by investment category and length of time
         that individual securities have been in a continuous unrealized loss
         position.
<TABLE>
<CAPTION>
         As of December 31, 2005:

                                          Less than 12 months            12 months or Greater
                               ------------------------------  ------------------------------                           Total
                                                   Unrealized                      Unrealized           Total      Unrealized
                                   Fair value          Losses      Fair value          Losses      Fair value          losses
                               --------------  --------------  --------------  --------------  --------------  --------------
                               $ in thousands  $ in thousands  $ in thousands  $ in thousands  $ in thousands  $ in thousands
                               --------------  --------------  --------------  --------------  --------------  --------------
<S>                                    <C>                 <C>        <C>                 <C>         <C>                 <C>
         US Government
          Agencies                     1,982               18         44,289              630         46,271              648
         Corporate bonds               5,522              144         36,339              466         41,861              610
                               --------------  --------------  --------------  --------------  --------------  --------------
         Total                         7,504              162         80,628            1,096         88,132            1,258
                               ==============  ==============  ==============  ==============  ==============  ==============

         As of December 31, 2004:

                                          Less than 12 months            12 months or Greater
                               ------------------------------  ------------------------------                           Total
                                                   Unrealized                      Unrealized           Total      Unrealized
                                   Fair value          Losses      Fair value          Losses      Fair value          losses
                               --------------  --------------  --------------  --------------  --------------  --------------
                               $ in thousands  $ in thousands  $ in thousands  $ in thousands  $ in thousands  $ in thousands
                               --------------  --------------  --------------  --------------  --------------  --------------
         US Government
          Agencies                    40,344             315           6,581             108          46,925             423
         Corporate bonds              26,419             377          16,919             148          43,338             525
                               --------------  --------------  --------------  --------------  --------------  --------------
         Total                        66,763             692          23,500             256          90,263             948
                               ==============  ==============  ==============  ==============  ==============  ==============

</TABLE>
         The unrealized losses on the Company's investments in US Government
         Agencies and corporate bonds were caused by interest rate increases.
         Because the Company has the ability and intent to hold these
         investments until a recovery of fair value, which may be maturity, the
         Company does not consider these investments to be impaired as of
         December 31, 2005 and 2004.

                                     F-263
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------

Note 3 - Inventories

         Consist of the following:
<TABLE>
<CAPTION>

                                                                                               December 31        December 31
                                                                                                      2005               2004
                                                                                            $ in thousands     $ in thousands
                                                                                            --------------     --------------

<S>                                                                                                <C>                <C>
         Raw materials and components                                                              47,970             39,773
         Work in process                                                                           23,839              31,983
         Finished products                                                                         75,154            103,309

                                                                                                  146,963            175,065


Note 4 - Long-Term Receivables, Net of Current Maturities

         A.       Consist of the following:
                                                                                Weighted
                                                                        average interest
                                                                              rate as of
                                                                             December 31       December 31        December 31
                                                                                    2005              2005               2004
                                                                                       %    $ in thousands     $ in thousands
                                                                          --------------    --------------     --------------

         Long-term receivables (1)                                                   5.3           19,905            186,604
         Less deferred interest income (*)                                                             64                  -

         Total (2)                                                                                 19,841            186,604
         Less - provision for uncollectible receivable (**)                                           624             77,252
         Less - current maturities                                                                 10,944             19,377
                                                                                            --------------     --------------

                                                                                                    8,273             89,975
                                                                                            ==============     ==============
         The receivables are denominated in U.S. dollars.

         (*)      The deferred interest income represents the difference between the original amount
                  of the receivables and their net present value computed, at the transaction date,
                  by the relevant interest rate.

         (**)     See Note 4C.

         (1)      Long-term receivables ("receivables") consist mainly of receivables resulting from
                  sales of the Company's products, providing from one to five years credit
                  commencing on the date of signing of the sales contract or the finance agreement
                  related thereto or other date as mentioned in the contract. Such receivables are
                  interest bearing and are payable in quarterly or semi-annual payments. The
                  principal is paid generally after the grant of a grace period. These receivables
                  are partially secured by trade risk insurance policies.
</TABLE>

                                               F-264
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 4 - Long-Term Receivables, Net of Current Maturities (cont'd)

         A.       Consist of the following: (cont'd)


         (2)      In the opinion of the Company's management, due to the nature
                  of the customers and their activities, their financial
                  performance, updated financial and business data, previous
                  business relations and existing trade insurance as stated
                  above, as well as provision for doubtful debts, the Company
                  has limited risk exposure in relation to the long-term
                  receivables.


         B.       Aggregate maturities are as follows:

                                                                   December 31
                                                                          2005
                                                                $ in thousands
                                                                --------------

         First year (current maturities)                              10,944
         Second year                                                   8,227
         Third year                                                      675
         Fourth year                                                       -
         Fifth year                                                        -
         Thereafter                                                       59
                                                                --------------

                                                                      19,905
                                                                ==============


         C.    1. In 2000, the Company and a subsidiary (InnoWave) entered
                  into an agreement for the sale to Global Village Telecom
                  ("GVT"), a Brazilian company, of wireless local loop systems
                  and services. Pursuant to the agreement, the Company agreed to
                  grant GVT long-term financing for the purchase, comprising a
                  line of credit of up to $168 million, based upon the progress
                  of sales. This financing was granted in conjunction with
                  credit made available to GVT by a group of other equipment
                  vendors. The credit was to be repaid during the years 2004
                  through 2007. The interest payable under the line of credit
                  was variable (ranging from LIBOR plus 6.5% to LIBOR plus 4.5%
                  ). As security for its obligations under the agreement, GVT
                  granted the Company (together with three other major
                  international suppliers) a charge on its license to operate
                  its communications network in Brazil, together with additional
                  security including shareholders' guarantees and charges on
                  revenue and contracts.

                                     F-265
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 4 - Long-Term Receivables, Net of Current Maturities (cont'd)

         C.       (cont'd)

                  2.       Due to various business reasons, including a
                           significant devaluation of the Brazilian currency
                           relative to the dollar, commencing December 2002, GVT
                           defaulted in its payments to the Company.
                           Accordingly, during 2002 and 2003, the Company
                           recorded a provision for doubtful debts, in the
                           amount of $34.0 million and $ 6.6 million,
                           respectively with respect to this debt.

                  3.       Following extensive negotiations, agreements to
                           reschedule GVT's debt repayments were signed in
                           December, 2004 among GVT, its shareholders and its
                           principal creditors, including the Company. These
                           agreements encompassed GVT's commercial debt to the
                           creditors for the supply of equipment and services,
                           the debt due under certain convertible notes received
                           from GVT's parent company and accumulated interest on
                           the debts to the closing. As a precondition to the
                           closing of these agreements, the sum of $5.4 million
                           was paid to the Company. The main provisions of the
                           agreements, as regards the Company, are:

                           o        All the existing debts were canceled and in
                                    place thereof GVT issued to the Company
                                    notes in the aggregate sum of approximately
                                    $163 million to be paid from 2005 through
                                    2013 at variable rates of interest.

                           o        The Company was granted warrants which were
                                    convertible, at no further consideration,
                                    into shares of GVT's parent company,
                                    equating to approximately 2.4% of its
                                    outstanding share capital.


                  4.       According to SFAS No. 114 "Accounting by Creditors
                           for Impairment of a Loan", the carrying amount of the
                           restructured debt was recognized based on the present
                           value of the expected future cash flows discounted at
                           the debt 's original contractual interest rate which,
                           was LIBOR plus 6.5%.

                  5.       In April 2005, the Company sold the long-term
                           receivables from GVT to ABN Amro Bank for the sum of
                           approximately $ 96 million in cash, plus a contingent
                           amount of approximately $ 3.3 million, resulting in
                           the recognition of a net gain from recovery of
                           doubtful debt of $ 10.4 million (excluding the
                           contingent amount), which was recognized in the year
                           ended December 31, 2005 under income from recovery of
                           doubtful debt.


                                     F-266
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------



Note 5 - Investments

         Consist of the following:

                                                  December 31        December 31
                                                         2005               2004
                                               --------------     --------------
                                               $ in thousands     $ in thousands
                                               --------------     --------------

         Affiliated company (A)                       11,976            16,259
         Loans (B)                                     3,000             6,000
         Other                                         4,811             4,507
                                               --------------     --------------

                                                      19,787            26,766
                                               ==============     ==============


         A.       The investment in affiliated company is comprised of:


                                                  December 31        December 31
                                                         2005               2004
                                               --------------     --------------
                                               $ in thousands     $ in thousands
                                               --------------     --------------

          Cost of shares                             28,223            28,223
         Accumulated losses                         (16,247)          (11,964)
                                               --------------     --------------

                                                     11,976            16,259
                                               ==============     ==============



         The following table shows the financial information of an affiliated
         company for the year ended December 31, 2004 (the financial information
         as of and for the year ended December 31, 2005 is not considered and
         accordingly has not been presented).

                                                                           2004
                                                                 $ in thousands
                                                                 --------------

         Balance sheet information
         Current assets                                                 65,832
         Total assets                                                   72,345
         Current liabilities                                            40,230
         Total liabilities                                              43,355
         Shareholders' equity                                           28,990

         Statement of operations information
         Revenues                                                       48,612
         Gross profit                                                   36,207
         Net loss                                                       (7,996)


                                     F-267

<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------



Note 5 - Investments (cont'd)

         B.       Loans

         In December 2004, the Company signed a series of transactions with
         Chiaro Networks Ltd. ("Chiaro") a developer of infrastructure-class
         IP/MPLS routing platforms. The transactions consisted of: (1) a loan
         agreement (2) a call option agreement for the acquisition of Chiaro by
         the Company and (3) a distribution agreement.


         1.       Loan agreement

                  In December 2004, the Company provided to Chiaro two loans in
                  the aggregate amount of $ 6 million ($ 3 million each loan).

                  The Company had the right to convert one of the loans at any
                  time into convertible preferred BB shares of Chiaro.

                  The loans are secured by a first-priority floating charge over
                  substantially all of Chiaro's assets.

                  During the first half of 2005, the business of Chiaro
                  deteriorated significantly and in January 2006, Chiaro has
                  ceased doing business. Accordingly, Management has determined
                  that the Company may be unable to collect all amounts due
                  according to the contractual terms of the loans agreement and
                  therefore, a provision of $ 3 million in respect thereof has
                  been recorded in the consolidated financial statements for the
                  year ended December 31, 2005. The Company as the sole secured
                  creditor has taken the steps necessary to realize the assets
                  Chiaro had, including cash, tangible assets and intellectual
                  property. The Company believes that the fair market value of
                  Chiaro's remaining assets is no less than the carrying amount
                  as of December 31, 2005 of Chiaro's debt.


         2.       Call option agreement

                  The Company had the option to acquire Chiaro under terms
                  defined in the agreement. The term of the option was 37.5
                  months.


         3.       Distribution agreement

                  The Company received exclusive, global distribution rights for
                  Chiaro's products, for a period of 37.5 months from closing.

                                     F-268
<PAGE>
<TABLE>
<CAPTION>


                                                                                          ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
----------------------------------------------------------------------------------------------------------------------------


Note 6 - Property, Plant and Equipment, Net

         Property, plant and equipment as of December 31, 2005 consist of the following:

                                     Freehold
                                        land,
                                buildings and       Machinery                          Office
                                    leasehold             and     Information   furniture and
                                 improvements       equipment      technology       equipment          Other           Total
                                  -----------     -----------     -----------     -----------    -----------     -----------
                                  $ thousands     $ thousands     $ thousands     $ thousands    $ thousands     $ thousands
                                  -----------     -----------     -----------     -----------    -----------     -----------
<S>                                    <C>           <C>               <C>            <C>          <C>              <C>
   Cost
   Balance at
   beginning of year                   70,343        120,936           56,638         5,949        5,452            259,318
    Acquisitions                          111          3,032              365           121          105              3,734
   Additions                            3,243         15,487            4,799           783          236             24,548
   Disposals                            5,124         12,457              911         1,007        2,655             22,154
                                  -----------     -----------     -----------     -----------    -----------     -----------
   Balance at end
    of year                            68,573        126,998           60,891         5,846        3,138            265,446
                                  -----------     -----------     -----------     -----------    -----------     -----------

   Accumulated
    Depreciation and
   amortization
    Balance at
   beginning of  year                  20,043         70,334           41,033         4,567        3,988            139,965
   Depreciation
    for the year                        1,571         13,415            7,229           556          542             23,313
   Disposals                              900         12,418              900           987        2,218             17,423
                                  -----------     -----------     -----------     -----------    -----------     -----------
   Balance at end
    of year                            20,714         71,331           47,362         4,136        2,312            145,855
                                  -----------     -----------     -----------     -----------    -----------     -----------

   Net book value at
    December 31, 2005                  47,859         55,667           13,529         1,710          826            119,591
                                  ===========     ===========     ===========     ===========    ===========     ===========

    Net book value at
    December 31,  2004                 50,300         50,602           15,605         1,382        1,464            119,353
                                  ===========     ===========     ===========     ===========    ===========     ===========

         Regarding pledge, see Note 14.
</TABLE>

                                              F-269
<PAGE>
<TABLE>
<CAPTION>


                                                                                          ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
----------------------------------------------------------------------------------------------------------------------------



Note 7 - Software Development Costs, Net

         Capitalization and amortization of software development costs as of
         December 31, 2005, and 2004 is as follows:
                                                                                                December 31        December 31
                                                                                                       2005               2004
                                                                                             --------------     --------------
                                                                                             $ in thousands     $ in thousands
                                                                                             --------------     --------------
<S>                                                                                                 <C>               <C>
         Balance at beginning of year                                                               14,435            16,289
         Capitalization of software development costs during the year                                8,014            11,151
         Amortization and write-offs during the year                                               (10,450)          (13,005)
                                                                                             --------------     --------------
                                                                                                    11,999            14,435
                                                                                             ==============     ==============


Note 8 - Goodwill

         Consist of the following:
                                                                                                December 31        December 31
                                                                                                       2005               2004
                                                                                             --------------     --------------
                                                                                             $ in thousands     $ in thousands
                                                                                             --------------     --------------

         Goodwill - Broadband Access Division                                                        1,039             1,039
         Goodwill - Data Networking Division                                                        37,036                 -
         Goodwill - Optical Networks Division                                                        1,230                 -
                                                                                             --------------     --------------
         Goodwill (1)                                                                               39,329             1,039
                                                                                             ==============     ==============

         (1)      Original amount                                                                  177,427           139,137
                  Amortization and write down due to decline in value                             (138,098)         (138,098)
                                                                                            --------------     --------------
                                                                                                    39,329             1,039
                                                                                            ==============     ==============
         See Note 19.


Note 9 - Other Assets, Net
                                                                                               December 31        December 31
                                                                                                       2005               2004
                                                                                             --------------     --------------
                                                                                             $ in thousands     $ in thousands
                                                                                             --------------     --------------
         Core Technology Products (1)                                                               35,423                  -
         Deferred tax                                                                                9,893             9,144
         Other intangible assets                                                                     2,340                 -
                                                                                             --------------     --------------
                                                                                                    47,656             9,144
                                                                                            ==============     ==============

         (1)      Original amount                                                                   38,169                 -
                  Amortization *                                                                    (2,746)                -
                                                                                            --------------     --------------
                                                                                                    35,423                 -
                                                                                            ==============     ==============

         * Amortized over the expected useful life of the related products, generally between 7 to 10 years.
</TABLE>

                                     F-270
<PAGE>


                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 10 - Liability for Employee Severance Benefits

         A.       Employees of the Company and of its consolidated subsidiaries
                  in Israel (Israeli companies)

         Under Israeli law and labor agreements, the Israeli companies are
         required to make severance and pension payments to their retired or
         dismissed employees and to employees leaving employment in certain
         other circumstances.

         1.       The liability in respect of most of its non-senior employees
                  is discharged by participating in a defined contribution
                  pension plan and making regular deposits with a pension fund.
                  The liability deposited with the pension fund is based on
                  salary components as prescribed in the existing labor
                  agreement. The custody and management of the amounts so
                  deposited are independent of the companies and accordingly
                  such amounts funded (included in expenses on an accrual basis)
                  and related liabilities are not reflected in the balance
                  sheet.

         2.       In respect of the liability to other employees, individual
                  insurance policies are purchased and deposits are made with
                  recognized severance pay funds.

                  The liability for severance pay is calculated on the basis of
                  the latest salary paid to each employee multiplied by the
                  number of years of employment. The liability is covered by the
                  amounts deposited including accumulated income thereon as well
                  as by the unfunded provision.

         3.       As to the union employees of Tadiran Telecommunication Ltd.
                  (TTL) who are covered by the labor agreements which were in
                  force in TTL, the Company's liability for severance pay is in
                  accordance with such labor agreements.

                  If the Company terminates the employment of these employees
                  through 2011, they are entitled to additional benefits. After
                  that time, the employees will no longer be eligible for such
                  additional benefits.

         4.       The expenses in respect of severance and pension pay (not
                  including expenses in restructuring) for the years ended
                  December 31, 2005, 2004 and 2003 are $ 6,009 thousand, $ 4,008
                  thousand and $ 5,593 thousand respectively.

         5.       Company's net liability for employee severance benefits is
                  composed as follows:

                                                 December 31        December 31
                                                        2005               2004
                                              --------------     --------------
                                              $ in thousands     $ in thousands
                                              --------------     --------------

                  Liability for employee
                     severance benefits               48,340            50,943
                  Less: Assets held for
                     severance benefits               25,931            25,182
                                              --------------     --------------
                                                      22,409            25,761
                                              ==============     ==============

                  Withdrawals from the funds may be made only for the purpose of
                  disbursement of severance pay.

                                     F-271
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 10 - Liability for Employee Severance Benefits (cont'd)

         B. Employees of U.S. consolidated subsidiaries (U.S. companies)

         The subsidiaries sponsor a section 401(k) defined contribution plan or
         401(a) plan which permits its employees to invest up to certain amounts
         of their compensation (subject to limitation by Internal Revenue
         Service Regulations) on a pretax basis in certain self-directed
         investment programs. The subsidiaries may, at the discretion of the
         Board of Directors, make contributions to the plan. Company
         contributions with respect to this plan were $ 482 thousand, $ 244
         thousand and $ 499 thousand in 2005, 2004 and 2003, respectively.


         C.       Employees in the rest of the world

         The provision for severance pay includes amounts related to employees
         in countries other than Israel and the U.S. and are calculated in
         accordance with the rules of the country in which they operate.


Note 11 - Commitments and Contingencies

         A.       Claims and potential claims

         1.       Following the reduction in workforce in accordance with the
                  reorganization plan of the Company that was implemented in
                  2002, claims and demands for higher amounts of severance pay
                  were submitted by certain former employees. Management of the
                  Company believes, based on the opinion of its legal advisors,
                  that the effect, if any, of the results of such claims and
                  demands on the financial position of the Company and the
                  results of its operations, will be immaterial and the
                  provisions which are included in the financial statements in
                  respect thereof are appropriate and sufficient.

         2.       The Company conducts negotiations from time to time with
                  international technology companies ("technology companies")
                  regarding allegations that it is using certain patents owned
                  by the technology companies in its products. Although the
                  Company cannot assess each negotiation for its merit, it
                  estimates that any settlement, if needed, will not have a
                  material adverse effect on the Company's financial position or
                  results of operations.

         3.       In December 1999, an agreement was signed with SCI Systems
                  ("SCI") for the sale of a plant which manufactures electronic
                  components. SCI is one of the largest manufacturers of
                  electronic components in the world. As part of the agreement,
                  SCI will, for several years to come, be the subcontractor for
                  part of the manufacturing activities of the Company, on a cost
                  plus basis.

                  The Company is in dispute with SCI as to the interpretation of
                  certain aspects of the agreement, such as volume commitments;
                  discount terms for large orders; the minimum size of orders;
                  timing; untimely payments etc.

                  The dispute was referred to an arbitrator in December 2002. As
                  part of the arbitration process, SCI submitted, in April 2003,
                  claims in an aggregate amount of approximately $ 30 million.

                                     F-272
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 11 - Commitments and Contingencies (cont'd)

         A.       Claims and potential claims (cont'd)

                  The Company rejected the allegations made against it and filed
                  a claim against SCI in an amount of approximately $ 50
                  million.

                  Subsequently, the arbitration was put on hold and the parties
                  appointed an independent mediator in an additional attempt to
                  settle this dispute. If the mediation fails, the parties will
                  resume the arbitration process.

                  In the opinion of the Company's legal counsel, it is not
                  possible at this stage of the proceedings, to evaluate the
                  chances of the Company's claim as well as the chances of SCI's
                  claim.

                  In the opinion of Management, the arbitrator's decision will
                  not have a material adverse effect on the Company's financial
                  position or results of its operation.

         4.       Several claims have been submitted against the Company and
                  against consolidated subsidiaries, resulting from ordinary
                  business operations inter alia, for using patents owned by
                  others. The Company's Management based mainly on opinions of
                  its legal advisors, believes that the effect, if any, of the
                  results of such claims on the financial position of the
                  Company and the results of its operations will be immaterial
                  and the provisions which are included in the financial
                  statements in respect thereof are appropriate and sufficient.

         5.       In October 1997, an investigation was commenced by the Israeli
                  Comptroller of Restrictive Trade Practices ("comptroller")
                  regarding alleged price fixing and non-competitive practices
                  among Tadiran Telecommunications Ltd. ("TTL"), Tadiran Ltd
                  ("Tadiran" - the parent company of TTL) and Telrad
                  Telecommunications and Electronics Industries Ltd., a
                  subsidiary of Koor Industries Ltd. (a significant shareholder
                  of the Company and Tadiran Ltd.).

                  In the 1999 merger agreement between the Company and TTL,
                  Tadiran. had agreed to indemnify the Company for damages above
                  $6 million.

                  In 2004, the Company was informed that the comptroller has
                  ceased the investigation without taking any action against the
                  Company. Accordingly, a provision in the amount of $6 million
                  that was recorded at the time of the acquisition of TTL was
                  reversed and recorded as other income.

         6.       In September 2004, following the completion of the
                  investigation by the comptroller mentioned above, a claim was
                  filed against Bezeq (Israel's national telecommunications
                  provider), Koor, TTL, Tadiran and Telrad in the District Court
                  of Tel Aviv-Jaffa. Attached to the claim was a request for
                  certification thereof as a class action, brought in the name
                  of all Bezeq customers against the aforesaid companies,
                  including the Company, in an amount of $ 371 million.

                  In March 2005 the Company and the other respondents filed
                  their respective answers to the request to certify the claim
                  as a class action. The applicant filed his reply to the
                  respondents' answers in December 2005.

                  Management of the Company believes, in light of the advice of
                  its legal counsel, that the allegations against the Company
                  are without merit and therefore no provision was recorded in
                  respect thereto in the financial statements.

                                     F-273
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 11 - Commitments and Contingencies (cont'd)

         A.       Claims and potential claims (cont'd)

         7.       In January 2005, the Company was named as a defendant in a
                  purported class action complaint filed in the United States
                  against ECtel, certain officers and directors of ECtel, and
                  ECI. The complaint alleges violations of U.S. Federal
                  Securities Laws by ECtel and breach of fiduciary duties by the
                  individual defendants, in connection with disclosure of
                  ECtel's financial results between April 2001 and April 2003.
                  It also alleges that ECI was the controlling shareholder of
                  ECtel during this period and, as such, influenced and
                  controlled the purported actions by its subsidiary. Damages
                  claimed by the plaintiff have not yet been quantified.

                  ECI based on the opinion of its legal advisors believes that
                  the allegations made in the complaint with respect to it are
                  without merit, , and accordingly no provision in respect
                  thereof has been included in the consolidated financial
                  statements.

         B.       Lease commitments

         The Company and its consolidated subsidiaries have entered into several
         operating lease agreements in Israel and abroad. The agreements expire
         on various dates from 2006 to 2011 (some of which have renewal options)
         and are in local currencies or linked to the dollar or to the Israeli
         Consumer Price Index.

         Rental expenses under operating leases is charged to expense over the
         periods of the respective leases by the straight-line method. Future
         minimum annual rent payments to which the Company and its subsidiaries
         are committed under the above leases, at rates in effect at December
         31, 2005, are as follows:

         Year ending December 31                                 $ in thousands
         -----------------------                                 --------------

         2006                                                        13,281
         2007                                                        11,660
         2008                                                         8,747
         2009                                                         3,484
         2010 and thereafter                                          2,397

         As to rent expense under the Company's leases, see Note 17N.

         C.       Royalty commitments

         1.       The Company is committed to pay royalties to the Government of
                  Israel on proceeds from sale of products in the Research and
                  Development of which the government participated by way of
                  grants. The royalties are computed mainly at the rates of 3.5%
                  to 5% of the aggregated proceeds from sale of such products,
                  up to the amount not exceeding 100% of such grants plus
                  interest at Libor rate. As of December 31, 2005, the maximum
                  possible future commitment of the Company is approximately $
                  135.3 million (excluding interest). See Note 17H with regard
                  to amounts paid pursuant to these commitments.

         2.       The Company is committed to pay royalties to certain parties
                  whose products, patents or technology are incorporated in
                  certain products of the Company. Such royalties are based on
                  sales of systems or a family of products incorporating such
                  products, patents or technology and are paid based either on a
                  fixed rate, a price per unit sold or as a rate of the system
                  or the family of products sale price.

                                     F-274
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 11 - Commitments and Contingencies (cont'd)

         D.       Financial instruments

         1.       Derivative financial instruments

                  The Company has significant international sales transactions
                  in foreign currencies and has a policy of hedging forecasted
                  and actual foreign currency risk with forward foreign exchange
                  contracts and purchased and written options. The Company's
                  forward foreign exchange contracts and purchased options are
                  primarily denominated in Euro, Pounds Sterling and NIS and are
                  for periods consistent with the terms of the underlying
                  transactions, generally one year or less. Derivative
                  instruments are employed to eliminate or minimize certain
                  foreign currency exposures that can be identified and
                  quantified. The Company was exposed to but realized no losses
                  from non-performance by counter parties on these derivatives.

                  The Company uses foreign currency forward contracts designated
                  as fair value hedges to protect against the foreign currency
                  exchange rate risks related to the remeasurement of firm sales
                  commitments and recognized assets such as accounts receivable.
                  Changes in the fair value of these derivatives are recognized
                  in operations as offsets to the changes in the fair value of
                  the related assets or liabilities.

                  The Company uses a combination of forwards and purchased and
                  written options designated as cash flow hedges to protect
                  against the foreign currency exchange rate risks inherent in
                  its forecasted revenue denominated in currencies other than
                  the U.S. dollar. The Company's cash flows hedges mature
                  generally within less than a year. For derivative instruments
                  that are designated and qualify as cash flow hedges, the
                  effective portions of the gain or loss on the derivative
                  instruments are initially recorded in accumulated other
                  comprehensive income (loss) as a separate component of
                  shareholders' equity and subsequently reclassified into
                  operations in the period during which the hedged transactions
                  is recognized in operations. The ineffective portion of the
                  gain or loss is reported in financial income or expenses
                  immediately. The effective portion of cash flow and foreign
                  currency hedges is reported in the same financial statement
                  line item as the changes in value of the hedged item. For
                  foreign currency option and forward contracts designated as
                  hedges, hedge effectiveness is measured by comparing the
                  cumulative change in the hedge contract with the cumulative
                  change in the hedged item, both of which are based on forward
                  rates.

                  Up until February 2005 the Company had used variable-rate debt
                  to finance its operations. The debt obligations exposed the
                  Company to variability in interest payments due to changes in
                  interest rates. Management believes that it is prudent to
                  limit the variability of a portion of its interest payments.
                  To meet this objective, management entered into interest rate
                  swap agreements to manage fluctuations in cash flows resulting
                  from interest rate risk. These swaps change the variable-rate
                  cash flow exposure on the debt obligations to fixed cash
                  flows. Under the terms of the interest rate swaps, the Company
                  received variable interest rate payments and made fixed
                  interest rate payments, thereby creating the equivalent of
                  fixed-rate debt.
                  Changes in the fair value of interest rate swaps designated as
                  hedging instruments that effectively offset the variability of
                  cash flows associated with variable-rate, long-term debt
                  obligations are reported in accumulated other comprehensive
                  income (loss). These amounts are subsequently recognized in
                  interest expenses as a yield adjustment of the hedged interest
                  payments, in the period in which the related interest affects
                  earnings.

                                     F-275
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 11 - Commitments and Contingencies (cont'd)

         D.       Financial instruments (cont'd)

         1.       Derivative financial instruments (cont'd)

                  The Company has entered into a long term agreement to provide
                  a customized network solution to a customer in Central
                  America. The network build-out will begin in 2006. This
                  transaction will be financed by a commercial bank ("the
                  bank"), in the form of a long-term loan to an intermediate
                  regional bank. The intermediate bank will repay the loan to
                  the bank at a fixed interest rate. As the bank requires the
                  payment of the interest at a floating rate, the Company is to
                  pay or receive the differential between the fixed interest
                  rate paid by the intermediate bank and the floating interest
                  rate required by the bank under the loan agreement.
                  The Company believes that it is prudent to mitigate the
                  exposure to interest rate fluctuations in respect of the above
                  transaction. To meet this objective, in October 2005 the
                  Company entered into interest rate swap agreements to manage
                  fluctuations in cash flows resulting from interest rate
                  changes. Under the terms of the interest rate swaps, the
                  Company will receive floating interest rate payments and will
                  make fixed interest rate payments, which will create a fixed
                  gain on the finance portion of the project.

                  Changes in the fair value of interest rate swaps designated as
                  hedging instruments that effectively offset the variability of
                  cash flows associated with variable-rate obligations are
                  reported in accumulated other comprehensive income (loss).
                  These amounts are subsequently recorded as interest income
                  (expenses), as a yield adjustment of the hedged interest
                  payments, for the period in which the related interest affects
                  earnings

                  Fluctuations in the fair value of interest rate swaps
                  designated as hedging instruments that effectively offset the
                  variability of cash flows associated with variable-rate,
                  long-term debt obligations are reported in accumulated other
                  comprehensive income (loss). These amounts subsequently are
                  reclassified into interest expense as a yield adjustment of
                  the hedged interest payments in the same period in which the
                  related interest affects earnings.

                  Other derivatives not designated as hedging instruments under
                  SFAS No. 133 consist primarily of purchase and written options
                  used to hedge foreign currency cash flows. For derivative
                  instruments not designated as hedging instruments under SFAS
                  No. 133, changes in the fair values are recognized in
                  operations in the period of change.


                  Fair value hedging transactions
                  -------------------------------

                  As of December 31, 2005, the Company did not have outstanding
                  currency forward contracts, as a hedge against sales contracts
                  receivable and firm commitments.

                                     F-276
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 11 - Commitments and Contingencies (cont'd)

         D.       Financial instruments (cont'd)

         1.       Derivative financial instruments (cont'd)

                  Anticipated cash flow hedging transactions
                  ------------------------------------------

                  As of December 31, 2005, the Company had entered into forward
                  exchange contracts and also purchased and written options as
                  hedges for currency exchange rates for various periods of
                  time. These transactions constitute a future cash flow hedge
                  for sales agreements and for the anticipated backlog of
                  orders.

                  As of December 31, 2005, the Company had entered into 85 hedge
                  transactions in respect of anticipated sales amounting to $
                  183.6 million, (in Euro currency), and $ 17.5 million (in
                  Pounds Sterling currency).

                  The hedge transactions are shown in the balance sheet at fair
                  value. The fair value of future transactions is based on
                  future exchange rates, as quoted at the balance sheet date.

                  As of December 31, 2005, the fair value of the cash flow
                  hedging transaction is a net asset of $ 8.0 million.


                  Payroll and purchase contracts
                  ------------------------------

                  As of December 31, 2005, the Company had entered into 77
                  future cash flow hedge transactions in respect of payroll and
                  purchase contracts amounting to $ 364.9 million (in NIS
                  currency).
                  As of December 31, 2005, the Company had entered into one
                  future cash flow hedge transaction in respect of purchase
                  contract amounting to $ 2.4 million (in Euro currency). As of
                  December 31, 2005, the fair value of the cash flow hedging
                  transactions is credit US$ 0.5 million.


                  Realized/unrealized gain (losses) from hedge transactions
                  ---------------------------------------------------------

                  The Company had net realized foreign currency exchange gain
                  (losses) from all hedge transactions of $ 2.5 million, $
                  (11.0) million and $ (6.9) million in 2005, 2004 and 2003,
                  respectively.

                  Comprehensive income for the year ended December 31, 2005
                  includes an unrealized gain of $ 19.2 million relating to the
                  above hedge transactions. As of December 31, 2005 the net
                  unrealized gain on financial instruments is $ 4.2 million.
                  This amount is expected to appear in the consolidated
                  statement of operations for the year ended December 31, 2006.


                  Interest rate cash flow risk
                  ----------------------------

                  Interest expense for the years ended December 31, 2005, 2004
                  and 2003, includes net losses in the amount of $ 38 thousand,
                  $ 294 thousand and $ 502 thousand, respectively, arising from
                  the difference between the fixed interest rate in the interest
                  rate swap agreements and the variable interest rate on the
                  hedged debt obligation.

                                     F-277
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 11 - Commitments and Contingencies (cont'd)

         D.       Financial instruments (cont'd)

         1.       Derivative financial instruments (cont'd)

                  Non-hedging transactions
                  ------------------------

                  The financing expenses include an income of $ 0.5 million, a
                  loss of $ 0.2 million and a loss of $ 2.0 million for the
                  years ended December 31, 2005, 2004 and 2003, respectively.
                  These amounts reflect the changes in the time value factor of
                  the derivatives, which are not considered as hedging
                  transactions.

         2.       Concentration of credit risks

                  Financial instruments which expose the Company to risks of
                  credit concentration include cash, deposits, currency hedging
                  transactions, trade and other receivables.

                  The cash and deposits as well as the hedging transactions are
                  deposited and/or executed through a number of established
                  financial institutions. These financial institutions are
                  located in Israel, the USA and Europe. The policy of the
                  Company is to avoid the risk of making deposits with one
                  financial institution. The Company frequently evaluates the
                  amounts and volume of the transactions executed with each one
                  of the said financial institutions. The exposure in respect of
                  credit to customers is limited due to the large number of
                  customers and their geographical spread.
                  As to the long-term deposits and customer debts see Note 4.
                  Management of the Company believes that the credit risk is
                  limited since the customers are large suppliers of
                  communications services operating in countries in which this
                  sector is anticipated to grow.

         3.       Fair value of the financial instruments

                  Management estimates that the fair value of the financial
                  instruments is not materially different from the amounts
                  included in the financial statements. In its determination of
                  fair value, management used certain estimates, as described
                  below, which do not necessarily indicate amounts which are
                  recoverable in current market trading

                  -     Cash and cash equivalents, short-term investments,
                        trade receivables, other receivables, trade payables,
                        other payables and accrued liabilities - the book
                        value is the same as the fair value due to the short
                        realization period of these instruments.

                  -     Long-term receivables and liabilities - the book
                        value is not materially different from the fair value
                        since the Company's interest rates on its long-term
                        receivables or liabilities are not materially
                        different from those indicated in respect of the
                        related assets and liabilities as of the balance
                        sheet date.

                                     F-278
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 11 - Commitments and Contingencies (cont'd)

         E.       Capital expenditure commitments

         The Company in Israel incurs capital expenditures pursuant to "Approved
         Enterprise" programs. At December 31, 2005, the Company is not
         committed to invest pursuant to existing programs.


         F.       Purchase commitments

         At December 31, 2005, the Company has commitments, in amount of $ 63.4
         million, covering, primarily, the purchase of materials. (December 31,
         2004 - $ 64.7 million).


         G.       Guarantees

         1.       The Company maintains certain third-party guarantees with
                  banks to support its performance obligations under customer
                  contracts and other contracts that can be demanded in case of
                  material breach of contracts. As of December 31, 2005, these
                  guarantees approximated $ 30,125 thousand.

         2.       The Company also maintains other third-party guarantees
                  (primarily with insurance companies) to support its
                  performance obligations under customer contracts and other
                  contracts that can be demanded in case of material breach of
                  contracts. As of December 31, 2005, these guarantees
                  approximated $ 4,502 thousand.


         H.       Commitments

         1.       In November 2001, the Company sold its information technology
                  unit ("IT") to EDS and signed a five-year outsourcing contract
                  with EDS. Under the agreement, EDS assumed all the IT
                  operations and was required to supply maintenance, support and
                  development services during the term of the agreement, for a
                  sum of between $ 15 and $ 18 million, per year. In 2003 a new
                  five-year agreement replacing the previous agreement was
                  signed with effect through 2007. The Company undertook to pay
                  EDS $ 11.8 million in 2003 and amounts between $ 8.8 million
                  and $ 7.8 million in 2004-2007 (in 2005 and in 2004 the
                  Company paid to EDS $ 8.6 million and $ 8.8 million,
                  respectively). In addition, for the years ended December 31,
                  2005, 2004 and 2003, the Company paid EDS $ 1.7 million, $ 3
                  million and $ 2.2 million, respectively, for additional
                  services.

         2.       The Company has an obligation to indemnify the purchasers of
                  certain activities and/or the purchasers of subsidiaries at
                  rates which are stipulated in the sales agreement, should the
                  purchasers be forced to discharge former employees of TTL
                  during a period up to 2011 (see Note 10A(3)) and, therefore,
                  to pay increased severance benefits.

                  In the opinion of Company management, the provisions for
                  future indemnification, as stated, which are included in the
                  financial statements, are proper and adequate.

                                     F-279
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 11 - Commitments and Contingencies (cont'd)

         H.       Commitments (cont'd)

         3.       If the Company dismisses any of the remaining unionized
                  employees who joined from TTL by 2011, it is committed to pay
                  them increased severance benefits or early retirement
                  pensions, depending on age and seniority (see Note 10A(3)). As
                  of December 31, 2005, the maximum amount payable as a result
                  of this commitment is $ 15.0 million. Management does not
                  expect to dismiss any of these employees and therefore no
                  provision in respect thereof has been included in the
                  financial statements.

         4.       Commitments to indemnify directors and officers

                  In 2001, the Board of Directors of ECI resolved to grant ECI's
                  directors and officers at the level of vice president and
                  above, who may serve from time to time, indemnification to the
                  fullest extent permitted by law and approved the form of
                  indemnification letter provided to each such director and
                  officer. The Company has undertaken to indemnify its directors
                  and officers for financial obligations and reasonable
                  litigation costs imposed on them in connection with their
                  duties. The undertaking was limited to categories of events
                  set forth in the indemnification letter and to an amount of $
                  15 million per director and officer, per case.

                  In 2002, the audit committee and the Board of Directors of ECI
                  resolved, to raise the amount of the aforesaid undertaking to
                  a limit of $ 30 million per director per case, but not more
                  than a commitment of $ 225 million in the aggregate for all
                  persons to be indemnified. The aforesaid changes were approved
                  by ECI's shareholders.


Note 12 - Shareholders' Equity

         A.       Authorized, issued and outstanding shares

                                                            Authorized
                                                     ---------------------------
                                                     December 31     December 31
                                                     -----------     -----------
                                                            2005            2004
                                                     -----------     -----------
                                                         Number of shares
                                                     ---------------------------

         NIS 0.12 par value per ordinary share      200,000,000      200,000,000
                                                    ===========     ============


         1.       The Company's shares (NIS 0.12 par value each) are traded in
                  the United States on the over the counter market and are
                  listed on the Nasdaq Stock Market.

         2.       For details of the issued share capital see consolidated
                  Statements of Changes in Shareholders' Equity.

         3.       Pursuant to a service agreement with one of the Company's
                  directors, the Company issued to him in 2005, 2004 and 2003 -
                  1,387, 1,653 and 5,650 Ordinary shares, respectively. Under
                  service agreements entered into in 2005 with two additional
                  directors, they were issued 3,521 and 3,041 restricted shares,
                  respectively, in that year (the latter amount issued pursuant
                  to the ECI Restricted Share Plan - see Note 12.C.2).

                                     F-280
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 12 - Shareholders' Equity (cont'd)

         B.       Dividends

         According to the Israeli corporate laws, dividends may be paid by the
         Company only out of accumulated earnings, or out of net income, in two
         consecutive years. See Note 15A(3).


         C.       Share incentive (stock options and restricted shares plans)

         1.       The Company's current stock option plans are the ECI Telecom
                  Ltd. Key Employee Share Incentive Plan 1991 and the ECI
                  Telecom Ltd. Employee Share Incentive Plan 2002 (together the
                  "ECI Plans"), which were adopted by the shareholders at the
                  Annual General Meetings held respectively on August 29, 1991
                  and November 19, 2002. The ECI Plans will expire on December
                  31, 2012.

                  The ECI Plans provide that options may be granted to any
                  employee, director, consultant or contractor of the Company
                  pursuant to (a) one or more sub-plans designed to benefit from
                  the provisions of Section 102 of the Israeli Income Tax
                  Ordinance (New Version) 1961 and (b) any other share incentive
                  plan approved by the Board of Directors of the Company.

                  Under the terms of the ECI Plans, as of December 31, 2005, the
                  Company is authorized to grant options for a total of
                  32,760,700 shares (increased from 29,760,700 shares following
                  shareholders' approval on July 14, 2005), subject to
                  anti-dilution adjustment. The option awards are personal and
                  non-assignable and terminate automatically upon termination of
                  employment (except for approved retirement or termination
                  caused by death or disability or as otherwise approved by the
                  Board of Directors or its Remuneration Committee).

                  Stock option grants during the reporting period

                  The principal stock option grants made by the Company to its
                  employees, during the year ended December 31, 2005 were as
                  stated below. Unless otherwise stated, these stock options
                  generally vest as follows: 12.5% after six months and 6.25% on
                  the last day of each following quarter over a period of 14
                  quarters.

                  On March 28, 2005, the Company granted options for 171,000
                  shares at an exercise price of $ 7.07 per share.

                  On May 10, 2005, the Company granted options for 125,000
                  shares at an exercise price of $ 7.47 per share.

                  On May 31, 2005, the Company granted options for 1,520,400
                  shares at an exercise price of $ 8.85 per share.

                  On June 3, 2005, the Company granted options for 75,000 shares
                  at an exercise price of $ 9.01 per share.

                  On June 21, 2005, the Company granted options for 32,000
                  shares at an exercise price of $ 8.48 per share.

                                     F-281
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 12 - Shareholders' Equity (cont'd)

         C. Share incentive (stock options and restricted shares plans) (cont'd)

            Stock option grants during the reporting period (cont'd)
            --------------------------------------------------------

            On July 28, 2005, the Company granted options for 77,000 shares at
            an exercise price of $ 8.26 per share

            On November 20, 2005, the Company granted options for 167,000 shares
            at an exercise price of $ 8.22 per share.

            On November 22, 2005, the Company granted options for 100,000 shares
            at an exercise price of $ 8.35 per share.

            On December 5, 2005, the Company granted options for 100,000 shares
            at an exercise price of $ 8.42 per share.

            On December 7, 2005, the Company granted options for 1,073,250
            shares at an exercise price of $ 9.22 per share. The vesting
            schedule for 373,250 of these options is 50% after 6 quarters and
            6.25% on the last day of each following quarter over a period of 8
            quarters, and for 655,000 of such options it is 75% after 10
            quarters and 6.25% on the last day of each following quarter over a
            period of 4 quarters.

            None of the above stock options were granted at exercise prices
            below the market price on the date of the grant.

            Following approval by the board of directors , the Company's
            shareholders approved adjustments to the terms of outstanding stock
            option awards, in order to preserve the aggregate intrinsic value of
            such stock options in light of the distribution to shareholders of
            7.6 million of the Company's shares in ECtel Ltd. (See Note 21B). On
            April 30, 2004, immediately prior to the ex-dividend date for the
            distribution of the ECtel shares, the closing market price of the
            Company's shares on Nasdaq was $5.60 per share. As a result of the
            proposed distribution, the opening market price on the business day
            immediately following, May 3, 2004, was adjusted to $5.36 per share,
            a reduction of $0.24 per share, or 4.305%. The main provisions of
            the adjustments are set forth below and applied to stock options
            granted prior to May 3, 2004:

            o      The exercise price of outstanding stock options granted at an
                   exercise price of less than $5.60 per share, was reduced by
                   4.305% and rounded upwards to a whole cent.

            o      The exercise price of outstanding stock options granted at an
                   exercise price of, or in excess of, $5.60 per share, was
                   reduced by $0.24 per share.

            o      Additional 462,939 stock options were granted to employees,
                   directors or consultants of the Company who, on May 3, 2004,
                   held stock options with an exercise price of less than $5.60
                   per share. The number of additional stock options equated to
                   approximately 4.5% of the said stock options held by such
                   grantees at May 3, 2004. The additional stock options are
                   exercisable at a price per share equivalent to the new,
                   reduced exercise price of the original stock options, and in
                   the same proportions and will expire on the same dates as the
                   original stock options.

                                     F-282
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 12 - Shareholders' Equity (cont'd)

         C. Share incentive (stock options and restricted shares plans) (cont'd)

            Stock option grants during the reporting period (cont'd)
            -----------------------------------------------

            There was no accounting consequence for the above changes made to
            the exercise price and the number of shares, since the above
            adjustments meet the criteria set forth in FIN 44, "Accounting for
            Certain Transactions involving Stock Compensation (an interpretation
            of APB Opinion No. 25)" as follows:

            a.     The aggregate intrinsic value of the award immediately after
                   the change was not greater than the aggregate intrinsic value
                   of the award immediately before the change.

            b.     The ratio of the exercise price per share to the market value
                   per share was not reduced.

         2. At the shareholders General Meeting held on July 28, 2005, the
            Company's Shareholders adopted the ECI Telecom Ltd. Employee
            Restricted Share Incentive Plan (the "ECI Restricted Share Plan").
            The ECI Restricted Share Plan will expire on June 4, 2015.
            Restricted shares issued under the ECI Restricted Share Plan are
            issued from the same pool of shares available for the issue of stock
            options under the ECI Plans.

            The ECI Restricted Share Plan provides that restricted shares may be
            granted to any employee, director, consultant or contractor of the
            Company (the "Participant"). The restricted shares are held in trust
            on behalf of a Participant until the Participant's interest in such
            restricted shares vests and they become freely transferable.

            Should a Participant cease to remain in the employ or service of the
            Company, for any reason, while holding unvested restricted shares
            (except for termination caused by death or as otherwise approved by
            the Board of Directors or its Remuneration Committee), then those
            restricted shares shall either (i) be immediately surrendered to the
            Company for cancellation, or (ii) be immediately sold by the
            Participant to the Company (for consideration equal to the issue
            price of such shares), or (iii) shall be treated in any other manner
            that will assure that the Participants rights in such shares shall
            cease to exist; and the Participant shall have no further
            shareholder rights with respect to those restricted shares.

            Unless determined otherwise by the Remuneration Committee, the
            restricted shares shall be fully vested after four years from the
            date of issuance according to the following schedule: 12.5% shall
            vest following the lapse of six months from the date of issuance and
            a further 6.25% shall vest on the last day of each quarter, during
            14 consecutive quarters thereafter.

            The fair value of the restricted shares as of the date of the issue
            is amortized over the vesting period.

            Restricted shares issued during the reporting period
            ----------------------------------------------------

            On July 28, 2005, the Company issued 583,585 restricted shares to
            its employees. The shares were issued for no consideration. The
            shares vest and become transferable a follows: 12.5% on November 30,
            2005 and a further 6.25% on the last day of each quarter during 14
            consecutive calendar quarter thereafter.

                                     F-283
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 12 - Shareholders' Equity (cont'd)

         C. Share incentive (stock options and restricted shares plans) (cont'd)

            On November 20, 2005, the Company issued 159,191 restricted shares
            to its employees and a director. The shares were issued for no
            consideration. Most of shares vest and become transferable as
            follows: 50% on November 7, 2006 and a further 6.25% on the last day
            of each quarter during 8 consecutive calendar quarter thereafter.

            Unearned compensation on the grant of the restricted shares as
            measured at the original grant date, totaling $ 6.1 million, was
            calculated based on the market value of the shares on the date of
            grants and is being amortized over the vesting period.

            Compensation expense of $ 1,999 thousand was recognized for the
            restricted shares during the year ended December 31, 2005.

         3. Stock options and restricted shares under the ECI Plans are as
            follows:
<TABLE>
<CAPTION>
                                                                             2005               2004               2003
                                                                 ----------------   ----------------   ----------------
                                                                 Number of shares   Number of shares   Number of shares
                                                                 ----------------   ----------------   ----------------
<S>                                                                   <C>                <C>               <C>
         Total number authorized at beginning of year                 29,760,700         29,760,700        26,760,700
         Increase in number authorized during the year                 3,000,000                  -         3,000,000
         Options unexercised at beginning of year                    (19,439,184)       (19,067,545)      (12,349,747)
         Options exercised till beginning of year                     (3,483,565)        (2,129,800)       (2,028,982)
         Options granted during the year                              (3,449,795)      * (4,154,481)      (10,523,271)
         Options cancelled during the year                               698,107          2,429,077         3,704,655
         Restricted shares granted during the year                      (742,776)                 -                 -
         Restricted shares forfeited during the year                       9,557                  -                 -
                                                                 ----------------   ----------------   ----------------
         Available for future grant at end of year                     6,353,044          6,837,951         8,563,355
                                                                 ================   ================   ================

         Options exercised during the year **                          1,697,867          1,353,765           100,818
                                                                 ================   ================   ================

         ** Average price of options exercised
             during the year (in $)                                          2.53               1.83             2.62
                                                                 ================   ================   ================

         Restricted shares vested during the year                        115,233                  -                 -
                                                                 ================   ================   ================

         Options unexercised and unvested restricted
         shares at the end of  year                                   21,110,991         19,439,184        19,067,545
                                                                 ================   ================   ================

         Options unexercised and unvested restricted shares
           may be vested as follows (1):
         First year or thereafter                                     17,168,269         16,840,697        16,540,199
         Second year or thereafter                                    1, 920,649          1,328,180         1,911,858
         Third year or thereafter                                      2,022,073          1,270,307           615,488
                                                                 ----------------   ----------------   ----------------
                                                                      21,110,991         19,439,184        19,067,545
                                                                 ================   ================   ================

         (*) Including grants as a result of distribution of ECtel's shares (see C1 and Note 22B).
</TABLE>


                                     F-284
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 12 - Shareholders' Equity (cont'd)

         C. Share incentive (stock options and restricted shares plans) (cont'd)

         3. Stock options and restricted shares under the ECI Plans (cont'd)

            (1)   To be paid in NIS based on the rate of exchange of
                  the dollar on the date of payment as follows:
<TABLE>
<CAPTION>
                                                             2005               2004               2003
                                                 ----------------   ----------------   ----------------
                  Dollars per Share (*)(**)      Number of shares   Number of shares   Number of shares
                                                 ----------------   ----------------   ----------------
<S>                                                   <C>                <C>               <C>
                  Restricted shares                      617,986                  -                 -
                  Zero                                 2,098,362          2,518,982         2,942,728
                  1.26 - 3.04                          1,966,098          2,213,569         2,587,619
                  3.11                                 3,921,429          4,673,266         5,124,326
                  3.12 - 6.91                          3,346,718          3,914,886           568,334
                  7.07 - 8.48                            901,574            187,574            30,000
                  8.85                                 1,460,400                  -                 -
                  9.01 - 9.22                          1,148,250                  -                 -
                  13.76 - 20.76                          711,957            748,991         1,134,842
                  23.76 - 26.14                          175,500            176,500           183,500
                  26.42                                2,902,256          3,075,356         3,985,054
                  27.27 - 29.29                        1,231,010          1,295,610         1,792,292
                  29.76 - 39.76                          629,450            634,450           718,850
                                                 ----------------   ----------------   ----------------

                                                      21,110,991         19,439,184        19,067,545
                                                 ================   ================   ================
</TABLE>


                  (*)  The dollars per share exercise range figures were
                       adjusted as a result of distribution of ECtel's shares
                       (see C1 and Note 20B).
                  (**) As of December 31, 2005, the weighted average exercise
                       price of options was $ 10.20 and the weighted average
                       remaining contractual life of outstanding options was 6
                       years.

         4.       Fair value method

                  a.       In October 1995 the Financial Accounting Standards
                           Board (FASB) issued SFAS No.123 "Accounting for
                           Stock-based Compensation" which establishes financial
                           accounting and reporting standards for stock-based
                           compensation plans. The statement defines a fair
                           value based method of accounting for employee
                           stock-based compensation awards.

                           As required by SFAS No. 123, the Company has
                           determined the weighted average fair value per option
                           of stock-based arrangements grants during 2005, 2004
                           and 2003 to be $ 3.87, $3.40 and $1.70, respectively.
                           The fair values of stock based compensation awards
                           granted were estimated using the "Black - Scholes"
                           option pricing model with the following assumptions.

                                            Option      Expected       Risk free
                           Year of grant      Term    volatility   interest rate
                           -------------      ----    ----------   -------------

                           2005                 3            63            3.80%
                           2004                 5            72            2.00%
                           2003                 5            70            1.00%


                                     F-285
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 12 - Shareholders' Equity (cont'd)

       C.   Share incentive (stock options and restricted shares plans) (cont'd)

       4.   Fair value method (cont'd)

            b.  Had the compensation expenses for stock options
                granted under the Company's stock option plans been
                determined based on fair value at the grant dates
                consistent with the method of SFAS No. 123, the
                Company's net income (loss) and net income (loss) per
                ordinary share would have been as follows:
<TABLE>
<CAPTION>
                                                                            For the year ended December 31
                                                                 ----------------------------------------------------
                                                                         2005              2004                2003
                                                                 ------------      -------------         ------------
                                                                       $ in thousands, except per share amounts
                                                                 ----------------------------------------------------
<S>                                                                     <C>               <C>               <C>
                  Net income (loss), as reported                        39,864            10,153            (71,040)
                  Add:     Stock-based employee
                            compensation expenses
                            included in reported net
                            income (loss), net of related
                            tax effects (nil)                            2,040             1,650              3,568
                  Deduct:  Total stock-based employee
                            compensation expense
                            determined under the fair
                            value based method for
                            all awards, net of related
                            tax effects (nil)                          (10,267)          (10,072)           (23,450)
                                                                   ------------      -------------       ------------

                  Pro Forma net income (loss)                           31,637             1,731            (90,922)
                                                                   ============      =============       ============

                  Basic earnings (loss) per ordinary
                   share ($):
                   - as reported                                          0.36              0.09             (0.65)
                   - pro forma                                            0.29              0.02             (0.84)

                  Diluted earnings (loss) per ordinary
                   share ($):
                   - as reported                                          0.34              0.09             (0.65)
                   - pro forma                                            0.27              0.01             (0.84)
</TABLE>


         5.   Employee Stock Purchase Plans ("ESPP")

              In July 2000, the ECI Telecom Ltd. 2000 Employee Stock
              Purchase Plans were approved. Under the ESPP plan all
              employees were permitted to purchase shares at a price equal
              to 85% of the lower of the fair market value at the beginning
              or end of each offering period.

              Under the ESPP, during 2003 the Company sold to its employees
              418,983 ordinary shares of the Company. The ESPP plan is no
              longer in effect.

                                     F-286
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 13 - Balances in Currencies Other Than the Dollar
<TABLE>
<CAPTION>

                                                                        December 31, 2005
                                                      ----------------------------------------------------------
                                                                                           Pounds
                                                            NIS            Euro         Sterling          Others
                                                      ---------       ---------        ---------       ---------
                                                                           $ in thousands
                                                      ----------------------------------------------------------
<S>                                                      <C>             <C>               <C>            <C>

         Assets
         Trade receivables                               12,240          45,907            4,031          17,325
         Other current assets (include
          discontinued operations)                        1,851           7,534            3,554           7,970
         Long-term deposits and marketable
          securities                                     15,479               -                -               -
         Asses held for severance benefits               25,931               -                -               -
                                                      ---------       ---------        ---------       ---------

                                                         55,501          53,441            7,585          25,295
                                                      =========       =========        =========       =========


         Liabilities
         Trade payables                                  21,182           8,608              575           2,609
         Other current liabilities (include
          discontinued operations)                       11,459           7,680            3,257           5,370
         Liabilities for employee severance
          benefits                                       44,782              88                -             509
                                                      ---------       ---------        ---------       ---------

                                                         77,423          16,376            3,832           8,488
                                                      =========       =========        =========       =========
[table continued]
<CAPTION>

                                                                        December 31, 2004
                                                      ------------------------------------------------------------
                                                                                         Pounds
                                                            NIS             Euro        Sterling           Others
                                                      ---------        ---------      ----------        ---------
                                                                           $ in thousands
                                                      ------------------------------------------------------------
<S>                                                      <C>             <C>               <C>            <C>
         Assets
         Trade receivables                               18,838           35,161           5,285            22,588
         Other current assets (include
          discontinued operations)                       23,460           40,630           1,162            5,360
         Long-term deposits and marketable
          securities                                     14,870                -               -                -
         Asses held for severance benefits               25,182                -               -                -
                                                      ---------        ---------      ----------        ---------

                                                         82,350           45,791           6,447           27,948
                                                      =========        =========      ==========        ==========


         Liabilities
         Trade payables                                  32,471            8,305             186            2,455
         Other current liabilities (include
          discontinued operations)                       23,297           17,111           3,775            4,897
         Liabilities for employee severance
          benefits                                       50,514                -               -              190
                                                      ---------        ---------      ----------        ---------

                                                        106,282           25,416           3,961            7,542
                                                      =========        =========      ==========        ==========
</TABLE>


                                     F-287
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 14 - Charges (Assets Pledged)

         In recent years, the Company received loans from Israeli banks,
         pursuant to a "Facility Agreement". As part of this Facility Agreement,
         the Company pledged its assets (including real estate in Israel) and
         undertook an unlimited "negative pledge" obligation on its assets in
         favor of those banks. During 2005 the Company reimbursed the banks all
         the outstanding loans and signed an agreement with the banks, which
         cancels the Facility Agreement, releases the Company from all
         obligations and undertakings pursuant thereto and obliges the banks to
         release all pledges and securities. At the release of this report, the
         formal cancellation from said pledges is in progress but has not been
         fully completed yet.

         In the fourth quarter of 2005 the Company signed new agreements with
         two banks providing off-balance sheet credit facilities to the Company.
         As a condition to these facilities by the banks, the Company undertook:
         (1) a "negative pledge" obligation on some of the Company's assets (not
         including cash and cash equivalent, short-term investment, long-term
         deposit and marketable securities) and (2) to maintain certain
         financial ratios with regard to the tangible equity of the Company as
         defined in the agreements.
         See Note 17B for restricted deposits.


Note 15 - Taxes on Income

         A.       Tax programs under various Israeli tax laws:

         1.       Israel tax reform

                  During 2003, tax reform legislation was enacted, which
                  significantly changed the taxation basis of corporate and
                  individual taxpayers from a territorial basis to a worldwide
                  basis. From such date an Israel resident taxpayers are taxed
                  on income produced and derived both in and out of Israel.

                  The main provisions of the tax that are relevant to the
                  Company are as follows:

                  a) Transfer pricing of international transactions with related
                     parties.

                     The Income Tax Ordinance was amended to include
                     provisions concerning transfer pricing between
                     related parties, where one of the parties is situated
                     abroad. The Company considers that the transfer
                     pricing policy adopted with foreign affiliates and
                     subsidiaries is economically fair and that it
                     complies with such regulations.

                  b) Employee stock incentive plans

                     The tax reform codified past practice and specified
                     three alternative tracks for taxing employee stock
                     option plans. Where a trustee arrangement is in
                     place, the employer can either claim an expense for
                     tax purposes while the employee will be fully taxed
                     up to the maximum marginal tax rate of 49% or the
                     Company can waive the tax expense deduction and the
                     employee will pay a reduced tax rate of 25% after
                     ending of a "trustee period" (pursuant to a more
                     recent amendment to Income Tax Ordinance effective
                     from January 1, 2006, twenty-months from the date of
                     the grant, and prior to 2006 grants, twenty four to
                     thirty six months from the date of the grant). Where
                     there is no trustee arrangement, the employee is
                     fully taxable and no expense deduction is allowed to
                     the Company. There are detailed provisions for
                     implementing these arrangements. The Company chose to
                     waive the tax expense deduction and the employees
                     will pay a reduced tax rate of 25%.

                                     F-288
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 15 - Taxes on Income (cont'd)

         A.       Tax programs under various Israeli tax laws: (cont'd)

                  c) Controlled foreign company (CFC)

                           The amendment to the law introduced Controlled
                           Foreign Company (CFC) provisions, which, in certain
                           circumstances, will lead to the Israeli company being
                           charged on passive income of foreign affiliates as if
                           it had received a dividend from such companies.

                  d)       The seven year limit for carrying forward of capital
                           losses has been removed with respect to capital
                           losses arising from 1996 and thereafter.

2.                In June 2004 and July 2005, the Knesset (the Israeli
                  Parliament) approved Amendments (and ancillary Temporary
                  Orders) to the Income Tax Ordinance (respectively "amendment
                  No. 140" and "Amendment No. 147", and together the
                  "Amendments").

                  The Amendments provide, inter alia, for a gradual reduction in
                  the statutory corporate tax rate as follows:

                                                                Corporate Tax
                  Tax Years                                        Rate
                  ---------                                     --------------

                  2001 through 2003                                    36%
                  2004                                                 35%
                  2005                                                 34%
                  2006                                                 31%
                  2007                                                 29%
                  2008                                                 27%
                  2009                                                 26%
                  2010 and thereafter                                  25%

                  Pursuant to the Amendments, capital gain tax is reduced to 25%
                  from Corporate tax rate, (except with respect to capital gains
                  from marketable securities which continue to be taxed at the
                  corporate tax rate until 2010), with transitional provisions
                  for assets acquired prior to January 1, 2003.

                  In addition, there was a change in the method of calculating
                  the tax on capital gains arising from the sale of depreciating
                  assets with effect from January 1, 2003, as defined in
                  Amendment No. 147.

                  The amendments also provide for changes in the methodology for
                  the set-off of losses from taxable income from different
                  sources.

                  Amendment No. 147 establishes a new entity within the Israel
                  Tax authority to make tax pre-ruling following an approach by
                  a corporation or other taxpayer. Notice of such pre-ruling
                  shall be in available to the public.

                  In addition, Amendment No. 147 imposing sanctions with regard
                  aggressive tax planning, pursuant to guidelines still to be
                  published as to what constitutes aggressive tax planning.

                  The current taxes for 2005 (other than an "approved
                  Enterprise" related income) and the deferred tax balances at
                  December 31, 2005 are calculated based on the new tax rates,
                  as prescribed in the Amendments.

                  The Company has examined the various provisions of the
                  Amendment and of its implications. In the opinion of
                  management, the financial effect of the said Amendment is
                  immaterial.

                                     F-289
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 15 - Taxes on Income (cont'd)

         A.       Tax programs under various Israeli tax laws: (cont'd)

         3.       Tax benefits under the Law for the Encouragement of Capital
                  Investments, 1959;

                  Pursuant to the Encouragement of Capital Investments Law -
                  1959 (The Law"), the Company is entitled to tax benefits
                  relating to investments in "Approved Enterprises" in
                  accordance with letters of approval received.

                  A major part of the production facilities of the Company and
                  its Israeli subsidiaries has been granted the status of an
                  "Approved Enterprise" under the Law. According to the Law, a
                  Company is entitled to an investment grant (up to 24% of
                  investment cost) and also to a tax benefit, which grants the
                  Company a reduced tax rate of 25% for a specific period
                  (Alternative A). The Company's "approved Enterprise" is
                  subject to zero tax rates under the "Alternative Benefit
                  Method" (Alternative B) and reduced tax rates (25% - subject
                  to examination of the level of foreign ownership), for
                  specified periods. All of the approved enterprises, which
                  currently entitle the Company to benefits, are under
                  Alternative B.

                  Benefits are attributed to an "Approved Enterprise" based on
                  the growth in turnover upon implementation of each plan.

                  The period of benefits in respect of most of the Company's
                  production facilities will terminate in the years 2006-2012.
                  Some of the company's current investments are made under new
                  approvals, or under a request of a new approval.

                  In the event of distribution of cash dividends from income
                  taxed at zero rate, a reduced tax rate in respect of the
                  amount distributed would have to be paid. As of December 31,
                  2005, the Company has an accumulated loss and therefore it
                  cannot distribute a cash dividend - see Note 12B. Effectively
                  such dividend distribution would be reduced by the amount of
                  the tax.

                  In March 2005, the Knesset approved a reform of the
                  Encouragement of Capital Investments Law - 1959. The primary
                  changes are as follows:

                  o    Companies that meet the criteria of the Alternative Path
                       of Tax benefit ("alternative B" as described above) will
                       receive those benefits without prior approval. In
                       addition, there will be no requirement to file reports
                       with the Investment Center. Audit will take place via the
                       Income Tax Authorities as part of the tax audits. Request
                       for pre-ruling is possible.

                  o    For any expansion of investment, a company is required to
                       invest within three years in production machinery and
                       equipment a certain percentage of its existing production
                       machinery and equipment.

                                     F-290
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 15 - Taxes on Income (cont'd)

         A.       Tax programs under various Israeli tax laws: (cont'd)

         4.       Measurement of results for tax purposes under the Income Tax
                  Law (Inflationary Adjustments), 1985.

                  Under this law, operating results for tax purposes are
                  measured in real terms, in accordance with the changes in the
                  Israeli CPI, or in the exchange rate of the dollar - for a
                  "Foreign Investors' Company", as defined by the Law for the
                  Encouragement of Capital Investments, 1959. The Company and
                  its subsidiaries elected to measure their operating results on
                  the basis of the changes in the Israeli CPI. As a result the
                  Company and its Israeli subsidiaries are entitled to deduct
                  from their taxable income an "equity preservation deduction"
                  (which partially compensates for the decrease in the value of
                  shareholders' equity resulting from the annual rise in the
                  Israel CPI).

         5.       Tax benefits under the Law for the Encouragement of Industry
                  (Taxation), 1969.

                  The Company is an "Industrial Company" as defined by this Law,
                  and as such is entitled, among other benefits, to claim
                  accelerated depreciation of machinery and equipment as
                  prescribed by regulations issued under the inflationary
                  adjustments tax law.

         6.       In 2002 the Company came to an arrangement with the income tax
                  authorities concerning tax returns filed by TTL through 1998.
                  Among other terms of the arrangement, the Company undertook to
                  pay a further $ 1.4 million in taxes if it does not produce
                  certain confirmations from government agencies in future
                  periods as defined in the arrangement.


         B.       Non-Israeli subsidiaries

         Non  Israeli subsidiaries are taxed based upon tax laws in their
         countries of residence.

                                     F-291
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 15 - Taxes on Income (cont'd)

         C.       Taxes on income from continuing operations

         Taxes on income included in the consolidated statements of operations
         are comprised as follows:
<TABLE>
<CAPTION>
                                                                        Year ended December 31
                                                            --------------------------------------------------
                                                                      2005              2004              2003
                                                            --------------    --------------    --------------
                                                            $ in thousands    $ in thousands    $ in thousands
                                                            --------------    --------------    --------------
<S>                                                                <C>                <C>               <C>
         Current taxes relating to -
          The Company and its Israeli subsidiaries                 1,672              1,436             1,402
          Foreign subsidiaries*                                    2,626                693            (6,704)
                                                            --------------    --------------    --------------
                                                                   4,298              2,129            (5,302)
                                                            --------------    --------------    --------------

         Deferred taxes relating to -
          The Company and its Israeli subsidiaries                  (774)                 -               559
          Foreign subsidiaries                                       (70)              (205)            6,884
                                                            --------------    --------------    --------------
                                                                    (844)              (205)            7,443
                                                            --------------    --------------    --------------

         Taxes on income                                           3,454              1,924             2,141
                                                            ==============    ==============    ==============

         (*)      In 2004 - including tax benefits of $ 758 thousand with respect to previous years.


         D.       Income from continuing operations before taxes on income


                                                                        Year ended December 31
                                                            --------------------------------------------------
                                                                      2005              2004              2003
                                                            --------------    --------------    --------------
                                                            $ in thousands    $ in thousands    $ in thousands
                                                            --------------    --------------    --------------

         The Company and its Israeli subsidiaries                 36,600            22,677           (31,395)
         Foreign subsidiaries                                     11,130            (3,005)           (6,929)
                                                            --------------    --------------    --------------

                                                                  47,730            19,672           (38,324)
                                                            ==============    ==============    ==============
</TABLE>

                                     F-292
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 15 - Taxes on Income (cont'd)

         E.   Reconciliation of the statutory tax expense (benefit) to actual
              tax expense

         A reconciliation of the statutory tax expense, assuming all income is
         taxed at the statutory rate (see A2 above) applicable to the income of
         companies in Israel, and the actual tax expense is as follows:
<TABLE>
<CAPTION>
                                                                        Year ended December 31
                                                            --------------------------------------------------
                                                                      2005              2004              2003
                                                            --------------    --------------    --------------
                                                            $ in thousands    $ in thousands    $ in thousands
                                                            --------------    --------------    --------------
<S>                                                                <C>                <C>              <C>
         Income from continuing operations
           as reported in the consolidated
           statements of operations                                47,730             19,672           (38,324)

         Tax rate                                                     34%                35%               36%
                                                            --------------    --------------    --------------

         Statutory income tax on the above amount                  16,228              6,885           (13,796)

         Foreign tax rate differential                                (91)                (7)           (1,519)

         Current income/ (losses) for which no deferred
          tax expense (benefit) has been recorded, net             (8,731)            (3,851)           10,160

         Tax benefits with respect to previous years                 (217)              (758)                -

         Effect of lower tax rates arising from
          "Approved Enterprise Status"                             (6,093)            (1,805)            2,652

         Increase in taxes resulting from
          permanent differences and non deductible
          expenses                                                  2,397              2,693             7,154

         Other*                                                       (39)            (1,233)           (2,510)
                                                            --------------    --------------    --------------

         Taxes on income                                            3,454              1,924             2,141
                                                            ==============    ==============    ==============
</TABLE>

         (*)    Including a difference between the financial carrying amounts
                of non monetary assets and liabilities and their tax basis
                attributable to the rate of change in Israeli Consumer Price
                Index (which serves as a basis for measurement for tax
                purposes) and the rate of change in the NIS/US dollar exchange
                rate, this in accordance with paragraph 9(f) of SFAS 109 (see
                A4 above).

                                     F-293
<PAGE>


                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 15 - Taxes on Income (cont'd)

         F.       Components of deferred income tax

         1.       As of December 31, 2005 and December 31, 2004, deferred income
                  tax assets and liabilities consists of future tax assets
                  (liabilities) attributable to the following:

                                                    December 31      December 31
                                                           2005             2004
                                                 --------------   --------------
                                                 $ in thousands   $ in thousands
                                                 --------------   --------------

                  Deferred tax assets:
                  Capital loss carryforward             36,940           36,781
                  Operating loss carryforward(a)       150,491          134,471
                  Vacation pay accruals,
                   severance pay fund, net,
                   and other accruals                    7,192           13,785
                  Property, plant and equipment          4,745            3,138
                  Other                                  4,976            4,577
                                                 --------------   --------------

                  Gross total deferred tax assets      204,344          193,252
                  Valuation allowance for
                    deferred tax assets(a)            (186,527)        (181,218)
                                                 --------------   --------------
                  Net deferred tax assets(a)            17,817           12,034
                                                 --------------   --------------
                  Deferred tax liabilities:
                  Software development costs
                     and other intangibles              (7,826)          (2,887)
                                                 --------------   --------------
                  Net deferred tax liabilities          (7,826)          (2,887)
                                                 --------------   --------------

                  Deferred income taxes, net(b)          9,991            9,147
                                                 ==============   ==============

                  (a)  In assessing the realizability of deferred tax assets,
                       management considers whether it is more likely than not
                       that some portion or all of the deferred tax assets will
                       not be realized. The ultimate realization of deferred tax
                       assets is dependent upon the generation of future taxable
                       income during the periods in which those temporary
                       differences become deductible and during which the
                       carryforwards are available. Management considers the
                       scheduled reversal of deferred tax liabilities, projected
                       future taxable income, and tax planning strategies in
                       making this assessment. Based upon the level of
                       historical taxable income and projections for future
                       taxable income over the periods in which the deferred tax
                       assets are deductible, management believes it is more
                       likely than not that the Company will realize the
                       benefits of these deductible differences, net of the
                       existing valuation allowances at December 31, 2005. The
                       amount of the deferred tax asset considered realizable,
                       however, could be reduced in the near term if estimates
                       of future taxable income during the carryforward period
                       are reduced. Based on this assessment, as of December 31,
                       2005, the Company determined that it is more likely than
                       not that $ 10 million of such net deferred tax assets
                       will be realized, therefore resulting in a valuation
                       allowance of $ 186 million. A valuation allowance in the
                       amount of $ 28.2 million was recognized for the deferred
                       tax asset for Laurel Networks' tax carryforwards at the
                       acquisition date. The tax benefits for this item that
                       would be first recognized (that is, by elimination of
                       that valuation allowance) in financial statements after
                       the acquisition date would be applied to reduce the
                       goodwill related to the acquisition. (See also Note 19B).

                                     F-294
<PAGE>


                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 15 - Taxes on Income (cont'd)

         F.       Components of deferred income tax (cont'd)

         1.       (a)      (cont'd)

                           The valuation allowance for deferred tax assets as of
                           January 1, 2005, 2004 and 2003 was $ 181 million, $
                           101 million and $ 94 million, respectively. The net
                           change in the total valuation allowance for the year
                           ended December 31, 2005, 2004 and 2003 was an
                           increase of $ 6 million, $ 80 million and $ 7
                           million, respectively.

                           If changes occur in the assumptions underlying the
                           Company's tax planning strategies or in the
                           scheduling of the reversal of the Company's deferred
                           tax liabilities or projections of future taxable
                           income, the valuation allowance may need to be
                           adjusted in the future.

                           The Company has not recognized a deferred tax
                           liability of approximately $ 2.1 million for the
                           undistributed earnings of its foreign operations that
                           arose in 2005 and prior years because the Company
                           currently does not expect those unmerited earnings to
                           reverse and become taxable to the Company in the
                           foreseeable future. A deferred tax liability will be
                           recognized in the event the Company is no longer able
                           to demonstrate that it plans to permanently reinvest
                           undistributed earnings. As of December 31, 2005, the
                           undistributed earnings of these subsidiaries were
                           approximately $ 15.4 million.

                  (b)      Long-term deferred taxes in the amount of $ 9,893
                           thousand ( 2004 - $ 9,144 thousand) are included in
                           the other assets item of the balance sheet and
                           short-term deferred taxes in the amount of $ 98
                           thousands are included in other receivables.


         2.       As of December 31, 2005, the Company and its subsidiaries had,
                  for tax purposes, operating loss carryforwards, capital loss
                  carryforwards and general business operating loss carryforward
                  of $ 656 million, $ 147.7 and $ 3.7 million, respectively.

                  The Company and its subsidiaries had no minimum tax credit
                  carryover. Approximately $168 million of the federal net
                  operating loss carryforwards will begin to expire over the
                  period of 2012 through 2024. The remainder of the operating
                  loss carryforwards have no expiration period. Substantially,
                  all of the capital losses have an unlimited carryforward
                  period.


         G.       Tax assessment

         Final tax assessments have been received by some of the Israeli
         companies through the 2000 tax year.

                                     F-295
<PAGE>


                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------



Note 16 - Related Party Transactions

         Related parties are comprised of principal shareholders (10% and over
         of the Company's share capital) and their subsidiaries and affiliates
         as well as affiliates of the Company. All related party transactions
         were at market rates.

         Transactions with related parties are mainly as follows:

         a.   Sales of certain of the Company's products and expenses related to
              such sales;

         b.   Insurance, management fees and other services;


         A.   Balances due from or to related parties:

                                                  December 31       December 31
                                                         2005              2004
                                               --------------    --------------
                                               $ in thousands    $ in thousands
                                               --------------    --------------

         Assets:
         Trade receivables, net                       13,544            18,362
         Other receivables                             1,025               236
         Long-term receivables, net                       88            81,112

         Liabilities:
         Trade payables                                1,954             1,383
         Other payables                                  486                59


         B.   Income from, and expenses to, related parties:
<TABLE>
<CAPTION>
                                                             Year ended December 31
                                                 --------------------------------------------------
                                                           2005              2004              2003
                                                 --------------    --------------    --------------
                                                 $ in thousands    $ in thousands    $ in thousands
                                                 --------------    --------------    --------------
<S>                                                     <C>               <C>               <C>
         Sales                                          23,411            25,610            28,473
         Cost of revenues                                1,564             3,287             8,751
         Selling and marketing expenses                    942             1,028             2,779
         General and administrative expenses             1,682               955             8,098
         Financial expenses                                 92                68                15
         Financial income                                   65                47                46
         Other expenses                                     75                 -             3,400
</TABLE>

                                     F-296
<PAGE>


                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 17 - Supplementary Financial Statement Information

         Balance sheet:

         A.       Cash and cash equivalents

         Including deposits of $1,540 thousand at December 31, 2005 (December
         31, 2004 - $55,039 thousand).


         B. Short-term investments

         Including restricted balances of $1,035 thousand at December 31, 2004.


         C. Trade receivables

         Net of provision for doubtful accounts of $ 18,471 thousand at December
         31, 2005 (December 31, 2004 - $ 25,387 thousand).

         The activity in the allowance for doubtful accounts for the years ended
         December 31, 2005 and 2004 follows:
<TABLE>
<CAPTION>
                                                                      December 31        December 31       December 31
                                                                             2005               2004              2003
                                                                   --------------     --------------    --------------
                                                                   $ in thousands     $ in thousands    $ in thousands
                                                                   --------------     --------------    --------------
<S>                                                                       <C>                <C>               <C>
         Allowance for doubtful accounts at beginning of year             25,387             29,775            34,764
         Additions charged to bad and doubtful debt expense                3,044              3,798            10,378
         Write-down charged against the allowance                         (7,466)            (5,588)             (968)
         Recoveries of amounts previously charged off                     (1,870)            (2,598)           (1,270)
         Reclassified to discontinued operations                               -                  -           (13,129)
                                                                   --------------     --------------    --------------

         Allowance for doubtful accounts at end of year*                  19,095             25,387            29,775
                                                                   ==============     ==============    ==============
</TABLE>


         As to factoring of certain trade receivables, see Note 17P.

         * Include allowance for doubtful accounts for long-term receivable.


                                     F-297
<PAGE>


                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 17 - Supplementary Financial Statement Information (cont'd)

         D.       Other receivables
                                                   December 31       December 31
                                                          2005              2004
                                                --------------    --------------
                                                $ in thousands    $ in thousands
                                                --------------    --------------

         Employees                                      1,053               918
         Chief Scientist                                1,524             3,031
         Tax Authorities                                2,482               448
         Deferred income tax                               98               114
         Accrued income and interest                    3,490             2,341
         Advances to suppliers                          1,579             4,228
         Related parties                                1,025               236
         Fair value of derivatives                      4,798             6,265
         Others                                         8,702             5,860
                                                --------------    --------------
                                                       24,751            23,441
                                                ==============    ==============

         E.       Current maturities of long-term loans

                                                  December 31       December 31
                                                          2005              2004
                                                --------------    --------------
                                                $ in thousands    $ in thousands
                                                --------------    --------------
         Current maturities of long term loans             -            30,000
                                                --------------    --------------
                                                           -            30,000
                                                ==============    ==============

         The loans carried an annual interest rate of LIBOR plus 2% (the LIBOR
         interest rate at December 31, 2004 was 1.2%).

         F.       Other payables and accrued liabilities

         Consist of the following:
                                                   December 31       December 31
                                                          2005              2004
                                                --------------    --------------
                                                $ in thousands    $ in thousands
                                                --------------    --------------

         Employees and social benefits                 22,529            28,023
         Chief Scientist                                7,380             2,919
         Tax authorities                               16,706            11,913
         Commissions payable                           15,044            12,234
         Advances from customers                       11,207            37,202
         Warranty accrual (*)                           5,435             6,007
         Accrued expenses                              39,881            35,182
         Fair value of derivatives                      1,222            13,174
         Other payables                                 1,134             2,994
                                                --------------    --------------
                                                      120,538           149,648
                                                ==============    ==============

                                     F-298
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 17 - Supplementary Financial Statement Information (cont'd)

         F.       Other payables and accrued liabilities (cont'd)
<TABLE>
<CAPTION>

                                                                  December 31        December 31       December 31
                                                                         2005               2004              2003
                                                               --------------     --------------    --------------
                                                               $ in thousands     $ in thousands    $ in thousands
                                                               --------------     --------------    --------------
<S>                                                                  <C>                <C>                  <C>
          (*) Balance at the beginning of the year
                  Warranty expenses                                  6,007              6,328                9,546
                  Change in accrual                                 (3,834)            (3,123)              (5,104)
                  Reclassified to discontinued operations            3,262              2,802                2,866
                  Balance at the end of the year                         -                   -                (980)
                                                               --------------     --------------    --------------

                                                                     5,435              6,007                6,328
                                                               ==============     ==============    ==============
</TABLE>


         G.       Disclosures about segments and related information

         1.       Segment Activities Disclosure:

         Segment information is presented in accordance with SFAS 131,
         "Disclosures about Segments of an Enterprise and Related Information."
         This standard is based on a management approach, which requires
         segmentation based upon the Company's internal organization and
         internal financial reports to management. The Company's internal
         financial reporting systems present various data for management to run
         the business, including statement of operations.

         The Company's segments are as follows:

         Broadband Access Division (formerly - Inovia)
         ---------------------------------------------

         The broadband access division focuses on the development and production
         of access products for communications systems, including broadband
         solutions which make it possible to transfer multi-media content, as
         well as certain narrowband solutions. These products are designed to
         allow telecom operators to offer their retail customers broadband
         access for data applications over telephone (copper) lines, primarily
         using DSL technology.

         Optical Networks Division (formerly - Lightscape and Enavis)
         ------------------------------------------------------------

         The division is a supplier of intelligent optical networking solutions
         for the metro and regional optical markets. It provides fully managed
         and scalable optical networks allowing "just on time" seamless coupling
         of network growth to the changing service needs of the operator, while
         delivering a variety of services including data, voice and video by
         means of optic DWDM, SDH/Sonet or Gigabit, Ethernet or other data
         transmission interfaces.

         The products are based on advanced synchronic digital hierarchy and
         optical technologies. Its lead product is the XDM, an optical dubbing
         system based on a new technique of band flattening which makes
         extensive use of state-of-the-art technology. The XDM enables the user
         to choose the initial platform for simple, low-speed, applications and,
         at a later stage, to expand them as required, simply, efficiently and
         at low cost

                                     F-299
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 17 - Supplementary Financial Statement Information (cont'd)

         G.   Disclosures about segments and related information (cont'd)

         1.   Segment Activities Disclosure: (cont'd)

         In addition, the division develops, markets and supplies modular
         solutions for broadband management on digital cross connect platforms
         for long haul applications, enabling operators to provide services in a
         variety of protocols and technologies, thus profiting from the width of
         the band laid in the optical infrastructure.

         Data Networking Division (formerly - Laurel Networks)
         -----------------------------------------------------

         The division is a provider of Next-Generation IP/MPLS Multi Service
         Edge Routes that combine full-feathered data service support and
         complete Internet routing in carrier-class IP-based platforms. The
         division's Edge Routers enable carriers to offer any type of data
         service (including MPLS Layer 2, IP VPNs, Internet access, ATM, frame
         relay and Ethernet and broadband) over a range of interface speeds and
         access networks. To further meet the evolving service delivery needs of
         carriers, service types and speeds are software-configurable to support
         changing customer requirements.

         Other
         -----

         The Other segment contains mainly the Company's manufacturing and
         service units; head office and management services; general and project
         management services to outside customers and others; and other
         activities which are not identified with any of the operational
         segments.

         The Company's manufacturing and service units serve as manufacturing
         and service sub-contractors and carry out activities primarily for the
         above divisions and for Veraz. The cost of manufacturing is included in
         the cost of revenues of each of the divisions, as applicable.

         2.   Operational segments statement operation disclosure:

         The following financial information is the information that management
         uses for analyzing the results of the operating segments.
<TABLE>
<CAPTION>
                                                         Year ended December 31, 2005
                                ------------------------------------------------------------------------------------
                                    Optical         Broadband              *Data             Other      Consolidated
                                   Networks            Access         Networking
                                $ thousands       $ thousands        $ thousands       $ thousands       $ thousands
                                -----------       -----------        -----------       -----------       -----------

<S>                                <C>               <C>                  <C>              <C>              <C>
         Revenues                  330,684           262,453              4,289            32,492           629,918

         Operating
          expenses (**)            290,977           237,990             23,040            43,765           595,772
         Recovery of
          doubtful debts                 -                 -                  -           (10,356)          (10,356)
         Impairment of loans             -                 -                  -             3,000             3,000
         Acquired in
          process research
          and development                -                 -                890                 -               890
                                -----------       -----------        -----------       -----------       -----------
         Operating income
          (loss)                    39,707            24,463            (19,641)           (3,917)           40,612
                                ===========       ===========        ===========       ===========       ===========

         (*)    From the closing date (See Note 19B).
         (**)   Includes cost of sales, research and development costs, selling and marketing expenses, general
                and administrative expenses and amortization of acquisition related intangible assets.
</TABLE>

                                     F-300
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------



Note 17 - Supplementary Financial Statement Information (cont'd)

         G.   Disclosures about segments and related information (cont'd)

         2.   Operational segments statement operation disclosure: (cont'd)
<TABLE>
<CAPTION>
                                                            Year ended December 31, 2004
                                          --------------------------------------------------------------------
                                              Optical          Broadband             Other        Consolidated
                                             Networks             Access
                                          -----------        -----------       -----------         -----------
                                          $ thousands        $ thousands       $ thousands         $ thousands
                                          -----------        -----------       -----------         -----------
<S>                                           <C>              <C>                 <C>                <C>

         Revenues                             254,058          212,939             29,715             496,712
                                          ===========        ===========       ==========-         -==========

         Operating expenses (*)               250,964          188,336             40,455             479,755
         Restructuring expenses                     -                -              2,585               2,585
                                          -----------        -----------       -----------         -----------
         Operating income (loss)                3,094           24,603            (13,325)             14,372
                                          ===========        ===========       ==========-         ===========


                                                            Year ended December 31, 2003
                                          --------------------------------------------------------------------
                                              Optical          Broadband             Other        Consolidated
                                             Networks             Access
                                          -----------        -----------       -----------         -----------
                                          $ thousands        $ thousands       $ thousands         $ thousands
                                          -----------        -----------       -----------         -----------

         Revenues                            177,706           182,290             32,571           392,567
                                          ===========        ===========       ==========-         ===========

         Operating expenses(*)               207,659           165,862             42,190           415,711
         Impairment of assets                      -                 -                667               667
         Restructuring expenses                7,243               478                673             8,394
                                          -----------        -----------       -----------         -----------

         Operating income (loss)             (37,196)           15,950            (10,959)          (32,205)
                                          ===========        ===========       ==========-         ===========

         (*)   Includes cost of sales, research and development costs, selling and marketing
               expenses, general and administrative expenses and amortization of acquisition related
               intangible assets.


         3.    The following financial information identifies the assets  allocated to the segments:


                                                            Year ended December 31, 2005
                                     ---------------------------------------------------------------------------------
                                         Optical          Broadband        Broadband            Other     Consolidated
                                        Networks             Access           Access
                                     -----------        -----------      -----------      -----------      -----------
                                     $ thousands        $ thousands      $ thousands      $ thousands      $ thousands
                                     -----------        -----------      -----------      -----------      -----------

         Assets**                       207,392           112,274            79,799           128,764        528,229
         Unallocated assets                                                                                  320,506
                                                                                                           -----------

         Total consolidated
          Assets                                                                                             848,735
                                                                                                           ===========
         Depreciation and
          amortization                   18,351             6,137             3,384             8,793         36,665
         Capital investments             20,468             5,901            73,473            12,549        112,391


         (**)  The assets include: trade receivables (short and long-term) inventories, property,
               plant and equipment, software development costs, goodwill and other intangibles.
</TABLE>

                                               F-301
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 17 - Supplementary Financial Statement Information (cont'd)

         G.   Disclosures about segments and related information (cont'd)

         3.   The following financial information identifies the assets
              allocated  to the segments: (cont'd)
<TABLE>
<CAPTION>

                                                           As of December 31, 2004
                                         ---------------------------------------------------------------
                                             Optical        Broadband             Other     Consolidated
                                            Networks           Access
                                         -----------      -----------       -----------      -----------
                                         $ thousands      $ thousands       $ thousands      $ thousands
                                         -----------      -----------       -----------      -----------
<S>                                          <C>            <C>                <C>              <C>
         Assets*                             241,291        131,597            170,018          542,906
         Unallocated assets                                                                     311,903
         Total consolidated assets                                                              854,809

         Depreciation and amortization        19,910         10,146              5,300           35,356
         Capital investments                  15,271          6,392             13,425           35,088


         (*)   The assets include: trade receivables (short and long-term), inventories, property,
               plant and equipment, software development costs, goodwill and other intangibles.
</TABLE>


         4.   Sales to significant customers

         The following table summarizes the percentage of sales to significant
         customers group (when they exceed 10 percent of total revenue for
         the year):

                                                Year ended December
                                     ------------------------------------------
                                         2005             2004          2003
                                     ----------       ----------     ----------

         Customer 1                       14%              13%           19%
         Customer 2                       13%              14%           11%


         5.   Information on sales by geographic distribution

                                        Year ended December 31
                          ----------------------------------------------------
                                    2005               2004               2003
                          --------------     --------------     --------------
                          $ in thousands     $ in thousands     $ in thousands
                          --------------     --------------     --------------

         North America           18,391             21,894            21,627
         Europe                 383,751            291,460           232,136
         Asia Pacific
           and Australia        132,580             99,436            64,731
         Israel                  84,149             68,742            61,818
         Others                  11,047             15,180            12,255
                          --------------     --------------     --------------

                                629,918            496,712           392,567
                          ==============     ==============     ==============


                                     F-302
<PAGE>
<TABLE>
<CAPTION>
                                                                                  ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------------------------------------------


Note 17 - Supplementary Financial Statement Information (cont'd)

         H.       Cost of revenues

                                                                             Year ended December 31
                                                               ----------------------------------------------------
                                                                         2005               2004               2003
                                                               --------------     --------------     --------------
                                                               $ in thousands     $ in thousands     $ in thousands
                                                               --------------     --------------     --------------
<S>                                                                  <C>                <C>               <C>
         Finished products consumed                                  325,317            267,981           197,906
         Other manufacturing and other service costs                  31,225             25,972            43,024
                                                               --------------     --------------     --------------

         Cost of revenues                                            356,542            293,953           240,930
         Royalties - mainly to the government of Israel
           (see Note 11C(1)                                           11,237              7,018          *(1,632)
                                                               --------------     --------------     --------------

                                                                     367,779            300,971           239,298
                                                               ==============     ==============    ===============

         (*)   In 2003, the Company reached an arrangement with the Chief Scientist according to
               which it would be credited with the amounts of the excess royalties that were paid in
               respect of the sale of certain products in prior years. Such credits amount to $ 6.3
               million.


         I.       Research and Development costs, net
                                                                             Year ended December 31
                                                               ----------------------------------------------------
                                                                         2005               2004               2003
                                                               --------------     --------------     --------------
                                                               $ in thousands     $ in thousands     $ in thousands
                                                               --------------     --------------     --------------
         Expenses incurred                                            93,080             72,893            76,557
         Less - grant participations (see Note 11C)                    5,791              8,023            14,516
                                                               --------------     --------------     --------------

                                                                      87,289             64,870            62,041
                                                               ==============     ==============    ===============
</TABLE>

                                     F-303
<PAGE>
<TABLE>
<CAPTION>
                                                                                  ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------------------------------------------


Note 17 - Supplementary Financial Statement Information (cont'd)

          J.       Selling and marketing expenses

                                                                             Year ended December 31
                                                               ----------------------------------------------------
                                                                         2005               2004               2003
                                                               --------------     --------------     --------------
                                                               $ in thousands     $ in thousands     $ in thousands
                                                               --------------     --------------     --------------
<S>                                                                  <C>                <C>               <C>
         Salaries and employee benefits                               44,224            37,387            35,033
         Agents' commissions                                          19,826            13,457            10,903
         Advertising and exhibitions                                   2,791             2,699             2,195
         Overseas travel                                               5,370             5,047             4,469
         Other                                                        23,615            19,833            21,043
                                                              --------------     --------------     --------------
                                                                      95,826            78,423            73,643
                                                              ==============     ==============    ===============


         K.       General and administrative expenses

                                                                             Year ended December 31
                                                               ----------------------------------------------------
                                                                         2005               2004               2003
                                                               --------------     --------------     --------------
                                                               $ in thousands     $ in thousands     $ in thousands
                                                               --------------     --------------     --------------
         Salaries and employee benefits                               20,469            19,225            16,949
         Rent and maintenance of premises                              2,469             1,065             1,817
         Bad and doubtful debt expenses                                1,174             1,200          (1)9,108
         Other                                                        17,864            14,001            11,082
                                                              --------------     --------------     --------------
                                                                      41,976            35,491            38,956
                                                              ==============     ==============    ===============
         (1) See also Note 4C(2).


         L.       Financial income/expenses, net
                                                                             Year ended December 31
                                                               ----------------------------------------------------
                                                                         2005               2004               2003
                                                               --------------     --------------     --------------
                                                               $ in thousands     $ in thousands     $ in thousands
                                                               --------------     --------------     --------------
         Financial expenses:
         Interest on loans from banks                                    149             1,518             2,449
         Bank charges                                                    922             2,117             1,529
         Loss from marketable securities                                   -                 -               111
         Exchange rate differences (see Note 1A(7)) and other          2,585             2,927             4,556
                                                              --------------     --------------     --------------
                                                                       3,656             6,562             8,645
                                                              ==============     ==============     ==============
         Financial income:
         Interest mainly on bank deposits and receivables              4,126             3,038             6,397
         Gain from marketable securities                               1,648             1,482                 -
         Interest from marketable securities                           1,919             1,877               881
         Exchange rate differences (see Note 1A(7)) and other          1,164             2,772               624
                                                              --------------     --------------     --------------
                                                                       8,857             9,169             7,902
                                                              ==============     ==============     ==============
</TABLE>

                                               F-304
<PAGE>
<TABLE>
<CAPTION>
                                                                                  ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------------------------------------------


Note 17 - Supplementary Financial Statement Information (cont'd)

         M.    Other income (expenses), net

                                                                             Year ended December 31
                                                               ----------------------------------------------------
                                                                         2005               2004               2003
                                                               --------------     --------------     --------------
                                                               $ in thousands     $ in thousands     $ in thousands
                                                               --------------     --------------     --------------
<S>                                                                  <C>                <C>               <C>

         Gain from sale of an investment                               2,350                  -                 -
         Gain (loss) from sale of property
            and equipment, net (1)                                     2,398               735              (167)
         Provision for the payment of indirect duty                     (882)           (1,600)                -
         Additional costs associated with sales
          of former operations                                        (1,513)                -                 -
         Loss from realization of investments and
           allowance for impairment of investments (2)                     -            (2,469)           (1,587)
         Realization of gain on available for
           sales securities                                                -             1,487                 -
         Gain from cancellation of a provision to the Israeli
          Comptroller of Restrictive Trade Practices
          (see Note 11A(5))                                                -             6,000                 -
         Loss from impairment of amounts
           funded for severance pay                                        -            (1,000)                -
         Decline in value of convertible notes (see Note 5B)               -                 -            (3,400)
         Other                                                          (436)             (460)             (222)
                                                               --------------     --------------     --------------

         Total other income (expenses), net                            1,917             2,693            (5,376)
                                                               ==============     ==============     ==============

         (1)   2005 includes gain of $ 1.8 million from sale of a building.

         (2)   Arising from a permanent impairment in the value of investments. The write down is
               based, among other factors, on stock exchange prices, the operations of the investees
               and a series of other relevant considerations.


         N.    Supplementary Statement of Operations information

                                                                             Year ended December 31
                                                               ----------------------------------------------------
                                                                         2005               2004               2003
                                                               --------------     --------------     --------------
                                                               $ in thousands     $ in thousands     $ in thousands
                                                               --------------     --------------     --------------
         Expenses:
         Maintenance and repairs                                       6,445             6,034             9,963
         Depreciation of property, plant and equipment                23,313            22,351            23,830
         Taxes (other than income taxes)                               3,209             1,521             2,171
         Rent                                                         13,899            10,820            11,507
         Advertising costs                                             4,132             3,259             1,980
         Amortization of capitalized software                         10,450            13,005            15,157
</TABLE>

                                               F-305
<PAGE>
<TABLE>
<CAPTION>
                                                                                  ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------------------------------------------


Note 17 - Supplementary Financial Statement Information (cont'd)

         O.       Earnings (loss) per ordinary share ("EPS")

         Following are the details of the calculation of basic EPS:


                                                        2005                                             2004
                                    ----------------------------------------------  ----------------------------------------------
                                        Net income       Number of    Earnings per        Net loss       Number of       Loss per
                                                          Ordinary        Ordinary                        Ordinary       Ordinary
                                    --------------          shares           share  --------------          shares        share t
                                                      ------------    ------------                    ------------    ------------
                                    $ in thousands    in thousands               $  $ in thousands    in thousands              $
                                    --------------    ------------    ------------  --------------    ------------    ------------

<S>                                        <C>            <C>                 <C>          <C>            <C>               <C>
         Income (loss) from
            continuing operations          39,864         110,322             0.36         14,056         108,575           0.13
                                    ==============    ============    ============  ==============    ============    ============

         Discontinued operations                -               -                -         (3,903)        108,575          (0.04)
                                    ==============    ============    ============  ==============    ============    ============

         Net income (loss)                 39,864         110,322             0.36         10,153         108,575           0.09
                                    ==============    ============    ============  ==============    ============    ============


[TABLE CONTINEUD]
<CAPTION>

                                                           2003
                                         ----------------------------------------------
                                               Net loss       Number of        Loss per
                                                               Ordinary        Ordinary
                                         --------------          shares           share
                                                           ------------       ---------
                                         $ in thousands    in thousands               $
                                         --------------    ------------       ---------

<S>                                            <C>             <C>               <C>
         Income (loss) from
            continuing operations              (44,723)        107,831           (0.41)
                                         ==============    ============       =========

         Discontinued operations               (26,317)        107,831           (0.24)
                                         ==============    ============       =========

         Net income (loss)                     (71,040)        107,831           (0.65)
                                         ==============    ============       =========

</TABLE>

                                               F-306
<PAGE>
<TABLE>
<CAPTION>
                                                                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
---------------------------------------------------------------------------------------------------------------------------------


Note 17 - Supplementary Financial Statement Information (cont'd)

         O.       Earnings (loss) per ordinary share ("EPS") (cont'd)

         Following are the details of the calculation of diluted EPS:


                                                        2005                                             2004
                                    ----------------------------------------------  ----------------------------------------------
                                        Net income       Number of    Earnings per        Net loss       Number of       Loss per
                                                          Ordinary        Ordinary                        Ordinary       Ordinary
                                    --------------          shares           share  --------------          shares        share t
                                                      ------------    ------------                    ------------    ------------
                                    $ in thousands    in thousands               $  $ in thousands    in thousands              $
                                    --------------    ------------    ------------  --------------    ------------    ------------
<S>                                         <C>            <C>                <C>           <C>            <C>             <C>

        Income (loss) from
        continuing operations,
        used for basic
        EPS calculation                     39,864         110,322           0.36          14,056         108,575          0.13

        The effect of dilutive
        stock option plans:
        Share incentive (stock
        options and
        restricted shares)                       -           7,736          (0.02)              -           8,558         (0.01)
                                    --------------    ------------    ------------  --------------    ------------    ------------
        Income (loss) from
        continuing operations               39,864         118,058           0.34          14,056         117,133          0.12
                                    --------------    ------------    ------------  --------------    ------------    ------------


        Loss from discontinued
        operations used
        for basic EPS calculation                -               -              -          (3,903)        108,575         (0.04)
        The effect of dilutive
        stock option plans:
        Share incentive (stock
        options and
        restricted shares)                       -               -              -               -           8,558          0.01

                                    --------------    ------------    ------------  --------------    ------------    ------------

                                                 -               -              -          (3,903)        117,133         (0.03)
                                    --------------    ------------    ------------  --------------    ------------    ------------


        Net income (loss)                   39,864         118,058           0.34          10,153         117,133          0.09
                                    ==============    ============    ============  ==============    ============    ============


[TABLE CONTINEUD]
<CAPTION>

                                                           2003
                                         ----------------------------------------------
                                               Net loss       Number of        Loss per
                                                               Ordinary        Ordinary
                                         --------------          shares           share
                                                           ------------     -----------
                                         $ in thousands    in thousands               $
                                         --------------    ------------     -----------
<S>                                            <C>             <C>               <C>

       Income (loss) from
        continuing operations,
        used for basic
        EPS calculation                        (44,723)        107,831           (0.41)

        The effect of dilutive
        stock option plans:
        Share incentive (stock
        options and
        restricted shares)                           -               -               -
                                         --------------    ------------     -----------

        Income (loss) from
        continuing operations                  (44,723)        107,831           (0.41)
                                         --------------    ------------     -----------


        Loss from discontinued
        operations used
        for basic EPS calculation              (26,317)        107,831           (0.24)
        The effect of dilutive
        stock option plans:
        Share incentive (stock
        options and
        restricted shares)                           -               -               -
                                         --------------    ------------     -----------

                                               (26,317)        107,831           (0.24)
                                         --------------    ------------     -----------


         Net income (loss)                    (71,040)         107,831           (0.65)
                                         ==============    ============     ===========
</TABLE>


                                      F-307
<PAGE>


                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------



Note 17 - Supplementary Financial Statement Information (cont'd)

         P.   Factoring of financial assets

         The Company entered into accounts receivable factoring agreements with
         a number of financial institutions ("banks"). Under the terms of the
         agreements, the Company has the option to factor receivables, with the
         banks on a non-recourse basis, provided that the banks approve the
         receivables in advance. In some cases, the Company continues to be
         obligated in the event of commercial disputes, (such as product
         defects) which are not covered under the credit insurance policy,
         unrelated to the credit worthiness of the customer. The Company
         accounts for the factoring of its financial assets in accordance with
         the provisions of SFAS No. 140, and accordingly in the past, there were
         no cases in which the Company had to reimburse the banks for accounts
         receivables following business disputes. The Company does not expect
         any reimbursements to take place in the foreseeable future.

         The agreements call for factoring fees on invoices or promissory notes
         factored with the banks, as follows: USD and EUR transactions - in most
         cases, LIBOR for the relevant period on the basis of the semi-annual
         discount to yield plus a margin of 0.96% per annum on average.

         As of December 31, 2005, trade receivables amounting to $ 9,480
         thousand (December 31, 2004 - $ 31,698 thousand) were factored.


Note 18 - Recently Enacted Accounting Standards

         A.   In December 2004, the FASB issued SFAS No. 123 (Revision 2004),
              "Share-Based Payment", , that addresses the accounting for
              share-based payment transactions in which employee services are
              received in exchange for either equity instruments of a company,
              liabilities that are based on the fair value of a company's
              equity instruments or that may be settled by the issuance of such
              equity instruments. SFAS No. 123R eliminates the ability to
              account for share-based compensation transactions using the
              intrinsic value method as prescribed in APB Opinion No. 25,
              "Accounting for Stock Issued to Employees". Instead, SFAS No.
              123R requires that such transactions be accounted for using a
              fair-value-based method and that compensation expense be
              recognized in the statement of operations rather than disclosing
              the pro forma impact of the stock based compensation, as the
              Company currently discloses in Note 1R.

              SFAS No. 123R provides two alternative adoption methods. The first
              method is a modified prospective transition method whereby a
              company would recognize share-based employee costs from the
              beginning of the fiscal period in which the recognition
              provisions are first applied as if the fair-value-based
              accounting method had been used to account for all employee
              awards granted, modified, or settled after the effective date and
              to any awards that were not fully vested as of the effective
              date. Measurement and attribution of compensation cost for awards
              that are unvested as of the effective date of SFAS No. 123R would
              be based on the same estimate of the grant-date fair value and
              the same attribution method used previously under SFAS No.123,
              "Accounting for Stock-Based Compensation" (SFAS No.123). The
              second adoption method is a modified retrospective transition
              method whereby a company would recognize in its statement of
              operations employee compensation cost for periods presented prior
              to the adoption of SFAS No.123R in accordance with the original
              provisions of SFAS No. 123; that is, an entity would recognize
              employee compensation expenses in the amounts previously reported
              in the pro forma disclosures provided in accordance with SFAS No.
              123.

                                     F-308
<PAGE>


                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 18 - Recently Enacted Accounting Standards (cont'd)

              The provisions of SFAS No, 123R are effective for annual periods
              beginning after June 15, 2005. This Standard will be effective for
              the Company as of January 1, 2006. The Company plans to adopt SFAS
              No. 123R using the modified prospective method. The adoption of
              SFAS No. 123R's fair value method will have a significant impact
              on the Company's results of operations, although it will have no
              impact on the Company's overall financial position and cash flows.
              The Company expects stock-based compensation expense under SFAS
              No. 123R, related to stock-based awards issued through fiscal
              2005, to be approximately $ 9.9 million, $ 5.2 million, $ 2.1
              million and $ 0.7 million in fiscal 2006, 2007, 2008 and 2009,
              respectively. In addition, the Company expects to grant additional
              stock-based awards in future years, which will result in
              additional stock-based compensation expense.

              In March 2005, the SEC released SAB No. 107, "Share-Based Payment"
              (SAB 107). SAB 107 expresses views of the SEC staff regarding the
              application of SFAS No.123R. Among other things, SAB 107 provides
              interpretive guidance related to the interaction between SFAS
              No.123R and certain SEC rules and regulations, as well as the
              staff's view regarding the valuation of share-based payment
              arrangements for public companies. The company will follow the
              interpretive guidance set forth in SAB 107 during the adoption of
              SFAS 123R.

         B.   In March 2004, the EITF reached a consensus on Issue No. 03-01,
              "The Meaning of Other-Than-Temporary Impairment and Its
              Application to Certain Investments" ("EITF 03-01"). EITF 03-01
              provides guidance on other-than-temporary impairment models for
              marketable debt and equity securities accounted for under SFAS No.
              115, "Accounting for Certain Investments in Debt and Equity
              Securities," and non-marketable equity securities accounted for
              under the cost method. The EITF developed a basic three-step model
              to evaluate whether an investment is other-than-temporarily
              impaired. The FASB issued proposed FSP EITF 03-1-a in September
              2004, which delayed the effective date of the recognition and
              measurement provisions of EITF 03-01. On November 2005, the FASB
              issued FSP FAS 115-1 and 124-1 ("FSP") which nullifies the
              guidance in EITF 03-1 for determining whether impairment is
              other-than-temporary. However, it carries forward many of the
              provision of EITF 03-1. The guidance of the FSP is effective to
              reporting periods beginning after December 15, 2005. The Company
              does not expect the adoption of the FSP to have a material impact
              on its financial position and results of operations.

         C.   In November 2004, the FASB issued SFAS No. 151, "Inventory Costs -
              an amendment of Accounting Research Bulletin No. 43, Chapter 4".
              The amendments made by SFAS No. 151 clarify that abnormal amounts
              of idle facility expense, freight, handling costs and wasted
              materials (spoilage) should be recognized as current-period
              charges and require the allocation of fixed production overheads
              to inventory based on the normal capacity of the production
              facilities. The guidance is effective for inventory costs incurred
              during fiscal years beginning after June 15, 2005. The company
              does not expect the adoption of SFAS No. 151 to have a material
              impact on its financial statements.

                                     F-309
<PAGE>


                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 18 - Recently Enacted Accounting Standards (cont'd)

         D.   In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non
              monetary Assets - an amendment of Accounting Principles Bulletin
              (APB) Opinion No. 29, Accounting for No monetary Transactions".
              The guidance in APB Opinion No. 29 (Opinion 29) is based on the
              principle that exchanges of no monetary assets should be measured
              based on the fair values of the assets exchanged. The guidance in
              Opinion 29, however, included certain exceptions to that
              principle. SFAS No. 153 amends Opinion 29 to eliminate the
              exception for no monetary assets exchanges of similar productive
              assets and replaces it with a general exception for exchanges of
              no monetary assets that do not have commercial substance. A no
              monetary exchange has commercial substance if the future cash
              flows of the entity are expected to change significantly as a
              result of the exchange. SFAS No. 153 is effective for fiscal
              periods beginning after June 15, 2005 and shall be applied
              prospectively. The adoption of this statement is not expected to
              have a material impact on the company's financial position and
              results of operations.


         E.   In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
              Errors Corrections". SFAS No. 154 replaces APB Opinion No. 20,
              "Accounting Changes", and FASB Statement No. 3, "Reporting
              Accounting Changes in Interim Financial Statements", although it
              carries forward some of their provisions. SFAS No. 154 requires
              retrospective application to prior periods' financial statements
              of changes in accounting principle, unless it is impracticable to
              determine either the period-specific effects or the cumulative
              effect of the change. A change in depreciation, amortization, or
              depletion method for long-lived, no financial assets will be
              accounted for as a change in accounting estimate effected by a
              change in accounting principle. SFAS No. 154 is effective for
              changes in accounting principle made in fiscal years beginning
              after December 15, 2005. The company does not expect the adoption
              of SFAS No. 154 to have a material impact on its financial
              position or result of operations.

         F.   In February 2006, the FASB issued SFAS No. 155 "Accounting for
              Certain Hybrid Financial Instruments." SFAS No. 155 amends SFAS
              No. 133 and SFAS No. 140, and allows financial instruments that
              have embedded derivatives that otherwise would require bifurcation
              from the host to be accounted for as a whole, if the holder
              irrevocably elects to account for the whole instrument on a fair
              value basis. Subsequent changes in the fair value of the
              instrument would be recognized in earnings. The standard also:

              o    Clarifies which interest-only strips and principal-only
                   strips are not subject to the requirements of SFAS No. 133;
              o    Established a requirement to evaluate interests in
                   securitized financial assets to determine whether interests
                   are freestanding derivatives or are hybrid financial
                   instruments that contain an embedded derivative requiring
                   bifurcation;
              o    Clarified that concentrations of credit risk in the form of
                   subordination are not embedded derivatives, and
              o    Amends SFAS No. 140 to eliminate the prohibition on a
                   qualifying special-purpose entity from holding a derivative
                   financial instrument that pertains a beneficial interest
                   (that is itself a derivative financial instrument).

                  SFAS No. 155 is effective for all financial instruments
                  acquired or issued after the beginning of an entity's first
                  fiscal year that begins after September 15, 2006. The Company
                  is currently evaluating the impact adoption of SFAS No. 155 on
                  its financial position and results of operations.

                                     F-310
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 19 - Acquisitions

         A.   In April 2005, the Company acquired the optical activities and
              technology of Eastern Communications Co., Inc. for approximately $
              8.5 million. The operations of the acquired unit have been merged
              with ECI's existing joint venture in China - Hangzhou ECI
              Telecommunication Co. Ltd. (HETC). Of the $ 8.5 million purchase
              price, $ 4.2 million was assigned to net tangible assets and $ 4.3
              million was assigned to Core Technology products. As a result of
              the transaction ECI's holdings in HETC increased to approximately
              72.4%.

         B.   On June 3, 2005, the Company acquired 100% of the outstanding
              common shares of Laurel Networks Inc. The results of Laurel
              Networks Inc.'s operations have been included in the consolidated
              financial statements since that date. Laurel Networks Inc. is an
              innovative provider of Next-Generation IP/MPLS Multi Service Edge
              Routers. The aggregate purchase price was $ 88 million in cash.
              The Company also incurred transaction costs, consisting primarily
              of professional fees amounting to approximately $ 1.75 million in
              connection with this acquisition. After the transaction, Laurel
              Networks became the "Data Networking" division of ECI.

              The acquisition is accounted for under the purchase method of
              accounting. The purchase price of Laurel Networks has been
              allocated based on independent appraisals and management
              estimates. The allocation of the acquisition cost is as follows.
              Fair value $ in thousands

              Tangible assets:
                Net current assets                                      14,881
                Property, plant and equipment                            3,156
                Long-term liabilities                                     (157)
                                                                      --------
              Net tangible assets                                       17,880

              Intangible assets:
                Core technology products                                33,820
                In-process research and development                        890
                Backlog                                                    100
                Goodwill                                                37,060
                                                                      --------
                                                                        71,870
                                                                      --------

              Net assets acquired                                       89,750
                                                                      ========

                                     F-311
<PAGE>


                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------

Note 19 - Acquisitions (cont'd)

              Of the $ 34.8 million identifiable intangible assets, $ 33.8
              million was allocated to Core Technology products that have a
              weighted-average useful life of approximately ten years, $ 100
              thousand was allocated to backlog that have a weighted average
              useful life of less than one year and $ 890 thousand was allocated
              to in-process research and development assets. Such amount
              represents the value attributed to research and development
              projects of the acquired company that were commenced but not
              completed at the date of acquisition, for which technological
              feasibility has not been established and which have no alternative
              future use in research and development activities or otherwise. In
              accordance with FASB Interpretation No. 4, Applicability of FASB
              Statement No. 2 to Business Combinations Accounted for by the
              Purchase Method. The amount allocated to in-process research and
              development was written off at the date of acquisition. This
              write-off is included in the statements of operation in a separate
              line "Acquired in-process research and development".

              The $ 37.1 million goodwill was derived by applying the "Residual
              Approach". Under this approach, the total Purchase Price is
              allocated to tangible assets and to specifically identifiable
              intangible assets, with any remainder allocated to goodwill. The
              goodwill was assigned to the "Data Networking" segment.

              The Company believes that the Laurel acquisition resulted in the
              recognition of goodwill primarily because Laurel's products and
              technology will add edge routing and IP service capabilities to
              ECI's overall portfolio of IP solutions, and will strengthen ECI's
              position as a supplier of next-generation IP solutions. This
              acquisition enhances ECI's ability to meet customers' needs with
              innovative solutions as their next-generation multi-service
              networks evolve toward a single converged IP network.

              Set forth below is certain unaudited pro forma combined statements
              of income data for the year ended December 31, 2005 and 2004, as
              if the acquisition of Laurel Networks Inc. occurred on January 1,
              2005 and 2004, respectively, after giving effect to: (a) purchase
              accounting adjustments, including amortization of identifiable
              intangible assets and adjustments for acquired in-process research
              and development; and (b) estimated reduction of interest income
              due to the decrease in on ECI's cash and cash equivalents and
              marketable securities used as cash consideration in the
              acquisition.

              The pro forma financial information is not necessarily indicative
              of the combined results that would have been attained had the
              acquisition taken place at the beginning of 2005 and 2004,
              respectively, nor is it necessary indicative of future results.

                                                    Year ended December 30
                                                 -----------------------------
                                                      2005               2004
                                                 ----------         ----------
                                                         $ in thousands,
                                                    except earnings per share
                                                 -----------------------------
                                                          (Unaudited)

              Sales                                634,695          513,535
                                                 =========        =========

              Net income (Loss)                     27,693          (12,702)
                                                 =========        =========

              Earnings (loss) per share:

              Basic                                   0.25           (0.12)
                                                 =========        =========

              Diluted                                 0.23           (0.12)
                                                 =========        =========


                                     F-312
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 19 - Acquisitions (cont'd)


     C.   In September 2005, the Company acquired the sales and support
          activities of MMG Ltd., including the rights that the Company
          had previously granted to MMG to distribute and install the
          Company's products in Russia ("the Rights"), for the sum of
          approximately $ 5.3 million. Of the $ 5.3 million purchase
          price, $ 1.6 million was assigned to net tangible assets, $
          1.8 million was assigned to the Rights, $ 0.7 million was
          assigned to Customer Relationships and $ 1.2 million was
          assigned to goodwill.


Note 20 - Restructuring


     A.   Following the Company's Board of Directors' decision to focus
          on its two core activities, in the first quarter of 2004, the
          Company recorded $ 2,585 thousand in restructuring expenses
          associated with the completion of reorganization plan and the
          integration of Lightscape Optical Networks and Enavis Networks
          into the Optical Networks Division. The expenses were due to
          abandonment of several leased buildings.


     B.   A reconciliation of the beginning and ending restructuring
          liability balances is as follows:

                                                                    Year ended
                                                                  December 31,
                                                                          2005
                                                                 Rent contract
                                                                   $ thousands

     At the beginning of the year                                      4,574
     Restructuring expenses                                                -
     Paid                                                              1,395
                                                                 -------------

     At the end of the year                                            3,179
                                                                 =============


                                            Year ended December 31, 2004
                                    -------------------------------------------
                                      Severance
                                            pay    Rent contract          Total
                                    -----------    -------------    -----------
                                    $ thousands      $ thousands    $ thousands
                                    -----------    -------------    -----------

     At the beginning of the year          707            5,450          6,157
     Restructuring expenses                  -            2,585          2,585
     Paid                                 (707)          (3,461)        (4,168)
                                    -----------    -------------    -----------

     At the end of the year                  -            4,574          4,574
                                    ===========    =============    ===========



                                     F-313
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 21 - Impairment of Loans and Impairment of Assets

         A.       For the year ended December 31, 2005

         During 2005, the Company recorded $ 3.0 million impairment charges
         associated with loans in the aggregate amount of $ 6.0 million provided
         to Chiaro. See Note 5B and Note 23.


         B.       For the year ended December 31, 2003

         During 2003, the Company recorded $0.7 million impairment of assets
         charges associated with NGTS.

         Separately, the Company recorded, as part of the loss on discontinued
         operations, a $6.0 million impairment charges associated with ECtel,
         arising from the write-down by ECtel of goodwill from the acquisition
         of Telrad Hawk Net-I Ltd. in October 2001.

         Due to significant reduction in ECtel's revenues, it was determined
         that goodwill had been impaired.

         This determination was based upon the guidance set forth in paragraphs
         19-22 of SFAS No. 142, which requires a two-step analysis. The first
         step used the Discounted Cash Flow approach to measure the fair value
         of the Telecommunication Systems reporting unit of ECtel Ltd., the
         result of which indicated that the carrying amount of such reporting
         unit, including goodwill, exceeded its fair value. The second step was
         then conducted in order to measure the amount of impairment loss, by
         means of a comparison between the implied fair value of the goodwill
         and the carrying amount of the goodwill. In the second step, the fair
         value of the Telecommunication Systems reporting unit of ECtel, as
         determined in the first step, was assigned to the reporting unit's
         individual assets and liabilities. The excess of the fair value of the
         reporting unit over the amounts assigned to its assets and liabilities
         represented the amount of the implied fair value of the goodwill. The
         excess of the carrying amount of goodwill over the implied fair value
         of goodwill was identified as the amount of the impairment loss.
         See also Note 22C.


Note 22 - Discontinuance of Operations

         A.       During the third quarter of 2002, the Company's Board of
                  Directors decided on a plan to sell the operations of the
                  InnoWave segment, which specialized in development of
                  solutions for broadband wireless access to communications
                  networks.

                  In April 2003, the Company signed an agreement with Alvarion
                  to sell the InnoWave operation. The total value of the
                  transaction was approximately $ 20 million, consisting of a
                  cash consideration paid by Alvarion and the cash balances
                  withdrawn by ECI at closing. In addition, Alvarion granted the
                  Company warrants to purchase 200,000 Alvarion shares at an
                  exercise price of $ 3 per share (of which, warrants to
                  purchase 50,000 Alvarion shares were transferred to certain
                  key InnoWave employees transferred to Alvarion). In the first
                  quarter of 2004, the Company sold all the shares it had
                  obtained from exercising the aforementioned warrants. The gain
                  from the sale of the shares amounted to $ 1.5 million and was
                  recorded in other income.

                                     F-314
<PAGE>

                                               ECI Telecom Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements as of December 31, 2005
--------------------------------------------------------------------------------


Note 22 - Discontinuance of Operations (cont'd)

         B.       During 2003, ECtel's Board of Directors decided on a plan to
                  sell the operations of the Government Surveillance business of
                  ECtel, which provided telecommunication monitoring needs to
                  government agencies.
                  In February 2004, ECtel signed a definitive agreement to sell
                  the Government Surveillance business to Verint Systems Inc.
                  for $35 million in cash. According to the terms of the
                  transaction, ECtel transferred to Verint various assets and
                  liabilities relating to its Government Surveillance business
                  and undertook certain commitments to Verint. ECtel recorded in
                  the first quarter of 2004 a gain of $ 24.2 million in respect
                  of this transaction.

                  On May 10, 2004, the Company distributed 7.6 million shares of
                  ECtel to the Company's shareholders of record on May 5, 2004.
                  Before distribution, the Company held approximately 10.5
                  million, or 58%, of ECtel's shares. Following the distribution
                  of the shares, the Company holds approximately 16% of ECtel's
                  outstanding shares.


         C.       Results of operations of the discontinued segments
<TABLE>
<CAPTION>

                                                            Year ended December 31
                                                --------------------------------------------------
                                                          2005              2004              2003
                                                --------------    --------------    --------------
                                                $ in thousands    $ in thousands    $ in thousands
                                                --------------    --------------    --------------
<S>                                                     <C>              <C>              <C>

         Revenues                                           -             3,948            44,697
         Expenses, including income taxes (1)               -            (7,851)          (71,014)
                                                --------------    --------------    --------------
         Net results                                        -            (3,903)          (26,317)
                                                ==============    ==============    ==============


         (1)  Including, loss from disposition for the year ended December 31, 2004 in the
              amount of $ 3,681 thousand and impairment of goodwill for the year ended December
              31, 2003 in the amount of $ 6,017 thousand.
</TABLE>


                                     F-315