===============================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 20-F/A
                               (Amendment No. 1)

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

                  For the fiscal year ended December 31, 2004

                      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)

                                     Israel
        ----------------------------------------------------------------
                (Jurisdiction of incorporation or organization)

                14 Hamelacha Street, Rosh Ha'ayin 48091, Israel
        ----------------------------------------------------------------
                    (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
             -------------------                ---------------------

      American Depositary Shares, Each         New York Stock Exchange
         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:
                      16,033,213 Ordinary Shares, Par Value NIS 0.001 Per Share
                      ---------------------------------------------------------

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 which financial statements the registrant has elected to
follow:

         Item 17   X       Item 18
                  ---               ---
===============================================================================
<PAGE>

                                EXPLANATORY NOTE

         Koor Industries Ltd. ("Koor") filed its Annual Report on Form 20-F for
the fiscal year ended December 31, 2004 (the "Form 20-F") with the Securities
and Exchange Commission ("SEC") on July 15, 2005.

         This Amendment No. 1 to Koor's Form 20-F is filed in response to
comments Koor received from the staff of the SEC to: (i) amend its disclosure
under Item 15 (Controls and Procedures) to clarify that Koor's disclosure
controls and procedures are effective to ensure that information required to be
disclosed in the reports that it filed or submits under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") is accumulated and communicated to
Koor's management, including its principal executive and principal financial
officers, to allow timely decisions regarding required disclosure; (ii) amend
its disclosure under Item 17 (Financial Statements) to provide clarifications
of several differences between generally accepted accounting principles in
Israel ("Israeli GAAP") and generally accepted accounting principles in the
United States ("US GAAP") in its US GAAP reconciliation footnote, including
providing a quantified description of the material differences between cash
flows reported in Koor's primary financial statements under Israeli GAAP and
cash flows that would be reported in accordance with US GAAP; (iii) amend the
financial statements of Makhteshim-Agan Industries Ltd. ("M-A Industries"),
which are included in Koor's Form 20-F pursuant to Rule 3-09 of Regulation S-X
promulgated under the Exchange Act, to provide a quantified description of the
material differences between cash flows reported in M-A Industries' primary
financial statements under Israeli GAAP and cash flows that would be reported
in accordance with US GAAP; and (iv) revise its auditors' report and the
auditors' reports of several of its subsidiaries and affiliates to include the
city and state where those auditors' reports were issued and, with respect to
the auditors' report for M-A Industries, to clarify that the auditors conducted
their audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States).

         Pursuant to Rule 12b-15 under the Exchange Act, amendments to Form
20-F must set forth the complete text of each item as amended. Accordingly,
Koor is amending and restating Items 15 and 17 of its Form 20-F in their
entirety and is amending and restating M-A Industries' financial statements in
their entirety. However, other than as described above, no part of Koor's Form
20-F filed on July 15, 2005, including its primary financial statements
prepared in accordance with Israeli GAAP, is being amended, and no part of the
Form 20-F or of the amended Items 15 and 17 as re-filed pursuant to this
amendment speaks as of any date subsequent to July 15, 2005.


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

         Koor hereby amends Item 15 of its Form 20-F in its entirety and
replaces it with the following:

         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, 2004. 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, 2004 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.


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

         Koor hereby amends Item 17 of its Form 20-F in its entirety and
replaces it with the following:

         See pages F-1 through F-144, incorporated herein by reference.


Financial Statements of Makhteshim-Agan Industries Ltd.
-------------------------------------------------------

         Koor hereby amends the financial statements of M-A Industries in their
entirety and replaces them with the following:

         See pages F-145 through F-232, incorporated herein by reference.


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

         Index to exhibits filed with this Amendment No. 1 to Koor's Form 20-F.

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

     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 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.

<PAGE>


                                   SIGNATURES

         The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F/A and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.


                                           KOOR INDUSTRIES LTD.


                                           By:    /s/ Jonathan B. Kolber
                                                -----------------------------
                                                  Jonathan B. Kolber
                                                  Chief Executive Officer

Date: September 16, 2005

<PAGE>



                                  Koor Industries Ltd. (an Israeli Corporation)

Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


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-12

Company Statements of Cash Flows                                           F-18

Notes to the Financial Statements                                          F-20



                                      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.
(hereinafter - the "Company" or Koor) and the consolidated balance sheets of
the Company and its subsidiaries as at December 31, 2004 and 2003, and the
related statements of operations, shareholders' equity and cash flows, for each
of the three years, the last of which ended December 31, 2004. 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 did not audit the financial statements of certain subsidiaries, including
those consolidated by the proportionate consolidation method, whose assets
constitute 12% and 20% of the total consolidated assets as at December 31, 2004
and 2003 respectively, and whose revenues constitute 14%, 19% and 20% of the
total consolidated revenues for the years ended December 31, 2004, 2003 and
2002, respectively. Furthermore, we did not audit the financial statement of
certain affiliates, whose company's investments constitute NIS 204,878 thousand
and NIS 218,081 thousand, as at December 31, 2004 and 2003, respectively, and
its equity in earnings constitute NIS 5,647 thousand for the year ended
December 31, 2004 and its equity in losses, NIS 12,875 thousand and NIS 6,748
thousand for the years ended December 31, 2003 and 2002, respectively. The
financial statements of those subsidiaries and affiliates were audited by other
auditors whose reports thereon were furnished to us. Our opinion, insofar as it
relates to amounts included for such subsidiaries and affiliates, 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. 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 the above-mentioned
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 their operations, the changes in
shareholders' equity and their cash flows for each of the three years, the last
of which ended December 31, 2004, 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 28 of the financial statements. As further
described in Note 28 to the financial statements, the reconciliation of
differences between Israeli GAAP and US GAAP as of and for the years ended
December 31, 2003 and 2002 has been restated.

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 for dates and reporting periods that 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.

/s/ Somekh Chaikin

Somekh Chaikin
Certified Public Accountants (Isr.)

March 29, 2005, except for Note 28, as to which the date is July 13, 2005.
Tel-Aviv, Israel

                                      F-2
<PAGE>

<TABLE>

Consolidated Balance Sheets as at December 31
------------------------------------------------------------------------------------------------------------------------------

<CAPTION>

                                                                                                                  Convenience
                                                                                                                  translation
                                                                                                                    (Note 2B)
                                                                             December 31       December 31        December 31
                                                                                    2004              2003               2004
                                                                           --------------   ---------------    ---------------
                                                                                               Adjusted in
                                                                                Reported    terms of NIS of           Reported
                                                                                amounts*      December 2003            amounts
                                                                           --------------   ---------------    ---------------
                                                                                    2004               2003               2004
                                                                           --------------   ---------------    ---------------
                                                                 Note                 NIS thousands             US $ thousands
                                                               --------    --------------------------------    ---------------
<S>                                                                 <C>         <C>               <C>                 <C>
Assets

Current assets
Cash and cash equivalents                                                       617,310           593,403            143,294
Short-term deposits and investments                                 4           416,468           366,809             96,673
Trade receivables                                                   5         2,173,599         2,052,461            504,549
Other receivables                                                   6           528,983           452,170            122,791
Inventories and work in progress, net
 of customer advances                                               7         2,294,885         1,885,751            532,703
Assets designated for sale                                                       41,765            42,525              9,695
                                                                           --------------   ---------------    ---------------
Total current assets                                                          6,073,010         5,393,119          1,409,705
                                                                           --------------   ---------------    ---------------

Investments and long-term
 receivables
Investments in affiliates                                           8         1,375,160           943,764            319,211
Other investments and receivables                                   9           489,031           483,384            113,517
                                                                           --------------   ---------------    ---------------
                                                                              1,864,191         1,427,148            432,728
                                                                           --------------   ---------------    ---------------

Fixed assets                                                       10         2,852,907         2,928,407            662,235
                                                                           --------------   ---------------    ---------------

Intangible assets deferred tax assets and
 deferred expenses                                                 11         2,357,458         2,121,083            547,228
                                                                           --------------   ---------------    ---------------





                                                                             13,147,566        11,869,757          3,051,896
                                                                           ==============   ==============     ==============



* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).
</TABLE>


                                                            F-3
<PAGE>
<TABLE>

                                                                                  Koor Industries Ltd. (An Israeli Corporation)

-------------------------------------------------------------------------------------------------------------------------------
<CAPTION>

                                                                                                                  Convenience
                                                                                                                  translation
                                                                                                                    (Note 2B)
                                                                             December 31       December 31        December 31
                                                                                    2004              2003               2004
                                                                           --------------   ---------------    ---------------
                                                                                               Adjusted in
                                                                                Reported    terms of NIS of           Reported
                                                                                amounts*      December 2003            amounts
                                                                           --------------   ---------------    ---------------
                                                                                    2004               2003               2004
                                                                           --------------   ---------------    ---------------
                                                                 Note                 NIS thousands             US $ thousands
                                                               --------    --------------------------------    ---------------
<S>                                                                 <C>         <C>               <C>                 <C>
Liabilities and Shareholders' Equity

Current liabilities
Credit from banks and others                                        12        1,738,456          1,577,402           403,541
Trade payables                                                      13        1,667,455          1,342,783           387,060
Other payables                                                      14        1,369,442          1,270,217           317,884
Customer advances, net of costs incurred on project                  7          211,207            156,441            49,027
                                                                           --------------   ---------------    ---------------
Total current liabilities                                                     4,986,560          4,346,843         1,157,512
                                                                           --------------   ---------------    ---------------

Long-term liabilities
Net of current maturities:                                          15
Bank loans                                                                    2,208,096          3,006,343           512,557
Other loans                                                                     133,019            113,494            30,877
Convertible debentures of consolidated company                                  646,200                  -           150,000
Customer advances                                                               142,164            194,094            33,000
Deferred taxes                                                     16G          240,468            199,787            55,819
Liability for employee severance benefits, net                      17          197,168            192,002            45,768
                                                                           --------------   ---------------    ---------------
Total long-term liabilities                                                   3,567,115          3,705,720           828,021
                                                                           --------------   ---------------    ---------------

Contingent liabilities and commitments                              18

Convertible debentures of consolidated company                                  165,091            340,270            38,322
                                                                           --------------   ---------------    ---------------

Minority Interest                                                             2,552,333          1,736,531           592,464
                                                                           --------------   ---------------    ---------------

Shareholders' Equity                                                20        1,876,467          1,740,393           435,577
                                                                           --------------   ---------------    ---------------



                                                                             13,147,566         11,869,757         3,051,896
                                                                           ==============   ===============    ===============


 /s/ Jonathan Kolber                   /s/ Gabriela Shalev                        /s/ Yuval Yanai
 ------------------------             --------------------------------           -------------------------
Jonathan Kolber                       Prof. Gabriela Shalev                      Yuval Yanai
Chief Executive Officer               Member of the Board of Directors           Vice President
                                                                                 Chief Financial Officer


March 29, 2005, except for Note 28, as to which the date is July 13, 2005

* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).

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

</TABLE>


                                                              F-4
<PAGE>
<TABLE>

Company Balance Sheets as at December 31
-----------------------------------------------------------------------------------------------------------------------------
<CAPTION>

                                                                                                                  Convenience
                                                                                                                  translation
                                                                                                                    (Note 2B)
                                                                             December 31       December 31        December 31
                                                                                    2004              2003               2004
                                                                           --------------   ---------------    ---------------
                                                                                               Adjusted in
                                                                                Reported    terms of NIS of           Reported
                                                                                amounts*      December 2003            amounts
                                                                           --------------   ---------------    ---------------
                                                                                    2004               2003               2004
                                                                           --------------   ---------------    ---------------
                                                                 Note                 NIS thousands             US $ thousands
                                                               --------    --------------------------------    ---------------
<S>                                                                 <C>         <C>               <C>                 <C>
Assets

Current assets
Cash and cash equivalents                                                        29,665             9,205              6,886
Short-term deposits and investments                                 4           298,641           310,806             69,322
Short-term loans and current maturities
 of loans to investee companies                                                  49,928            16,480             11,590
Receivables:
  Investee companies                                                              9,435            28,650              2,190
  Others                                                            6            84,038            67,774             19,507
Assets designated for sale                                                       41,765            42,525              9,695
                                                                           --------------   ---------------    ---------------

Total current assets                                                            513,472           475,440            119,190
                                                                           --------------   ---------------    ---------------

Investments and long-term receivables

Investments in investees                                            8         3,601,557         3,453,066            836,016
Other investments and receivables                                   9            33,175            33,177              7,701

                                                                           --------------   ---------------    ---------------
                                                                              3,634,732         3,486,243            843,717
                                                                           --------------   ---------------    ---------------

Fixed assets, net                                                  10            22,484            23,323              5,219
                                                                           --------------   ---------------    ---------------




                                                                              4,170,688         3,985,006            968,126
                                                                           ==============   ===============    ===============





* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).

</TABLE>


                                                           F-5
<PAGE>
<TABLE>
                                                                                  Koor Industries Ltd. (An Israeli Corporation)

-------------------------------------------------------------------------------------------------------------------------------
<CAPTION>

                                                                                                                  Convenience
                                                                                                                  translation
                                                                                                                    (Note 2B)
                                                                             December 31       December 31        December 31
                                                                                    2004              2003               2004
                                                                           --------------   ---------------    ---------------
                                                                                               Adjusted in
                                                                                Reported    terms of NIS of           Reported
                                                                                amounts*      December 2003            amounts
                                                                           --------------   ---------------    ---------------
                                                                                    2004               2003               2004
                                                                           --------------   ---------------    ---------------
                                                                 Note                 NIS thousands             US $ thousands
                                                               --------    --------------------------------    ---------------
<S>                                                                 <C>         <C>               <C>                 <C>
Liabilities and Shareholders' Equity

Current liabilities
Credit from banks and others                                       12           719,730           588,535            167,068
Trade payables                                                     13               383               503                 89
 Other payables:
 Investee companies                                                              14,311                57              3,322
Others                                                             14            49,132            43,266             11,405
                                                                           --------------   ---------------    ---------------
Total current liabilities                                                       783,556           632,361            181,884
                                                                           --------------   ---------------    ---------------

Long-term liabilities
Net of current maturities:                                         15
Loans from banks and others                                                   1,505,690         1,610,768            349,510
Liability for employee severance
 benefits, net                                                     17             4,975             1,484              1,155
                                                                           --------------   ---------------    ---------------
Total long-term liabilities                                                   1,510,665         1,612,252            350,665
                                                                           --------------   ---------------    ---------------

Contingent liabilities and commitments                             18

Shareholders' equity                                               20         1,876,467         1,740,393            435,577
                                                                           --------------   ---------------    ---------------




                                                                              4,170,688         3,985,006            968,126
                                                                           ==============   ===============    ===============



 /s/ Jonathan Kolber                         /s/ Gabriela Shalev                          /s/ Yuval Yanai
-----------------------                      --------------------------------             --------------
Jonathan Kolber                              Prof. Gabriela Shalev                        Yuval Yanai
Chief Executive Officer                      Member of the Board of Directors             Vice President
                                                                                          Chief Financial Officer



March 29, 2005, except for Note 28, as to which the date is July 13, 2005


* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).

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

</TABLE>


                                                       F-6
<PAGE>
<TABLE>

                                                                                 Koor Industries Ltd. (An Israeli Corporation)

Consolidated Statements of Operations
------------------------------------------------------------------------------------------------------------------------------
<CAPTION>


                                                                                                                  Convenience
                                                                                                                  translation
                                                                                                                    (Note 2B)
                                                                                                               --------------
                                                                       Year ended December 31                      Year ended
                                                          ------------------------------------------------        December 31
                                                                  2004              2003              2002               2004
                                                          ------------    --------------    --------------     ---------------
                                                              Reported     Adjusted in terms of NIS                  Reported
                                                              amounts*        of  December 2003                      amounts*
                                                          ------------    --------------------------------     ---------------
                                               Note                        NIS thousands                       US $ thousands
                                            ---------     ------------------------------------------------     ---------------
<S>                                            <C>          <C>               <C>               <C>                <C>

Revenue from sales
 and services                                  23A          9,228,673         7,690,430         7,099,790          2,142,218
Cost of sales and services                     23B          6,287,679         5,392,944         5,315,780          1,459,536
                                                          ------------      ------------     -------------       ------------
Gross profit                                                2,940,994         2,297,486         1,784,010            682,682

Selling and marketing expenses                 23C          1,172,204           940,457           814,777            272,099
General and administrative
 expenses                                      23D            526,004           460,744           489,369            122,100
                                                          ------------      ------------     -------------       ------------
Operating earnings                                          1,242,786           896,285           479,864            288,483
Financing expenses, net                        23E            271,362           228,200           408,437             62,990
                                                          ------------      ------------     -------------       ------------
                                                              971,424           668,085            71,427            225,493
Other income (expenses), net                   23F            (78,759)         (219,721)            5,824            (18,282)
Transfer to statement of income
 of translation differences of
 autonomous investee in voluntary
 liquidation                                    3B                  -                 -          (390,901)                 -
                                                          ------------      ------------     -------------       ------------
Earnings (loss) before income tax                             892,665           448,364          (313,650)           207,211
Income tax                                     16H           (287,100)          (85,372)         (141,179)           (66,643)
                                                          ------------      ------------     -------------       ------------
                                                              605,565           362,992          (454,829)           140,568
Group's equity in the operating
 results of affiliates, net                    23G            (27,687)         (113,823)         (252,091)            (6,427)
                                                          ------------      ------------     -------------       ------------
                                                              577,878           249,169          (706,920)           134,141
Minority interest in consolidated
 company's results, net                                      (432,888)         (202,807)          (60,049)          (100,485)
                                                          ------------      ------------     -------------       ------------

Net earnings (loss) from
 continuing activities                                        144,990            46,362          (766,969)            33,656
                                                          ============      ============     =============       ============



                                                                   NIS               NIS               NIS                US$
                                                          ------------      ------------     -------------       ------------

Basic and diluted earnings
 (loss) per NIS 1 par value
 of ordinary shares:                            26               8.851            2.950           (50.547)             2.054
                                                          ============      ============     =============       ============




* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).

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

</TABLE>


                                                              F-7
<PAGE>
<TABLE>
<CAPTION>

                                                                                Koor Industries Ltd. (An Israeli Corporation)

Company Statements of Operations
-----------------------------------------------------------------------------------------------------------------------------


                                                                                                                  Convenience
                                                                                                                  translation
                                                                                                                    (Note 2B)
                                                                                                               --------------
                                                                       Year ended December 31                      Year ended
                                                          ------------------------------------------------        December 31
                                                                  2004              2003              2002               2004
                                                          ------------    --------------    --------------     ---------------
                                                              Reported     Adjusted in terms of NIS                  Reported
                                                              amounts*        of  December 2003                      amounts*
                                                          ------------    --------------------------------     ---------------
                                               Note                        NIS thousands                       US $ thousands
                                            ---------     ------------------------------------------------     ---------------
<S>                                            <C>          <C>               <C>               <C>                <C>
Income
Management services
 from subsidiaries                                             22,334            25,006            35,573              5,184
Other income                                   23F            234,959             5,691           365,431             54,540
                                                          ------------      ------------     -------------       ------------
Total income                                                  257,293            30,697           401,004             59,724

Expenses
General and administrative
 Expenses                                      23D             46,648            41,164            48,136             10,828
Financing, net                                 23E            110,806            35,108           199,808             25,721
                                                          ------------      ------------     -------------       ------------
Total expenses                                                157,454            76,272           247,944             36,549
                                                          ------------      ------------     -------------       ------------

Earnings (loss) before
 income tax                                                    99,839           (45,575)          153,060             23,175
Income tax                                                     18,951            55,667             3,722              4,399

Earnings after income tax                                    118,790             10,092           156,782             27,574

Koor's equity in the
 operating results of
 investee companies, net                       23G             26,200            36,270          (923,751)             6,082
                                                          ------------      ------------     -------------       ------------

Net earnings (loss) for the
 year                                                         144,990            46,362          (766,969)            33,656
                                                          ============      ============     =============       ============



                                                                   NIS               NIS               NIS               US$
                                                          ------------      ------------     -------------       ------------


Basic and diluted  earnings
 (loss ) per NIS 1 par value
 of ordinary shares :                           26               8.851            2.950           (50.547)              2.054
                                                          ============      ============     =============       ============




* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).

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

</TABLE>


                                                           F-8
<PAGE>
<TABLE>
<CAPTION>


                                                                                    Koor Industries Ltd. (An Israeli Corporation)

Statement of Shareholders' Equity
---------------------------------------------------------------------------------------------------------------------------------



                                                                                Company    Cumulative
                                                                            shares held       foreign
                                       Number of                                 by the      currency     Retained
                                        ordinary      Share      Capital    Company and   translation     earnings
                                      shares (1)    capital     reserves   subsidiaries   adjustments    (deficit)        Total
                                    ------------  ---------   ----------   ------------  ------------    ----------   -----------
                                                                Adjusted in terms of NIS of December 2003
                                    ---------------------------------------------------------------------------------------------
                                                                          NIS thousands
                                    ---------------------------------------------------------------------------------------------


<S>                                  <C>            <C>        <C>             <C>           <C>          <C>          <C>
Balance at December 31, 2001         15,168,884     564,515    2,564,099       (272,458)     (418,923)    (241,409)    2,195,824

Changes during 2002:
Net loss                                      -           -            -              -             -     (766,969)     (766,969)
Exercise of stock options
  granted to Israeli banks                4,493          *-            -              -             -            -             -
Cumulative foreign currency
  translation adjustments, net                -           -            -              -        12,538            -        12,538
Provision for decline in value of
  autonomous investee
  (see Note 3A(1))                            -           -            -              -      (105,125)           -      (105,125)
Transfer to statement of income
  of translation differences
  of autonomous investee in
  in voluntary liquidation
  (see Note 3B)                               -           -            -              -       390,901            -       390,901
                                    ------------  ---------   ----------   -------------  ------------  -----------   -----------

Balance as December 31, 2002         15,173,377     564,515    2,564,099       (272,458)     (120,609)  (1,008,378)    1,727,169
                                    ============  =========   ==========   =============  ============  ===========   ===========


Balance at December 31, 2002         15,173,377     564,515    2,564,099       (272,458)     (120,609)  (1,008,378)    1,727,169

Changes during 2003:
Net earnings                                  -           -            -              -             -       46,362        46,362
Exercise of stock options
  granted  to employees                  67,783          *-            -              -             -            -             -
Issuance of "treasury stock"
  (see Note 20B)                        500,000           -            -        192,137             -     (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                     -           -            -              -      (149,550)           -      (149,550)
                                    ------------  ---------   ----------   -------------  ------------  -----------   -----------

Balance at December 31, 2003         15,741,160     564,515    2,564,099        (80,321)     (196,758)  (1,111,142)    1,740,393
                                    ============  =========   ==========   =============  ============  ===========   ===========

</TABLE>

*        Represents an amount lower than NIS 1,000.
(1)      Net of the Company holdings and its subsidiaries' holdings.

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



                                                           F-9
<PAGE>
<TABLE>
<CAPTION>
                                                                                    Koor Industries Ltd. (An Israeli Corporation)

Statement of Shareholders' Equity (cont'd)
---------------------------------------------------------------------------------------------------------------------------------


                                                                                Company    Cumulative
                                                                            shares held       foreign
                                       Number of                                 by the      currency     Retained
                                        ordinary      Share      Capital    Company and   translation     earnings
                                      shares (1)    capital     reserves   subsidiaries   adjustments    (deficit)        Total
                                    ------------  ---------   ----------   ------------  ------------    ----------   -----------
                                                                Adjusted in terms of NIS of December 2003
                                    ---------------------------------------------------------------------------------------------
                                                                          NIS thousands
                                    ---------------------------------------------------------------------------------------------

<S>                                  <C>            <C>        <C>           <C>           <C>          <C>            <C>
Balance at December 31, 2003         15,741,160     564,515    2,564,099     (80,321)      (196,758)    (1,111,142)    1,740,393

Changes during 2004:
Net earnings                                  -           -            -           -              -        144,990       144,990
Exercise of stock options
  granted to employees                   83,025          *-            -           -              -              -             -
Cumulative foreign currency
  translation adjustments, net                -           -            -           -         (8,916)             -        (8,916)
                                    ------------  ---------   ----------   -------------  ------------  -----------   -----------

Balance as December 31, 2004         15,824,185     564,515    2,564,099     (80,321)      (205,674)      (966,152)    1,876,467
                                    ============  =========   ==========   =============  ============  ===========   ===========

</TABLE>

*        Represents an amount lower than NIS 1,000.
(1)      Net of the Company holdings and its subsidiaries' holdings.

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


                                                               F-10
<PAGE>
<TABLE>
<CAPTION>

                                                                                   Koor Industries Ltd. (An Israeli Corporation)

Statement of Shareholders' Equity (cont'd)
--------------------------------------------------------------------------------------------------------------------------------

Convenience translation into US Dollars (Note 2B)

                                                                           Company       Cumulative
                                                                       shares held          foreign
                                                                            by the         currency        Retained
                                                          Capital      Company and      translation        earnings
                                     Share capital       reserves     subsidiaries      adjustments       (deficit)         Total
                                     -------------     ----------     ------------      -----------     -----------    ----------
                                                                            US$ thousands
                                     --------------------------------------------------------------------------------------------

<S>                                       <C>            <C>              <C>              <C>            <C>            <C>
Balance at January 1, 2003                131,039        595,194          (18,645)         (45,672)       (257,925)      403,991

Changes during 2004:
Net earnings                                    -              -                -                           33,656        33,656
Exercise of stock options
   granted to employees                        *-              -                -                                -             -
Cumulative foreign currency
   translation adjustments                      -              -                -           (2,070)              -        (2,070)
                                     -------------     ----------     ------------      -----------     -----------    ----------

Balance at December 31, 2004              131,039        595,194          (18,645)         (47,742)       (224,269)      435,577
                                     =============     ==========     ============      ===========     ===========    ==========




*  Represents an amount lower than US$ 1,000
** With respect to discontinuance of adjustment to the effect of inflation as from the CPI of December 2003 (see Note 2B).
 (1) Net of the Company holdings and its subsidiaries' holdings.

</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
-----------------------------------------------------------------------------------------------------------------------------

                                                                                                                  Convenience
                                                                                                                  translation
                                                                                                                    (Note 2B)
                                                                                                               --------------
                                                                                                                   Year ended
                                                                    Year ended December 31                        December 31
                                                         -------------------------------------------------
                                                                  2004              2003              2002               2004
                                                         -------------   ---------------    --------------     --------------
                                                              Reported     Adjusted in terms of NIS of               Reported
                                                              amounts*            December 2003                      amounts*
                                                         -------------   ---------------------------------     --------------
                                                                         NIS thousands                         US $ thousands
                                                         -------------------------------------------------     --------------
<S>                                                          <C>            <C>               <C>                  <C>
Cash flows generated by operating activities:
Net earnings (loss) for the year                             144,990             46,362          (766,969)            33,656
Adjustments to reconcile net earnings to net
 cash flows generated by operating activities (A)            745,683            728,413         1,194,420            173,093
                                                         -------------   ---------------    --------------     --------------
Net cash inflow generated by operating
 activities                                                  890,673            774,775           427,451            206,749
                                                         -------------   ---------------    --------------     --------------
Cash flows generated by investing activities:
Purchase of fixed assets                                     (232,146)         (193,424)         (260,119)           (53,887)
Investment grants in respect of fixed assets                    6,908             8,482             7,583              1,603
Amounts charged to intangible assets
 and deferred expenses                                       (153,206)         (313,125)         (810,649)           (35,563)
Additional investments in subsidiaries                             -               (600)           (2,802)                 -
Acquisition of subsidiaries (B)                              (299,305)          (14,372)          (92,746)           (69,477)
Investments in affiliates                                    (646,672)           (6,316)          (13,652)          (150,110)
Investments in loans to affiliates                             (1,680)           (1,616)           (1,405)              (390)
Repayment of loans from affiliates and others                      -            226,765                 4                  -
Proceeds from realization of investments
 in formerly consolidated subsidiaries,
 net of cash in those subsidiaries at the
 time they ceased being consolidated (c)                           -            (14,182)                -                  -
Repayment of liability in respect of
 subsidiary in prior years                                    (28,309)                -                 -             (6,571)
Proceeds from realization of activity of
 prior year                                                        -                  -            11,849                  -
Acquisition of minority in subsidiaries                        (4,762)                -                 -             (1,105)
Proceeds from disposal of investments
 in investee companies and others                             636,286           123,742           484,355            147,699
Proceeds from sale of fixed assets and
 intangible assets                                             10,519            30,998           314,396              2,442
Investment in venture capital companies                       (34,928)          (13,580)          (47,025)            (8,108)
Decrease (increase) in other investments, net                  (5,110)            7,465           (58,406)            (1,186)
Decrease (increase) in short-term deposits
 and investments, net                                          (8,673)          426,348           210,804             (2,013)
Proceeds from realization of subsidiary's shares
 that became proportionately consolidated (D)                 38,239                  -                 -              8,876
                                                         -------------   ---------------    --------------     --------------
Net cash inflow (outflow) generated by
 investing activities                                        (722,839)          266,585          (257,813)          (167,790)
                                                         =============   ===============    ==============     ==============

* With respect to discontinued of adjustment for the effect of inflation as
  from the CPI of December 2003 (see Note 2B).

The accompanying notes are an integral part of the financial statements.
</TABLE>

                                     F-12
<PAGE>

<TABLE>
<CAPTION>


                                                                                Koor Industries Ltd. (An Israeli Corporation)

Consolidated Statements of Cash Flows (cont'd)
-----------------------------------------------------------------------------------------------------------------------------
                                                                                                                  Convenience
                                                                                                                  translation
                                                                                                                    (Note 2B)
                                                                                                               --------------
                                                                                                                   Year ended
                                                                    Year ended December 31                        December 31
                                                         -------------------------------------------------
                                                                  2004              2003              2002               2004
                                                         -------------   ---------------    --------------     --------------
                                                              Reported     Adjusted in terms of NIS of               Reported
                                                              amounts*            December 2003                      amounts*
                                                         -------------   ---------------------------------     --------------
                                                                         NIS thousands                         US $ thousands
                                                         -------------------------------------------------     --------------
<S>                                                          <C>            <C>               <C>                  <C>
Cash flows generated by financing activities:
Issuance of equity                                                  -            43,011                 -                  -
Issuance of shares to minority interest in
 subsidiaries                                                  14,617            14,137             2,928              3,393
Dividend paid to minority interest
 in subsidiaries                                             (107,006)          (56,529)          (27,104)           (24,839)
Payment of suppliers credit received
 for the purchase of fixed assets                                   -                 -           (13,014)                 -
Purchase of convertible debentures of
 subsidiary by its subsidiary in the market                         -                 -           (15,137)                 -
Issuance of convertible debentures in subsidiary              665,982                 -           136,210            154,592
Proceeds from principal of long-term
 loans and other long-term liabilities                      1,063,387           949,392         1,551,258            246,840
Repayment of long-term loans, debentures
 and other long-term liabilities                           (1,791,112)       (1,891,766)       (1,875,023)          (415,764)
Increase (decrease) in credit from banks
 and others, net                                               26,063          (268,028)           16,162              6,050
                                                         -------------   ---------------    --------------     --------------
Net cash outflow generated by
 financing activities                                        (128,069)       (1,209,783)         (223,720)           (29,728)
                                                         -------------   ---------------    --------------     --------------
Translation differences in respect of cash
 balances of autonomous foreign investee
 companies                                                    (15,858)          (28,273)            3,056             (3,681)
                                                         -------------   ---------------    --------------     --------------
Increase (decrease) in cash and cash
 equivalents                                                   23,907          (196,696)          (51,026)             5,550

Balance of cash and cash equivalents
 at beginning of year                                         593,403           790,099           841,125            137,744
                                                         -------------   ---------------    --------------     --------------
Balance of cash and cash equivalents
 at end of year                                               617,310           593,403           790,099            143,294
                                                         =============   ===============    ==============     ==============

*  With respect to discontinued of adjustment for the effect of inflation as
   from the CPI of December 2003 (see Note 2B).

The accompanying notes are an integral part of the financial statements.
</TABLE>


                                     F-13
<PAGE>

<TABLE>
<CAPTION>

                                                                                Koor Industries Ltd. (An Israeli Corporation)

Consolidated Statements of Cash Flows (cont'd)
-----------------------------------------------------------------------------------------------------------------------------

                                                                                                                  Convenience
                                                                                                                  translation
                                                                                                                    (Note 2B)
                                                                                                               --------------
                                                                                                                   Year ended
                                                                    Year ended December 31                        December 31
                                                         -------------------------------------------------
                                                                  2004              2003              2002               2004
                                                         -------------   ---------------    --------------     --------------
                                                              Reported     Adjusted in terms of NIS of               Reported
                                                              amounts*            December 2003                      amounts*
                                                         -------------   ---------------------------------     --------------
                                                                         NIS thousands                         US $ thousands
                                                         -------------------------------------------------     --------------
<S>                                                          <C>            <C>               <C>                  <C>

A.    Adjustments to reconcile net earnings
      (loss) to cash flows generated by operating
      activities:

Income and expenses not involving cash flows:

Minority interest in subsidiaries, net                        432,888           202,807            60,049            100,485
Equity in operating results of affiliates, net                 27,687           113,823           252,091              6,427
Depreciation and amortization                                 463,800           440,856           423,580            107,660
Deferred taxes, net                                            49,647           (45,206)           64,479             11,524
Increase (decrease) in liabilities in respect of
  employee severance benefits, net                             20,619           (49,822)           52,138              4,786
Net capital losses (gains) from realization:
 Fixed assets and intangible assets                            16,091            22,863           (23,079)             3,735
 Investments in formerly consolidated
  subsidiaries                                                      -           (16,428)                 -                 -
 Investments in investee companies                           (227,477)           (4,852)         (342,343)           (52,804)
Translation differences of autonomous
 investee in voluntary liquidation                                  -                 -           390,901                  -
Inflationary erosion (linkage) of principal of
 long-term loans and other liabilities                          8,241           (77,510)           56,490              1,913
Inflationary erosion (linkage) of principal of
 credit from banks and others                                       -           (10,565)          (11,010)                 -
Inflationary erosion of value of investments,
 deposits and loans receivable                                  9,314            32,540           (19,749)             2,162
Impairment in value of assets and investments                  58,144            70,503           143,400             13,497
                                                         -------------   ---------------    --------------     --------------
                                                              858,954           679,009         1,046,947            199,385
                                                         =============   ===============    ==============     ==============

* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).

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

</TABLE>

                                     F-14
<PAGE>
<TABLE>
<CAPTION>

                                                                                Koor Industries Ltd. (An Israeli Corporation)

Consolidated Statements of Cash Flows (cont'd)
-----------------------------------------------------------------------------------------------------------------------------

                                                                                                                  Convenience
                                                                                                                  translation
                                                                                                                    (Note 2B)
                                                                                                               --------------
                                                                                                                   Year ended
                                                                    Year ended December 31                        December 31
                                                         -------------------------------------------------
                                                                  2004              2003              2002               2004
                                                         -------------   ---------------    --------------     --------------
                                                              Reported     Adjusted in terms of NIS of               Reported
                                                              amounts*            December 2003                      amounts*
                                                         -------------   ---------------------------------     --------------
                                                                         NIS thousands                         US $ thousands
                                                         -------------------------------------------------     --------------
<S>                                                          <C>            <C>               <C>                  <C>
A.   Adjustments to reconcile net
     earnings to cash flows generated
     by operating
     activities (cont'd)

Changes in operating asset and liability items:

Decrease (increase) in trade receivables
 and other receivables (after taking into
 account non-current receivables)                             (71,964)         (218,826)          300,164            (16,705)
Decrease (increase) in inventories, projects in
 progress and customer advances (including
 long-term customer advances and deposits)                   (319,645)         (116,927)           52,251            (74,197)
Increase (decrease) in trade payables
 and other payables                                           278,338           385,157          (204,942)            64,610
                                                         -------------   ---------------    --------------     --------------
                                                             (113,271)           49,404           147,473            (26,292)
                                                         -------------   ---------------    --------------     --------------
                                                              745,683           728,413         1,194,420            173,093
                                                         =============   ===============    ==============     ==============
B.  Acquisition of subsidiaries

Assets and liabilities of the subsidiaries
at date of acquisition:

Working capital deficit (surplus),
 excluding cash and cash equivalents                          (34,493)          (12,160)            6,516             (8,007)
Fixed assets and investments, net                            (287,724)           (2,404)          (36,434)           (66,788)
Issuance of shares by investee company                         34,238                 -                 -              7,947
Long-term liabilities                                         187,144               192            10,280             43,441
Contingent liability                                                -                 -            18,516                  -
Goodwill                                                     (198,470)                -           (91,624)           (46,070)
                                                         -------------   ---------------    --------------     --------------
                                                             (299,305)          (14,372)          (92,746)           (69,477)
                                                         =============   ===============    ==============     ==============


* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).

The accompanying notes are an integral part of the financial statements.
</TABLE>


                                     F-15
<PAGE>

<TABLE>
<CAPTION>

                                                                                Koor Industries Ltd. (An Israeli Corporation)

Consolidated Statements of Cash Flows (cont'd)
-----------------------------------------------------------------------------------------------------------------------------

                                                                                                                  Convenience
                                                                                                                  translation
                                                                                                                    (Note 2B)
                                                                                                               --------------
                                                                                                                   Year ended
                                                                    Year ended December 31                        December 31
                                                         -------------------------------------------------
                                                                  2004              2003              2002               2004
                                                         -------------   ---------------    --------------     --------------
                                                              Reported     Adjusted in terms of NIS of               Reported
                                                              amounts*            December 2003                      amounts*
                                                         -------------   ---------------------------------     --------------
                                                                         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 deficit, excluding cash
 and cash equivalents                                               -           (47,105)                -                  -
Fixed assets and investments                                        -             8,765                 -                  -
Intangible assets                                                   -            15,440                 -                  -
Long-term liabilities                                               -            (3,463)                -                  -
Investments in affiliated companies, net                            -            12,971                 -                  -
Capital loss on sale of investments in
 subsidiaries                                                       -              (790)                -                  -

                                                                    -           (14,182)                -                  -

D.  Proceeds from realization of subsidiary's shares that became
    proportionately consolidated
Working capital surplus excluding cash and
 cash equivalents                                              23,057                 -                 -              5,352
Fixed assets                                                   40,851                 -                 -              9,482
Realization proceeds receivable                               (25,544)                -                 -             (5,929)
Capital gain                                                     (125)                -                 -                (29)
                                                         -------------   ---------------    --------------     --------------
                                                               38,239                 -                 -              8,876
                                                         =============   ===============    ==============     ==============


* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).
</TABLE>


                                     F-16
<PAGE>

<TABLE>
<CAPTION>

                                                                                Koor Industries Ltd. (An Israeli Corporation)

Consolidated Statements of Cash Flows (cont'd)
-----------------------------------------------------------------------------------------------------------------------------

                                                                                                                  Convenience
                                                                                                                  translation
                                                                                                                    (Note 2B)
                                                                                                               --------------
                                                                                                                   Year ended
                                                                    Year ended December 31                        December 31
                                                         -------------------------------------------------
                                                                  2004              2003              2002               2004
                                                         -------------   ---------------    --------------     --------------
                                                              Reported     Adjusted in terms of NIS of               Reported
                                                              amounts*            December 2003                      amounts*
                                                         -------------   ---------------------------------     --------------
                                                                         NIS thousands                         US $ thousands
                                                         -------------------------------------------------     --------------
<S>                                                          <C>            <C>               <C>                  <C>
E. Non-cash transactions:

Purchase of fixed assets by credit                              9,172            24,514             10,680              2,129
                                                         =============   ===============    ==============     ==============
Purchase of other assets by credit                             28,178             6,639            245,924              6,541
                                                         =============   ===============    ==============     ==============
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                  -              6,874
                                                         =============   ===============    ==============     ==============
Dividend in kind from affiliate company                        33,363                 -                  -              7,744
                                                         =============   ===============    ==============     ==============
Loans converted into shareholders' equity
 of subsidiary                                                 14,042                 -                  -              3,260
                                                         =============   ===============    ==============     ==============
Purchase of fixed and other assets and inventory
 in consideration of issuance subsidiary shares
 to minority                                                        -                 -             28,683                  -
                                                         =============   ===============    ==============     ==============
Contingent liability from consolidated
 subsidiary                                                         -                 -             18,516                  -
                                                         =============   ===============    ==============     ==============
Conversion of investment to loan in an
 affiliates                                                         -               470                  -                  -
                                                         =============   ===============    ==============     ==============


* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).


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

</TABLE>


                                     F-17
<PAGE>
<TABLE>
<CAPTION>

                                                                                Koor Industries Ltd. (An Israeli Corporation)

Company Statements of Cash Flows (cont'd)
-----------------------------------------------------------------------------------------------------------------------------

                                                                                                                  Convenience
                                                                                                                  translation
                                                                                                                    (Note 2B)
                                                                                                               --------------
                                                                                                                   Year ended
                                                                    Year ended December 31                        December 31
                                                         -------------------------------------------------
                                                                  2004              2003              2002               2004
                                                         -------------   ---------------    --------------     --------------
                                                              Reported     Adjusted in terms of NIS of               Reported
                                                              amounts*            December 2003                      amounts*
                                                         -------------   ---------------------------------     --------------
                                                                         NIS thousands                         US $ thousands
                                                         -------------------------------------------------     --------------
<S>                                                          <C>            <C>               <C>                  <C>
Cash flows generated by operating activities:
Net income (loss) for the year                                144,990            46,362          (766,969)            33,656
Adjustments to reconcile net income to net cash
 flows generated by operating activities (A)                 (136,907)         (163,429)          310,315            (31,780)
                                                         -------------   ---------------    --------------     --------------
Net cash outflow generated by operating
 activities                                                     8,083          (117,067)         (456,654)             1,876
                                                         -------------   ---------------    --------------     --------------
Cash flows generated by investing activities:
Investee companies:
  Acquisition of shares                                      (667,779)          (17,488)          (12,007)          (155,009)
  Loans granted\received, capital notes
   and non-current accounts                                    34,950           304,725            18,258              8,113
Purchase of fixed assets                                         (423)             (392)             (108)               (98)
Increase in investments and
 other receivables, net                                             -           (31,428)          (54,106)                 -
Proceeds from sale of fixed assets                                  -                30           272,776                  -
Proceeds from realization of investments
 in investee companies                                        562,177           102,875           454,752            130,496
Investment in short-term deposits and
 investments, net                                              63,412           460,818           197,446             14,719
                                                         -------------   ---------------    --------------     --------------
Net cash inflow (outflow) generated by
 investing activities                                          (7,663)          819,140           877,011             (1,779)
                                                         -------------   ---------------    --------------     --------------
Cash flows generated by financing activities:
Equity issuance                                                     -            43,011                 -
Receipt of long-term loans and other
 long-term liabilities                                        637,000           360,213           574,422            147,864
Payments of long-term loans and
 other long-term liabilities                                 (628,703)       (1,107,283)         (883,190)          (145,938)
Credit from banks and others, net                              11,743           (13,600)         (148,154)             2,726
                                                         -------------   ---------------    --------------     --------------
Net cash (outflow) inflow generated by
 financing activities                                          20,040          (717,659)         (456,922)             4,652
                                                         -------------   ---------------    --------------     --------------
Increase (decrease) in cash and cash
 equivalents                                                   20,460           (15,586)          (36,565)             4,749
Balance of cash and cash equivalents at
 beginning of year                                              9,205            24,791            61,356              2,137
                                                         -------------   ---------------    --------------     --------------
Balance of cash and cash equivalents at
 end of year                                                   29,665             9,205            24,791              6,886
                                                         =============   ===============    ==============     ==============


* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).


The accompanying notes are an integral part of the financial statements.
</TABLE>


                                     F-18
<PAGE>
<TABLE>
<CAPTION>

                                                                                Koor Industries Ltd. (An Israeli Corporation)

Company Statements of Cash Flows (cont'd)
-----------------------------------------------------------------------------------------------------------------------------

                                                                                                                  Convenience
                                                                                                                  translation
                                                                                                                    (Note 2B)
                                                                                                               --------------
                                                                                                                   Year ended
                                                                    Year ended December 31                        December 31
                                                         -------------------------------------------------
                                                                  2004              2003              2002               2004
                                                         -------------   ---------------    --------------     --------------
                                                              Reported     Adjusted in terms of NIS of               Reported
                                                              amounts*            December 2003                      amounts*
                                                         -------------   ---------------------------------     --------------
                                                                         NIS thousands                         US $ thousands
                                                         -------------------------------------------------     --------------
<S>                                                          <C>            <C>               <C>                  <C>
(A) Adjustments to reconcile net earnings
   (losses) 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                                            47,879           (17,120)           952,414             11,114
Depreciation and amortization                                   2,022            13,718              2,899                469
Deferred taxes, net                                           (18,580)          (58,903)           (43,798)            (4,313)
Increase (decrease) in liability in respect of
 employee severance benefits, net                               3,491            (6,898)             5,643                810
Net capital losses (gains) from realization:
Fixed assets                                                        -                96            (29,189)                 -
Investment in investee companies                             (213,249)          (11,635)          (336,621)           (49,501)
Increase in value of deposits and other
 erosions, net                                                 (6,623)          (11,260)           (10,880)            (1,537)
Exchange rate differences and erosion of
 long-term loans and other liabilities                          6,077           (24,865)            29,083              1,411
Erosion (linkage) of loans from banks
 and others                                                         -           (10,526)             5,056                  -
Changes in value of investments and assets                          -               673             10,037                  -
                                                         -------------   ---------------    --------------     --------------
                                                             (178,983)         (126,720)           584,644            (41,547)
                                                         -------------   ---------------    --------------     --------------
Changes in operating assets and liability items:
Increase in current accounts of
 investee companies, net                                       36,543           (43,975)          (270,044)             8,482
Decrease (increase) in receivables                               (213)           42,817            (18,118)               (49)
Increase (decrease) in trade payables
 and other payables                                             5,746           (35,551)            13,833              1,334
                                                         -------------   ---------------    --------------     --------------
                                                               42,076           (36,709)          (274,329)             9,767
                                                         -------------   ---------------    --------------     --------------
                                                             (136,907)         (163,429)           310,315            (31,780)
                                                         =============   ===============    ==============     ==============
(B) Significant non-cash transactions:

Dividend in kind from investee company                              -                 -            244,067                  -
                                                         =============   ===============    ==============     ==============
Proceeds from realization of affiliated
 company in capital note                                            -                 -             27,373                  -
                                                         =============   ===============    ==============     ==============
Loans converted into shareholders' equity
 of subsidiary                                                  6,837                 -                  -              1,587
                                                         =============   ===============    ==============     ==============

* With respect to discontinued of adjustment for the effect of inflation as from the CPI of December 2003 (see Note 2B).

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

</TABLE>


                                     F-19
<PAGE>

                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------



Note 1 - General

         Koor Industries Ltd. is a holding company, which operates in the
         fields of telecommunications, defense electronics, agro-chemicals and
         other chemicals and venture capital investment, through its
         subsidiaries, proportionately consolidated companies and affiliates
         (hereinafter - 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.



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:

         1.       The Company - Koor Industries Ltd. ("Koor" or "the Company").

         2.       Subsidiaries - companies, including partnerships, whose
                  statements are fully consolidated, directly or indirectly,
                  with those of the Company.

         3.       Proportionately consolidated companies - jointly controlled
                  companies, which are consolidated by the proportionate
                  consolidation method, directly or indirectly, in Koor's
                  consolidated financial statements.

         4.       Affiliates - companies in which Koor has voting rights which
                  give it 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.

         5.       Investees - subsidiaries, proportionately consolidated
                  companies or affiliates.

         6.       Other companies - companies, the investment in which does not
                  confer significant influence, which are accounted for by the
                  cost method.

         7.       Interested parties - as defined in Paragraph (1) to the
                  definition of "related parties" in Section 1 of the Israeli
                  Securities Law, including related parties as defined in
                  Opinion 29 of the Institute of Certified Public Accountants
                  in Israel ("ICPAI").


                                     F-20
<PAGE>

                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------



Note 2 - Significant Accounting Policies (cont'd)

         A.       Definitions (cont'd):

         8.       Controlling shareholders - as defined in the Israeli
                  Securities Regulations (Financial Statement Presentation of
                  Transactions between a Company and its Controlling
                  Shareholder), 1996.

         9.       Venture capital fund - as defined in Standard No. 1 of the
                  Israel Accounting Standards Board ("IASB").

         10.      Venture capital investments - an investment in a company that
                  meets the following two conditions:

                  (a)      The company is engaged primarily in research,
                           development or marketing of innovative,
                           high-technology products or processes; and

                  (b)      At least 90% of the company's financing stems from
                           owners' capital (including shareholder loans and
                           owner-guaranteed credit), with the support of state
                           authorities or research grants.

         11.      Consumer Price Index - the Israeli Consumer Price Index
                  (CPI) published by the Central Bureau of Statistics.

         12.      Dollar - U.S. dollar.

         13.      Adjusted amount - the historical nominal amount that was
                  adjusted in conformity with the provisions of Opinions 23
                  and 34 and Opinions 36 and 37.

         14.      Reported amount - an amount adjusted to the transition date
                  (December 31, 2003), plus amounts in nominal values that
                  were added after the transition date, minus amounts that
                  were deducted after the transition date.

         15.      Adjusted financial reporting - financial reporting based on
                  the provisions of Opinions 23, 34, 36, 37 and 50.

         16.      Nominal financial reporting - financial reporting based on
                  reported amounts.

         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 effects of changes in the general
                  purchasing power of the shekel will be discontinued,
                  commencing January 1, 2004. Until December 31, 2003, the
                  Company continued to prepare adjusted financial statements in
                  accordance with Opinion No. 36 of the ICPAI. The Company is
                  applying the provisions of the Standard and, accordingly, the
                  adjustment was discontinued, as stated, commencing January 1,
                  2004.

         (2)      In the past, the Company prepared its financial statements on
                  the basis of historical cost, adjusted to the Consumer Price
                  Index. The adjusted amounts that were included in the
                  financial statements as at December 31, 2003, served as the
                  starting point for the nominal financial reporting commencing
                  January 1, 2004. Additions made during the period were
                  included in nominal values.


                                     F-21
<PAGE>

                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 2 - Significant Accounting Policies (cont'd)

B.       Financial statements in reported amounts (cont'd)

         (3)      The non-monetary asset amounts do not necessarily represent
                  their realizable or current economic value, but rather the
                  reported amounts of those assets.

         (4)      In the financial statements, the term "cost" means cost in
                  reported amount.

         (5)      The financial statements of companies classified as
                  autonomous units, are stated based on the changes in the
                  exchange rates of their relevant functional currencies - see
                  2.D below.

         (6)      All comparative data for earlier periods are stated adjusted
                  to the CPI for December 2003.


         C.       Reporting principles

         (1)      Balance sheets:

                  a.       Non-monetary items (namely - fixed assets,
                           inventory of projects in progress and investments
                           stated at cost) are stated in reported amounts.

                  b.       Monetary items are stated in the balance sheet at
                           historical nominal values as at the balance sheet
                           date.

         (2)      Statements of operations:

                  a.       Revenues and expenses deriving from non-monetary
                           items (such as: depreciation and amortization,
                           changes in inventory, prepaid expenses and income,
                           etc.) or from balance sheet provisions, are derived
                           from the change between the reported amounts in the
                           opening balance and closing balance.

                  b.       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 at nominal values.


         D.       Effects of the changes in foreign currency exchange rates

         The Company has been applying Accounting Standard No. 13 on "The
         Effect of Changes in Foreign Currency Exchange Rates" since January 1,
         2004. The Standard deals with the translation of foreign currency
         transactions and the translation of financial statements of overseas
         operations for their inclusion in the financial statements of the
         reporting corporation. The Standard prescribes rules for classifying
         foreign operations as an autonomous foreign unit or as an integrated
         unit, based on indications listed in the Standard and the use of
         judgment, as well as the manner in which the financial statements of
         autonomous held units are to be translated.


                                     F-22
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------



Note 2 - Significant Accounting Policies (cont'd)

         D.       Effects of the changes in foreign currency exchange rates

         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 deriving from the discharge of monetary
         items, or deriving from the reporting of the Company's financial items
         at exchange rates that are different than those used for preliminary
         recording during the period, or from those reported in prior financial
         statements, will be charged to the statement of operations.

         Foreign operations classified as an autonomous held unit
         --------------------------------------------------------

         For certain investees which are domiciled in Israel, and whose
         revenues and most of their raw materials and fixed assets are acquired
         in dollars, and for which the dollar is the major currency in the
         economic environment in which the companies operate, the dollar
         constitutes the measurement and reporting currency in their financial
         statements. This is in accordance with the rules provided in Section
         29A of Opinion 36 of the Institute of Certified Public Accountants in
         Israel.

         The financial statements of investees operating in a foreign country
         as "an autonomous held unit" of the Group and companies registered in
         Israel, the measuring and reporting currency of which is foreign
         currency (dollar) as aforementioned, were translated to Israeli
         currency as follows:

         (1)      The monetary and non-monetary assets and liabilities of an
                  overseas autonomous held unit were translated at the closing
                  rate. The goodwill balance created in the acquisition of the
                  overseas autonomous held unit is treated as an asset of that
                  unit and is translated at the closing rate as of 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 were classified as a
                  separate item in shareholders' equity until the net
                  investment is realized.

         The impairment of an investment in an autonomous held unit overseas
         does not constitute partial realization. Therefore, no part of the
         translation differences were charged to the statement of operations
         when the impairment was recorded.

         The financial statements of investees operating overseas that are an
         "integrated unit" of the Group, in accordance with the indicators
         provided in Standard 13 of the Israeli Accounting Standard Board, 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 created from the
         translation are charged to financing.

         E.       Consolidation of financial statements

         (1)      The consolidated financial statements include the financial
                  statements of Koor 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.


                                     F-23
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------



Note 2 - Significant Accounting Policies (cont'd)

         E.                Consolidation of financial statements

         (2)               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.

         (3)               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.

         (4)               As to the financial statements of subsidiaries that
                           are adjusted according to changes in foreign
                           currency exchange rates - see Note 2.D.

         (5)               a.   The excess cost of an investment over the fair
                                value of its identified assets less the fair
                                value of the identified liabilities (after
                                allocation of the tax deriving from temporary
                                provisions) 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.   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.

         (6)      The Company's shares that were acquired by the Company and
                  subsidiaries are presented as treasury stock.

         (7)      When the sale and/or exercise of convertible securities that
                  were issued by investees (including in respect of employee
                  options) is probable, according to the criteria prescribed in
                  Opinions 48 and 53 of the IACPA, and a decline in the
                  shareholding percentage is expected when they are converted
                  or exercised, as a result of which the holder will sustain a
                  loss, an appropriate provision is included in respect of the
                  anticipated loss.

         (8)      The Company applies Accounting Standard No. 20 on the
                  "Goodwill Amortization Period". Goodwill is stated in the
                  consolidated balance sheet in "other assets and deferred
                  expenses" and is amortized over its estimated useful life, in
                  a methodical manner. 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 amortization period is not to exceed 20 years from the
                  date of initial recognition. Accordingly, the Group companies
                  amortize goodwill mainly over a period of 10 to 20 years.

                  The Standard applies to financial statements for periods
                  beginning on or after January 1, 2004. The change in the
                  amortization period of amortization balances as at January 1,
                  2004 is treated as a prospective change in estimate. These
                  goodwill balances will be amortized methodically over the
                  remainder of the prescribed amortization period.

         F.       Use of estimates:

         Preparation of the financial statements in conformity with generally
         accepted accounting principles requires management to use estimates
         and assessments that influence the reported amounts of assets and
         liabilities and the disclosure relating to contingent assets and
         liabilities, as well as the revenues and expenses in the reporting
         period. It should be clarified that actual results may differ from
         such estimates.


                                     F-24
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------



Note 2 - Significant Accounting Policies (cont'd)

         G.       Cash and cash equivalents:

         Cash and cash equivalents include short-term bank deposits and
         short-term government notes traded in banks, with an original maturity
         of three months or less and which are not restricted.

         H.       Marketable Securities:

         (1)      Marketable securities
                  Investments in marketable securities held for the short term
                  as a current investment are stated at realization value on
                  the stock market as at the balance sheet date. Investments
                  in marketable securities, which are permanent investments,
                  are stated at cost (debentures - including accrued
                  interest), as long as there has not been a decrease in
                  value, which is not of a temporary nature (see also section
                  (3) below). The changes in the value of the securities are
                  charged in full to the statement of operations.

         (2)      Non-marketable securities
                  Stated at cost (debentures - including accrued interest),
                  which, in management's opinion is not higher than realization
                  value (see also section (3) below).

         (3)      Decrease in value of investments
                  From time to time, the Company reviews its permanent
                  investments in other companies to identify if there has been
                  a non-temporary decrease in their value. Such a review is
                  carried out where there are indications of the possibility
                  that the value of permanent investments has been impaired,
                  including a drop in stock market prices, the investee's
                  businesses, the industry in which the investee operates and
                  other parameters. The impairment in the value of these
                  investments, which management bases on an evaluation of all
                  the relevant aspects, giving appropriate weight to each and
                  which is not temporary, is charged to the statement of
                  operations.


         I.       Allowance for doubtful accounts:

         The financial statements include allowances for doubtful accounts,
         which management believes fairly reflect the loss inherent in accounts
         whose collection is doubtful. Among the factors on which management
         bases its determination of the appropriateness of the allowances are
         an assessment of risk, based on information it has on the financial
         status of the 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.       Inventories:

         Inventories are included at the lower of cost or market value. Cost is
         determined as follows: Raw materials, auxiliary materials and spare
         parts - at "moving average" or by the "first-in, first-out" method.
         Finished goods and work-in-process - some on the basis of direct
         manufacturing costs (including materials, labor and subcontractor
         costs) plus the related part of indirect manufacturing costs, and some
         on an average basis (including raw materials, tools, labor) and other
         direct and indirect expenses.
         Merchandise at "first-in, first-out" method or by the "moving
         average".


                                     F-25
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------



Note 2 - Significant Accounting Policies (cont'd)

         K.       Work in progress:

         Inventory of long-term projects in progress is stated at cost, less
         the part of cost that has been charged to the statement of operations
         by the "percentage of completion" method. The cost includes the direct
         cost of materials, wages, subcontractors, other direct costs and
         indirect manufacturing costs allocated to the said projects (also see
         Note 2.5 below).

         Projects in progress and customer advances in respect of long-term
         contracts include amounts in respect of contracts to be executed over
         a period exceeding one year.

         Where a loss is anticipated from the project, a provision is made for
         the entire loss anticipated until completion of the project.


         L.       Venture capital investments:

         The holdings of a venture capital fund in venture capital investments
         are stated at cost in their reported amounts, net of provisions for
         decline in value, if a non-temporary decline occurs. Gains from
         venture capital investments are charged to the statement of operations
         when the investment is realized.


         M.       Investments in investees:

         (1)      The investments in investees 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 investees, if the conversion or exercise
                  of those securities is probable.
                  Taken into account when determining the equity value of the
                  investments in these companies are the amounts as they are
                  included in the companies' financial statements, after the
                  adjustments necessitated by the application of generally
                  accepted accounting principles.

         (2)      Regarding the goodwill amortization policy - see Note 2E(8)
                  above.

         (3)      Regarding the decline in value of investments in investees -
                  see Note 2.AD.

                  A list of investee companies is presented as an appendix to
                  the financial statements.


         N.       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.


                                     F-26
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 2 - Significant Accounting Policies (cont'd)

         O.       Fixed assets:

         1.       The assets are stated at cost, after deduction of related
                  investment grants.

         2.       Cost includes interest capitalized during the set-up period,
                  which was calculated using the interest rates applicable to
                  the sources used to finance the investment.

         3.       Improvements are charged to the cost of assets and are
                  amortized over the economic life of the asset. Repair and
                  maintenance expenses are charged to the statement of
                  operations as incurred.

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

                  The annual depreciation rates used are as follows:
<TABLE>
<CAPTION>

                                                           %
                                                       ---------

<S>                                                      <C>               <C>
                  Buildings and leasehold rights         1.2-10        (mainly 2%)
                  Machinery, equipment and
                   installations                          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
                  Lease hold improvements                  *10
</TABLE>

         *        or over the lease period, whichever shorter.

         P.       Other assets and deferred expenses:

         Other assets and deferred expenses are amortized on a straight-line
         basis over the expected period of benefit therefrom, as follows:

         1.       Licensing of products and acquisition of know-how are stated
                  at cost and are mostly amortized over eight years.

         2.       Marketing rights are stated at cost and amortized over
                  periods of five to ten years.

         3.       Intangible assets in the purchase of products are stated at
                  cost and are mainly amortized over 20 years.

         4.       Deferred expenses - debenture issue costs:

                  These costs are amortized by the straight-line method over
                  the life of the debentures - mainly six years.

         5.       See Note 2.E(8) regarding goodwill deriving from the
                  acquisition of companies that were consolidated.

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

         The amortization period is reevaluated periodically, based on the
estimated period of economic benefit.


                                     F-27
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------



Note 2 - Significant Accounting Policies (cont'd)

         Q.       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 included between the
                  long-term liabilities item and the shareholders' equity item,
                  according to the liability value or the capital value,
                  whichever is the higher.

         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 item
                  "minority interest" in the consolidated balance sheet, and in
                  the item "investment in investees" in the Company balance
                  sheet.

         R.       Deferred taxes:

         1.       Deferred taxes are calculated in respect of temporary
                  differences between the amounts included in the adjusted
                  financial statements and the amount taken into account for
                  tax purposes. Such deferred taxes are allocated for
                  differences related to assets, the consumption or
                  depreciation of which are deductible for tax purposes. As for
                  the main components in respect of which deferred taxes have
                  been created - see Note 16.G.

         2.       Deferred tax balances (asset or liability) are computed at
                  the tax rate expected to be in effect at the time these taxes
                  will be utilized, or when the tax benefit will be realized,
                  based on the tax rates and tax laws legislated or whose
                  legislation is essentially complete by the balance sheet
                  date.

                  The deferred taxes amount in the statement of operations
                  expresses the change in these balances during the year.

         3.       Taxes that would be imposed in the event of realization of
                  investments in investees, the sale of which is not expected
                  in the foreseeable future, are not included in deferred
                  taxes.

                  Deferred taxes were not created for taxes to be imposed on
                  earnings distributed by subsidiaries, as it is the Company'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.

         S.       Revenue recognition:

         Revenues and costs from work in progress under long-term contracts are
         recognized in accordance with Accounting Standard No. 4 ("Standard 4")
         published by the Israel Accounting Standards Board ("IASB"), as
         follows:

         A.       Revenues and costs from work in progress under long-term
                  contracts will be recognized by the "percentage of
                  completion" method, if the following conditions are met: the
                  revenues are known or can be reliably estimated, the
                  collection of revenues is expected, the costs involved in
                  carrying out the project are known or can be reliably
                  estimated, 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 the percentage of completion may be
                  reliably estimated.

                  As long as all the conditions listed above are not met,
                  revenue will be recognized at an amount equal to the costs
                  incurred and the recovery of which is expected ("zero
                  margin").


                                     F-28
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------



Note 2 - Significant Accounting Policies (cont'd)

         S.       Revenue recognition: (cont'd)

         B.       Revenues and costs in government contracts, which are based
                  on cost plus a fixed margin ("cost plus"), are reported on
                  the basis of the invoices submitted to the customer
                  (essentially - on an accrual basis).

         C.       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.

         D.       For contracts in which a loss is anticipated, a provision is
                  recorded immediately for the full amount of the anticipated
                  loss at the time it is identified by management.

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

         2.       Sale of products and providing services:

                  Revenues from sales and services are recognized upon delivery
                  of the products and transfer of the main risks and rewards
                  involved in ownership of the products, or upon performance of
                  the services.
                  In special contracts, sales are recognized after the work is
                  performed and acceptance tests are passed, as prescribed in
                  the product supply contract.


         T.       Sale of trade receivables:

         See Note 3C(2).


         U.       Research and development expenses:

         Research and development expenses -
         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.

         Research and development in process -
         Costs to acquire in-process research and development which have no
         alternative future use and which have not reached technological
         feasibility at the date of acquisition are expensed as incurred.


                                     F-29
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------



Note 2 - Significant Accounting Policies (cont'd)

         V.       Presentation of transactions between the Company and the
                  controlling shareholder:

         Transactions between the Company and its controlling shareholder are
         included in accordance with the Securities Regulations (Financial
         Statement Presentation of Transactions between a Company and its
         Controlling Shareholder), 1996. Accordingly, the difference between
         the price paid to the controlling shareholder on the sale of an asset
         and the book value of the asset to the controlling shareholder, is
         included in the shareholders' equity.
         In addition, the amount of the erosion of an unlinked interest-free
         loan having no maturity date which was received from the controlling
         shareholder, and that the parties do not intend to repay, is included
         in shareholders' equity


         W.       Derivative financial instruments:

         Koor and its subsidiaries enter into different kinds of option
         contracts and forward trades that are intended to reduce the financial
         risks (i.e. commitments for the import of raw materials, export of
         goods, liabilities linked to the CPI or foreign currency) involved in
         the exposure to fluctuations in inter-currency exchange rates,
         interest rates and changes in the CPI.

         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. Changes in the fair value
         are included in the statement of operation in the period they
         occurred.

         The fair value of derivative financial instruments is determined
         according to their market values or quotes by financial institutions,
         and when such do not exist, according to a valuation model.


         X.       Earnings (losses) per share:

         Earnings (losses) per share data are computed in accordance with
         Opinion 55 of the ICPAI.
         Taken into account in the computation of basic earnings (losses) 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 (losses) per share are convertible securities issued by the
         Company and its investees, that were not included in the computation
         of basic earnings (losses) per share, when their conversion or
         exercise does not increase earnings per share.


         Y.       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. Likewise, separate expression is given in
         the statement of changes in shareholders' equity to the dividend
         amount to be distributed against a reduction in the retained earnings
         balance.


                                     F-30
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------



Note 2 - Significant Accounting Policies (cont'd)

         Z.       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.


         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 Company applies Accounting Standard No. 15 - Impairment of Assets
         ("the Standard"), which prescribes procedures that the Company must
         implement in order to assure that its assets in the consolidated
         balance sheet (which are subject to the Standard) are not stated at an
         amount exceeding their recoverable value, which is the higher of the
         net sales price and 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 Company 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
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>

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
                                                          -------------    ------------------
<S>                                                      <C>               <C>
         For the year ended:
         December 2004                                        180.74             4.308
         December 2003                                        178.58             4.379
         December 2002                                        182.01             4.737


                                                                %                  %
                                                          -------------    ------------------

         Changes during:
         2004                                                  1.2               (1.6)
         2003                                                 (1.9)              (7.6)
         2002                                                  6.5                7.3

                                                                %
                                                          -------------
         Real rate of increase (decrease) in the CPI
          relative to the exchange rate of the
         dollar during the year:
          2004                                                 2.8
          2003                                                (5.7)
          2002                                                (0.8)

         (*)      According to the CPI for the month of the balance sheet date 1993 average basis = 100
</TABLE>

         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.      Influence of new accounting standards prior to their
                  application

         In July 2004, the IASB published Accounting Standard No. 19, "Taxes on
         Income", which prescribes that a deferred tax liability is to be
         recognized for all temporary differences that are taxable, except for
         a limited number of exceptions. Likewise a deferred tax asset is to be
         recognized for all temporary differences that are deductible, losses
         for tax purposes and unutilized tax benefits, if it is expected that
         there will be taxable income against which it will be possible to
         utilize them, except for a limited number of exceptions. The new
         Standard will apply to financial statements beginning on January 1,
         2005. The Standard will be adopted as the cumulative effect of a
         change in accounting method. First time application of the said
         Standard will have a net non-recurring impact, as at January 1, 2005,
         of increasing the net income by approximately NIS 19 million (which
         mainly derives from recording deferred taxes in an investee company in
         respect of unrealized profits which are anticipated to be realized in
         the near future).


                                     F-32
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------

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 value of Koor's investment in ECI. In accordance
                  with this appraisal, the Company reversed the impairment loss
                  from decline in value that had been created in 2001, based on
                  various indications, including a valuation for 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.

                  At the request of the appraiser (who agreed that the Company
                  would make use of the valuation), the Company undertook to
                  indemnify him against any expense or financial damage he will
                  sustain, if any, with respect to any claim to be filed by any
                  third party against the appraiser, the cause of action of
                  which is the valuation.

                  As at December 31, 2004, the balance of the investment in
                  ECI, stated by the equity method, is NIS 673 million.

         2.       In its financial statements for 2003, ECI reported on a
                  retroactive restatement of its financial statements for 2002
                  and for the fourth quarter of that year, relating to a
                  decrease in the value of its investment in an affiliate
                  (received in exchange for the transfer of certain assets),
                  having an effect on the investment in ECI of about 2 million
                  dollars.

                  The amount of the restatement was taken into account by the
                  Company, when in the third quarter of 2002, it included an
                  impairment provision for decline in value of its investment
                  in ECI, based on a valuation obtained from an independent
                  appraiser. Therefore, this restatement in the financial
                  statements of ECI has no effect on the financial statements
                  of the Company for the years 2002 and 2003.

         3.       On March 9, 2004, the board of directors of ECI resolved to
                  distribute 7.6 million shares of ECtel (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 had held 10.5 million shares of ECtel (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 in ECtel. The investment
                  in ECtel is presented in the financial statements of ECI and
                  of Koor by the cost method.


                                     F-33
<PAGE>

                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------



Note 3 - Information Regarding Certain Investees (cont'd)

         A.       ECI Telecom Ltd. ("ECI") - an affiliate (cont'd)

         4.       ECI prepares its financial statements in accordance with
                  generally accepted accounting principles in the U.S. For the
                  adjustment of ECI's net income (loss) as reported in
                  accordance with U.S. generally accepted accounting principles
                  (US GAAP) to the net losses according to Israeli generally
                  accepted accounting principles:
<TABLE>
<CAPTION>

                                                                                      Year ended December 31
                                                                         ---------------------------------------------------
                                                                                   2004               2003              2002
                                                                         --------------     --------------    --------------
                                                                          US$ thousands      US$ thousands     US$ thousands
                                                                         --------------     --------------    --------------
<S>                                                                      <C>                <C>               <C>
                  Net gain ( loss) of ECI based on its
                   reporting according to US GAAP                               10,153            (71,040)         (155,685)
                                                                         --------------     --------------    --------------
                  Adjustments:
                  Temporary differences resulting from
                   recognition of revenue arising from
                   application of SAB 101                                            -             (5,905)           (1,548)
                  Finance income - FAS 133                                      (8,303)            (4,843)           (3,632)
                  Tax expenses                                                  (1,529)              (956)              645
                  Amortization of excess cost attributed to
                   intangible assets                                            (1,233)            (1,556)           (1,809)
                  Profit from marketable securities                             (1,282)             1,282                 -
                  Decline in value of assets                                       968              2,452              (533)
                  Cumulative effect of a change in
                   accounting method - FAS 142                                       -                  -               550
                  Discontinued activities                                            -                  -              (570)
                                                                         --------------     --------------    --------------
                  Net loss of ECI according to Israeli GAAP                     (1,226)           (80,566)         (162,582)
                                                                         --------------     --------------    --------------
</TABLE>


         B.       Tadiran Ltd. (in voluntary liquidation) ("Tadiran") - a
                  subsidiary

         On March 7, 2002, Tadiran's Board of Directors adopted a resolution to
         begin the voluntary liquidation of Tadiran and to appoint a
         liquidator. Following the liquidation, the debit balance of the
         capital reserve from foreign currency translation adjustments at Koor
         in respect of its investment in Tadiran of approximately NIS 391
         million was transferred to the statement of operations.


                                     F-34
<PAGE>

                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------


Note 3 - Information Regarding Certain Investees (cont'd)

         C.       Makhteshim Agan Industries Ltd. ("M-A Industries") - a
                  subsidiary

         1.       As at December 31, 2003, Koor held 48.59% of the voting
                  rights in M-A Industries, and taking into account the voting
                  agreement with certain other shareholders, Koor held most of
                  the voting rights. Therefore, the financial statements of M-A
                  Industries for 2003 were included in the consolidated
                  financial statements of the Company.

                  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". Likewise, a tax asset of NIS 59 million which had
                  been created in 2003, because of the expectation that the
                  carryforward tax losses would be utilized, was realized as a
                  result of this sale.

                  As a result of this sale, and after the realization and
                  conversion of convertible securities that had been allotted
                  to the public and to employees, Koor's holding percentage in
                  the voting rights of M-A Industries at December 31, 2004 is
                  38.6% (32.9% on a fully diluted basis).

                  Following the sale of the shares in January 2004, as a result
                  of which Koor's shareholding percentage in M-A Industries
                  fell below 50%, Koor evaluated the existence of effective
                  control in M-A Industries and the implications for continuing
                  to consolidate 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, show that the economic substance that stood and
                  continues to stand at the basis of the relationship between
                  the Company and M-A Industries immediately before and after
                  the said transactions demonstrates effective control, i.e.,
                  Koor's ability to set the financial and operational policies
                  of M-A Industries.

                  See Note 27(4) regarding an additional sale of shares of M-A
                  Industries.

         2.       In October 2001, M-A Industries and its subsidiaries entered
                  into a securitization arrangement, pursuant to which those
                  companies sold all of their trade receivables to foreign
                  companies established for that purpose and which are neither
                  owned nor controlled by M-A Industries ("the Special Purpose
                  Companies"). Purchase of the receivables was financed by an
                  American company from the Bank of America Group.

                  On September 28, 2004, M-A Industries and certain
                  subsidiaries ("the Companies") signed an agreement with Bank
                  of America to terminate the securitization undertaking. On
                  that same date, the Companies 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 certain changes
                  including among others that in the new agreement additional
                  M-A Indusries subsidiaries are included in the transaction.


                                     F-35
<PAGE>

                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------



Note 3 - Information Regarding Certain Investees (cont'd)

         C.       Makhteshim Agan Industries Ltd. (M-A Industries) -
                  subsidiary (cont'd)

         2.       (cont'd)

                  Under the terms of the new securitization agreement, the
                  Companies will sell their trade receivables to a foreign
                  company established for this purpose and which are neither
                  owned nor controlled by M-A Industries ("the Purchasing
                  Company"). The purchase of the trade receivables by the
                  Purchasing Company will be financed by the American company
                  Erasmus Capital Corporation of the Rabobank International
                  Group. During the transition from the previous agreement to
                  the new agreement, the Purchasing Company purchased the trade
                  receivables remaining in the ownership of the Special Purpose
                  Companies. The trade receivables included in the
                  securitization transaction meet certain criteria, as
                  stipulated in the 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 (compared
                  with 150 million dollars in the previous securitization
                  agreement), 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 4 extensions.

                  As at balance sheet date, cash in the amount of about 142.5
                  million dollars was received from the sale of customer debts
                  (December 31, 2003 - about 125.3 million dollars).

                  The price at which the trade receivables are sold is the
                  amount of the sold receivables, which are reduced based on
                  the period expected to elapse between the date the trade
                  receivables are sold and the date they are repaid.

                  On the purchase date of the receivables, the Purchasing
                  Company will pay most of the price of the receivables in
                  cash, and the balance in a deferred liability that will be
                  paid after collection of the sold receivables. The percentage
                  of the cash proceeds varies according to the behavior of the
                  trade receivables portfolio.

                  The companies 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 balance of the total unpaid balance of the sales
                  price included in the subordinated note.

                  The Purchasing Company will have no recourse against the
                  companies in respect of amounts paid in cash, except for
                  receivables in respect of which a commercial dispute arises
                  between the companies and their customers, i.e. a dispute
                  with respect to the non-fulfillment of the seller's
                  obligation in the agreement to supply the product, such as:
                  not supplying the correct product, a defective product, a
                  delay in the supply date, etc.

                  The Companies will handle the collection of the trade
                  receivables included in the securitization transaction for
                  the Purchasing Company.


                                     F-36
<PAGE>

                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------



Note 3 - Information Regarding Certain Investees (cont'd)

         C.       Makhteshim Agan Industries Ltd. (cont'd)

         2.       (cont'd)

                  The essence of 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. In
                  respect of the part of the trade receivables included in the
                  securitization transaction not recognized as a sale, a
                  subordinated note was recorded in the amount of the
                  difference between the trade receivable balances included in
                  the securitization transaction and the proceeds, as noted,
                  and the recording of receivables in respect of those trade
                  receivables sold for which proceeds were received subsequent
                  to the balance sheet date.

                  A loss from the sale of trade receivables is charged at the
                  time of sale to the statement of operations in the item
                  "other expenses".

                  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.

         3.       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.

                  In accordance with this policy, a dividend was declared and
                  paid in 2004 in the amount of 32.9 million dollars (of which
                  7.2 million dollars is in respect of the earnings of 2003). A
                  dividend of 11.2 million dollars was declared in December
                  2004 and paid in early 2005.
                  Subsequent to balance sheet date, another dividend was
                  declared in respect of the earnings of 2004, in the amount of
                  12.7 million dollars.

         4.       Acquisition of companies in the report year:

                  a.       In April 2004, M-A Industries, through a
                           wholly-owned and controlled 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 ("the
                           acquired companies"), which are engaged in the
                           registration, import and marketing of agrochemicals
                           in the U.S.

                           The total sales price amounted to NIS 303 million
                           (the price is after an amendment to the original
                           contract made in December 2004). NIS 34.4 million of
                           the total sales price was paid through a transfer of
                           1,908 thousand shares of M-A Industries that had
                           been held by a subsidiary (cost of shares - NIS 19.2
                           million).

                           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
                           (namely registration and licensing). The amount of
                           NIS 2.3 million was attributed to tax liabilities
                           and NIS 2.7 million was allocated to inventories.
                           The balance of NIS 105.2 million was allocated to
                           goodwill.

                           The excess cost allocated to licensing and
                           registration, as well as to goodwill, are amortized
                           over a 20-year period, which, in the estimation of
                           M-A Industries, represents the period of economic
                           benefit deriving from them.

                                     F-37
<PAGE>

                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------


Note 3 - Information Regarding Certain Investees (cont'd)

         C.       Makhteshim Agan Industries Ltd. (cont'd)


         4.       Acquisition of companies in the report year: (cont'd)

                  a.       (cont'd)

                           The statements of operations and the statements of
                           cash flows of the acquired operations were
                           consolidated beginning May 1, 2004. The effect on
                           the consolidated statement of operations of the
                           first-time consolidation of the acquired operations
                           is additional revenues of NIS 108 million for the
                           period ended December 31, 2004 and an addition to
                           net earnings (after amortization of goodwill) of NIS
                           25 million for that period (Koor's share in the
                           additional net earnings is NIS 10 million). The
                           effect on the consolidated balance sheet as at
                           December 31, 2004 is an increase in assets of NIS
                           334 million.

                  b.       In the report year, M-A Industries, through
                           subsidiaries, signed agreements for the acquisition
                           of three marketing companies, as follows:

                           1)       In June 2004, M-A Industries, through a
                                    wholly owned and controlled subsidiary,
                                    signed an agreement for acquisition of 45%
                                    of the rights in the U.S. company, Control
                                    Solutions Inc. ("CSI"), which is engaged in
                                    the marketing of pesticides to the
                                    non-agricultural market in the United
                                    States.

                                    Pursuant to the acquisition agreement, as
                                    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 the proportionate
                                    consolidation method.

                                    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.

                                    Furthermore, 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 in the three years
                                    preceding the acquisition date.

                           2)       In July 2004, M-A Industries, 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.

                           3)       In August 2004, M-A Industries, 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 for rice.

                           The aggregate acquisition cost of the acquired
                           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 (namely
                           registration and licensing), the amount of NIS 15.8
                           million was attributed to deferred tax liabilities,
                           NIS 3.1 million was allocated to inventories, and
                           the balance of NIS 85.6 million was allocated to
                           goodwill.


                                     F-38
<PAGE>

                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 3 - Information Regarding Certain Investees (cont'd)

         C.       Makhteshim Agan Industries Ltd. (cont'd)


         4.       Acquisition of companies in the report year: (cont'd)

                  b.       (cont'd)

                           The excess cost that was allocated to registration
                           and licensing as well as the goodwill are amortized
                           over a 20-year period, which, in the estimation of
                           M-A Industries, represents the period of economic
                           benefit deriving from them.

                           The statements of operations and the statements of
                           cash flows of the three marketing companies were
                           consolidated from their acquisition date. The total
                           effect of the first-time consolidation of the
                           acquired marketing companies on the consolidated
                           statement of operations is additional revenues of
                           NIS 207 million for the period ended December 31,
                           2004 and a decrease in net earnings (after
                           amortization of goodwill) of NIS 1 million during
                           that period. The effect on the consolidated balance
                           sheet as at December 31, 2004 is an increase in
                           assets of NIS 314 million.

         5.       In a private placement to institutional investors (mainly
                  overseas) in March 2004, M-A Industries allotted
                  non-marketable convertible debentures in the amount of 150
                  million dollars par value (including 5 million dollars which
                  was issued to the underwriters in April 2004), in
                  consideration for their par value. See Note 15B(1).

         6.       In March 2004, a subsidiary of M-A Industries transferred to
                  a third party, in an off-exchange transaction, 7 million
                  shares of M-A Industries it had held. Under the terms of the
                  agreement, the proceeds will be paid by the end of one year
                  from the transfer date, whether in cash, based on the share
                  price on the stock exchange on such date, or whether in the
                  shares of M-A Industries plus an increment of 0.5% of the
                  share price on the stock exchange. Since the cash proceeds
                  have not yet been received, no capital issuance was recorded
                  by M-A Industries in respect of the transferred shares.
                  During the second quarter, 1,908 thousand shares of the above
                  shares were returned, for the purpose of paying the
                  consideration for the acquisition of a group of companies in
                  the U.S., as discussed in Note 3(C)(4)(a) above.
                  Subsequent to balance sheet date an additional 750 thousand
                  shares were returned and an extension was granted with
                  respect to the rest of the shares.

                  See Note 27(1) regarding the purchase of MABENO.

         7.       On February 3, 2005, Koor sold 15.9 million shares of M-A
                  Industries for NIS 374 million. The resultant gain of NIS 204
                  million will be charged in the Company's financial statements
                  for the first quarter of 2005. As a result of the sale, the
                  utilization of carryforward tax losses is certain. Therefore,
                  the Company recorded a deferred tax asset of NIS 69 million
                  in the reporting period - (see Note 27(4)).


                                     F-39
<PAGE>

                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------



Note 3 - Information Regarding Certain Investees (cont'd)

         D.       Telrad Networks Ltd. ("Telrad") - a subsidiary

         1.       On September 28, 2004, Koor and Telrad Holdings, a
                  wholly-owned subsidiary ("the Koor Group") entered into an
                  agreement to sell 39% of its holdings in Telrad Networks to
                  Fortissimo GP Capital Fund L.P. ("Fortissimo") for 21 million
                  dollars.

                  The sale will be effected in two stages. In the first stage,
                  which was closed in November 2004, Koor transferred 19.5% of
                  the Telrad Networks shares to Fortissimo for consideration of
                  10.5 million dollars. In the second stage, to be closed 180
                  days after the closing of the first stage, Fortissimo will
                  transfer the balance of the consideration, amounting to 10.5
                  million dollars, and will receive the balance of the sold
                  shares. The Koor Group and Fortissimo agreed on a formula,
                  whereby if Fortissimo does not transfer the entire balance in
                  the second stage, it will receive shares on a basis
                  proportionate to the consideration paid. In such a situation,
                  there are cases in which changes will be made to the
                  composition of the board of directors, in the voting rights
                  given to the minority shareholders, in the loan amounts and
                  in the options terms, as described below.

                  Fortissimo was given an option, exercisable for a period of
                  up to 48 months from the closing date of the first stage, to
                  acquire additional shares from the Koor Group, whereby
                  Fortissimo's total holdings will not exceed 49% of the shares
                  of Telrad Networks. The exercise price will be determined
                  according to the value of Telrad Networks, which will not be
                  less than its shareholders' equity in the financial
                  statements on the exercise date.

                  As part of the share-sale agreement, the parties agreed that
                  upon the closing of the first stage of the sale, the Koor
                  Group would transfer 9.5 million dollars as a loan to Telrad
                  Networks, and with the closing of the second stage, would
                  transfer an additional 11.5 million dollars. These loans will
                  bear annual interest of Libor+2% per annum, and will mature
                  20 years from the closing date of the first stage.
                  On the closing date of the first stage, the Koor Group
                  provided Telrad Networks with the said 9.5 million dollar
                  loan. As at December 31, 2004, based on estimates by the
                  Company's management, forecasts on the operating results of
                  Telrad Networks and a range of indemnifications provided in
                  the transaction, the management of Koor Group assessed that
                  the value of the loan was impaired. Therefore a provision was
                  recorded in the amount of the net loss that will be incurred
                  by the Group.

                  As to the indemnifications given by the Koor Group as part
                  of this transaction, see Note 18A(5)(C).

                  Pursuant to the sale agreement, Telrad's board of director
                  appointed 3 directors from Koor, 3 directors from Fortissimo,
                  and an outside expert with the consent of the parties, who,
                  as at the publication date of the financial statements, was
                  not as yet appointed.

                  The agreement stipulates a list of matters which must be
                  approved by the joint consent of the Koor Group and
                  Fortissimo, including: approval Telrad's budget, appointment
                  of Telrad's executives and determining their terms of
                  employment and a dividend distribution. Those rights confer
                  to the minority shareholders the right to actually
                  participate in the significant decisions related to the
                  Telrad's normal course of business, and, therefore, prevent
                  Koor's Group, the majority shareholder, from actual control
                  over Telrad Networks and require the joint consent of Koor
                  and Fortissimo in decisions on matters that are critical for
                  the operating objectives of Telrad.

                  Therefore, beginning from the fourth quarter of 2004, Telrad
                  is included in Koor's financial statements by the
                  proportionate consolidation method, at a rate of 80.5%.


                                     F-40
<PAGE>

                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------



Note 3 - Information Regarding Certain Investees (cont'd)

         D.       Telrad Networks Ltd. (cont'd)

         1.       (cont'd)

                  Below is the Company's share in the balance sheet date of
                  Telrad as at December 31, 2004 (in NIS thousands):

                  Current assets                               296
                  Non-current assets                           144
                  Current liabilities                          197
                  Long-term liabilities                         91

                  The Company's share in the results of Telrad at the fourth
                  quarter of 2004 (in NIS thousands):

                  Income                                        93
                  Costs and expenses                           155

         2.       During the report period Telrad recorded an impairment of its
                  deferred tax assets by NIS 67 million, due to changes in
                  management's estimation of the probability of utilization of
                  the company's carryforward tax losses.

         3.       In 2004, Telrad's board of directors approved a
                  reorganization plan that includes additional employee layoffs
                  in addition to prior early retirement plans in 2000 to 2002.
                  The financial statements for 2004 included in the item "other
                  income (expenses), net" an expense of NIS 29 million (of
                  which NIS 3 million is in respect of previous plans)
                  (expenses of reorganization plan in 2003 and 2002 totaled NIS
                  2 million and NIS 107 million, respectively).


         E.       Elisra Electronic Systems Ltd. ("Elisra") - a subsidiary

         1.       On March 17, 2001, a fire broke out at the plants of
                  Elisra's subsidiaries - Tadiran Systems Ltd. and Tadiran
                  Spectralink Ltd. ("the companies"). The fire caused damage
                  to equipment, building, inventories and projects in
                  progress. The book value of the equipment, inventories and
                  identified costs in projects in progress that were damaged
                  in the fire, together with the building restoration costs
                  and other costs, are estimated at approximately 36 million
                  dollars. As at the balance sheet date, advances were
                  received from the insurance company of approximately 10
                  million dollars. The claim sent by the companies to the
                  insurance company, which was based on the terms of the
                  insurance policy, also include a demand for amounts related
                  to consequential damage and other damages that, in the
                  opinion of the companies, is covered by the insurance
                  policy. Therefore, the total amount of the claim is
                  significantly higher than the book value damage and
                  restoration cost of the building, as aforesaid.

                  The companies took legal measures to receive insurance
                  compensation and even filed a lawsuit in Tel Aviv District
                  Court against the insurance company and its appraisers in the
                  amount of 96 million dollars. In view of the duration of the
                  proceedings, the managements of the companies decided to
                  classify the balance of the income receivable from the
                  insurance companies as a long-term receivable.


                                     F-41
<PAGE>

                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------



Note 3 - Information Regarding Certain Investees (cont'd)

         E.       Elisra Electronic Systems Ltd. ("Elisra") - a subsidiary
                  (cont'd)

         1.       (cont'd)

                  In the estimation of the companies, based on factors
                  including opinions from their counsel on this matter, it is
                  difficult to estimate at this stage what the chances are that
                  the companies will receive the full amount of the claim,
                  although they are assessed as solid. Nonetheless, the
                  managements of the companies, based, as aforesaid, on the
                  opinions of their counsel on this matter, estimate that the
                  chances are good that indemnification will be received from
                  the insurance company at an amount exceeding the balance of
                  the receivable recorded by them as assets in the financial
                  statements.

                  In April 2004, the companies filed a motion with the court to
                  issue a partial ruling of 33 million dollars (beyond the
                  advances already paid by the insurance company), based on the
                  admission of liability by the insurance company and its
                  representatives deriving from the insurance incident, whereas
                  the dispute focuses on the level of damages. In December
                  2004, a hearing was held in the Court in which a ruling was
                  put into effect, with the consent of the parties, whereby a
                  separate bank account would be opened, in which the insurance
                  company would deposit 15 million dollars. Any withdrawal from
                  this account would require the Court's approval, until the
                  conclusion of the proceedings in the lawsuit. According to
                  the above agreement, the lawsuit was sent to arbitration
                  before retired Supreme Court Justice Prof. Yitzhak Zamir, and
                  at this time, the court proceedings will be stayed until the
                  end of the arbitration.

         2.       In July 2002, the Company, Elisra and Elta Electronic
                  Industries Ltd. ("Elta" or "the Buyer") signed an agreement
                  ("the Purchase Agreement"), whereby Koor sold 30% of Elisra's
                  shares to Elta for 100 million dollars. The sale was closed
                  in November 2002. As a result of the sale, Koor recorded a
                  capital gain in 2002 of NIS 339 million, under the item
                  "other income, net".

                  In addition, Koor granted options to Elta, exercisable until
                  December 31, 2003, to increase its holdings in Elisra by up
                  to an additional 8% in consideration of a maximum sum of
                  approximately 26 million dollars. This option expired and was
                  not exercised by Elta. Under the Purchase Agreement, Koor
                  agreed to indemnify Elta if certain conditions, set out in
                  the Agreement, are fulfilled. Also see Note 18A(3).

                  As part of the agreement between Koor and Elta, an agreement
                  was signed, to which Elisra is a party, setting forth the
                  structure of Elisra's board of directors and the
                  decision-making process, as well as certain limitations with
                  respect to the sale of Elisra's shares. In addition, a
                  cooperation agreement was signed between Elisra and Elta,
                  with regard to activities between the companies, including a
                  proposal for an agreed range of products and the principles
                  for selecting a project leader from time to time.


                                     F-42
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------



Note 3 - Information Regarding Certain Investees (cont'd)

         F.       Koor Corporate Venture Capital ("Koor CVC") - a consolidated
                  partnership

         1.       Regarding commitments to invest and other investments
                  subsequent to balance sheet date, see Note 18B(5).

         2.       During the current year, 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
                  investment by approximately NIS 58 million (in 2003 and 2002
                  - NIS 72 million and NIS 93 million, respectively).

         3.       In June 2004, Cisco Systems purchased all the shares of
                  Riverhead Inc. from its shareholders for consideration of 39
                  million dollars. The share of Koor CVC in the proceeds is 7
                  million dollars. The gain to Koor CVC is NIS 17 million.

         G.       Knafayim Holdings Arkia ("Knafayim") - affiliate

         1.       During 2003 and in the first quarter of 2004, Knafayim
                  acquired shares, which did not confer the status of related
                  party, and various types of options of El Al Israel Airlines
                  Ltd. ("El Al"). During the second quarter of 2004, after
                  receiving the requisite approval to increase its stake in the
                  shares of El Al above 5%, Knafayim exercised some of the
                  options. Thus, after the exercise, Knafayim held 22% of El
                  Al's issued share capital. Pursuant to a third-party voting
                  agreement, Knafayim held 24.9% of the voting rights of El Al.
                  During the third quarter of 2004, Knafayim filed a request
                  with the State of Israel, which holds a special share in El
                  Al, for approval to increase its stake in El Al above 25%.
                  On August 5, 2004 the Anti-Trust Commissioner approved the
                  merger between Knafayim and El-Al, with restrictive
                  conditions, mainly regarding the sale of Knafayim's aviation
                  activities to an independent third party.

                  On December 22, 2004, Knafayim received the requisite
                  approval to increase its stake in the shares of El Al to 40%,
                  and to a shareholding that would grant control over El Al.
                  Upon receipt of this approval, Knafayim exercised part of the
                  purchase option so that as of December 31, 2004 Knafayim
                  holds approximately 39.8% of the issued and paid shares of El
                  Al and approximately 42.8% of the voting rights in El Al
                  according to authorization that was granted to Knafayim by a
                  third-party.

         2.       On September 29, 2004 the Company signed two agreements to
                  sell 16% of the shares of Knafayim for approximately NIS 121
                  million. In the statement of operations for the third quarter
                  of 2004, the Company recorded a gain of NIS 43 million. As a
                  result of the sale, the Company's shareholding in Knafayim
                  decreased from approximately 28.3% to approximately 12.2%.
                  Accordingly, the investment in Knafayim is stated by the cost
                  method, beginning from the date of the sale.

                  In addition, on September 29, 2004, the Company signed an
                  agreement for the sale of an additional 3% of the shares of
                  Knafayim for approximately NIS 23 million. The conditions for
                  closing the sale were fulfilled on October 20, 2004.
                  Therefore a gain of approximately NIS 8 million was recorded
                  in the fourth quarter of 2004.

                  As of the balance sheet date, the Company holds approximately
                  9% of Knafayim. Since management intends to sell the
                  remainder of the shares in Knafayim, the investment is
                  presented within current assets. As a result of management's
                  intention to sell the remainder of its holding in Knafayim,
                  the Company recorded deferred taxes of approximately NIS 8
                  million during the reporting period in respect of the
                  anticipated utilization of carryforward tax losses.


                                     F-43
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------



Note 3 - Information Regarding Certain Investees (cont'd)

         H.       Tadiran Communications Ltd. ("Tadiran Communications") - an
                  affiliated Company

          1.      On September 10, 2004 the Company signed an agreement to
                  acquire about 33% of the shares of Tadiran Communications
                  (about 31% taking into consideration stock options the
                  exercise of which is probable) from two shareholders for
                  approximately NIS 637 million (approximately 144 million
                  dollars). Tadiran Communications develops, manufactures and
                  markets communication devices and systems mainly for military
                  purposes. The sale was closed in November 2004. The purchase
                  was financed by a loan received from an Israeli bank in
                  consideration for a lien in favor of the bank on the sold
                  shares.

                  Excess cost created on the acquisition date totaled NIS 490
                  million (111 million dollars), which was allocated based on
                  the valuation received from an independent appraiser. At the
                  request of the appraiser (who agreed that the Company would
                  make use of the valuation), the Company undertook to
                  indemnify him against any expense or financial damage he will
                  sustain, if any, with respect to any claim to be filed by any
                  third party against the appraiser, the cause of action of
                  which is the valuation.

                  Provided below is the allocation of excess cost (according to
                  a holding rate of 31%):

                                                                  NIS millions
                                                                  ------------
                  Current assets                                          14
                  Investments and long-term receivables                    1
                  Fixed assets                                             1
                  Intangible assets (1)                                  308
                  Goodwill (2)                                           242
                  Current liabilities                                     19
                  Long-term liabilities                                    3
                  Deferred taxes (3)                                     (98)

                  (1)     The intangible assets include NIS 20 million
                          allocated to in-process research and development,
                          which were charged to the statement of operations on
                          the acquisition date, in accordance with the
                          provisions of FIN 4. The balance of NIS 288 million
                          was allocated to intangible assets with an average
                          life of seven years, according to the following
                          breakdown: NIS 14 million allocated to brand name,
                          NIS 173 million allocated to customer list, NIS 98
                          million allocated to technology and NIS 3 million
                          allocated to the orders backlog.

                  (2)     Useful life of goodwill is estimated at 10 years.

                  (3)     Deferred taxes deriving from the allocation of excess
                          cost.

          2.      On December 27, 2004, Koor entered into a series of
                  agreements with Elbit Systems Ltd. ("Elbit") and with
                  Federman Enterprises Ltd. ("Federman"). Under the terms of
                  the agreements, Koor will sell its entire holdings in Tadiran
                  Communications (33%) to Elbit for 146 million dollars ("Elbit
                  sale"). Concurrently, Koor will acquire 9.8% of Elbit's share
                  capital from Federman for 99 million dollars ("Federman
                  sale"). On the date the agreements were drafted, Elbit held
                  4.2% of the shares of Tadiran Communications and Federman
                  held 50% of Elbit's shares. On March 1, 2005, a general
                  meeting of the shareholders of Elbit ratified the Elbit sale.


                                     F-44
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
--------------------------------------------------------------------------------



Note 3 - Information Regarding Certain Investees (cont'd)

         H.       Tadiran Communications Ltd. ("Tadiran Communications") - an
                  affiliate (cont'd)

         2.       (cont'd)

                  The two sales are interconnected and will be executed -
                  subject to the conditions stipulated in the agreements,
                  including approval of the Anti-Trust Commissioner and other
                  approvals - in two stages.

                  In the first stage, Koor will sell 13.8% of Tadiran
                  Communications to Elbit for 63 million dollars and
                  concurrently Koor will acquire 5.3% of the shares of Elbit
                  from Federman for 53 million dollars. The closing date for
                  the first stage will be in the second quarter of 2005, or at
                  a later date, if so agreed by the parties. After the closing
                  of the first stage, Koor will be entitled to appoint one
                  director to Elbit's board, and Elbit will be entitled to
                  appoint three of the members of Tadiran Communications' board
                  of directors.

                  In the second stage of the transaction, Koor will sell the
                  balance of its holdings in Tadiran Communications (19.2%) to
                  Elbit for 83 million dollars and concurrently will acquire
                  4.5% of the shares of Elbit for 46 million dollars. In
                  addition to the aforementioned conditions, the second stage
                  is contingent on the closing of a transaction in which
                  Tadiran Communications will acquire from Koor the holdings of
                  Koor (70%) in Elisra Elecronic System Ltd.

                  The closing date for the second stage of the agreements was
                  scheduled for September 30, 2005. If all the other
                  conditions are fulfilled, but the Elisra transaction has not
                  been closed, the date will be postponed to April 30, 2006 or
                  to another date agreed upon by the parties.

                  After both stages in the Elbit sale and the Federman sale are
                  executed, Koor will no longer hold shares of Tadiran
                  Communications, although it will hold 9.8% of the Elbit
                  shares and will have the right to appoint 20% of Elbit's
                  directors. One of the directors nominated by Koor willl serve
                  as Vice Chairman of the Board of Directors of Elbit.

                  It was further agreed by the parties that if the second stage
                  of the sales is not closed within sixteen months of the
                  signature date of the agreements, then the board of directors
                  of Tadiran Communications will be comprised in a manner
                  whereby Koor and Elbit will have the same number of directors
                  in the board of directors of Tadiran Communications, and
                  there will be rotation of two-year terms for the chairman of
                  the board, with Koor's candidate being the first to serve.


                                     F-45
<PAGE>
<TABLE>
<CAPTION>
                                                                                Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------


Note 4 - Short-Term Deposits and Investments

                                                                Consolidated                            Company
                                                           -----------------------------        ------------------------------
                                                                 December 31                          December 31
                                                           -----------------------------        ------------------------------
                                                                  2004              2003               2004               2003
                                                           ------------       ----------        -----------         ----------
                                                                NIS thousands                        NIS thousands
                                                           -----------------------------        ------------------------------

<S>                                                         <C>                <C>               <C>                 <C>
         Marketable securities (1):
          Debentures                                          122,706           141,221            117,110            132,218
          Short-term Treasury notes                           145,927            74,628             81,901             74,628
          Shares and options                                  106,773            56,010             99,630             48,753
          Mutual fund participation
           certificates                                             -             5,618                  -                  -
                                                           ------------       ----------        -----------         ----------
                                                              375,406           277,477            298,641            255,599
         Deposits in banks and financial
          institutions                                         37,584            89,161                  -             55,207
         Short-term loans and current
          maturities of long-term loans                         3,478               171                  -                  -
                                                           ------------       ----------        -----------         ----------
                                                              416,468           366,809            298,641            310,806
         (1) Presented at market value.
                                                           ============       ==========        ===========         ==========



Note 5 - Trade Receivables

         Consolidated:
                                                                                                      December 31
                                                                                                ------------------------------
                                                                                                       2004               2003
                                                                                                ------------       -----------
                                                                                                        NIS thousands
                                                                                                ------------------------------

         Open accounts                                                                           1,877,696         1,732,827
         Deferred promissory note and receivables from sale of
          customers' debts*                                                                        261,004           250,492
         Post dated checks receivable and credit card companies                                     29,920            43,561
         Current maturities of long-term trade receivables                                           4,979            25,581
                                                                                                ------------       -----------
                                                                                                 2,173,599         2,052,461
                                                                                                ============       ===========
         Including:
         Net of allowance for doubtful accounts                                                    121,922           106,305
                                                                                                ============       ===========

         *  See Note 3C(2).
</TABLE>


                                     F-46
<PAGE>
<TABLE>
<CAPTION>

                                                                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------


Note 6 - Other Receivables
                                                                Consolidated                            Company
                                                           -----------------------------        ------------------------------
                                                                 December 31                          December 31
                                                           -----------------------------        ------------------------------
                                                                  2004              2003               2004               2003
                                                           ------------       ----------        -----------         ----------
                                                                NIS thousands                        NIS thousands
                                                           -----------------------------        ------------------------------

<S>                                                         <C>                <C>               <C>                 <C>
         Government agencies                                  195,708           126,043                357                  7
         Deferred taxes, see Note 16G                         171,310           156,030             77,483             58,903
         Accrued income                                        31,639            31,289                390                717
         Prepaid expenses                                      48,498            45,712                  -                  -
         Employees                                              8,524             8,855                  -                  -
         Affiliates - current accounts                            643             2,378                376                  -
         Others                                                72,661            82,863              5,432              8,147
                                                           ------------       ----------        -----------         ----------
                                                              528,983           452,170             84,038             67,774
                                                           ============       ==========        ===========         ==========


Note 7 - Inventories and Work in Progress

         Consolidated:
                                                                                                           December 31
                                                                                                ------------------------------
                                                                                                       2004              2003
                                                                                                ------------       -----------
                                                                                                          NIS thousands
                                                                                                ------------------------------
         A.       Inventories and work in progress, net of
                   customer advances

                  Presented as current assets:
                  Industrial inventory:
                  Raw and auxiliary materials                                                      712,021           570,455
                  Goods and work in progress                                                       228,122           199,748
                  Finished goods                                                                 1,171,574         1,024,181
                  Advances in respect of materials                                                  13,974             4,562
                  Inventories for trading operations -merchandise,
                   including advance payments                                                      169,194            91,591
                                                                                                ------------       -----------
                                                                                                 2,294,885         1,890,537
                  Less - customer advances                                                               -             4,786
                                                                                                ------------       -----------
                                                                                                 2,294,885         1,885,751
                                                                                                ============       ===========
         B.       Customer advances, net of work in progress

                  Presented as current liabilities:
                  Customer advances in respect of work in progress(1)(2)                           211,297           156,831
                  Less - inventory and work in progress                                                 90               390
                                                                                                ------------       -----------
                                                                                                   211,207           156,441
                                                                                                ============       ===========
                  (1)     Not including long-term advances
                  (2)     See Note 22 regarding guarantees provided for
                          securing the gross amounts of customer advances
                          (including long-term advances).
</TABLE>


                                     F-47
<PAGE>
<TABLE>
<CAPTION>

                                                                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------


Note 7 - Inventories and Work in Progress (cont'd)

                                                                                                           December 31
                                                                                                ------------------------------
                                                                                                       2004              2003
                                                                                                ------------       -----------
                                                                                                          NIS thousands
                                                                                                ------------------------------
<S>                                                                                            <C>                <C>
         C.       Financial value of contracts signed during the report
                   period                                                                         902,621            736,517
                                                                                                ============       ===========
         D.       The balance of the financial value of existing contracts
                   which were not recognized as revenues as at the
                   balance sheet date                                                           1,990,684          2,245,371
                                                                                                ============       ===========
</TABLE>


                                     F-48
<PAGE>
<TABLE>
<CAPTION>

                                                                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------



Note 8 - Investments in Investee companies


         A.       Consolidated balance sheet - affiliates

                                                                                                           December 31
                                                                                                ------------------------------
                                                                                                       2004              2003
                                                                                                ------------       -----------
                                                                                                          NIS thousands
                                                                                                ------------------------------
<S>                                                                                            <C>                <C>
         Net asset value of the investments (1)(2)                                                 882,854           902,343
                                                                                                ------------       -----------
         Goodwill and original difference (2):
          Original amount                                                                          491,044            66,465
          Accumulated amortization                                                                 (26,859)          (51,395)
                                                                                                ------------       -----------
                                                                                                   464,185            15,070
                                                                                                ------------       -----------
         Long-term loans (3)                                                                        28,121            26,351
                                                                                                ------------       -----------
                                                                                                 1,375,160           943,764
                                                                                                ============       ===========
         (1)      As follows:
                  Net asset value of investments as at December 31, 1991                           277,159           277,159
                  Changes from January 1, 1992:
                  Cost of shares acquired or received                                            1,427,857         1,266,706
                  Accumulated losses, net                                                         (744,819)         (708,007)
                  Changes in capital reserves and foreign currency
                   translation adjustments                                                         (32,626)          (11,648)
                  Initially consolidated subsidiaries, net                                         465,193           465,193
                  Disposals, net                                                                  (509,910)         (387,060)
                                                                                                ------------       -----------
                                                                                                   882,854           902,343
                                                                                                ============       ===========
         (2)       Including investments in companies traded on the
                    Stock Exchange in Tel Aviv or abroad, in NIS millions:
                   Carrying value at the balance                                                      1,275               862
                                                                                                ============       ===========
                  Market value as at balance date                                                    1,754               985
                                                                                                ============       ===========
         (3)      Linkage terms and interest rates relating to long-term loans:

                  Linked to the CPI - bearing interest at the rate of 5.5%,
                   without maturity date                                                            22,335            20,470
                  Linked to the Dollar - bearing interest at the rate of
                   LIBOR  + 1%, without maturity date (*)                                            5,786             5,881
                                                                                                ------------       -----------
                                                                                                    28,121            26,351
                                                                                                ============       ===========

                  (*) On December 31, 2004, the LIBOR rate is 3.1%.
</TABLE>


                                     F-49
<PAGE>
<TABLE>
<CAPTION>

                                                                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------



Note 8 - Investment in Investee Companies (cont'd)

         B.       Company balance sheet - investees
                                                                                                           December 31
                                                                                                ------------------------------
                                                                                                       2004              2003
                                                                                                ------------       -----------
                                                                                                          NIS thousands
                                                                                                ------------------------------
<S>                                                                                            <C>                <C>
         Shares:
         Net asset value of the investments                                                      1,729,813         1,940,588
                                                                                                ------------       -----------
         Goodwill and original differences:
         Original amount, net                                                                      556,043           158,187
         Accumulated amortization                                                                  (57,236)          (90,179)
                                                                                                ------------       -----------
                                                                                                   498,807            68,008
                                                                                                ------------       -----------
         Book value (1)                                                                          2,228,620         2,008,596
         Payments on account of shares (1)                                                          60,927            60,927
         Long-term loans and capital notes (2)                                                   1,307,998         1,379,561
         Non-current inter-company accounts (3)                                                      4,012             3,982
                                                                                                ------------       -----------
                                                                                                 3,601,557         3,453,066
                                                                                                ============       ===========
         (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                                                        7,714,479         7,055,603
                  Accumulated losses, net                                                       (4,467,604)       (4,432,466)
                  Changes in capital reserves and erosion of capital notes, net                    (33,483)           14,648
                  Disposals                                                                     (2,956,526)       (2,600,943)
                                                                                                ------------       -----------
                  Book value, including payments on account of shares (4)                        2,289,547         2,069,523
                                                                                                ============       ===========
</TABLE>


                                     F-50
<PAGE>

<TABLE>
<CAPTION>

                                                                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------



Note 8 - Investment in Investee Companies (cont'd)

         B.       Company balance sheet - investees (cont'd)
                                                                                                           December 31
                                                                                                ------------------------------
                                                                                                       2004              2003
                                                                                                ------------       -----------
                                                                                                          NIS thousands
                                                                                                ------------------------------
<S>                                                                                            <C>                <C>

         (2)      Long-term loans and capital notes:
                  Long-term loans (a) (b)                                                           93,476            65,633
                  Capital notes - unlinked and not bearing interest (c)                          1,251,902         1,316,457
                                                                                                ------------       -----------
                                                                                                 1,345,378         1,382,090
                  Less - current maturities of long-term loans                                     (37,380)           (2,529)
                                                                                                ------------       -----------
                                                                                                 1,307,998         1,379,561
                                                                                                ============       ===========

         (a)      Long-term loans classified by linkage terms and interest rates:

                                                                           Interest rate
                                                                          at December 31        December 31        December 31
                                                                          --------------     --------------      -------------
                                                                                    2004               2004               2003
                                                                          --------------     --------------      -------------
                                                                                       %             NIS thousands
                                                                          --------------     ---------------------------------
                  Linked to the Dollar                                                 3            42,765             12,184
                  Linked to the CPI                                                  7-2            41,803             43,205
                  Linked to the CPI                                          No interest             8,908             10,244
                                                                                            --------------      -------------
                                                                                                    93,476             65,633
                                                                                            ==============      =============

         (b)      The loans mature in the years subsequent to the balance sheet date
                  (excluding current maturities) as follows:

                                                                                                           December 31
                                                                                            ---------------------------------
                                                                                                      2004              2003
                                                                                            --------------       ------------
                                                                                                          NIS thousands
                                                                                                -----------------------------
                  Second year                                                                        5,385                  -
                  Third year                                                                             -              5,474
                  Fourth year                                                                            -              6,710
                  Fifth year                                                                             -                  -
                  Thereafter                                                                        50,711             50,920
                                                                                            --------------      -------------
                                                                                                    56,096             63,104
                                                                                            ==============      =============
         (c)      Capital notes are not presented at their present value, since
                  their repayment date has not yet been fixed by the parties.
</TABLE>


                                     F-51
<PAGE>
<TABLE>
<CAPTION>

                                                                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------



Note 8 - Investment in Investee Companies (cont'd)

         B.       Company balance sheet - investees (cont'd)

(3)      Non-current inter-company accounts:
                                                                                                      December 31
                                                                                            ---------------------------------
                                                                                                       2004              2003
                                                                                            --------------       ------------
                                                                                                     NIS thousands
                                                                                            ---------------------------------
<S>                                                                                          <C>               <C>
                  Linked to the Dollar                                                                 599               569
                  Unlinked-bears interest at the rate of the increase in the CPI                     3,413             3,413
                                                                                            --------------       ------------
                                                                                                     4,012             3,982
                                                                                            ==============       ============

                                                                                                      December 31
                                                                                            ---------------------------------
                                                                                                      2004              2003
                                                                                            --------------       ------------
                                                                                                     NIS millions
                                                                                            ---------------------------------
         (4)       Including investments in marketable shares traded on the Tel
                   Aviv Stock Exchange or abroad in NIS millions:

                  Carrying value                                                                       754               498
                                                                                            ==============       ============
                  Market value as at balance date                                                      960               867
                                                                                            ==============       ============
</TABLE>

<TABLE>
<CAPTION>

Note 9 - Other Investments and Receivables

         A.       Composition:
                                                                Consolidated                            Company
                                                        -------------------------------      ---------------------------------
                                                                 December 31                          December 31
                                                                  2004              2003               2004               2003
                                                        --------------    --------------     --------------       ------------
                                                                NIS thousands                        NIS thousands
                                                        -------------------------------      ---------------------------------
<S>                                                     <C>              <C>                 <C>                 <C>
         Deposits in banks and in
          financial institutions                               47,278            49,180             32,028             32,028
         Non-current trade receivables                          5,229             9,362                  -                  -
         Long-term loans receivable
          from others                                         113,637            73,498                  -                  -
                                                        --------------    --------------     --------------       ------------
         Total (see Note B above)                             166,144           132,040             32,028             32,028

         Marketable securities                                 33,471             1,625                  -                  -

         Venture capital investment                           171,207           230,390                  -                  -
         Indemnification receivable for fire
          damages (1)                                         111,508           113,346                  -                  -
         Non-marketable shares and
          payments on account                                   1,040             1,036              1,040              1,036
         Others                                                 5,661             4,947                107                113
                                                        --------------    --------------     --------------       ------------
                                                              489,031           483,384             33,175             33,177
                                                        ==============    ==============     ==============       ============
         (1) See Note 3E(1)
</TABLE>


                                     F-52
<PAGE>
<TABLE>
<CAPTION>

                                                                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------



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 from others:

         Consolidated:

                                                                       Interest rates at
                                                                             December 31              December 31
                                                                       -----------------    ----------------------------------
                                                                                    2004               2004               2003
                                                                       -----------------    ---------------     --------------
                                                                                       %             NIS thousands
                                                                       -----------------    ----------------------------------
<S>                                                                   <C>                        <C>                <C>
         Linked to the CPI                                              Mainly 5.7                  36,228             39,028
         Linked to the foreign currency (mainly to the Dollar)          Mainly 0                   106,715             93,012
         Linked to dollar                                               Libor* + 2%                 12,757                  -
         Unlinked                                                       -                           10,444                  -
                                                                                           ---------------     --------------
                                                                                                   166,144            132,040
                                                                                           ===============     ==============
         * As at December 31, 2004 the Libor rate is 3.1%.



         Company:                                                                                     December 31
                                                                                            ----------------------------------
                                                                                                       2004               2003
                                                                                            ---------------     --------------
                                                                                                     NIS thousands
                                                                                            ----------------------------------
         Linked to the CPI                                                           5.7            32,028             32,028
                                                                                            ===============     ==============

         C.       Repayment schedule of deposits, non-current customers balances and long-term loans
                  from others, in the consolidated balance sheet:

                                                                Consolidated                            Company
                                                        --------------------------------     ---------------------------------
                                                                 December 31                          December 31
                                                        --------------------------------     ---------------------------------
                                                                  2004              2003               2004               2003
                                                        --------------    --------------     --------------       ------------
                                                                NIS thousands                        NIS thousands
                                                        --------------------------------     ---------------------------------
         Amounts collectible in the:
         Second year                                           75,680            50,094             32,028                  -
         Third year                                            19,957            45,958                  -             32,028
         Fourth year                                           13,748             8,230                  -                  -
         Fifth year                                             3,852             3,909                  -                  -
         Thereafter and without a
          specific maturity date                               52,907            23,849                  -                  -
                                                        --------------    --------------     --------------       ------------
                                                              166,144           132,040             32,028             32,028
                                                        ==============    ==============     ==============       ============
</TABLE>


                                     F-53
<PAGE>
<TABLE>
<CAPTION>

                                                                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------



Note 10 - Fixed Assets

         A.       Consolidated




                                                                Land                       Machinery,        Vehicles

                                                          (including                    equipment and   and forklifts
                                                     leasehold land)       Buildings    installations
                                                    ----------------    ------------   --------------   -------------
                                                                             NIS thousands
                                                    --------------------------------------------------------------------
<S>                                                     <C>           <C>              <C>                <C>
         Cost as at January 1, 2004                         115,651       1,705,294        3,751,016          39,455

         Additions during the year                              679          34,908          146,112           9,042
         Disposals during the year                               (8)         (5,446)         (18,403)        (13,261)
         Adjustments resulting from foreign
          currency translation differences*                    (257)         (7,153)         (41,928)           (465)
         Acquisition of subsidiaries, net                       932           2,694            2,973           2,962
         Company that became proportionately
          consolidated                                       (4,184)        (31,526)         (55,397)           (157)
                                                    ----------------    ------------   --------------   -------------
         Balance as at December 31, 2004                    112,813       1,698,771        3,784,373          37,576
                                                    ================    ============   ==============   =============
         Accumulated depreciation as at
          January 1, 2004                                     1,233         652,118        2,072,799          21,029
         Additions during the year                               46          38,812          159,431           5,294
         Disposals during the year                                -          (2,054)         (16,256)         (8,162)
         Adjustments resulting from foreign
          currency translation differences*                     (13)         (1,698)         (23,920)           (709)
         Acquisition of subsidiaries, net                         -             372            1,189           1,155
         Company that became proportionately
          consolidated                                          (82)         (9,178)         (48,301)           (155)
                                                    ----------------    ------------   --------------   -------------
         Balance as at December 31, 2004                      1,184         678,372        2,144,942          18,452
                                                    ================    ============   ==============   =============
         Write down for decline in value                          -          11,707                -               -
                                                    ----------------    ------------   --------------   -------------
         Net book value as at December 31, 2004             111,629       1,008,692        1,639,431          19,124
                                                    ================    ============   ==============   =============
         Net book value as at
          December 31, 2003                                 114,418       1,041,469        1,678,217          18,426
                                                    ================    ============   ==============   =============
         *    See Note 2B(5)

(TABLE CONTINUED)
<CAPTION>

         A.       Consolidated

                                                                                     Installations            Total
                                                                                             under
                                                                                      construction
                                                           Office                     and payments
                                                        furniture        Tools and      on account
                                                    and equipment      instruments  of acquisition
                                                                                         of assets
                                                   --------------    -------------  --------------     -------------
                                                                                                 NIS thousands
                                                   -----------------------------------------------------------------
<S>                                                  <C>                <C>               <C>        <C>
         Cost as at January 1, 2004                      202,506            3,167             822        5,817,911

         Additions during the year                        18,391                -             764          209,896
         Disposals during the year                        (3,185)               -             (92)         (40,395)
         Adjustments resulting from foreign
          currency translation differences*                 (283)               -              71          (50,015)
         Acquisition of subsidiaries, net                  5,685                -               -           15,246
         Company that became proportionately
          consolidated                                    (6,973)               -               -          (98,237)
                                                   --------------    -------------  --------------     -------------
         Balance as at December 31, 2004                 216,141            3,167           1,565        5,854,406
                                                   ==============    =============  ==============     =============
         Accumulated depreciation as at
          January 1, 2004                                130,618                -               -        2,877,797
         Additions during the year                        22,876                -               -          226,459
         Disposals during the year                        (2,250)               -               -          (28,722)
         Adjustments resulting from foreign
          currency translation differences*               (2,094)               -               -          (28,434)
         Acquisition of subsidiaries, net                  1,592                -               -            4,308
         Company that became proportionately
          consolidated                                    (3,900)               -               -          (61,616)
                                                   --------------    -------------  --------------     -------------
         Balance as at December 31, 2004                 146,842                                         2,989,792
                                                   ==============    =============  ==============     =============
         Write down for decline in value                       -                -               -           11,707
                                                   --------------    -------------  --------------     -------------
         Net book value as at December 31, 2004           69,299            3,167           1,565        2,852,907
                                                   ==============    =============  ==============     =============
         Net book value as at
          December 31, 2003                               71,888            3,167             822        2,928,407
                                                   ==============    =============  ==============     =============
         *    See Note 2B(5)
</TABLE>


                                     F-54
<PAGE>

                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



Note 10 - Fixed Assets (cont'd)

         A.       Consolidated (cont'd)

         (1)      Some of the real estate properties have not yet been
                  registered in the Land Registry Office in the name of the
                  subsidiaries, in some cases because of the absence of formal
                  parceling of the area.

                  Leasehold rights are for a period of 49 years, ended in the
                  year 2004 and thereafter. Certain leases provide an option
                  for extension for another 49 years.

                  The cost of leasehold real estate as at December 31, 2004, is
                  approximately NIS 751 million, of which approximately NIS 402
                  million is under capitalized lease.

         (2)      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, amounting to NIS 553 million
                  and NIS 181 million as at December 31, 2004 and 2003,
                  respectively (see also Note 16A).

         (3)      Includes capitalized interest amounting to about NIS 137
                  million and about NIS 141 million to December 31, 2004 and
                  2003, respectively.

         (4)      As for amounts charged to cost of fixed assets, see Notes
                  23B and E.

         (5)      Including fully depreciated assets amounting to NIS 895
                  million to December 31, 2004.

         (6)      See Note 22 regarding liens.

         B. Company

Composition of the assets and accumulated depreciation, according to major
groups, and changes therein during the current year, are as follows:

<TABLE>
<CAPTION>
                                                                   Offices             Office
                                                               and land(*)          Equipment             Total
                                                           ---------------    ---------------    --------------
                                                             NIS thousands      NIS thousands     NIS thousands
                                                           ---------------    ---------------    --------------
<S>                         <C>                                     <C>                <C>               <C>
         Cost as at January 1, 2004                                 36,275             5,370             41,645
         Additions during the year                                       -               423                423
                                                           ---------------    ---------------    --------------
         Balance as at December 31, 2004                            36,275             5,793             42,068
                                                           ---------------    ---------------    --------------
         Accumulated depreciation as at January 1, 2004              4,252             2,363              6,615
         Additions during the year                                     721               541              1,262
                                                           ---------------    ---------------    --------------
         Balance as at December 31, 2004                             4,973             2,904              7,877
                                                           ---------------    ---------------    --------------
         Write down for decline in value                            11,707                 -             11,707
                                                           ---------------    ---------------    --------------
         Net book value as at December 31, 2004                     19,595             2,889             22,484
                                                           ===============    ===============    ==============
         Net book value as at December 31, 2003                     20,316             3,007             23,323
</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 dunams, not yet registered in the Company'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.


                                     F-55
<PAGE>
<TABLE>
<CAPTION>

                                                                                Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------



Note 11 - Intangible Assets, Deferred Tax Assets and Deferred Expenses

         A.       Consolidated balance sheet
                                                                                                        December 31
                                                                                                ------------------------------
                                                                                                       2004               2003
                                                                                                -----------       ------------
                                                                                                       NIS thousands
<S>                                                                                             <C>             <C>
         Intangible assets-goodwill:
         Original amounts                                                                          859,238            714,841
         Accumulated amortization                                                                  348,568            298,430
                                                                                                -----------       ------------
                                                                                                   510,670            416,411
                                                                                                -----------       ------------
         Licensing of products abroad:
         Original amounts                                                                        1,144,717            783,206
         Accumulated amortization                                                                  474,767            413,741
                                                                                                -----------       ------------
                                                                                                   669,950            369,465
                                                                                                -----------       ------------
         Intangible assets in the purchase of products:(1)
         Original amounts                                                                        1,211,508          1,231,476
         Accumulated amortization                                                                  177,429            100,993
                                                                                                -----------       ------------
                                                                                                 1,034,079          1,130,483
                                                                                                -----------       ------------
         Marketing rights and others:
         Original amounts                                                                          186,940            189,757
         Accumulated amortization                                                                   67,503             52,654
                                                                                                -----------       ------------
                                                                                                   119,437            137,103
                                                                                                -----------       ------------
         Deferred expenses:

         Debentures issuance costs:
         Original amount                                                                            16,069             10,799
         Accumulated amortization                                                                    5,480              3,715
                                                                                                -----------       ------------
                                                                                                    10,589              7,084
                                                                                                -----------       ------------
         Deferred taxes receivable (see Note 16(G))                                                 12,733             60,537
                                                                                                -----------       ------------
                                                                                                 2,357,458          2,121,083
                                                                                                ===========       ============

         (1) Including intellectual property rights, trade mark, technological know-how, etc.
</TABLE>


                                     F-56
<PAGE>
<TABLE>
<CAPTION>

                                                                                Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------



Note 12 - Credit from Banks and Others

         A.       Composition:
                                                                Consolidated                            Company
                                                          ------------------------------       -------------------------------
                                                                 December 31                          December 31
                                                          ------------------------------       -------------------------------
                                                                  2004              2003               2004               2003
                                                          ------------     -------------       ------------       ------------
                                                                NIS thousands                        NIS thousands
                                                          ------------------------------       -------------------------------
<S>                                                         <C>                 <C>                <C>                <C>
         From banks                                         1,084,944           914,260            181,452            169,709

         Current maturities of long-term
          loans and debentures                                653,512           663,142            538,278            418,826
                                                          ------------     -------------       ------------       ------------
                                                            1,738,456         1,577,402            719,730            588,535
                                                          ============     =============       ============       ============
         See also Note 15A


         B.       Classification by linkage terms and interest rates:

                                                                       Interest rates at              Consolidated
                                                                                               -------------------------------
                                                                             December 31              December 31
                                                                                               -------------------------------
                                                                                    2004               2004               2003
                                                          ------------------------------       ------------       ------------
                                                                                       %             NIS thousands
                                                          ------------------------------       -------------------------------
         Linked to foreign currency (mainly to
          the Dollar)                                                         3.0 - 16.9           753,900            647,098
                                                                      (mainly 3.5 - 4.8)
         Unlinked                                                             1.8 -11.4
                                                                           (mainly 10.6)           331,044            267,162
                                                                                              ------------       ------------
                                                                                                 1,084,944            914,260
                                                                                              ============       ============

                                                                       Interest rates at                   Company
                                                                                               -------------------------------
                                                                             December 31              December 31
                                                                                               -------------------------------
                                                                                    2004               2004               2003
                                                          ------------------------------       ------------       ------------
                                                                                       %             NIS thousands
                                                          ------------------------------       -------------------------------
         Linked to the Dollar                                                  3.5 - 4.8           166,427           169,704
         Unlinked                                                                    5.5            15,025                 5
                                                                                               ------------       ------------
                                                                                                   181,452           169,709
                                                                                               ============       ============

         C.       See Note 22 regarding liens to secure credit.
</TABLE>


                                     F-57
<PAGE>
<TABLE>
<CAPTION>

                                                                                Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------



Note 13 - Trade Payables

                                                                Consolidated                            Company
                                                          ------------------------------       -------------------------------
                                                                 December 31                          December 31
                                                          ------------------------------       -------------------------------
                                                                  2004              2003               2004               2003
                                                          ------------     -------------       ------------       ------------
                                                                NIS thousands                        NIS thousands
                                                          ------------------------------       -------------------------------
<S>                                                         <C>                 <C>                <C>                <C>
         Open debts                                        1,660,762          1,337,442                379                484
         Cheques and notes payable                             6,693              5,341                  4                 19
                                                          ------------     -------------       ------------       ------------
                                                           1,667,455          1,342,783                383                503
                                                          ============     =============       ============       ============


Note 14 - Other Payables

                                                                Consolidated                            Company
                                                          ------------------------------       -------------------------------
                                                                 December 31                          December 31
                                                          ------------------------------       -------------------------------
                                                                  2004              2003               2004               2003
                                                          ------------     -------------       ------------       ------------
                                                                NIS thousands                        NIS thousands
                                                          ------------------------------       -------------------------------
         Employees and
          withholdings remitted                               162,639           162,035              3,213                291
         Provision for vacation pay and
          vacation expense allowance                           93,436           100,006              4,795              3,353
         Expenses to be paid                                  360,760           252,491             22,932             21,341
         Government agencies
          (including taxes)                                   252,894           192,770              1,217              2,143
         Provision for warranty and repairs
          and provision for losses in
          respect of long-term contracts                      104,171           *87,695                  -                  -
         Payables for purchase of assets
          and investees                                        30,036           *27,588                  -                  -
         Severance pay payable and current
          portion of early retirement
          pensions (see Note 17)                               59,873            87,438                122                134
         Dividend proposed by subsidiary                       29,615            15,231                  -                  -
         Deferred income                                       23,037            43,148                  -                  -
         Liability in respect of securities
          that were sold short                                 24,241            67,515                  -                  -
         Liabilities regarding forward
          transaction                                          46,388            57,061              4,997              9,457
         Others                                               182,352          *177,239             11,856              6,547
                                                          ------------     -------------       ------------       ------------
                                                            1,369,442         1,270,217             49,132             43,266
                                                          ============     =============       ============       ============
         Includes interested parties                                                                   712              1,544
                                                                                               ============       ============

         *  Reclassified
</TABLE>


                                     F-58
<PAGE>
<TABLE>
<CAPTION>

                                                                                Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------



Note 15 - Long Term Liabilities

         A.       Loans
                                                                Consolidated                            Company
                                                          ------------------------------       -------------------------------
                                                                 December 31                          December 31
                                                          ------------------------------       -------------------------------
                                                                  2004              2003               2004               2003
                                                          ------------     -------------       ------------       ------------
                                                          NIS thousands    NIS thousands       NIS thousands      NIS thousands
                                                          -------------    -------------       -------------      -------------
<S>                                                         <C>                 <C>                <C>                <C>
         1.       Loans from banks                          2,859,180         3,668,341          1,995,835          1,875,279
                  Less - current maturities                   651,084           661,998            498,270            320,200
                                                          -------------    -------------       -------------      -------------
                                                            2,208,096         3,006,343          1,497,565          1,555,079
                                                          -------------    -------------       -------------      -------------
         2.       Loans from others:
                  Shareholders in subsidiaries
                   and in proportionately
                   consolidated companies                      37,611            52,386                  -                  -
                  Investees                                         -                 -             48,133            154,315
                  Receipts from
                   time-sharing units                          33,053            33,765                  -                  -
                  Others and long-term
                   accrued expenses                            64,783            28,487                  -                  -
                                                          -------------    -------------       -------------      -------------
                                                              135,447           114,638             48,133            154,315
                  Less - current maturities                     2,428             1,144             40,008             98,626
                                                          -------------    -------------       -------------      -------------
                                                              133,019           113,494              8,125             55,689
                                                          -------------    -------------       -------------      -------------
                                                            2,341,115         3,119,837          1,505,690          1,610,768
                                                          =============    =============       =============      =============

         3.       Classification by linkage terms and interest rates:

                  The consolidated balance sheet:
                                                                        Interest rate at
                                                                             December 31              December 31
                                                                                             ---------------------------------
                                                                                    2004               2004              2003
                                                                        ----------------     --------------       ------------
                                                                                       %             NIS thousands
                                                                        ----------------     ---------------------------------
                  Linked to the foreign currency
                   (mainly Dollar)                                               1.7-8.1           982,275         2,147,952

                  Linked to the CPI                                              3.7-7.7         1,368,683         1,581,728

                  Linked to the CPI                                                   -                  -            46,227

                  Unlinked                                                       6.2-7.9           643,669             7,072
                                                                                               -------------      -------------
                                                                                                 2,994,627         3,782,979
                  Less - current maturities                                                        653,512           663,142
                                                                                               -------------      -------------
                                                                                                 2,341,115         3,119,837
                                                                                               =============      =============
</TABLE>


                                     F-59
<PAGE>
<TABLE>
<CAPTION>

                                                                                Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------



Note 15 - Long Term Liabilities (cont'd)


         A.       Loans (cont'd)

         The Company balance sheet:
                                                                        Interest rate at
                                                                             December 31              December 31
                                                                                             ---------------------------------
                                                                                    2004               2004              2003
                                                                        ----------------     --------------       ------------
                                                                                       %             NIS thousands
                                                                        ----------------     ---------------------------------
        a.        From banks:

<S>                                                                            <C>            <C>               <C>
                  Linked to the CPI                                              6.2-6.9         1,256,006         1,502,011
                  Linked to the Dollar                                           3.6-7.7           102,829           373,268
                  Unlinked                                                           6.2           637,000                  -
                                                                                               -------------      -------------
                                                                                                 1,995,835         1,875,279
                  Less - current maturities                                                        498,270           320,200
                                                                                               -------------      -------------
                                                                                                 1,497,565         1,555,079
                                                                                               =============      =============

                                                                        Interest rate at
                                                                             December 31              December 31
                                                                                             ---------------------------------
                                                                                    2004               2004              2003
                                                                        ----------------     --------------       ------------
                                                                                       %             NIS thousands
                                                                        ----------------     ---------------------------------
         b.       From investees:

                  Capital note                                                        -              8,125             8,125
                  Linked to the CPI                                                   -                  -            98,626
                  Linked to the CPI                                                   -             40,008            47,564
                                                                                             --------------       ------------
                                                                                                    48,133           154,315
                  Less - current maturities                                                         40,008            98,626
                                                                                             --------------       ------------
                                                                                                     8,125            55,689
                                                                                             ==============       ============
         B.       Debentures
                                                                                                      Consolidated
                                                                                             ---------------------------------
                                                                                                      December 31
                                                                                             ---------------------------------
                                                                                                       2004               2003
                                                                                             --------------       ------------
                                                                                                     NIS thousands
                                                                                             ---------------------------------

         1.       Presented at long-term liabilities
                  Debentures convertible into shares of subsidiary (1)                              646,200                 -
                                                                                             --------------       ------------
         2.       Presented between long-term liabilities and shareholders equity
                  Debentures convertible into shares of subsidiary (2)                              165,091           340,270
                                                                                             ==============       ============
                  (1)      In a private placement to institutional investors
                           (mainly overseas) in March 2004, M-A Industries
                           allotted non-marketable convertible debentures in
                           the amount of 150 million dollars par value
                           (including 5 million dollars which was issued to the
                           underwriters in April 2004), in consideration for
                           their par value. The debentures are for a 7-year
                           period 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. The ordinary shares to be allotted as
                           a result of the conversion of the debentures will be
                           listed for trading on the Tel Aviv Stock Exchange.
</TABLE>


                                     F-60
<PAGE>
                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



Note 15 - Long Term Liabilities (cont'd)

         B.       Debentures (cont'd)

                  (1)      (cont'd)

                           On March 22, 2007, the debenture holders will have
                           the right, by serving prior written notice to M-A
                           Industries (between 30 and 60 days prior to March
                           22, 2007), to demand redemption of the debentures
                           (principal and interest balance at such date).

                           M-A Industries will have the right to force the
                           conversion of the debentures, beginning March 22,
                           2007, as long as the average share price of M-A
                           Industries in the period of 20 business days
                           preceding the notice of forced conversion will be
                           more than 30% higher than the conversion price of
                           the debentures.

                           M-A Industries 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 which the M-A Industries intends to
                           register for trading.

                           The issue costs for these debentures amounted to
                           NIS 11 million.

                  (2)      a.       In 2001, M-A Industries issued convertible
                                    bonds and options for net consideration of
                                    NIS 276 million, of which NIS 257 million
                                    was allocated to the fair value of the
                                    convertible bonds.

                                    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 10.03
                                    (following distribution of a dividend) par
                                    value of debentures per one ordinary share.

                           b.       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.

                           c.       In June 2002 a consolidated company of M-A
                                    Industries purchased in the stock exchange
                                    approximately NIS 16,684 thousand par value
                                    of debentures (Series A) in consideration
                                    of approximately NIS 14 million.
                                    During June 2003, all of the above
                                    debentures were sold for NIS 18.8 million.


                                     F-61
<PAGE>
                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------


Note 15 - Long Term Liabilities (cont'd)

         B.       Debentures (cont'd)

                  (2)      (cont'd)

                           d.       In 2003, NIS 57,661 thousand par value of
                                    debentures (Series A) were converted into
                                    5,566 thousand ordinary shares, NIS 1 par
                                    value, most at an exercise price of NIS
                                    10.36 par value of debenture per ordinary,
                                    NIS 1 par value, share. M-A Industries
                                    total share capital issued as a result of
                                    the conversion is 1,270 thousand dollars,
                                    at a premium of 11,331 thousand dollars.
                                    In 2004, 179,608 thousand par value of
                                    debentures (Series A) was converted into
                                    17,582 thousand ordinary shares, NIS 1 par
                                    value, at a conversion rate of between NIS
                                    10.03 and NIS 10.36 in par value of the
                                    debentures for 1 ordinary share, NIS 1 par
                                    value. The total share capital issued as a
                                    result of the conversion is 3,974 thousand
                                    dollars, with a premium of 35,581 thousand
                                    dollars.

                                    Subsequent to the balance sheet date and
                                    proximate to the approval date of the
                                    financial statements, NIS 12,839 thousand
                                    par value of debentures (Series A) was
                                    converted into 1,280 thousand ordinary
                                    shares, NIS 1 par value.

                                    Subsequent to the balance sheet date and
                                    proximate to the approval date of the
                                    financial statements, NIS 12,839 thousand
                                    par value of debentures (series A) was
                                    converted into 1,280 thousand ordinary
                                    shares, NIS 1 par value.

                                    The debentures are secured by a symbolic
                                    fixed senior lien on a deposit of NIS 1 in
                                    favor of the trustee for the
                                    debenture-holders.

                                    Beginning from 2003, conversion of the
                                    debentures became probable. Accordingly,
                                    the balance of the debentures is stated in
                                    a separate item between long-term
                                    liabilities and shareholders' equity.


                                     F-62
<PAGE>

<TABLE>
<CAPTION>

                                                                                Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
----------------------------------------------------------------------------------------------------------------------------


Note 15 - Long Term Liabilities (cont'd)

         C.       Liabilities (net of current maturities) that will mature in the following years subsequent to balance sheet
                  date are as follows:

         1.       Consolidated

                                                                   Loans from banks                 Loans from others
                                                        ---------------------------      ----------------------------
                                                               December 31                      December 31
                                                        ---------------------------      ----------------------------
                                                                2004            2003             2004            2003
                                                        ------------    ------------     ------------    ------------
                                                                                 NIS thousands
                                                        -----------------------------------------------------------------
<S>                                                       <C>               <C>               <C>              <C>
         Second year                                      1,284,673         626,983           20,120           7,929
         Third year                                         598,769       1,649,252           17,704          13,622
         Fourth year                                        182,326         308,944           12,941           5,150
         Fifth year                                          52,786         224,854            9,076           4,832
         Sixth year                                          18,710          43,029            1,030           1,000
         Subsequent years                                    70,832         153,281           72,148          80,961
                                                        -----------     -----------      -----------    ------------
                                                          2,208,096       3,006,343          133,019         113,494
                                                        ===========     ===========      ===========    ============

         2.       The Company
                                                                                                     Loans from banks

                                                                                                December 31
                                                                                         ---------------------------
                                                                                                2004            2003
                                                                                         -----------    ------------
                                                                                                     NIS thousands
                                                                                         --------------------------------
         Second year                                                                       1,027,889         314,174
         Third year                                                                          461,000       1,232,086
         Fourth year                                                                               -               -
         Fifth year                                                                            8,676               -
         Sixth year                                                                                -               -
         Subsequent years                                                                          -           8,819
                                                                                         -----------    ------------
                                                                                           1,497,565       1,555,079
                                                                                         ===========    ============
         D. See Note 22 for details of security pledged to secure loans.

(Table Continued)

<CAPTION>
                                                                               Debentures                            Total
                                                             -----------------------------    -----------------------------
                                                                    December 31                       December 31
                                                             -----------------------------    -----------------------------
                                                                     2004             2003            2004             2003
                                                             ------------     ------------    ------------     ------------
                                                                                       NIS thousands
                                                        -------------------------------------------------------------------
<S>                                                         <C>             <C>               <C>                <C>
         Second year                                                   -                -       1,304,793          634,912
         Third year                                              165,091                -         781,564        1,662,874
         Fourth year                                                   -          340,270         195,267          654,364
         Fifth year                                                    -                -          61,862          229,686
         Sixth year                                                    -                -          19,740           44,029
         Subsequent years                                        646,200                -         789,180          234,242
                                                            ------------     ------------     -----------     ------------
                                                                 811,291          340,270       3,152,406        3,460,107
                                                            ============     ============     ===========     ============

         2.       The Company
                                                                    Loans and capital note                            Total
                                                                            from investees
                                                                    December 31                       December 31
                                                            -----------------------------     ----------------------------
                                                                    2004             2003            2004             2003
                                                            ------------     ------------     -----------     ------------
                                                                                     NIS thousands
                                                        ------------------------------------------------------------------
         Second year                                                   -           47,564       1,027,889          361,738
         Third year                                                    -                -         461,000        1,232,086
         Fourth year                                                   -                -               -                -
         Fifth year                                                    -                -           8,676                -
         Sixth year                                                    -                -               -                -
         Subsequent years                                          8,125            8,125           8,125           16,944
                                                            ------------     ------------     -----------     ------------
                                                                   8,125           55,689       1,505,690        1,610,768
                                                            ============     ============     ===========     ============

         D. See Note 22 for details of security pledged to secure loans.
</TABLE>


                                     F-63
<PAGE>

                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



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 up 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 serving the approved enterprise, investees are
         entitled to an accelerated amortization deduction over five years.

         In the event that an investee distributes a dividend to shareholders
         out of income attributable to revenues from an approved enterprise
         which received a tax exemption, the company that distributes the
         dividend would be liable to tax at 25% of the earnings distributed.

         Deferred taxes in respect of income from approved enterprises were not
         provided, since it is the Subsidiaries policy not to initiate a
         distribution of dividend that involves 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 Income Tax (Inflationary Adjustments) Law, 1985 (hereinafter -
         "the Adjustments Law") which has been in effect since the 1985 tax
         year, instituted the measurement of results for tax purposes on a real
         basis. The various adjustments required under the Adjustments Law are
         meant to bring about taxation of income on a real basis. However, the
         adjustment of nominal income under the tax laws is not always
         identical to the inflationary adjustment according to the Opinions of
         the ICPAI. Consequently, differences are created between reported
         incomes according to the financial statements and between the adjusted
         income for tax purposes.


                                     F-64
<PAGE>
                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



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 in fact claimed, accelerated rates of depreciation. Likewise,
         certain subsidiaries are entitled to file consolidated tax returns
         with the tax authorities.


         D.       Tax rates applicable to income from other sources:

         Income not eligible to "approved enterprise" benefits, mentioned in
         Note 16 A. above, is liable to tax at the regular rate of 35% (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 tax loss as at December 31, 2004
                  carryforwards to next years amounted to approximately NIS
                  3,030 million as at balance sheet date, out of which NIS
                  1,432 million relates to Koor.

                  Carryforward tax losses are linked to the CPI, according to
                  the Adjustments Law.

         2.       The Company has received final assessments until 2002 tax
                  year.

         3.       See Note 18A(7)(C) regarding fiscal claims against a
                  subsidiary of M-A Industries.


         F.       Amendment to the Income Tax Ordinance

         On June 29, 2004, the Knesset passed the "Law for the Amendment of the
         Income Tax Ordinance (Amendment No. 140 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
         5,083 thousand.


                                     F-65
<PAGE>
<TABLE>
<CAPTION>

                                                                               Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
-----------------------------------------------------------------------------------------------------------------------------


Note 16 - Taxes on Income (cont'd)

         G.       Deferred taxes:

         1.       Deferred taxes are presented in the consolidated balance sheet as follows:

                                                                                                        December 31
                                                                                               -------------------------------
                                                                                                       2004               2003
                                                                                               ------------       ------------
                                                                                                       NIS thousands
                                                                                               -------------------------------
<S>                                                                                            <C>                  <C>
                  Within current assets in respect of:
                  Provision for vacation pay and severance benefits                                 16,098            28,185
                  Operating loss and capital loss carried forwards (2)                              89,513            92,327
                  Inventory, net of customer advances                                               67,868             3,757
                  Timing differences in respect of recognition of income
                   and expenses, net                                                                (2,169)           31,761
                                                                                               ------------       ------------
                  Total in current assets, net                                                     171,310           156,030
                                                                                               ============       ============
                  Within long-term assets in respect of:
                  Depreciation                                                                     (21,110)          (33,256)
                  Operating loss and capital loss carried forwards                                 691,275          *917,920
                  Liability in respect of employee severance benefits                                9,523            28,680
                  Other                                                                               (367)            3,709
                                                                                               ------------       ------------
                                                                                                   679,321           917,053
                  Balance not expected to be realized (1)                                         (666,588)        *(856,516)
                                                                                               ------------       ------------
                  Total in other long-term assets                                                   12,733            60,537
                                                                                               ============       ============
                  Within short-term liabilities in respect of:
                  Provision for vacation pay and severance benefits                                      -                71
                  Timing differences in respect of recognition of income
                   and expenses                                                                       (183)           (5,054)
                                                                                               ------------       ------------
                  Total in other payables                                                             (183)           (4,983)
                                                                                               ============       ============
                  Within long-term liabilities in respect of:
                  Depreciation                                                                    (374,761)         (364,906)
                  Operating loss and capital loss carried forwards                                  81,115          *125,892
                  Inventories less customer advances                                                 9,934                 -
                  Liability in respect of employee severance benefits                               45,049            41,842
                  Other                                                                             (1,805)           (2,615)
                                                                                               ------------       ------------
                                                                                                  (240,468)         (199,787)
                                                                                               ============       ============
                  (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. Companies Management's believes that it is
                      not likely that these balances will be realized and,
                      accordingly, no deferred taxes were created in respect
                      thereof.

                  (2) The Company's balance - see Notes: 3G(2), 3C(7).

                  *  Reclassified
</TABLE>


                                                           F-66
<PAGE>
<TABLE>
<CAPTION>

                                                                               Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
-----------------------------------------------------------------------------------------------------------------------------



Note 16 - Taxes on Income (cont'd)

         G.       Deferred taxes (cont'd):

         2.       Balances and movement of deferred taxes in the consolidated balance sheet:

                                                                                              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, 2003           (400,721)         (6,905)        140,842         178,883          39,849         (48,052)
         Translation
          differences in
          subsidiaries                21,304           1,386          (7,627)         (9,026)          8,606          14,643

         Amounts charged
          to statement of
          operations                 (18,745)          9,276         (34,437)        109,766         (20,654)         45,206
                                 ------------   -------------   -------------   -------------  --------------  ---------------
         Balance as at
          December 31,
          2003                      (398,162)          3,757          98,778         279,623          27,801          11,797

         Translation
          differences in
          subsidiaries                 8,057             (59)         (1,124)         (4,219)           (211)          2,444

         Adjustments to
          changes in
          tax rate                     19,202            (93)           (918)         (9,704)         (3,404)          5,083

         Amounts charged
          to statement of
          operations                  (7,229)         74,197         (26,066)        (66,922)        (28,710)        (54,730)

         Other differences,          (17,739)              -               -          (3,463)              -         (21,202)
         net*
                                 ------------   -------------   -------------   -------------  --------------  ---------------
         Balance as at
          December 31,
          2004                      (395,871)         77,802          70,670         195,315          (4,524)        (56,608)
                                 ============   =============   =============   =============  ==============  ===============

         * Mainly subsidiaries that were sold/acquired, net.

         Deferred taxes were computed at tax rates of 22% - 35%.
</TABLE>


                                                             F-67
<PAGE>
<TABLE>
<CAPTION>

                                                                               Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
-----------------------------------------------------------------------------------------------------------------------------



Note 16 - Taxes on Income (cont'd)

         H. Taxes on income included in consolidated statements of operations:

         1. Composition:
                                                                                        Year ended December 31
                                                                             -------------------------------------------------
                                                                                   2004               2003               2002
                                                                             ----------         ----------          ----------
                                                                                            NIS thousands
                                                                             -------------------------------------------------
<S>                                                                             <C>                <C>                <C>
                  Current taxes                                                 242,082            111,910            84,836
                  Deferred taxes                                                 49,647            (45,206)           64,479
                  In respect of previous years, net                              (4,629)            18,668            (8,136)
                                                                             -----------         ----------        ----------
                                                                                287,100             85,372           141,179
                                                                             ===========         ==========        ==========
         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 35%, and
                  the tax amount charged in the statement of income.

                                                                                        Year ended December 31
                                                                             -------------------------------------------------
                                                                                   2004               2003               2002
                                                                             ----------         ----------          ----------
                                                                                            NIS thousands
                                                                             -------------------------------------------------
                  Earnings (losses) before taxes on income, as
                   reported in the statement of operations                      892,665            448,364          (313,650)
                                                                             ===========         ==========        ==========
                  Statutory tax rate                                                 35%                36%               36%
                                                                             ===========         ==========        ==========
                  Theoretical tax expenses (income) in respect
                   of these earnings (losses)                                   312,433            161,411          (112,914)
                  Increase (decrease) in taxes resulting from
                   the following factors - the tax effect:
                  Tax benefits under various encouragement laws                 (49,676)           (32,790)          (58,461)
                  Non-deductible expenses for tax purposes                       19,611             22,650           144,711
                  Losses for which deferred taxes were
                   not recorded                                                 113,347             40,470           194,666
                  Provisions for anticipated losses from the
                   sale of assets, net                                                -             25,748            43,699
                  Tax loss carried forwards from prior years for
                   which deferred taxes were not created and
                    which were utilized during the current year                 (20,037)                 -           (60,132)
                  Deferred taxes in respect of prior years and
                   which were written-off at the reporting year                  75,601                  -                 -
                  Tax losses from prior years, for which
                   deferred taxes were recorded this year                       (77,483)           (58,903)                -
                  Differences between the measurement
                   basis according to the financial statement
                   to measurement basis for tax purposes                          9,520            (25,660)           24,032
                  Taxes in respect of prior years                                (4,629)            18,668            (8,136)
                  Effect of foreign subsidiaries *                              (93,213)           (63,328)          (28,862)
                  Others **                                                       1,626             (2,894)            2,576
                                                                             -----------         ----------        ----------
                  Total taxes on income                                         287,100             85,372           141,179
                                                                             ===========         ==========        ==========

                  * 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.
</TABLE>


                                                             F-68
<PAGE>

                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



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 Company'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. Where amounts accumulated in the pension funds are
         insufficient to cover such severance pay, the company and its
         subsidiaries will make up the amount of the shortfall at the time of
         payment.

         In certain subsidiaries, past experience has shown that the vast
         majority of employees continue to work until they reach retirement
         age, and these companies were not required, in the past, to make up
         significant shortfalls for employees who chose early retirement.
         Accordingly, the managements of these companies believe that there is
         a low probability that such shortfalls will be paid. Therefore, the
         financial statements of these companies do not include a provision.
         The financial statements of the other Group companies include a
         suitable provision, based on management's estimate of the salary
         components used to compute the pension for full coverage of the said
         obligation.
         Regarding companies in which enhanced severance has been planned or
         agreed upon for the employees, appropriate provisions have been made
         for the supplementary amounts.

         In January 2004, the Retirement Age Law, 2004 ("the Law") was enacted.
         The Law raises the retirement age for men and women. In the estimation
         of the management of the Company and its investees, 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 were
         included in this respect.

         B.       Funds for severance pay and retirement grants:

         The funds provisions in severance pay funds include accrued linkage
         differences and interest, and they are deposited in severance pay
         funds in banks and insurance companies. Withdrawals from the funded
         provision monies are contingent 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-69
<PAGE>

                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



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
                                                          ------------------------------        ------------------------------
                                                                  2004              2003               2004               2003
                                                          ------------      ------------        ------------      ------------
                                                                NIS thousands                        NIS thousands
                                                          ------------------------------        ------------------------------
<S>                                                           <C>               <C>                  <C>                <C>
         Severance pay and retirement grants                  265,013           259,455              6,903              3,227

         Amount accrued for
          early retirement                                    184,335           186,059                575                548

         Amount accrued in respect of
          unutilized sick leave                                14,177            11,853                362                314
                                                          ------------      ------------        ------------      ------------
                                                              463,525           457,367              7,840              4,089

         Less - amount funded                                 266,357           265,365              2,865              2,605
                                                          ------------      ------------        ------------      ------------
                                                              197,168           192,002              4,975              1,484
                                                          ============      ============        ============      =============
</TABLE>



Note 18 - Contingent Liabilities and Commitments

         A.       Contingent liabilities

         1.       Anti-Trust Commissioner:

                  a)       During 1997, an investigation was conducted on
                           behalf of the Anti-Trust Commissioner ("the
                           Commissioner") in connection with alleged violations
                           of the Anti-Trust Law, 1988 ("the Anti-Trust Law"),
                           relating to alleged price fixing and absence of
                           competition between Tadiran Ltd. (a subsidiary of
                           Koor - "Tadiran") and Tadiran Telecommunications
                           Ltd. (a former subsidiary of Koor that merged with
                           ECI - "Telecommunications") and between Telrad
                           Networks Ltd. (a subsidiary of Koor - "Telrad").

                           On September 7, 2004 it was agreed with the
                           Commissioner that he would issue an order according
                           to Section 50B of the Anti-Trust Law by which
                           Tadiran and Telrad would pay to the State Treasury
                           the total amount of NIS 8 million, without this
                           being considered an admission of guilt by the above
                           companies and/or any of their officers to committing
                           any crime. It was further agreed that indictments
                           would not be filed, in the field of public switches
                           and in the field of private switches, and the
                           Commissioner would not take any further action
                           against the companies and/or their officers. The
                           order was approved by the Court. In accordance with
                           the agreement with the Commissioner, a provision of
                           NIS 8 million was included in the consolidated
                           financial statements as at December 31, 2004.


                                     F-70
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



Note 18 - Contingent Liabilities and Commitments

         A.       Contingent liabilities (cont'd)

         1.       Anti-Trust Commissioner (cont'd)

                  b)       On February 2, 2005, Koor's offices received notice
                           from the Anti-Trust Authority that it was
                           considering the possibility of prosecuting Koor,
                           together with 7 other companies that are not
                           members of the Koor Group (including 2 companies
                           that had been owned by Koor on the relevant dates,
                           and were later sold to third parties) and 9
                           executives (including 2 who had been salaried
                           employees of Koor on the relevant dates), for
                           violations of the anti-Trust Law. The notice came
                           in the wake of an investigation opened by the
                           Anti-Trust Authority in the 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 two 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.       On September 21, 2004 a suit was filed against the Company,
                  Bezeq - the Israel Telecommunications Company Ltd., Tadiran
                  Ltd., Telecommunications, Tadiran Public Switching Ltd., (a
                  former subsidiary in Telecommunications), and Telrad 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 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.

                  On March 10, 2005, the Company and the other defendants
                  submitted to the District Court their decisive objection to
                  the request of the plaintiff to certify the claim as a class
                  action.

                  In the estimation of the Company, based on its legal counsel,
                  the chances for the suit and for the action to be recognized
                  as a class action are remote.

                  As to the indemnification Tadiran gave to ECI, see Note
                  18A(6)(a) below.


                                     F-71

<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



Note 18 - Contingent Liabilities and Commitments (cont'd)

         A.       Contingent liabilities (cont'd)

         3.       Elisra

                  a)       As part of the agreement for the sale of part of the
                           Company's holdings in Elisra to Elta, as described
                           in Note 3E(2), Koor undertook to indemnify Elta for
                           damages, as defined in the agreement, which will be
                           sustained as a result of breach of representations
                           made to Elta in the agreement. The main points of
                           the indemnification undertaking liabilities that
                           have not expired are as follows:

                           1.       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 the Group's plants, see Note
                                    3E(1). Elta's right to demand payment of
                                    the indemnity in this matter carries no
                                    time limit.

                           2.       Any amount of damages that will be
                                    sustained as a result of tax payments in
                                    respect of the tax year 2001, for which
                                    Elisra will be liable, and that are at
                                    least 4 million dollars higher than the
                                    total provisions for taxes included in
                                    Elisra's financial statements for 2001;
                                    provided that the demand for payment of
                                    indemnity is submitted by Elta not later
                                    than 30 days after the date on which the
                                    self-assessment in respect of that tax year
                                    becomes final.

                  b)       Financial covenants

                           1.       Elisra's undertakings with banks are
                                    secured by negative pledges. Under the
                                    terms of the negative pledges, Elisra
                                    undertook to maintain financial covenants
                                    (which will be measured on the basis of the
                                    consolidated financial statements),
                                    including a minimum ratio of shareholders'
                                    equity to total assets (as described in the
                                    agreement), minimum current ratio, amount
                                    of shareholders' equity and minimum pre-tax
                                    earnings. In addition, certain limitations
                                    were imposed on the Elisra with respect to
                                    furnishing guarantees to third parties,
                                    creating new liens and the sale or transfer
                                    of assets in material amounts.

                           2.       During 2004, Elisra took out long-term
                                    loans totalling 20 million dollars. Under
                                    the terms of these loans, Elisra's
                                    undertakings toward the credit providers
                                    include meeting financial covenants as
                                    provided in Note 18(b)(1) above, as well as
                                    a debt coverage ratio, as defined in the
                                    agreement, which will be measured on the
                                    basis of Elisra's unconsolidated financial
                                    statements. Likewise, limitations were also
                                    imposed on Elisra relating to the
                                    distribution of a dividend and other
                                    payments to its shareholders, as stipulated
                                    in the agreement.

                                    In the estimation of Elisra's management,
                                    during the report period and as at the
                                    balance sheet date, Elisra was in
                                    compliance with the above financial
                                    covenants.


                                     F-72
<PAGE>

                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



Note 18 - Contingent Liabilities and Commitments (cont'd)

         A.       Contingent liabilities (cont'd)

         4.       In accordance with the agreements with the banks, Koor
                  undertook to maintain certain financial covenants, including
                  minimum shareholders' equity and debt capital - of Koor and
                  certain investees, ratio of shareholders' equity to debt
                  capital, a ban on creating pledges or furnishing guarantees
                  without the advance consent of the banks, and limitations
                  prescribed in the agreement. Koor also undertook to repay
                  part of the existing debt, by using the proceeds to be
                  received from the realization of certain assets, if they are
                  realized.

                  Additionally, Koor undertook not to sell the shares of a
                  certain investee, except for cash, and at a percentage not to
                  exceed that stipulated in the agreement with the banks and
                  other limitations as mentioned in the above agreements.

                  As at the balance sheet date, Koor is in compliance with the
                  above covenants.

         5.       Telrad

                  a.       In October 1994, a claim in an unspecified amount
                           was filed by the Engineers Union against Telrad.
                           The claim pertains to recognition of the
                           applicability to Telrad engineers of the salary
                           tables included in the general collective
                           agreements signed in the years 1994 and 1995,
                           between the Engineers Union and employers in the
                           public service sector, beginning January 1, 1993.

                           On January 31, 1996, Tel Aviv District Labor Court
                           issued a ruling, which dismissed outright the
                           claims of the Engineers Union.

                           The Engineers Union appealed the ruling to the
                           National Labor Court, which ruled that the agreement
                           is a collective agreement governing the relations
                           between Telrad, the Union and the Telrad employees.
                           Telrad filed an appeal with the Supreme Court.

                           On January 29, 2002, a ruling was issued dismissing
                           Telrad's appeal. Consequently, the next stage is a
                           hearing of evidence by the Labor Court concerning
                           the applicability of public service sector to
                           salaries in Telrad.

                           In April 1996 a parallel claim was filed by the Lod
                           Workers Council and the Monthly Workers Committee,
                           to have the salary scales of the public services
                           sector applied to the employees of Telrad.

                  b.       In 1999, a claim was filed against Telrad by company
                           employees who are members of Telrad's workers'
                           committee. They are suing to be given accounts so
                           that the plaintiffs can examine the calculation of
                           the distribution of earnings to employees. They are
                           also suing for a declaratory judgment which will
                           rule that Telrad is obliged to draw up new accounts
                           for the distribution of earnings. In addition, a
                           motion was filed to recognize the plaintiffs as
                           representatives of all of Telrad's workers and
                           employees. The court dismissed the motion for a
                           class action. A defense brief has been filed by
                           Telrad.

                  Telrad recorded an appropriate provision in respect of the
                  above claims.


                                     F-73
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------


Note 18 - Contingent Liabilities and Commitments (cont'd)

         A.       Contingent liabilities (cont'd)

         5.       Telrad (cont'd)

                  c.       As part of the agreement for the sale of shares of
                           Telrad Networks (see Note 3D(1)), Koor and Telrad
                           Holdings (a wholly-owned subsidiary of Koor)
                           undertook indemnifications in respect of the
                           following events:

                           1.       Damage or loss sustained by the buyer from
                                    a decline in the value of the acquired
                                    shares as a result of a decrease in the
                                    equity value of Telrad Networks due to
                                    erroneous representations made on the
                                    transaction date. This indemnification
                                    will be in force until 30 days after
                                    publication of the financial statements of
                                    Telrad Networks as at December 31, 2006,
                                    except for representations on the capital
                                    structure of Telrad Networks and tax items
                                    in the financial statements, for which
                                    there is no time limit on indemnification.

                           2.       Telrad Networks not meeting certain
                                    targets as defined in the agreements. The
                                    indemnifications listed in this item are
                                    for between two and five years.

                           3.       Damage or loss sustained by the buyer in
                                    respect of erroneous representations with
                                    respect to the sellers' ownership of the
                                    shares being sold and their ability to
                                    execute the sale. This indemnification will
                                    have no time limit.

                           The total amount of the indemnification is limited
                           to the amount of the consideration received from the
                           sale of the shares of Telrad Networks (except in
                           respect of claims, the cause of action of which is
                           fraud, in which the amount is unlimited). As at the
                           publication date of the financial statements, the
                           amount of the proceeds received is about 10 million
                           dollars.

                           In the event the indemnification is invoked
                           according to one of the causes of action described
                           previously, the amount of the indemnification will
                           be deducted from the loans that the seller made
                           available to Telrad Networks as part of the sale
                           agreement.

                           Additionally, indemnification was given in respect
                           of expenses that Telrad Networks will incur at an
                           amount exceeding the sum stipulated in the agreement
                           in respect of the recognition of a class action
                           filed in September 2004 relating to anti-trust
                           activities (see Note 18A(2)).

         6.       Tadiran and its investees

                  a.       In the 1999 merger agreement between ECI and Tadiran
                           Telecommunications Ltd. ("TTL"), Tadiran Ltd.
                           undertook to indemnify ECI for any damages (in
                           excess of the amount defined in the agreement) it
                           sustains as a result of matters under investigation
                           by the Anti-Trust Commissioner.

                           This indemnification will remain valid for a period
                           of seven years from the date of the merger and may
                           be extended for an additional period, as long as
                           these matters are under investigation by the
                           Commissioner.


                                     F-74
<PAGE>

                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



Note 18 - Contingent Liabilities and Commitments (cont'd)

         A.       Contingent liabilities (cont'd)

         6.       Tadiran and its investees (cont'd)

                  b.       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. Tadiran recorded provisions in respect of
                           possible damages which had been covered by an
                           insurance company currently in liquidation.

                  c.       In October 1999, Bezeq - The Israel
                           Telecommunication Corp. Ltd. ("Bezeq") lodged a
                           claim against Tadiran Ltd. whose main cause is
                           various losses sustained by Bezeq due to delays in
                           the performance of projects ordered in development
                           and application contracts originally signed between
                           Bezeq and TTL, in the amount of approximately 8.6
                           million dollars ("main claim").

                           Alternatively, Bezeq is suing for the balance of
                           arrearage penalties to which it alleges it is
                           entitled pursuant to these contracts, and which were
                           not paid in full, in the amount of approximately 1.7
                           million dollars ("alternative claim").

                           In an arbitration judgment issued on February 17,
                           2000, all of Bezeq's arguments regarding Tadiran's
                           liability for the main claim were dismissed. The
                           arbitration judgment rules that pursuant to the
                           contractual commitments between the parties, Bezeq
                           is entitled to compensation within the framework of
                           arrearage penalties only. The negotiations between
                           the parties for a settlement were unsuccessful, and
                           the matter was returned to the arbitrator for his
                           decision. In February 2003, a supplementary
                           arbitration agreement was signed. The parties
                           submitted their written arguments and the arbitrator
                           issued his ruling on February 26, 2004. In his
                           ruling, the arbitrator affirmed Tadiran's position
                           and ruled in accordance with the parameters for
                           calculating the damages that Tadiran is meant to pay
                           to Bezeq. The parties conducted negotiations
                           regarding implementation of the aforementioned
                           parameters, and they agreed that the final amount
                           would be NIS 4.6 million, which was paid subsequent
                           to balance sheet date. The financial statements of
                           the Company include an adequate provision.


                                     F-75
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



Note 18 - Contingent Liabilities and Commitments (cont'd)

         A.       Contingent liabilities (cont'd)

         7.       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 it
                           does comply therewith. 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, M-A Industries believes
                           that the terms of the insurance, including the sum
                           insured, do not at present justify taking out such
                           insurance.

                           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 about
                           3 years. In the estimation of M-A Industries
                           management, the aggregate construction cost will be
                           between 30 million dollars and 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 area
                           is suitable for the construction of chemical plants
                           under the assumption that the geological layers in
                           that particular area are completely impermeable to
                           seepage or pollution. The Ministry of the
                           Environment ("The Ministry") 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 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 said
                           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. In the opinion
                           of the subsidiary 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 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 used to
                           treat 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.


                                     F-76
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



Note 18 - Contingent Liabilities and Commitments (cont'd)

         A.       Contingent liabilities (cont'd)

         7.       M-A Industries and its investees

                  a. Quality of the environment (cont'd)

                           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. In
                           the appeal, the District Court was asked to issue an
                           order declaring that the additional terms are
                           nullified.

                           On December 29, 2004 a preliminary hearing on the
                           appeal was held. The hearing on the appeal was
                           scheduled for March 2005.

                           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.

                           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 derived from the additional
                                             conditions for a business license
                                             from May 2004).


                                     F-77
<PAGE>

                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



 Note 18 - Contingent Liabilities and Commitments (cont'd)

         A.       Contingent liabilities (cont'd)

         7.       M-A Industries and its investees (cont'd)

                  a.       Quality of the environment (cont'd)

                           (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 15,000
                                             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.

                           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 complaint and/or the resultant
                           exposure. Therefore, the financial statements do not
                           include a provision in respect thereof.

                  b.       In 1995, a claim was filed against a subsidiary of
                           M-A Industries and several other defendants,
                           totaling approximately NIS 137.5 million, 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 NIS 8.6 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.


                                     F-78
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



 Note 18 - Contingent Liabilities and Commitments (cont'd)

         A.       Contingent liabilities (cont'd)

         7.       M-A Industries and its investees (cont'd)

                  c.       Administrative proceedings, civil actions and other
                           monetary claims of approximately NIS 209 million
                           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, if any, from these claims.

                  d.       On the matter of undertaking in securitization of
                           transactions, and on the matter of compliance with
                           financial covenants, see Note 3C(2).

         8.       The other shareholders ("the plaintiffs") in Herods, a
                  proportionately consolidated company of Sheraton Moriah
                  (Israel) Ltd., a subsidiary of Koor, filed a "motion for
                  approval of a claim as a derivative action" with the Tel Aviv
                  District Court against Sheraton and a subsidiary. The
                  derivative action for which they are seeking approval is for
                  the cancellation of the management agreement between Herods
                  and a subsidiary, as part of the arbitration process to which
                  the claim has been referred. The claim itself deals with the
                  plaintiffs' arguments regarding breaches in the management
                  and image promotion agreements.

                  As a result of negotiations conducted between the parties, a
                  compromise agreement was signed on February 26, 2005,
                  pursuant to which the motion for approval of the derivative
                  claim will be dismissed, and the proceedings of the
                  derivative claim will be stricken. The compromise agreement
                  is subject to the approval of the board of directors of the
                  parties. After such approval is given, a final binding
                  agreement will be signed and the parties will appeal to stay
                  the proceedings.

         9.       In addition, a number of claims have been filed against
                  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.

         10.      On conditions relating to an investment grant - see Note
                  10A(2).

         11.      In Israel, the Stamp Duty on Documents Law, 1961 ("the Law")
                  is 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 the stamping of documents. Since June 2003, the
                  Israeli tax authorities have intensified the enforcement of
                  the Law. The amendment to the Law and the enforcement
                  activities of the tax authorities were brought before the
                  Supreme Court for a hearing, on which a ruling has not yet
                  been issued. Moreover, according to the legislative trends,
                  the Stamp duty tax is expected to be gradually eliminated,
                  until it is fully cancelled in 2008.

                  Certain investee companies received a request from Tax
                  Authorities to produce documents.

                  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 in
                  respect of any demand related to the Stamps Duty Law.

         12.      On the indemnity granted to Claridge as advisor - see Note
                  25C(2).

         13.      In connection with the indemnification of the appraiser who
                  conducted a valuation for ECI, see Note 3A(1).


                                     F-79
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



 Note 18 - Contingent Liabilities and Commitments (cont'd)

         A.       Contingent liabilities (cont'd)

         14.      The liabilities of directors and officers in the Company and
                  investees are insured by leading insurance companies in
                  Directors and Officers Insurance (D&O), subject to the terms
                  of the insurance policy.

                  Additionally, in accordance with a resolution of the general
                  meeting of the Company's shareholders, the Company resolved
                  to indemnify the directors and officers for various events
                  that are not covered by the insurance, at a monetary amount
                  exceeding the insured amounts, all as provided in the said
                  resolution.

         15.      In connection with the indemnification of the appraiser who
                  conducted a valuation for Tadiran Communications Ltd, see
                  note 3H(1).

         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, 2004 - NIS 29,758 thousand.
                  In the year ended December 31, 2003 - NIS 22,902 thousand. In
                  the year ended December 31, 2002 - NIS 24,662 thousand.

         2.       Certain subsidiaries undertook 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.       Commitments for the purchase of fixed assets: December 31,
                  2004 - NIS 22 million; December 31, 2003 - NIS 50 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 43
                  million in 2004, NIS 50 million in 2003 and NIS 60 million in
                  2002.
                  Future minimum payments under the operating leases and rental
                  fees for the years subsequent to balance sheet date, are as
                  follows:
                                                                 December 31
                                                                        2004
                                                             ---------------
                                                             (NIS thousands)
                                                             ---------------
                  First year                                         41,960
                  Second year                                        34,044
                  Third year                                         21,514
                  Fourth year                                         8,748
                  Fifth year and thereafter                          26,961
                                                             ---------------
                                                                    133,227
                                                             ===============

         5.       Koor Corporate Venture Capital's commitment for additional
                  investments in a venture capital fund, as at the signing
                  date of the financial statements is approximately 5 million
                  dollars.

         6.       A subsidiary of M-A Industries has agreements regarding
                  long-term supply contracts with a multinational company in
                  the amount of 17 million dollar per year for a period of five
                  years (2001-2006).

                                     F-80

<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



Note 19 - Convertible Securities of Investee Companies

         Option warrants to employees:

         Certain investees issued options to their employees until 2004
         inclusive. 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 period, 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.



Note 20 - Share Capital and Stock Options

         A.       Share capital is composed as follows:
<TABLE>
<CAPTION>

                                                 December 31, 2004                    December 31, 2003
                                         ----------------------------------    ----------------------------------
                                               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) (5)            83,932,757        16,033,213         83,932,757         15,950,188
                                         =================  ===============    ===============   ================
         Deferred shares, par value
          of NIS 0.001  (2) (4)               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            16,033             83,933             15,950
                                         =================  ===============    ===============   ================
         Deferred shares, par value
          of NIS 0.001                            15,792            15,157             15,792             15,157
                                         =================  ===============    ===============   ================
</TABLE>


                                     F-81
<PAGE>

                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



Note 20 - Share Capital and Stock Options

         A.       Share capital is composed as follows:

         (1)      These shares are listed on the Tel Aviv Stock Exchange
                  (TASE). On December 31, 2004, the share price on the TASE
                  was NIS 224.90.

                  The ADS, (American Depository Shares) each of which
                  represents 0.2 ordinary shares, par value of NIS 0.001
                  (hereinafter - Ordinary Shares), are traded on the New York
                  Stock Exchange (NYSE). The ADS price on the NYSE on December
                  31, 2004 was 10.56 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.

         (4)      A subsidiary of Koor - Koor Trusts (1995) Ltd. (in voluntary
                  liquidation) had held 624,577 deferred shares of Koor, and in
                  anticipation of its final liquidation, sold them to Koor
                  Investments Ltd. (a subsidiary of Koor) in 2004.

         (5)      During 2004, options in the employee stock option plans (See
                  Note 20C) were exercised for 83,025 ordinary shares.


         B.       Buy-back of Company shares

          On April 7, 2000, Koor's Board of Directors resolved to approve a
          framework of 50 million dollars for buying back ordinary shares of
          Koor.

          In the framework, which was fully utilized in 2000, 538,592 ordinary
          shares were purchased (approximately 3.4% of the ordinary share
          capital), at a cost of approximately NIS 219 million. This amount is
          deducted from the shareholders' equity of the Company.

          On December 31, 2001, the Company purchased 154,637 of its ordinary
          shares from a subsidiary at the market price. The transaction was
          treated according to the Israeli Securities Regulations (Financial
          Statement Presentation of Transactions between a Corporation and its
          Controlling Shareholders), 1996.

          On May 27, 2003, a foreign institutional investor (hereinafter - "the
          Buyer") purchased 500,000 of the aforementioned Company's 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 NIS 43 million.

          The Company holds a total of 193,229 of its shares. The amount
          deducted from shareholders' equity at the balance sheet date in
          respect of the shares held by the Company and subsidiaries is NIS
          80,321 thousand.

                                     F-82
<PAGE>

                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



Note 20 - Share Capital and Stock Options (cont'd)

         C.       Stock options to senior employees

         1.       1997 plan:

                  In 1997, 188,968 stock options were allotted under this plan.

                  On March 22, 2000, Koor's Board of Directors resolved to
                  amend the plan so that for an employee who resigned and who
                  holds stock options that vested before his resignation, their
                  exercise period would be until the end of the five years from
                  the inception date of the plan (hereinafter - "Amendment of
                  the exercise period for employees who resign").

                  On August 6, 2000, Koor's Board of Directors resolved that
                  for Company employees who are not related parties in the
                  Company and who did not resign before the end of 2000, the
                  exercise period of each stock option would be extended to the
                  end of 5 years from the vesting date (hereinafter -
                  "Amendment of extension of the exercise period").

                  On November 15, 2001, Koor's Board of Directors resolved that
                  for Company employees on the date of resolution and who are
                  not related parties in the Company the exercise price of
                  their stock options would be amended to NIS 101.38 per share.
                  The Board of Directors also resolved that the technical
                  method of exercise would be the "Bonus Component Method" (see
                  below, in sub-section 2).

                  On June 5, 2003, the Company's Board of Directors resolved to
                  extend the exercise period of the options of Koor Group
                  employees on the date of the resolution, to December 31,
                  2010.

                                         Balance of
                                       stock option      Exercise     Exercise
                                      not exercised         price         date
                                      --------------     --------     --------
                                                              NIS
                                                         --------
                                             2,519         101.38      05/2005
                                             3,000         101.38      12/2010
                                      --------------
                                             5,519
                                      --------------
         2.        1998 plan:

                  On August 30, 1998, an extraordinary general meeting of the
                  shareholders of the Company approved a private placement of
                  400,000 stock options, free of charge, to Company employees.
                  The options are exercisable for up to 400,000 ordinary shares
                  of a par value of NIS 0.001 each (hereinafter - "the Plan").

                  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 (above and hereafter - "the Benefit
                  Component Method").


                                     F-83
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



Note 20 - Share Capital and Stock Options (cont'd)

         C.       Stock options to senior employees (cont'd)

         2.       1998 plan: (cont'd)

                  On March 22, 2000, the Board of Directors approved an
                  amendment of extension of the exercise period for employees
                  who resign, applicable to option holders under the Plan who
                  are not related parties (see Note 20C(1)). The Board of
                  Directors also resolved that for these option holders, the
                  exercise price would be adjusted in respect of distribution
                  of a dividend for all the options, even if the vesting date
                  preceded the entitlement to the dividend.

                  On October 6, 2000, the Board of Directors approved the
                  amendment of extension of the exercise period for Company
                  employees who are not related parties in the Company and who
                  did not retire before the end of 2000.

                  On November 15, 2001, the Board of Directors approved the
                  amendment of the exercise price to NIS 101.38 per share for
                  Company employees on the resolution date who are not related
                  parties in the Company.

                  On June 5, 2003, the Company's Board of Directors resolved to
                  extend the exercise period of the options for Koor Group
                  employees on the resolution date to December 31, 2010.

                                          Balance of
                                        stock option      Exercise     Exercise
                                       not exercised         price         date
                                      ---------------    ---------     --------
                                                               NIS
                                                         ---------
                                                670         101.38      07/2006
                                             52,593         101.38      12/2010
                                      ---------------
                                             53,263
                                      ---------------

         3.       2000 Plan:

                  On August 6, 2000, the Board of Directors of the Company
                  approved the 2000 stock options plan, which was previously
                  approved on June 14, 2000 by the Executive Committee of the
                  Board of Directors. The main points of the plan are these:

                  1)       A total framework was approved for the allotment of
                           400,000 stock options theoretically exercisable for
                           up to 400,000 ordinary shares of the Company, i.e.
                           about 2.5% of the ordinary issued share capital of
                           the Company.

                  2)       The options 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.

                  3)       The exercise price of each stock option, pursuant to
                           the amendment by the Board of Directors of the
                           Company on November 15, 2001, will be NIS 101.38 per
                           share.

                  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.


                                     F-84
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



Note 20 - Share Capital and Stock Options (cont'd)

         C.       Stock options to senior employees (cont'd)

         3.       2000 Plan: (cont'd)

                  5)       The stock options will vest in accordance with a
                           division of the options into three batches, so that
                           at the end of the first year from the record date
                           (June 14, 2000) or from the date on which the
                           employee started work in the Company (whichever is
                           the later), one third of the quantity allotted will
                           vest, and the remaining two thirds of the quantity
                           will vest at the end of each of the two subsequent
                           years. The exercise period of each vested option is
                           5 years from the vesting date.

                  6)       On October 5, 2000, the total quantity of 400,000
                           stock options was allotted to a trustee.

                  7)       On June 5, 2003, the Company's Board of Directors
                           resolved to extend the exercise period of the
                           options of Koor Group employees on the date of the
                           resolution to December 31, 2010.
                                          Balance of
                                        stock option      Exercise     Exercise
                                       not exercised         price         date
                                      ---------------    ---------     --------
                                                               NIS
                                                         ---------

                                              1,734         101.38       6/2007
                                             30,000         101.38     12/2010
                                      ---------------
                                             31,734
                                      ---------------

         4.       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 of the Company's Board of Directors 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.

                  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.

                  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.


                                     F-85
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



Note 20 - Share Capital and Stock Options (cont'd)

         C.       Stock options to senior employees (cont'd)

         4.       2003 Plan: (cont'd)

                  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, including the Company's
                           directors and the CEO.

                  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. And on the other hand, 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.

                  9)       The balance of options remaining as at December 31,
                           2004 is 939,450 options.

<TABLE>
<CAPTION>

                                                                             Balance of
                                                                           stock option           Exercise          Exercise
                                                                          not exercised              price              date
                                                                        ---------------    ---------------   ---------------
                                                                                                       NIS
                                                                                           ---------------
<S>                                                                            <C>                      <C>          <C>
                                                                               856,450                  96           12/2010
                                                                                33,000              175.95           12/2010
                                                                                50,000              186.20           12/2010
                                                                        ---------------
                                                                               939,450
                                                                        ==============
         Changes in the options during 2004:

                                          1997 Plan         1998 Plan          2000 Plan         2003 Plan             Total
                                    ---------------   ---------------    ---------------   ---------------   ---------------
         Balance as at
          beginning of year                 26,039            65,926             61,667           951,789         1,105,421
         Granted                                 -                 -                  -            93,000            93,000
         Exercised                         (20,520)          (12,663)           (29,933)         (105,339)       *(168,455)
                                    ---------------   ---------------    ---------------   ---------------   ---------------
         Balance as at end
          of year                            5,519            53,263             31,734           939,450         1,029,966
                                    ===============   ===============    ===============   ===============   ===============

         *        Because of the "Benefit Component Method", a total of 83,025 ordinary shares of the Company were issued.
</TABLE>


                                     F-86
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



Note 21 - Financial Instruments and Linkage Terms of Monetary Balances

         A.       General:

         The Company and certain subsidiaries have entered into forward
         transactions and option contracts, in order to hedge assets and
         liabilities denominated in foreign currency and in order to reduce the
         overall exposure of commitments for the purchase of raw materials and
         the sale of goods, in currencies other than the function currency.
         Those subsidiaries neither hold nor issue financial instruments for
         trading purposes.


         B.       Details of the open foreign exchange transactions made to
                  hedge the company's and subsidiaries' assets and liabilities
                  in foreign currency as at December 31, 2004:
<TABLE>
<CAPTION>

                                                           Forward               Call               Put               Swap
                                                       Transaction            options           options       transactions
                                                      ------------       ------------      ------------       ------------
                                                                               NIS thousands
                                                      --------------------------------------------------------------------
<S>                                                   <C>                <C>               <C>               <C>
         Purchase of Dollars in exchange for:
           NIS                                             25,848            124,932           335,716                  -
           European currencies                             53,850          1,185,992           141,302                  -
           Brazilian Real                                  15,078             43,080            43,080             24,509
           Others                                          45,234             99,515           177,920                  -
                                                      ------------       ------------      ------------       ------------
                                                          140,010          1,453,519           698,018             24,509
                                                      ============       ============      ============       ============
         Sale of Dollars in exchange for:
           NIS                                             17,232            142,164           196,014                  -
           European currencies                             28,433            189,983         1,334,618                  -
           Brazilian Real                                       -                  -                 -            258,480
           Others                                               -            178,351            95,638                  -
                                                      ------------       ------------      ------------       ------------
                                                           45,665            510,498         1,626,270            258,480
                                                      ============       ============      ============       ============
</TABLE>

         C.       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.
                  Additionally, the Company executed hedges on its CPI-linked
                  loans and acquired a CPI-dollar forward contract in the
                  amount of NIS 170 million.

         D.       Fair value of financial instruments:

         Condensed data of monetary assets and liabilities, whose fair value as
         at December 31, 2004, based on their market value, is different from
         those presented in the financial statements, is as follows:

                                                    Carrying               Fair
                                                      amount              value
                                                ------------       ------------
                                                       NIS millions
                                                -------------------------------
         Investments in affiliates                    1,275             1,754
                                                ============       ============


                                     F-87
<PAGE>
                                  Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



Note 21 - Financial Instruments and Linkage Terms of Monetary Balances (cont'd)

         D.       Fair value of financial instruments: (cont'd)

         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.


         E.       Credit risk of trade receivables:
<TABLE>
<CAPTION>

                                                                                                              NIS millions
                                                                                                           ---------------
<S>                                                                                                         <C>
         Condensed data of credit risk of trade receivables as at December 31,
          2004:
         Receivables insured by credit card companies                                                                 341
         Receivables insured by foreign trade risk insurance                                                           22
         Receivables - Government authorities and Bezeq                                                                42
         Other receivables, including checks and credit card companies                                              1,774
                                                                                                           ---------------
         Total, including non-current receivables                                                                   2,179
                                                                                                           ===============
</TABLE>

         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-88
<PAGE>
<TABLE>
<CAPTION>

                                                                               Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
-------------------------------------------------------------------------------------------------------------------------------



Note 21 - Financial Instruments and Linkage Terms of Monetary Balances (cont'd)

         F.       Linkage terms of monetary balances:

         (1)      Consolidated
                                                                            December 31, 2004
                                                      ---------------------------------------------------------------
                                                          In foreign          Linked         Unlinked           Total
                                                         currency or          to the
                                                      linked thereto             CPI
                                                      --------------    ------------     ------------    ------------
                                                                              NIS thousands
                                                      ---------------------------------------------------------------
<S>                                                  <C>                <C>              <C>             <C>
         Assets
         Current assets:
         Cash and cash equivalents                          512,511               -          104,799         617,310
         Short-term deposits and investments                 91,312         101,785          223,371         416,468
         Trade receivables                                1,968,387          13,546          191,666       2,173,599
         Other accounts receivable                          177,180          29,131          102,298         308,609
         Investments and other
          long-term receivables                             236,974          58,562           10,346         305,882
                                                      --------------    ------------     ------------    ------------
                                                          2,986,364         203,024          632,480       3,821,868
                                                      ==============    ============     ============    ============
         Liabilities
         Current liabilities:
         Credits from banks and others
          (not including current maturities
          of long-term liabilities)                         753,900               -          331,044       1,084,944
         Trade payables                                   1,371,290               -          296,165       1,667,455
         Other accounts payable                             840,327         130,893          375,002       1,346,222
         Long-term loans and debentures
          (including current maturities)                  1,793,566       1,368,683          643,669       3,805,918
                                                      --------------    ------------     ------------    ------------
                                                          4,759,083       1,499,576        1,645,880       7,904,539
                                                      ==============    ============     ============    ============
</TABLE>


(Table Continued)

<TABLE>
<CAPTION>

                                                                               Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
-------------------------------------------------------------------------------------------------------------------------------



Note 21 - Financial Instruments and Linkage Terms of Monetary Balances (cont'd)

         F.       Linkage terms of monetary balances:

         (1)      Consolidated
                                                                               December 31, 2003
                                                       -----------------------------------------------------------------
                                                            In foreign           Linked        Unlinked            Total
                                                           currency or           to the
                                                        linked thereto              CPI
                                                        --------------     ------------     -----------   --------------
                                                                                 NIS thousands
                                                       -----------------------------------------------------------------
<S>                                                     <C>                <C>              <C>           <C>
         Assets
         Current assets:
         Cash and cash equivalents                            491,889                -         101,514          593,403
         Short-term deposits and investments                   87,534          150,495         128,780          366,809
         Trade receivables                                  1,794,141           11,945         246,375        2,052,461
         Other accounts receivable                            139,050           25,770          85,608          250,428
         Investments and other
          long-term receivables                               217,970           59,565           2,823          280,358
                                                        --------------     ------------     -----------   --------------
                                                            2,730,584          247,775         565,100        3,543,459
                                                        ==============     ============     ===========   ==============
         Liabilities
         Current liabilities:
         Credits from banks and others
          (not including current maturities
          of long-term liabilities)                           647,098                -         267,162          914,260
         Trade payables                                     1,030,693                -         312,090        1,342,783
         Other accounts payable                               642,646          171,487         407,953        1,222,086
         Long-term loans and debentures
          (including current maturities)                    2,488,222        1,627,955           7,072        4,123,249
                                                        --------------     ------------     -----------   --------------
                                                            4,808,659        1,799,442         994,277        7,602,378
                                                        ==============     ============     ===========   ==============
</TABLE>


                                     F-89
<PAGE>
<TABLE>
<CAPTION>

Note 21 - Financial Instruments and Linkage Terms of Monetary Balances (cont'd)


         F.       Linkage terms of monetary balances (cont'd):

         (2)      Company
                                                                            December 31, 2004
                                                      ---------------------------------------------------------------
                                                          In foreign          Linked         Unlinked           Total
                                                         currency or          to the
                                                      linked thereto             CPI
                                                      --------------    ------------     ------------    ------------
                                                                              NIS thousands
                                                      ---------------------------------------------------------------
<S>                                                  <C>                <C>              <C>             <C>
         Assets
         Cash and cash equivalents                            2,547               -           27,118          29,665
         Short-term deposits and
          investments                                        51,909          80,235          166,497         298,641
         Other receivables                                    1,121               -           14,869          15,990
         Short term loans to
          investee companies                                      -          12,548                -          12,548
         Other investments and receivables                      107          32,028                -          32,135
         Investments and other long-term receivables:
         Investee companies (including
          current maturities of loans)                       43,364          50,711        1,255,315       1,349,390
                                                      --------------    ------------     ------------    ------------
                                                             99,048         175,522        1,463,799       1,738,369
                                                      ==============    ============     ============    ============
         Liabilities
         Current liabilities:
         Credits from banks and others
          (not including current maturities
          of long-term liabilities)                         166,427               -           15,025         181,452
         Trade payables                                          43               -              340             383
         Other accounts payable                              18,864          17,143           27,436          63,443
         Long-term liabilities (including
          current maturities of loans)                      102,829       1,296,014          645,125       2,043,968
                                                      --------------    ------------     ------------    ------------
                                                            288,163       1,313,157          687,926       2,289,246
                                                      ==============    ============     ============    ============
</TABLE>


(Table Continued)

<TABLE>
<CAPTION>

Note 21 - Financial Instruments and Linkage Terms of Monetary Balances (cont'd)


         F.       Linkage terms of monetary balances (cont'd):

         (2)      Company
                                                                              December 31, 2003
                                                      -----------------------------------------------------------------
                                                           In foreign           Linked        Unlinked            Total
                                                          currency or           to the
                                                       linked thereto              CPI
                                                       --------------     ------------     -----------   --------------
                                                                                NIS thousands
                                                      -----------------------------------------------------------------
<S>                                                     <C>                <C>              <C>           <C>
         Assets
         Cash and cash equivalents                             4,066                -           5,139            9,205
         Short-term deposits and
          investments                                         57,202          144,133         109,471          310,806
         Other receivables                                    11,074                -          23,598           34,672
         Short term loans to
          investee companies                                       -           13,951               -           13,951
         Other investments and receivables                       109           32,028               4           32,141
         Investments and other long-term receivables:
         Investee companies (including
          current maturities of loans)                        12,753           53,449       1,319,870        1,386,072
                                                       --------------     ------------     -----------   --------------
                                                              85,204          243,561       1,458,082        1,786,847
                                                       ==============     ============     ===========   ==============
         Liabilities
         Current liabilities:
         Credits from banks and others
          (not including current maturities
          of long-term liabilities)                          169,704                -               5          169,709
         Trade payables                                           85                -             418              503
         Other accounts payable                                4,408           12,057          26,858           43,323
         Long-term liabilities (including
          current maturities of loans)                       373,268        1,648,201           8,125        2,029,594
                                                       --------------     ------------     -----------   --------------
                                                             547,465        1,660,258          35,406        2,243,129
                                                       ==============     ============     ===========   ==============
</TABLE>

                                     F-90
<PAGE>

                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



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. They also pledged a
                  portion of their shares in investee companies.

                  Regarding the pledge in respect to an investment grant - see
                  Note 10A(2).


         B.       The balances of secured liabilities are as follows:
<TABLE>
<CAPTION>

                                                                                                      Consolidated
                                                                                                ------------------------------
                                                                                                      December 31
                                                                                                ------------------------------
                                                                                                       2004               2003
                                                                                                -----------       ------------
                                                                                                     NIS thousands
                                                                                                ------------------------------
<S>                                                                                                <C>               <C>
                  Credit from banks                                                                333,113           392,341
                  Loans from banks and others and debentures (including
                   current maturities), see Note 15, and also C and D, E,
                   below                                                                         2,017,912         1,288,411
                                                                                                -----------       ------------
                                                                                                 2,351,025         1,680,752
                                                                                                ===========       ============
</TABLE>


         C.       The Company financed the acquisition of Tadiran
                  Communications through a NIS 637 million loan from a bank in
                  Israel, in consideration for a lien on the acquired shares
                  in favor of the bank.


         D.       The convertible debentures, which were issued by M-A
                  Industries, are guaranteed by first level fixed symbolic
                  lien with a deposit to the amount of NIS 1 for the Trustee
                  of the convertible debenture holders (see Note 15B).


         E.       Guarantees to banks and others for loans and for assuring
                  credit lines and other guarantees in favor of: Consolidated
                  Company December 31 December 31 2004 2003 2004 2003 NIS
                  thousands NIS thousands

<TABLE>
<CAPTION>
                                                               Consolidated                           Company
                                                         ------------------------------         ------------------------------
                                                               December 31                            December 31
                                                         ------------------------------         ------------------------------
                                                                2004               2003                2004               2003
                                                         -----------       ------------         -----------       ------------
                                                              NIS thousands                          NIS thousands
                                                         ------------------------------         ------------------------------
<S>                                                       <C>               <C>                   <C>                <C>
                  Subsidiaries                                     -                  -            240,151            314,125
                  Affiliates                                       -                340                  -                340
                  Others                                      78,473             67,723                150                154
                                                         -----------       ------------         -----------       ------------
                                                              78,473             68,063            240,301            314,619

</TABLE>

         1)       In certain cases when advances from customers are received, a
                  subsidiary provides its customers with bank guarantees to
                  secure the advances. Guarantees in excess of the amount of
                  advance payments stated as liabilities in the balance sheet,
                  amounted to NIS 265,786 thousand, and NIS 302,782 thousand,
                  as at the years ending December 31, 2004 and 2003,
                  respectively.


                                     F-91
<PAGE>

                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



Note 22 - Liens and Guarantees (cont'd)

         E.       Guarantees to banks and others for loans and for assuring
                  credit lines and other guarantees: (cont'd)

         2)       In connection with the Bezeq agreement to transfer ownership
                  of public switching, Bezeq received from Koor a guarantee in
                  the amount of NIS 125 million.

         3)       A subsidiary has a guarantee for a major customer to pay any
                  amounts up to 40 million dollars in relation to an
                  indemnification that the subsidiary signed for the same
                  customer, on account of breaches of contracts to Bezeq, the
                  Israeli Communication Company. The guarantee is at least till
                  2015.

         4)       A subsidiary and its subsidiary in Brazil are, under certain
                  conditions, a guarantor to financial institutions for credit
                  that its customers received in relation to commercial sales
                  of the consolidated company to those customers. The balance
                  of guarantees, as at the balance sheet date, was
                  approximately 98 million dollars. (December 31, 2003
                  approximately 85 million dollars).

         5)       There are also guarantees, in an unlimited amount, to ensure
                  due performance of work and customer agreements, product
                  warranty, advance payments received and guarantees on behalf
                  of liabilities to customs and excise authorities.

         6)       As a condition for the continued availability, see Notes 3
                  and 18.


Note 23 - Data concerning Items in Statements of Operations

         A.       Revenues from sales and services - net (1) (2):

         Consolidated:
<TABLE>
<CAPTION>

                                                                                        Year ended December 31
                                                                            --------------------------------------------------
                                                                                   2004               2003              2002
                                                                            -----------        -----------         -----------
                                                                                            NIS thousands
                                                                            --------------------------------------------------
<S>                                                                         <C>               <C>                 <C>
         Local:
         Industrial operations                                                  874,861            757,759           899,768
         Trading operations                                                     505,293            262,692           644,591

         Abroad:
         Industrial operations - export and
          international operations                                            6,947,748          5,902,716         5,157,580
         Trading operations                                                     900,771            767,263           397,851
                                                                            -----------        -----------         -----------
                                                                              9,228,673          7,690,430         7,099,790
                                                                            ===========        ===========         ===========
         (1)      Not including agency sales                                    425,224            386,491           315,124
                                                                            ===========        ===========         ===========
         (2)       Revenues and expenses relating to work performed under
                   long-term contracts:
                  Revenues                                                      880,959            979,950         1,359,621
                  Costs                                                        (709,899)          (793,260)         (949,898)
                                                                            -----------        -----------         -----------
                                                                                171,060            186,690           409,723
                                                                            ===========        ===========         ===========
</TABLE>


                                     F-92
<PAGE>
                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------


Note 23 - Data to Items in Statements of Operations (cont'd)

          B.  Cost of sales and services - consolidated:
<TABLE>
<CAPTION>

                                                                                           Year ended December 31
                                                                             --------------------------------------------------
                                                                                   2004               2003             2002
                                                                             ------------      ------------     ---------------
                                                                                                NIS thousands
                                                                             --------------------------------------------------
         Industrial operations:

<S>                                                                           <C>                <C>               <C>
         Materials                                                            3,817,178          2,757,523         2,766,122
         Labor                                                                  750,457            775,567           906,158
         Subcontracted work                                                      41,640             49,725            68,009
         Depreciation and amortization                                          177,535            180,228           189,720
         Research and development expenses, net (*)                             212,115            221,343           256,313
         Other manufacturing expenses                                           645,915            533,736           493,684
                                                                             ------------      ------------     ---------------
                                                                              5,644,840          4,518,122         4,680,006
         Less - expenses charged to cost of fixed assets                          6,510              8,027            10,350
                                                                             ------------      ------------     ---------------
                                                                              5,638,330          4,510,095         4,669,656
         (Decrease) increase in inventory of goods and
          work in process                                                       (39,305)            43,428            13,057
                                                                             ------------      ------------     ---------------
                                                                              5,599,025          4,553,523         4,682,713
         Increase in inventory of finished goods                               (176,611)           (18,778)         (208,753)
                                                                             ------------      ------------     ---------------
                                                                              5,422,414          4,534,745         4,473,960
                                                                            ------------      ------------     ---------------
         Trading operations:
         Merchandise                                                            508,189            537,512           533,532
         Labor                                                                   55,394             93,235            69,319
         Depreciation                                                            26,155             26,873            29,160
         Others                                                                 275,527            200,579           209,809
                                                                             ------------      ------------     ---------------
                                                                                865,265            858,199           841,820
                                                                             ------------      ------------     ---------------
                                                                              6,287,679          5,392,944         5,315,780
                                                                             ============      ============     ===============
         (*) Net of grants and participations that were
             received and royalties that were paid, net                          14,220             (1,952)              788
                                                                             ============      ============     ===============

         C.    Selling and marketing expenses - consolidated:

                                                                                           Year ended December 31
                                                                             --------------------------------------------------
                                                                                   2004               2003             2002
                                                                             ------------      ------------     ---------------
                                                                                                NIS thousands
                                                                             --------------------------------------------------
         Salaries                                                               338,629            258,260           251,372
         Commissions                                                            150,556            142,256            97,030
         Advertising expenses                                                    40,993             30,384            45,584
         Depreciation and amortization                                          113,638             97,086            78,843
         Other                                                                  528,388            412,471           341,948
                                                                             ------------      ------------     ---------------
                                                                              1,172,204            940,457           814,777
                                                                             ============      ============     ===============
</TABLE>


                                     F-93
<PAGE>
                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------


Note 23 - Data to Items in Statements of Operations (cont'd)


         D.       General and administrative expenses:
<TABLE>
<CAPTION>

                                                    Consolidated                                      Company
                                     ------------------------------------------   ----------------------------------------------
                                               Year ended December 31                         Year ended December 31
                                     ------------------------------------------   ----------------------------------------------
                                         2004            2003            2002           2004            2003            2002
                                     ------------   ------------   ------------   -------------   ------------   ---------------
                                                    NIS thousands                                   NIS thousands
                                     ------------------------------------------   ----------------------------------------------
<S>                                     <C>            <C>            <C>              <C>            <C>            <C>
         Salaries                       229,180        217,525        234,098          22,399         17,325         24,342
         Bad and
          doubtful debts                 54,959         36,903         33,933               -              -              -
         Depreciation and
          amortization                   24,171         24,070         30,797           1,262          1,342          1,665
         Other                          217,694        182,246        190,541          22,987         22,497         22,129
                                     ------------   ------------   ------------   -------------   ------------   ---------------
                                        526,004        460,744        489,369          46,648         41,164         48,136
                                     ============   ============   ============   =============   ============   ===============
</TABLE>

         E.       Financing expenses (income), net:
<TABLE>
<CAPTION>

                                                    Consolidated                                      Company
                                     ------------------------------------------   ----------------------------------------------
                                               Year ended December 31                         Year ended December 31
                                     ------------------------------------------   ----------------------------------------------
                                         2004            2003            2002           2004            2003            2002
                                     ------------   ------------   ------------   -------------   ------------   ---------------
                                                    NIS thousands                                   NIS thousands
                                     ------------------------------------------   ----------------------------------------------

<S>                                     <C>             <C>         <C>                <C>            <C>             <C>
         In respect of
          convertible
          debentures                    18,942        15,319        17,825                  -             612         1,139
         In respect of
          debentures                      (480)            -           651                  -               -             -
         In respect of
          long-term loans              200,509       141,078       240,713            111,396          94,641       170,283
         In respect of
          short-term loans
          and credit                    79,521       182,868       168,478             10,756          (2,458)       15,024
         Amortization of
          capital raising
          expenses                       4,334         2,106         2,250                  -               -             -
         Losses (gains)
          from
          marketable
          securities, net              (24,238)      (72,681)       44,112          (18,568 )         (61,974)       35,691
         Interest
          capitalized to
          fixed assets and
          work in process               (1,544)         (371)      (14,860)                 -               -             -
         Expenses
          (income) from
          balance with
          investees, net                     -             -              -             1,430          (2,833)        6,478
         Expenses
          (income) from
          deposits and
          others, net                   (5,682)      (40,119)      (50,732)             5,792           7,120       (28,807)
                                     ------------   ------------   ------------   -------------   ------------   ---------------
                                       271,362       228,200       408,437            110,806          35,108       199,808
                                     ============   ============   ============   =============   ============   ===============

</TABLE>


                                     F-94
<PAGE>
                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------


Note 23 - Data to Items in Statements of Operations (cont'd)


         F.   Other income (expenses), net

         1.   Consolidated
<TABLE>
<CAPTION>

                                                                                           Year ended December 31
                                                                             --------------------------------------------------
                                                                                   2004               2003             2002
                                                                             ------------      ------------     ---------------
                                                                                                NIS thousands
                                                                             --------------------------------------------------

<S>                                                                             <C>                 <C>                <C>
         Sale of investments and activities in investees
          (including changes in rates of holding)                               223,095             32,916           342,343
         Expenses relating to the termination,
          sale of activities and sale and write down
          of assets, net                                                        (73,078)          (107,306)         (164,401)
         Supplemental severance pay and pensions                                (54,010)           (28,279)         (126,997)
         Management services - affiliated companies                               2,682              2,272             2,674
         Securitization costs (see Note 3C(2))                                  (27,783)         **(16,112)        **(22,254)
         Compensation for damages                                                     -              5,580            37,957
         Amortization of goodwill                                              (136,437)          (118,736)          (91,085)
         Miscellaneous, net                                                     (13,228)           **9,944          **27,587
                                                                             ------------      ------------     ---------------
                                                                                (78,759)          (219,721)            5,824
                                                                             ============      ============     ===============
</TABLE>

         2.       Company
<TABLE>
<CAPTION>

                                                                                           Year ended December 31
                                                                             --------------------------------------------------
                                                                                   2004               2003             2002
                                                                             ------------      ------------     ---------------
                                                                                                NIS thousands
                                                                             --------------------------------------------------

<S>                                                                              <C>                 <C>               <C>
         Profit (loss) from sale of investments in
          investee companies                                                    212,024              7,039           336,621
         Net changes in value of long-term assets                                     -            (12,382)          (10,036)
         Rental income, net*                                                      8,135              7,216             9,219
         Capital gain from sale of fixed assets                                       -                (96)           29,189
         Dividend                                                                 4,701                  -                 -
         Miscellaneous, net                                                      10,099              3,914               438
                                                                             ------------      ------------     ---------------
                                                                                234,959              5,691           365,431
                                                                             ============      ============     ===============
         *  Depreciation included in the item                                       760                668             1,235
                                                                             ============      ============     ===============

         **  Reclassified
</TABLE>

                                     F-95
<PAGE>


                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------


Note 23 - Data to Items in Statements of Operations (cont'd)

         G. Equity of the Koor Group in the operating results of affiliates,
net

         1. Consolidated
<TABLE>
<CAPTION>

                                                                                           Year ended December 31
                                                                             --------------------------------------------------
                                                                                   2004               2003             2002
                                                                             ------------      ------------     ---------------
                                                                                                NIS thousands
                                                                             --------------------------------------------------

<S>                                                                              <C>              <C>               <C>
         Affiliated companies, net (1)                                            3,406            108,049           245,703
         Amortization of goodwill *                                              24,281              5,774             6,388
                                                                             ------------      ------------     ---------------
                                                                                 27,687            113,823           252,091
                                                                             ============      ============     ===============

         (1) Including loss from a discontinued operation
              in an affiliate                                                         -                  -           110,911
                                                                             ============      ============     ===============

         *   In 2004 - net of in process research and development in the amount of NIS 20 million with respect to purchase of
             affiliated company - See Note 3H.

         2.  Company
</TABLE>

<TABLE>
<CAPTION>

                                                                                           Year ended December 31
                                                                             --------------------------------------------------
                                                                                   2004               2003             2002
                                                                             ------------      ------------     ---------------
                                                                                                NIS thousands
                                                                             --------------------------------------------------
<S>                                                                             <C>                <C>             <C>
         Equity of Koor in operating results for the year (1)                    57,192           **51,709          (900,592)
         Amortization of goodwill                                               (30,992)         **(15,439)          (23,159)
                                                                             ------------      ------------     ---------------
                                                                                 26,200             36,270          (923,751)
                                                                             ============      ============     ===============
         Dividend received/proposed                                              74,201             23,043            28,663

                                                                             ============      ============     ===============
         (1) Including loss from a discontinued operation
             in an affiliate                                                          -                  -           110,911
                                                                             ============      ============     ===============

         (2)
                                                                                           Year ended December 31
                                                                             --------------------------------------------------
                                                                                   2004               2003             2002
                                                                             ------------      ------------     ---------------
                                                                                                NIS thousands
                                                                             --------------------------------------------------

         Subsidiaries                                                           122,172            151,053          (680,871)
         Proportionately consolidated companies                                 (61,114)                 -                 -
         Affiliates                                                             (34,858)          (114,783)         (242,880)
                                                                             ------------      ------------     ---------------
                                                                                 26,200             36,270          (923,751)
                                                                             ============      ============     ===============
</TABLE>

         *    In 2004 - net of in process research and development in process
              in the amount of NIS 20 million with respect to purchase
              of affiliated company. - See Note 3H.

         **  Reclassified

                                     F-96
<PAGE>


                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------

Note 23 - Supplementary Data to Items in Statements of Operations (cont'd)

         I.  Income (expenses) from investee companies and their participation
             in expenses - Company
<TABLE>
<CAPTION>

                                                                  Year ended December 31
                               -----------------------------------------------------------------------------------------------
                                            2004                           2003                            2002
                               -------------------------------  -----------------------------  -------------------------------
                                 Consolidated      Affiliated    Consolidated     Affiliated    Consolidated      Affiliated
                                    companies       companies       companies      companies       companies       companies
                               --------------     -----------    -------------   ------------   ------------    --------------
                                                                       NIS thousands
                               -----------------------------------------------------------------------------------------------
<S>                                  <C>               <C>            <C>                <C>            <C>         <C>
         Income:
         Management
         services                     22,334               -          25,006              -          35,573               -
                               --------------     -----------    -------------   ------------   ------------    --------------
         Administrative
         expenses --
         Salary and other
         administrative
         expenses                      1,457               -           1,679              -           9,002               -
                               --------------     -----------    -------------   ------------   ------------    --------------
         Financing
         income
          (expenses), net             (1,430)              -           2,828              5          (6,480)              2
                               --------------     -----------    -------------   ------------   ------------    --------------
         Rental income,
         net                               -               -               -              -             654               -
                               --------------     -----------    -------------   ------------   ------------    --------------
</TABLE>




                                     F-97
<PAGE>



                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------

Note 24 - Business Segments

         A.       The Koor Group operates in the following business segments:

                  The Company's telecommunication activities are focused in two
                  companies - Telrad Networks Ltd., which develops and markets
                  telecom products and provides end-user solutions, and ECI
                  Telecom Ltd., an affiliated company, that provides solutions
                  for access networks (Inovia) and transmission systems and
                  optical networks (Enavis, Lightscape).

                  The Company's agrochemical activities are carried out through
                  M-A Industries considered a 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.

                  Activities in the defense space are carried out mainly by the
                  Elisra Electronics Industries Ltd. Group, a leader in the
                  planning, development and manufacturing of solutions for
                  electronic warfare and defense, wireless communication
                  systems, command and control systems, pilot rescue systems
                  and advanced communications systems.

                  Activities in venture capital investments space 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 Company's remaining business activities are in tourism,
                  through Sheraton Moriah, which holds the Sheraton Hotel chain
                  in Israel and Knafayim-Arkia (an affiliated company until the
                  third quarter of 2004) which holds 40% of the EL-AL airline
                  company which provides aviation and holiday services and
                  leases aircrafts to other companies. Additional activities
                  include international trade through several 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 charged on a
                  proportionate basis, expenses that benefit more than one
                  segment. Expenses and revenue presented in the statements of
                  operations after operating earnings are not taken in account
                  in the determination of operating earnings or loss.
                  Identifiable assets and liabilities by industry segments are
                  those that are used by Koor in its activities in each
                  segment.



                                     F-98
<PAGE>


                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------

Note 24 - Business Segments (cont'd)

         C.       Data regarding business segments of the Koor Group:
<TABLE>
<CAPTION>

                                                                   Year ended December 31
                                ----------------------------------------------------------------------------------------------
                                             2004                          2003                            2002
                                ----------------------------- ------------------------------  --------------------------------
                                 NIS thousands              %   NIS thousands              %   NIS thousands               %
                                --------------- ------------- --------------- --------------  ---------------  ---------------

<S>                                 <C>               <C>         <C>             <C>           <C>                <C>
         Revenues from
          sales and
          services:
         Segments:
         Telecommunication*            615,057            6.66        796,059           10.35        814,108           11.47
         Defense electronics         1,165,998           12.63      1,286,432           16.73      1,687,551           23.77
         Agro-chemicals and
          other chemicals            6,895,238           74.72      5,191,913           67.51      4,140,471           58.32
         Others                        552,380            5.99        416,026            5.41        457,660            6.44
         Total segments              9,228,673         100.00       7,690,430          100.00      7,099,790          100.00
                                =============== ============= =============== ==============  ===============  ===============
         * Including sales
          to major customer            586,114                        753,863                        415,442
                                =============== ============= =============== ==============  ===============  ===============
</TABLE>

<TABLE>
<CAPTION>

                                                                   Year ended December 31
                                ----------------------------------------------------------------------------------------------
                                             2004                          2003                            2002
                                ----------------------------- ------------------------------  --------------------------------
                                 NIS thousands              %   NIS thousands              %   NIS thousands               %
                                --------------- ------------- --------------- --------------  ---------------  ---------------

<S>                                    <C>            <C>          <C>                 <C>         <C>            <C>
         Pre-tax earnings
          (losses):
         Operating earnings
         (loss) according to
         segments:

         Telecommunication             (64,491)        (5.02)          3,158            0.34        (178,623)         (34.43)
         Defense electronics            30,865           2.4          (4,294)          (0.46)         78,853           15.20
         Agro-chemicals
          and other chemicals        1,312,534         102.1         949,290           102.61        658,507          126.93
         Venture capital
          investments                   (1,457)        (0.11)         (1,445)          (0.16)         (7,894)          (1.52)
         Others                          8,030          0.63         (21,536)          (2.33)        (32,062)          (6.18)
                                --------------- ------------- --------------- --------------  ---------------  ---------------
         Total segments              1,285,481        100.00         925,173           100.00        518,781          100.00
                                =============== ============= =============== ==============  ===============  ===============
         Joint general
          expenses                     (42,695)                      (28,888)                        (38,917)
                                ---------------               ---------------                 ---------------
         Total operating
          earnings                   1,242,786                       896,285                         479,864
         Financing
          expenses, net               (271,362)                     (228,200)                       (408,437)
         Other income
          (expenses), net              (78,759)                     (219,721)                          5,824
         Transfer to
          statement of income
          of translation
          differences of
          autonomous
          investee in
          voluntary liquidation              -                             -                        (390,901)
                                --------------- ------------- --------------- --------------  ---------------  ---------------
         Pre-tax earnings
          (losses)                     892,665                       448,364                        (313,650)
                                =============== ============= =============== ==============  ===============  ===============
</TABLE>


                                     F-99
<PAGE>

                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------


Note 24 - Business Segments (cont'd)


         C.       Data regarding business segments of the Koor Group: (cont'd)

         The Koor Group's equity in the excess of losses over earnings of
affiliates, net, is as follows:
<TABLE>
<CAPTION>

                                                                   Year ended December 31
                                ----------------------------------------------------------------------------------------------
                                             2004                          2003                            2002
                                ----------------------------- ------------------------------  --------------------------------
                                 NIS thousands              %   NIS thousands              %   NIS thousands               %
                                --------------- ------------- --------------- --------------  ---------------  ---------------

<S>                                   <C>              <C>          <C>               <C>           <C>               <C>
         Telecommunications           (15,919)         (57.5)       (101,795)         (89.43)       (246,998)         (97.98)
         Defense
          electronics                       -               -           (130)          (0.11)           (172)          (0.07)
         Venture capital
          investments                    (329)         (1.19)           (329)          (0.30)           (329)          (0.13)
         Others                       (11,439)        (41.31)        (11,569)         (10.16)         (4,592)          (1.82)
                                --------------- ------------- --------------- --------------  ---------------  ---------------
                                      (27,687)       (100.00)       (113,823)        (100.00)       (252,091)        (100.00)
                                =============== ============= =============== ==============  ===============  ===============
</TABLE>

<TABLE>
<CAPTION>

                                                                                    December 31
                                                         ---------------------------------------------------------------------
                                                                     2004                                *2003
                                                         ------------------------------    -----------------------------------
                                                         NIS thousands                 %    NIS thousands                    %
                                                         -------------   --------------    ---------------  ------------------

<S>                                                      <C>               <C>                 <C>           <C>
         Identifiable assets
         Segments:
         Telecommunications                                   550,914               4.97           778,182                7.50
         Defense electronics                                1,119,371              10.10         1,104,515               10.66
         Agro-chemicals and
          other chemicals                                   8,242,246              74.33         7,329,815               70.69
         Venture capital investments                          175,818               1.58           223,733                2.16
         Others                                             1,000,295               9.02           932,586                8.99
                                                         -------------   ---------------   ---------------  ------------------
         Total segments                                    11,088,644             100.00        10,368,831              100.00
                                                                         ---------------                    ------------------
         Corporate assets                                     683,762                              557,162
         Affiliates**                                       1,375,160                              943,764
                                                         -------------                     ---------------
                                                           13,147,566                           11,869,757
                                                         =============                     ===============
</TABLE>

         **  Including an investment in ECI as at December 31, 2004 and 2003 in
             the amount of NIS 673 million and NIS 726 million respectively,
             which operates in the telecommunications segment and investment in
             Tadiran Communications Ltd. which operates in the defense
             electronics in the amount of NIS 602 million as at December 31,
             2004.


                                     F-100
<PAGE>

                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------

Note 24 - Business Segments (cont'd)

         C.       Data regarding business segments of the Koor Group: (cont'd)
<TABLE>
<CAPTION>

                                                                                    December 31
                                                         ---------------------------------------------------------------------
                                                                     2004                                *2003
                                                         ------------------------------    -----------------------------------
                                                         NIS thousands                 %    NIS thousands                    %
                                                         -------------   --------------    ---------------  ------------------

         Identifiable liabilities

<S>                                                          <C>                  <C>             <C>                    <C>
         Segments:
         Telecommunications                                   215,060              6.87            263,873                9.12
         Defense electronics                                  668,157              21.34           728,443               25.16
         Agro-chemicals and other chemicals                 2,089,083              66.72         1,733,760               59.89
         Venture capital investments                               24                  -             8,930                0.31
         Others                                               158,607               5.07           159,870                5.52
                                                         -------------   ---------------   ---------------  ------------------
         Total segments                                     3,130,931             100.00         2,894,876              100.00

         Corporate liabilities                                 49,515                               63,676
                                                         -------------                     ---------------
                                                            3,180,446                            2,958,552

         Financing commitments                              4,725,771                            4,697,239

         Others                                               647,458                              396,772
                                                         -------------                     ---------------
                                                            8,553,675                            8,052,563
                                                         =============                     ===============

</TABLE>

<TABLE>
<CAPTION>

                                                                   Year ended December 31
                                ----------------------------------------------------------------------------------------------
                                             2004                          2003                            2002
                                ----------------------------- ------------------------------  --------------------------------
                                 NIS thousands              %   NIS thousands              %   NIS thousands               %
                                --------------- ------------- --------------- --------------  ---------------  ---------------

<S>                                     <C>              <C>          <C>               <C>        <C>                <C>
         Capital
          investments:
         Segments:
         Telecommunications            21,015            2.39          7,173            2.25         15,554            1.19
         Defense
          electronics                  21,408            2.44         28,210            8.85         45,753            3.48
         Agro-chemicals
          and other
          chemicals                   816,287            92.9        277,195           86.94      1,241,091           94.53
         Others                        19,991            2.27          6,262            1.96         10,464            0.80
                                --------------- ------------- --------------- --------------  ---------------  ---------------
         Total segments               878,701          100.00        318,840          100.00      1,312,862          100.00
                                                =============                 ==============                   ===============
         Corporate assets                 423                            392                            108
                                ---------------               ---------------                 ---------------
                                      879,124                        319,232                      1,312,970
                                ===============               ===============                 ===============

</TABLE>


                                     F-101
<PAGE>


                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------


Note 24 - Business Segments (cont'd)

         C.       Data regarding business segments of the Koor Group: (cont'd)
<TABLE>
<CAPTION>

                                                                   Year ended December 31
                                ----------------------------------------------------------------------------------------------
                                             2004                          2003                            2002
                                ----------------------------- ------------------------------  --------------------------------
                                 NIS thousands              %   NIS thousands              %   NIS thousands               %
                                --------------- ------------- --------------- --------------  ---------------  ---------------

<S>                                <C>                  <C>        <C>                <C>         <C>             <C>
         Depreciation and
          amortization:
         Segments:
         Telecommunications           31,863             6.89        44,696           10.17         57,664          13.67
         Defense electronics          35,721             7.72        39,297            8.94         49,825          11.81
         Agro-chemicals
          and other
          chemicals                  364,995            78.91       318,492           72.47        278,482          66.03
         Others                       29,957             6.48        37,029            8.42         35,792           8.49
                                --------------- ------------- --------------- --------------  ---------------  ---------------
         Total segments              462,536           100.00       439,514          100.00        421,763         100.00
                                                =============                 ==============                   ===============
         Corporate assets              1,264                         13,050                          1,817
                                --------------- ------------- --------------- --------------  ---------------  ---------------

                                     463,800                        452,564                        423,580
                                ===============               ===============                 ===============
</TABLE>


         D. Revenues from sales and services by geographic destinations
according to customer location
<TABLE>
<CAPTION>

                                                                                         Year ended December 31
                                                                            ---------------------------------------------------
                                                                                    2004               2003               2002
                                                                            -------------   ----------------    ---------------
                                                                                              NIS thousands
                                                                            ---------------------------------------------------

<S>                                                                           <C>                <C>               <C>
         North America                                                        1,542,409          1,152,009         1,125,915
         Europe                                                               3,150,853          2,473,635         1,864,012
         South America                                                        2,056,261          1,670,256         1,213,485
         Asia and Australia                                                     842,986          1,050,873         1,123,387
         Africa                                                                 256,010            323,206           228,632
         Israel                                                               1,380,154          1,020,451         1,544,359
                                                                            -------------   ----------------    ---------------
                                                                              9,228,673          7,690,430         7,099,790
                                                                            =============   ================    ===============
</TABLE>


                                     F-102
<PAGE>

                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------


Note 24 - Business Segments (cont'd)

         E.   Assets by geographic location of manufacturing operation
<TABLE>
<CAPTION>

                                                                                                         December 31
                                                                                             ----------------------------------
                                                                                                       2004              2003
                                                                                             --------------    ----------------
                                                                                              NIS thousands     NIS thousands
                                                                                             ----------------------------------
<S>                                                                                              <C>               <C>
         Israel                                                                                  9,411,628         8,636,399
         South America                                                                           1,821,643         1,530,178
         Europe                                                                                  1,630,720         1,495,176
         United States                                                                             169,497           167,808
         Others                                                                                    114,078            40,196
                                                                                             --------------    ----------------
                                                                                                13,147,566        11,869,757
                                                                                             ==============    ================



         F.    Capital investments in assets by geographic location

                                                                                                         December 31
                                                                                             ----------------------------------
                                                                                                       2004              2003
                                                                                             --------------    ----------------
                                                                                              NIS thousands     NIS thousands
                                                                                             ----------------------------------
         Israel                                                                                    798,310           248,131
         Brazil                                                                                     37,184            40,725
         United States                                                                               2,839             2,719
         Others                                                                                     40,791            27,657
                                                                                             --------------    ----------------
                                                                                                   879,124           319,232
                                                                                             ==============    ================
</TABLE>


Note 25 - Transactions and Balances with Interested Parties

         A.     The following are details of interested parties in Koor
                resulting from their holdings of Koor's ordinary shares:

         1.     Claridge Group (Claridge).

         2.     Anfield Ltd.

         B.     On October 15, 2002 the Board of Directors of Bank Hapoalim
                B.M. decided, on the distribution of a dividend in kind of
                all its holdings in the Company. On November 27, 2002, the
                date of actual distribution, Bank Hapoalim B.M. ceased to be
                an interested party in the Company.

                During the period when Bank Hapoalim B.M. was an interested
                party, Koor and its consolidated companies also made
                transactions with Bank Hapoalim. These transactions, which
                were mainly for receipt of banking services, were made in the
                normal course of business, and therefore, no separation is
                made with regard to the management and the recording of the
                transactions.



                                     F-103
<PAGE>
                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------

Note 25 - Transactions and Balances with Interested Parties (cont'd)

         C.       Benefits to interested parties - Company

         1.       Directors (*)
<TABLE>
<CAPTION>

                                                                                              Year ended December 31
                                                                                ----------------------------------------------
                                                                                    2004               2003              2002
                                                                                ----------     -------------     -------------
                                                                                               NIS thousands
                                                                                ----------------------------------------------

<S>                                                                                 <C>              <C>             <C>
                  Directors not employed by the Company:
                  Annual compensation and participation
                   in meetings:

                  Claridge Group                                                    116                115               245
                                                                                ==========     =============     =============
                  Number of directors                                                 2                  3                 3
                                                                                ==========     =============     =============
                  Poalim Assets (Shares) Ltd.                                         -                  -                95
                                                                                ==========     =============     =============
                  Number of directors                                                 -                  -                 2
                                                                                ==========     =============     =============
                  Other directors                                                   516                442               533
                                                                                ==========     =============     =============
                  Number of directors                                                 8                  8                10
                                                                                ==========     =============     =============

                  (*) Including directors who have been replaced during the
year.

         2.       Consultancy services

                                                                                              Year ended December 31
                                                                                ----------------------------------------------
                                                                                    2004               2003              2002
                                                                                ----------     -------------     -------------
                                                                                               NIS thousands
                                                                                ----------------------------------------------
                  Claridge                                                        1,788              1,789             1,871
                                                                                ==========     =============     =============
                  Poalim Capital Markets and Investment Ltd.                          -                  -             1,433
                                                                                ==========     =============     =============
</TABLE>

                  The Company has agreements with interested parties - Poalim
                  Capital Markets and Investments Ltd. (Poalim) (at the time
                  when Bank Hapoalim B.M. was an interested party) and 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 (Claridge/Poalim) 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 to
                  each of the consultants. The agreements 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.

                  On the date on which Bank Hapoalim ceased to be an interested
                  party in Koor, the agreement with Poalim expired.

         3.       See Note 18A(14) regarding insurance and indemnification of
                  interested parties.



                                     F-104
<PAGE>

                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------
Note 26 - Earnings (Loss) Per Share

         A.       Adjusted net earnings (loss) used in the computation of
                  earnings per NIS 1 par value of the share capital:
<TABLE>
<CAPTION>


                                                                                         Year ended December 31
                                                                            ---------------------------------------------------
                                                                                    2004               2003               2002
                                                                            -------------   ----------------    ---------------
                                                                                              NIS thousands
                                                                            ---------------------------------------------------

<S>                                                                              <C>               <C>            <C>
         Net earnings (loss) used in the computation
          of earnings (loss) per NIS 1 par value of shares                      144,990             46,362          (766,969)
                                                                            =============   ================    ===============

         B.       Weighted number of ordinary shares of NIS 0.001 used in
                  the computation of net earnings (loss) per NIS 1 par value of
                  the share capital:

                                                                                         Number of ordinary shares
                                                                            --------------------------------------------------
                                                                                   2004              2003              2002
                                                                            ------------     -------------     -------------

         Total share capital used in the computation of
          16,381,279                                                         16,381,279         15,716,725        15,173,291
                                                                            ============     =============     =============
</TABLE>

         C.       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 3.5%
                  (December 31, 2003 - 4%, December 31, 2002 - 6%) for
                  securities linked to the CPI.


Note 27 - Events Subsequent to the Balance Sheet Date

         1.       In January 2005, M-A Industries, through a wholly-owned and
                  controlled subsidiary, signed an agreement to acquire 49% of
                  the shares and rights of Mabeno, a Dutch company serving as
                  exclusive distributor of the agrochemical products of the
                  Makhteshim-Agan Group in Benelux and Scandinavia.
                  Under the terms of the agreement, the purchase will be
                  effected in consideration for the allotment of the number of
                  shares of M-A Industries equal to 2,940 thousand euro(about
                  NIS 17 million), according to the share's market price on the
                  transfer date. Additionally, M-A Industries received an
                  option to increase its holdings in Mabeno to 55%.

         2.       In January 2005, a lawsuit and a motion to recognize it as
                  a class action, were filed in a U.S. court against ECtel,
                  directors and officers of ECtel and against ECI. In their
                  lawsuit, the plaintiffs claim that, in the period between
                  April 2001 and April 2003, ECtel violated provisions of the
                  U.S. securities laws, and that directors and officers of
                  ECtel breached their duty of faith in connection with the
                  disclosure of its business results in its financial
                  statements. The lawsuit was also directed against ECI,
                  because control in ECtel during that period was held by ECI,
                  and the plaintiffs claim that the acts and omissions of ECtel
                  were directed by and carried out at ECI's initiative. The
                  plaintiffs did not cite the amount they are claiming.
                  Management of ECI is of the opinion that the plaintiffs'
                  claims, as they relate to it, are baseless.

         3.       In February 2005, ECI entered into a preliminary agreement
                  with ABN Amro Bank for the sale of the balance of long-term
                  receivables for cash totalling 96 million dollars, as well as
                  possible future consideration of 3.3 million dollars. The
                  sale is subject to several conditions and approvals,
                  including approval from the shareholders of ECI, and is
                  expected to be approved in April 2005. The sale is expected
                  to generate a gain to ECI of 11 million dollars (excluding
                  the future consideration). The Company's share in the
                  aforementioned gain will be NIS 15 million.


                                     F-105
<PAGE>
                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------


Note 27 - Events Subsequent to the Balance Sheet Date (cont'd)

         4.       On February 3, 2005, Koor sold 15.9 million shares of M-A
                  Industries for NIS 374 million, at a gain of NIS 204 million,
                  which will be charged in the Company's financial statements
                  for the first quarter of 2005.

                  Within the framework of the sale, Koor undertook to not sell
                  additional shares of M-A Industries for a nine-month period
                  beginning from the date of the sale.

                  Following the sale of the shares by Koor in February 2005, as
                  a result of which Koor's shareholding percentage in M-A
                  Industries fell to 34.6% (29.5% on a fully diluted basis),
                  the management of Koor reevaluated the issue of continuing to
                  consolidate M-A Industries, beginning from the first quarter
                  of 2005.

                  Based on an evaluation of the range of circumstances, as
                  discussed in Note 3C(1), Koor decided that due to the
                  combination of new circumstances created as a result of the
                  aforementioned sale of its holdings, continuation of 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 in the
                  financial statements of Koor will be discontinued, and the
                  investment therein will be stated by the equity method.

         5.       On March 14, 2005, M-A Industries published a prospectus
                  offering employees of M-A Industries and its subsidiaries up
                  to 14,900 thousand stock options exercisable for up to 14,900
                  ordinary registered shares of par value NIS 1 of M-A
                  Industries.
                  Assuming all the options are exercised, the grantees will
                  hold approximately 3.05% of M-A Industries issued and paid
                  share capital. However, the grantees will not be issued the
                  full number of shares underlying the options, but only the
                  number of shares reflecting the monetary benefit implicit in
                  the options.




                                     F-106
<PAGE>

                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------

Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements

         A.       Differences between Israel GAAP and US GAAP

                  Koor's consolidated financial statements conform with Israeli
                  generally accepted accounting principles ("Israeli GAAP"),
                  which differ in certain respects from those generally
                  accepted in the United States of America ("US GAAP") as
                  described below:

                  1.       Effect of inflation

                  In accordance with Israeli GAAP:

                  The Company, in accordance with Israeli GAAP, comprehensively
                  includes the effect of price level changes in the
                  accompanying financial statements, as described in Note 2B.
                  According to such Israeli accounting principles, the Company
                  has discontinued the adjustment of the financial statements
                  as of January 1, 2004.

                  US GAAP does not provide for recognition of the effects of
                  such price level changes. Such effects have not been included
                  in a reconciliation to US GAAP.


                  2.       Debt arrangement within the framework of an overall
                           financial arrangement

                  In accordance with Israeli GAAP:
                  Koor reported an extraordinary gain in 1991 as a result of
                  restructuring part of its debts.

                  In accordance with US GAAP:
                  In accordance with FAS No. 15 - "Accounting by Debtors and
                  Creditors for Doubtful Debt Restructuring" future interest
                  payments were deducted from the restructuring of an old debt.
                  The recognition of non-realized earnings (which represents
                  deferred interest) is affected by payments of interest over
                  the period from the date of the restructuring of the debt up
                  to its repayment date.
                  As at December 31, 2002, the entire balance of the deferred
                  interest was fully amortized.



                                     F-107
<PAGE>

                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         A.       Differences between Israel GAAP and US GAAP (cont'd)

                  3.       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.

                  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 depending on the geographical location of
                           the approved enterprise 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
                           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, if and when such dividend out of
                           "approved enterprise" earnings is distributed to its
                           shareholders.

                           In accordance with Israeli GAAP:
                           Deferred taxes should be provided on the excess of
                           the financial statement carrying value over the tax
                           basis of an investment in an Israeli subsidiary as
                           the Company does not have any means under local tax
                           law to recover this difference in a tax-free manner.

                           Koor has not provided deferred tax in respect of
                           undistributed tax-exempt or tax reduced 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.



                                     F-108
<PAGE>

                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------

Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         A.       Differences between Israel GAAP and US GAAP (cont'd)

                  3.       Deferred taxes (cont'd)

                  In accordance with US GAAP:
                  A reserve for deferred tax should be provided on the
                  undistributed tax-exempt earnings of local subsidiaries
                  established subsequent to December 15, 1992, as their
                  distribution results in additional tax.

                  4.       Salary expenses in respect of share options issued
                           to employees

                  In accordance with Israeli GAAP:
                  No expense is recorded due to stock options granted to
                  employees.

                  In accordance with US GAAP:

                  a)       Fixed Option Plan:

                           Under APB-25, the expense is measured as the
                           difference between the share market price and the
                           exercise price of the option, at the date of grant.
                           The difference is charged as a salary expense during
                           the period in which the employee performs the
                           services for which the benefit was granted.

                  b) Variable Option Plan:

                           Under APB-25 the expense is measured as the
                           difference between the share market price and the
                           exercise price of the option at the end of each
                           reporting period. In each reporting period the
                           expense is recorded based on the vested part of the
                           period which has passed, taking into consideration
                           amounts previously recorded as expenses.

                  5.       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: securities held for a short period and
                  traded at a high frequency (trading securities), available
                  for sale securities and held to maturity securities.



                                     F-109
<PAGE>

                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------

Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         A.       Differences between Israel GAAP and US GAAP (cont'd)

                  5.       The accounting treatment of marketable securities:
                           (cont'd)

                  A change in the value of trading securities, including
                  unrealized earnings, is charged to the statement of
                  operations, while unrealized earnings after tax, if any, of
                  the available for sale type is reported as a separate item
                  within shareholders' equity.
                  Marketable securities that are classified as held-to-maturity
                  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.

                  Most of the short term securities held by the Company are
                  available-for-sale securities.

                  6.       Allocation of proceeds from an issuance of
                           debentures and stock warrants, when securities are
                           issued as a package (issuance by Koor in 1994):

                  According to the accounting policy at this issuance:
                  The proceeds from an issuance of debentures and stock
                  warrants, as a package, are allocated to debentures according
                  to their face value while the remainder of the proceeds is
                  attributed to the share warrants.

                  In accordance with US GAAP:
                  The proceeds from an issuance of share options and
                  convertible debentures, as a package, are split based on the
                  relative fair value, of these securities at the date of
                  issuance. This will sometimes result in the recording of a
                  discount in respect of the convertible debentures that is to
                  be amortized as interest expense over the term of debentures.

                  As at December 31, 2003, the entire balance of the deferred
                  interest was amortized in full.

                  7. 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 create a provision for losses, which
                  it may incur from the dilution of its holdings in investee
                  companies, when it is probable that the share options will be
                  exercised or the debentures will be converted.

                  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.

                  8.       Employee severance benefits as a part of an
                           efficiency program:

                  In accordance with Israeli GAAP:
                  Up to and including 2002 employee severance benefits, as part
                  of future anticipated dismissals, were recorded when
                  management decided on the dismissals, and/or when management
                  declared its intention regarding the dismissals. Since 2003,
                  management's decision or intention regardingthe dismissals
                  does not in itself constitute a reason to record a provision
                  for employee severance benefits, rather a provision is
                  recorded only when an obligation to the employees exists.


                                     F-110
<PAGE>

                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------

Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         A.       Differences between Israel GAAP and US GAAP (cont'd)

                  8.       Employee severance benefits as a part of an
                           efficiency program: (cont'd)

                  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.

                  9.       Earnings per share:

                  In accordance with Israeli GAAP:
                  In accordance with Opinion No. 55, 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.

                  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 dilutive potential effect of convertible
                  instruments. Diluted earnings per share arecomputed on the
                  basis of the weighted average number of shares outstanding
                  during the year, plus the dilutive potential effect of
                  ordinary share options considered outstanding during the
                  year.



                                     F-111
<PAGE>

                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------


Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         A.       Differences between Israel GAAP and US GAAP (cont'd)

                  10.      Venture capital fund investments:

                  In accordance with Israeli GAAP:
                  Venture capital fund investments in venture capital
                  investments are presented according to their cost less a
                  provision for devaluation in the event of a permanent
                  devaluation.

                  In accordance with US GAAP:
                  Venture capital fund investments are presented according to
                  their fair value.

                  11.      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
                  implemented retroactively to the beginning of 2000, by way of
                  cumulative effect at the beginning of the year and
                  presentation of the previous quarters once again.

                  ECI implemented these guidelines in its financial statements,
                  which are prepared in accordance with US GAAP. 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:
                  The provision does not apply in Israel, although it is
                  possible to adopt the principles set out in the rule, if
                  management estimates that the method of revenue recognition
                  prescribed in SAB 101 is appropriate for economic and
                  commerce conditions presently existing in its area of
                  business.
                  This rule was adopted prospectively as of the fourth quarter
                  of 2000, without implementing cumulative effect to the
                  beginning of 2000 and without presenting data, which has
                  already been published in the past.


                  12.      Exchange of assets:

                  In accordance with Israeli GAAP:
                  Certain share exchange transactions were considered as
                  exchanges of similar assets transactions and therefore
                  neither a profit nor a loss was recorded subsequent to the
                  transaction and the newly acquired assets were recorded based
                  on book value of the original assets.

                  In accordance with US GAAP:
                  According to EITF 98-3 and EITF 01-2 such transactions are
                  not considered as exchanges of similar assets transaction and
                  therefore the newly acquired assets were recorded based on
                  their fair values.


                                     F-112
<PAGE>

                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------


Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         A.       Differences between Israel GAAP and US GAAP (cont'd)

                  13.      Derivatives

                  In accordance with Israeli GAAP:
                  The Company applied FAS 52, FAS 80 and EITF 90-17 to account
                  for its financial derivatives.

                  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. Changes in the fair value are included in the
                  statement of operations in the period they occurred.

                  In accordance with US GAAP:
                  The Company applied FAS 133 to the 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.

                  14.      Impairment of Long-lived Assets to be Held and Used

                  In accordance with Israeli GAAP:
                  The Company applied Standard No. 15 under which the Company
                  is required to test the recoverable amount of the assets,
                  which is the higher of the net sales price and usage value. A
                  loss from impairment will be reversed only if changes have
                  occurred in the estimates used in determining the recoverable
                  value of the asset, from the date of recognition of the last
                  impairment.

                  In accordance with US GAAP:
                  The Company applied FAS 144 according to which a long-lived
                  asset to be held and used is considered to be impaired only
                  if the undiscounted cash flows of the related asset do not
                  exceed its book value and reversals of impairments are not
                  allowed.



                                     F-113
<PAGE>


                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------

Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         A.       Differences between Israel GAAP and US GAAP (cont'd)

                  15.      Impairment of Investments 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 sales price and usage value. A
                  loss from impairment will be reversed only if changes have
                  occurred in the estimates used in determining the recoverable
                  value of the investment, from the date of recognition of the
                  last impairment.

                  In accordance with US GAAP:
                  The Company applied APB 18 according to which 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
                         -----------------------------------
                         Subsequent to the negative indications concerning ECI,
                         an impairment provision of NIS 130 million was
                         recorded under both Israeli GAAP and US GAAP.
                         According to Israeli GAAP, the impairment in value is
                         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.
                         This difference is presented in the reconciling item
                         entitled "foreign currency translation due to
                         impairment".

                         2. Amortization differences
                         ---------------------------
                         The Company allocated the excess of fair value of
                         ECI's net assets over the book value of those assets
                         ("the impairment provision") to the net assets of ECI
                         and amortized the impairment provision over the useful
                         life of these assets.
                         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
                         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".


                                     F-114
<PAGE>


                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------

Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

          A.     Differences between Israel GAAP and US GAAP (cont'd)

                 15.     Impairment of Investments in ECI (cont'd)

                         3. Reversal of impairment
                         -------------------------
                         Subsequent to the recovery of ECI, under Israeli GAAP
                         the impairment provision was reversed and Koor once
                         again presented its investment in ECI according to the
                         equity method.
                         According to Israeli GAAP, an impairment provision may
                         be reversed if there is an increase in the fair value
                         of the investee company. According to US GAAP, an
                         impairment provision may not be reversed.
                         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.

                  16.      Amortization of Goodwill:

                  In accordance with Israeli GAAP:
                  Goodwill is amortized over its economic life which may not
                  exceed 20 years. Goodwill is monitored for an impairment in
                  value where there are indications indicating a permanent
                  impairment in the value of the goodwill.

                  In accordance with US GAAP:
                  Effective January 1, 2002, goodwill balances are not
                  amortized systematically but are instaed evaluated for
                  recoverability by means of an impairment test to be performed
                  at least once a year on a fixed date in accordance with the
                  directives of FAS 142. Impairment of goodwill subsequent to
                  the first implementation of the impairment test on January 1,
                  2002, was recorded as a cumulative effect in respect of a
                  change in the accounting method. Accordingly, a cumulative
                  effect of NIS 806 thousand was recorded in the adjustment
                  note in 2002. No further impairments have been required
                  subsequent to the initial implementation.



                                     F-115
<PAGE>
                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------

Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         A.       Differences between Israel GAAP and US GAAP (cont'd)

                  17.      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 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 3C(1) Koor
                  continues to consolidate M-A Industries' financial
                  statements.

                  In accordance with US GAAP:
                  The condition for a controlling financial interest is
                  ownership of a majority voting interest, and, therefore, as a
                  general rule 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, M-A Industries is accounted under
                  the equity method for US GAAP purposes, beginning in 2004.


                  18.      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.

                  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.

                                     F-116
<PAGE>

                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------


Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         A.       Differences between Israel GAAP and US GAAP (cont'd)

                  19.      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 would be presented as other long-term
                  assets and the amount of the liability would be presented
                  under long-term liabilities.

                  20.      Gains from decline in holdings in consolidated and
                           affiliated companies

                  Various GAAP differences affecting the shareholders' equity
                  of the consolidated or affiliated company, cause differences
                  in the book value of the investment at the Company level,
                  i.e. the Company's book value of the holdings according to US
                  GAAP differs from the book value according to Israeli GAAP.
                  Therefore the amounts of the gains according to US GAAP
                  differ from the amounts of the gains according to Israeli
                  GAAP.

                  21.      Restatement

                  In prior years, one of the Company's subsidiaries capitalized
                  for U.S. GAAP purposes certain costs incurred in connection
                  with the registration process to obtain licenses to sell
                  products in various jurisdictions. Under U.S. GAAP these
                  costs are deemed to be development costs and should have been
                  expensed as incurred.

                  In addition, one of the Company's subsidiaries incorrectly
                  applied FAS No 109 with respect to the calculation of certain
                  deferred tax items relating to temporary differences that
                  arose from currency exchange rate differences.

                  Therefore, the reconciliation of material differences between
                  Israeli and US GAAP has been restated. The impact on the
                  reconciliation is disclosed below:

<TABLE>
<CAPTION>
                                                            As reported       As restated
                                                          --------------   ----------------

<S>                                                           <C>            <C>
                  2003
                  Net loss                                    (105,308)         (108,924)
                  Earnings (loss) per ordinary share             (6.81)            (7.04)

                  Intangible assets                          2,240,439        (2,011,874)
                  Deferred taxes                               269,468           206,189
                  Minority interests                         1,774,894         1,689,966
                  Shareholders equity                        1,662,480         1,582,122


                  2002
                  Net loss                                    (761,561)         (762,511)
                  Earnings (loss) per ordinary shares           (50.18)           (50.25)


</TABLE>

                                     F-117
<PAGE>

                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------

Note 28 - Material Differences Between Israeli and US GAAP and their Effect on
          the Financial Statements (cont'd)

         A.       Differences between Israel GAAP and US GAAP (cont'd)


                  22.      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.

                  (b)      Securitization transaction

                           In accordance with Israeli GAAP:

                           The securitization transaction (see Note 3C(2)) 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 consolidates M-A Industries' cash
                           flows.

                           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 are not consolidated.

                           See also Note 28A(17).


                                     F-118

<PAGE>

                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------

Note 28 - 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 operations:
<TABLE>
<CAPTION>

                                                                                             Year ended December 31
                                                                             ----------------------------------------------------
                                                                                    2004                2003               2002
                                                                             ------------   -----------------   -----------------
                                                                                               NIS thousands
                                                                             ----------------------------------------------------

<S>                                                                           <C>                    <C>             <C>
         a) Net earnings (loss) as reported, according to
                  Israeli GAAP                                                  144,990             46,362          (766,969)

                  Amortization of deferred interest in respect of
                   the restructuring of debts - Note 28A(2)                           -                  -             4,812
                  Salary expenses in respect of share options
                   issued to employees - Note 28A(4)                            (91,318)          (185,276)              486
                  Loss (gain) from marketable securities, net - Note 28A(5)      (4,295)           (58,319)           54,145
                  Provisions for anticipated losses from realization
                   of convertible securities in investee companies  -
                   Note 28A(7)                                                   10,106             50,729              (515)
                  Amortization of discount in respect of
                   convertible debentures - Note 28A(6)                               -                (18)             (338)
                  Severance pay arising from an efficiency program
                  -  Note 28A(8)                                                 17,326            (10,181)            7,130
                  Gains from  decline in holding in consolidated and
                    affiliated companies - Note 28A(20)                          11,829                  -             6,199
                  Venture capital investments - Note 28A(10)                    (20,726)            15,790           (16,327)
                  Temporary differences resulting from recognition
                   of revenue arising from application of SAB 101 - Note 28A(11)      -              7,949             2,230
                  Profit from exchange of assets - Note 28A(12)                       -                  -            15,105
                  Discontinued activities                                             -                  -               835
                  Impairment in value of long-lived assets to be held
                    and used - Note 28A(14)                                      (1,277)            (4,983)            5,858
                  Differences from investee due to impairment
                   previously recorded - Note 28A(15)                            29,588            (19,676)          (14,342)
                  Foreign currency translation due to impairment - Note 28A(15)       -                  -          (105,124)
                  Amortization of goodwill - Note 28A(16)                        39,938             40,949            87,234
                  Expensing of licensing costs - Note 28A(18)                    (8,859)          *(16,793)         *(53,594)
                  Derivatives (FAS 133) - Note 28A(13)                            4,602            (34,002)          (12,690)
                  Other                                                             711              1,078            (4,669)
                                                                             ------------   -----------------   -----------------
                                                                                (12,375)          (212,753)          (23,565)
                  Income taxes - Note 28A(3)                                    (21,212)           (79,808)           42,434
                  Minority interests in respect of the above
                   differences                                                      170           *137,275          *(13,605)
                                                                             ------------   -----------------   -----------------
                                                                                (33,418)          (155,286)            5,264

                  Cumulative effect as beginning of the year                          -                  -              (806)
                                                                             ------------   -----------------   -----------------
                                                                                (33,418)          (155,286)            4,458
                                                                             ------------   -----------------   -----------------

                  Net earnings (loss) according to US GAAP                      111,572         *(108,924)         *(762,511)
                                                                             ============   =================   =================
</TABLE>

                  *        Restated, see Note 28A(21).


                                     F-119
<PAGE>

                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------

Note 28 - 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)

         1.       Statements of operations (cont'd):

         b)       Earnings (loss) per ordinary share

<TABLE>
<CAPTION>
                                                                                              Year ended December 31
                                                                            ----------------------------------------------------
                                                                                    2004               2003               2002
                                                                            -------------    ---------------    ----------------
                                                                                                   NIS
                                                                            ----------------------------------------------------

<S>                                                                              <C>              <C>              <C>
                  Basic earnings per ordinary share:

                  As reported according to Israeli GAAP                            8.85               2.95            (50.55)

                  As reported according to US GAAP                                 7.05            * (7.04)         * (50.25)
                                                                            =============    ===============    ================
                  Weighted average of number of shares
                   and share equivalents according to
                   US GAAP                                                   15,824,185         15,474,614        15,173,291
                                                                            =============    ===============    ================

                  Fully diluted earnings per ordinary share:

                  As reported according to Israeli GAAP                            8.85               2.95            (50.55)
                                                                            =============    ===============    ================

                  As reported according to US GAAP                                 4.89            * (7.82)         * (50.65)
                                                                            =============    ===============    ================

                  Weighted average of number of shares and
                   share equivalents according to US GAAP                    16,242,770       **15,474,614      **15,173,291
                                                                            =============    ===============    ================
                  *        Restated, see Note 28A(21).

                  ** Share equivalents are not reflected in US GAAP due to the
fact that they are anti-dilutive.
</TABLE>



                                     F-120
<PAGE>
<TABLE>
<CAPTION>

                                                                                    Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
-----------------------------------------------------------------------------------------------------------------------------------

Note 28 - 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:


                                                                                                                       December 31
                                                                   ----------------------------------------------------------------
                                                                                                2004
                                                                   -------------------------------------------------------------
                                                                         Israeli   Discontinuance of
                                                                            GAAP    consolidation of
                                                                                                 M-A
                                                                                      Industries(11)   Adjustments        US GAAP
                                                                    -------------  -----------------   -----------   ------------

<S>                                                                     <C>             <C>                               <C>
         Cash and cash equivalents                                      617,310         (174,375)              -          442,935
         Short-term deposits and investment (1)                         416,468           (6,733)         32,911          442,646
         Receivables                                                  2,173,599       (1,590,552)              -          583,047
         Other receivables                                              528,983         (332,817)              -          196,166
         Inventories and projects in progress                         2,294,885       (1,985,428)              -          309,457
         Assets designed for sale                                        41,765                -               -           41,765
         Investments in affiliates (2)                                1,375,160        1,471,197        (154,317)       2,692,040
         Investments and other receivables (1)(3)                       489,031          (95,073)        202,105          596,063
         Fixed assets, net                                            2,852,907       (1,876,731)          8,574          984,750
         Intangible assets after amortization (4)                     2,357,458       (2,316,290)         30,198           71,366
         Total assets                                                13,147,566       (6,906,802)        119,471        6,360,235
         Short-term liabilities                                       1,738,456         (603,210)              -       1,135,246
         Trade payables                                               1,667,455       (1,404,171)              -          263,284
         Other payables (5)(6)                                        1,369,442         (867,233)          8,020          510,229
         Customer advances                                              353,371           (9,891)              -          343,480
         Bank loans and other                                         2,341,115         (440,968)              -        1,900,147
         Convertible debentures                                         811,291         (811,291)              -                -
         Deferred taxes (7)                                             240,468         (234,157)         29,304           35,615
         Liability for employee severance benefits (3)                  197,168         (115,061)        197,614          279,721
         Minority interests (8)                                       2,552,333       (2,420,820)         (6,850)         124,663
         Capital reserve for "available-for-sale" securities (2)              -                -           6,442            6,442
         Capital reserves (9)(10)                                     2,358,425                -         276,419        2,634,844
         Retained losses  (8)                                          (966,152)               -        (391,478)      (1,357,630)
         Total shareholders' equity                                   1,876,467                -        (108,617)       1,767,850

         *        Restated, see Note 28A(21).



Continued --
<CAPTION>

                                                                  ------------------------------------------------
                                                                                         2003
                                                                   -----------------------------------------------
                                                                         Israeli
                                                                            GAAP

                                                                                       Adjustment          US GAAP
                                                                    -------------    ------------    -------------

<S>                                                                       <C>                              <C>
         Cash and cash equivalents                                        593,403               -          593,403
         Short-term deposits and investment (1)                           366,809               -          366,809
         Receivables                                                    2,052,461          10,847        2,063,308
         Other receivables                                                452,170               -          452,170
         Inventories and projects in progress                           1,885,751               -        1,885,751
         Assets designed for sale                                          42,525               -           42,525
         Investments in affiliates (2)                                    943,764         (60,839)         882,925
         Investments and other receivables (1)(3)                         483,384         290,230          773,614
         Fixed assets, net                                              2,928,407          11,455        2,939,862
         Intangible assets after amortization (4)                       2,121,083       *(109,209)      *2,011,874
         Total assets                                                  11,869,757        *142,484      *12,012,241
         Short-term liabilities                                         1,577,402               -        1,577,402
         Trade payables                                                 1,342,783               -        1,342,783
         Other payables (5)(6)                                          1,270,217          75,551        1,345,768
         Customer advances                                                350,535               -          350,535
         Bank loans and other                                           3,119,837               -        3,119,837
         Convertible debentures                                           340,270               -          340,270
         Deferred taxes (7)                                               199,787          *6,402         *206,189
         Liability for employee severance benefits (3)                    192,002         265,365          457,367
         Minority interests (8)                                         1,736,531        *(46,565)      *1,689,966
         Capital reserve for "available-for-sale" securities (2)                -         (30,074)         (30,074)
         Capital reserves (9)(10)                                       2,367,341        *229,863       *2,597,204
         Retained losses  (8)                                          (1,111,142)      *(358,060)     *(1,469,202)
         Total shareholders' equity                                     1,740,393       *(158,271)      *1,582,122

         *        Restated, see Note 28A(19).

</TABLE>



                                     F-121
<PAGE>

                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------


Note 28 - 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)

         (1)      Adjustment of value of investment securities to market value.
         (2)      Adjustments to the investments in M-A Industries and ECI
         (3)      Reconciliation of deposits funded in respect of severance
                  pay.
         (4)      Reversal of periodical provisions related to goodwill and
                  intangible assets.
         (5)      Provision for employee severance benefits resulting from an
                  efficiency program.
         (6)      Financial derivatives.
         (7)      Change in deferred taxes.
         (8)      Effects of the reconciliation to US GAAP.
         (9)      Share options issued to employees.
         (10)     Cumulative foreign currency translation adjustments,
                  cancellation of provision for decline in value of autonomous
                  investee.
         (11)     See Note 28 A(17).

         3.       Comprehensive loss

         "Comprehensive earnings (loss)" consists of the change, during the
         current period, in the Company's shareholder equity that does not
         derive from shareholders' investments or from the distribution of
         earnings to shareholders.

         Comprehensive earnings (loss) include two components - net earnings
         and other comprehensive earnings. Net earnings are the earnings stated
         in the statement of operations and other comprehensive earnings
         include the amounts that are recorded directly in shareholders' equity
         and that do not derive from transactions with shareholders.
<TABLE>
<CAPTION>

                                                                          Year ended December 31
                                                           ---------------------------------------------------
                                                                  2004               2003               2002
                                                           ------------   ----------------    ----------------
                                                                          NIS thousands
                                                           ---------------------------------------------------

<S>                                                           <C>               <C>               <C>
         Net earnings (loss) according to US GAAP             111,572          *(108,924)        *(762,511)
                                                           ------------   ----------------    ----------------
         Other comprehensive earnings, after tax:
         Adjustments from translation of
          financial statements of investee
          companies                                            (9,546)         *(143,585)         *389,873
         FAS 133                                              (10,964)             6,487            (5,397)
         Unrealized gains (loss) from securities               36,516             32,572           (54,145)
                                                           ------------   ----------------    ----------------
         Total other comprehensive earnings (loss)             16,006           (104,526)          330,331
                                                           ------------   ----------------    ----------------
         Total comprehensive earnings (loss)                  127,578           (213,450)         (432,180)
                                                           ============   ================    ================
</TABLE>

         *        Restated, see Note 28A(21).

                                     F-122
<PAGE>


                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------


Note 28 - 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)

<TABLE>
         4.       Cash flows:
<CAPTION>

                                                                           Year ended December 31
                                                                  2004(1)          2003(2)         2002(2)
                                                              -------------     ------------     -----------
                                                                             NIS thousands
                                                              ----------------------------------------------
         Net cash flows from operating activities:
<S>                                                                <C>              <C>             <C>
         Israeli GAAP                                              890,673          774,775         427,451
         Adjustments                                              (907,798)        (235,808)        (23,427)
                                                              -------------     ------------     -----------
         US GAAP                                                   (17,125)          538,967         404,024
                                                              -------------     ------------     -----------

         Net cash flows from investing activities:
         Israeli GAAP                                            (722,839)         266,585         (257,813)
         Adjustments                                              383,650                -                -
                                                              -------------     ------------     -----------
         US GAAP                                                 (339,189)         266,585         (257,813)
                                                              -------------     ------------     -----------

         Net cash flows from financing activities:
         Israeli GAAP                                            (128,069)      (1,209,783)        (223,720)
         Adjustments                                               340,457          211,182           29,568
                                                              -------------     ------------     -----------
         US GAAP                                                   212,388        (998,601)        (194,152)
                                                              -------------     ------------     -----------

         Translation differences in respect of cash and cash equivalents:
         Israeli GAAP                                              (15,858)         (28,273)          3,056
         Adjustments (3)                                             9,316            24,626         (6,141)
                                                              -------------     ------------     -----------
         US GAAP                                                    (6,542)          (3,647)         (3,085)
                                                              -------------     ------------     -----------

         Increase (decrease) in cash and cash equivalents:
         Israeli GAAP                                               23,907         (196,696)        (51,026)
         Adjustments                                              (174,375)               -               -
                                                              -------------     ------------     -----------
         US GAAP                                                  (150,468)        (196,696)        (51,026)
                                                              -------------     ------------     -----------

         Balance of cash and cash equivalents at beginning of year:
         Israeli GAAP and US GAAP                                 593,403          790,099          841,125
                                                              -------------     ------------     -----------

         Balance of cash and cash equivalents at end of year:
         Israeli GAAP                                              617,310          593,403         790,099
         Adjustments                                              (174,375)               -               -
                                                              -------------     ------------     -----------
         US GAAP                                                   442,935          593,403         790,099
                                                              -------------     ------------     -----------
(1)      See Note 28A(22)(c).
(2)      See Note 28A(22)(b).
)3)      See Note 28A(22)(a).
</TABLE>


                                     F-123

<PAGE>


                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------



Note 28 - 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, 2004
<TABLE>
<CAPTION>

                                       Israeli GAAP       Adjustments          US GAAP
                                     --------------     -------------    --------------
                                      US$ thousands     US$ thousands    US$ thousands
                                     --------------     -------------    --------------

<S>                                         <C>                <C>            <C>
         Current assets                     949,338            5,323          954,661
         Non-current assets                 985,229           42,118        1,027,347
         Current liabilities                669,571           14,685          684,256
         Non-current liabilities            333,423           24,631          358,054
         Minority interests                  18,756           (1,981)          16,775
         Convertible debentures              38,322                -           38,322
</TABLE>


         B.       For the year ended December 31, 2004 according to Israeli GAAP

         Revenue from sales and services                             1,539,702
         Gross profit                                                  595,794
         Net income according to Israeli GAAP                          165,527

         Adjustment to US GAAP                                         (41,789)
         Net income according to US GAAP                               123,738

<TABLE>
<CAPTION>

         (2)      ECI's condensed figures according to US GAAP
                                                                  2004             2003
                                                        --------------    --------------
                                                         US$ thousands    US$ thousands
                                                        --------------    --------------

         As at December 31

<S>                                                           <C>              <C>
         Current assets                                       449,556          537,528
         Non-current assets                                   405,253          364,468
         Current liabilities                                  248,012          242,037
         Non-current liabilities                               50,943           86,673
         Minority interests                                     4,086            3,781


         For the year ended December 31

         Revenues                                             496,712          392,567
         Gross profit                                         195,741          153,269
         Income (loss) from continuing operations              14,056          (44,723)
         Net income (loss)                                     10,153          (71,040)
</TABLE>



                                     F-124
<PAGE>



                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------


Note 28 - 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
</TABLE>

         B.       For the three months ended December 31, 2004 (1)

         Revenue from sales and services                              93,403
         Gross profit (loss)                                        (11,565)
         Net loss according to Israeli GAAP                         (61,114)
         Adjustment to US GAAP                                        18,970
         Net loss according to US GAAP                              (42,144)

         Cash flows from operating activities                          7,259
         Cash flows from investing activities                       (13,043)
         Cash flows from financing activities                         27,757

         (1) Telrad is included in Koor's financial statements by the
             proportionate consolidation method from the fourth quarter of
             2004. See Note 3D(1).

         (2) Proportionately consolidated companies of Sheraton

         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                                              20,694               -           20,694
         Non-current assets                                         220,893         (2,516)          218,377
         Current liabilities                                         29,530               -           29,530
         Non-current liabilities                                    219,890               -          219,890

         B.       For the year ended December 31, 2004

         Revenue from sales and services                              83,238
         Gross profit                                                 22,710
         Net loss according to Israeli GAAP                          (1,416)
         Adjustment to US GAAP                                         1,078
         Net loss according to US GAAP                                 (338)

         Cash flows from operating activities                          5,808
         Cash flows from investing activities                            942
         Cash flows from financing activities                        (3,584)
</TABLE>


                                      125
<PAGE>


                                 Koor Industries Ltd. (An Israeli Corporation)

Notes to the Financial Statements
------------------------------------------------------------------------------

Note 29 - Events (Unaudited) Subsequent to the Date of the Independent Auditors'
          Report

A.       On July 6, 2005 the Company signed an amendment to the agreements
         with Elbit and Federman (see Note 3H(2)), pursuant to which the
         Company will sell its 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. The Company 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, the
         Company will sell the balance of its 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 will be conducted in two parts, and the Company
         and Elbit will share joint control of Tadiran Communications, as
         described in Note 3H(2), following the sale of the first 5%. The sale
         of the Company's remaining shares in Tadiran Communications is
         contingent on the execution of the sale of its holdings in Elisra to
         Elbit. Elbit's acquisition of Elisra is subject to the approvals of
         Elbit's 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, the Company will acquire only an additional 2.3% of Elbit
         from Federman for $25 million, regardless of whether the sale of
         Elisra is approved by the Israeli Anti-Trust Commissioner. Upon
         completion of all the stages of these transactions, the Company will
         hold approximately 7.6% of Elbit.


B.       On April 10, 2005, as part of a private placement to Israeli
         institutional investors, the Company issued NIS 400 million par value
         in debentures for NIS 400 million in cash, as well as 800,000 options
         without consideration. 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. Each option is exercisable for one
         ordinary share par value NIS 0.001 of the Company until April 30,
         2010, at an exercise price of NIS 300. The Company intends to register
         for trade on the Tel-Aviv stock exchange the shares that will ensue
         from exercise of the options.


C.       On June 7, 2005, the Company received a bill of indictment from the
         Anti-Trust Authority in accordance with the notice from February, 2
         2005 as described in Note 18A(1)(b).



                                     F-126
<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, 2005                             A Member of Ernst & Young Global



                                     F-127
<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. and Subsidiaries


We have audited the accompanying consolidated balance sheets of Talla-Com,
Tallahassee Communications Industries, Inc. and Subsidiaries as of December 31,
2004 and 2003, 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, 2004 and 2003, 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
a material effect on the results of operations, shareholder's equity and cash
flows for the years ended December 31, 2004 and 2003.



                         /s/ Hoberman, Miller, Goldstein & Lesser, CPA'S, P.C.


January 28, 2005
New York, New York

                                     F-128
<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, 2004 and 2003 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, 2004. 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,
2004 and 2003, 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,
2004, 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 Almago & Co.
Certified Public Accountants
Tel Aviv, Israel
February 14, 2005


                                     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
                            Tadiran Spectralink Ltd.



We have audited the accompanying balance sheets of Tadiran Sprectralink Ltd.
("the Company") as of December 31, 2004 and 2003 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, 2004. 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,
2004 and 2003, 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,
2004, 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 14, 2005



                                     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 sheet of Tadiran Electronic
Industries, LLC (formerly Tadiran Electronic Industries, Inc.) as of December
31, 2004 and the consolidated balance sheet of Tadiran Electronic Industries,
LLC and Subsidiary as of December 31, 2003, and the consolidated statements of
operations, member's equity, and cash flows for each of the three years in the
period ended December 31, 2004. 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 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 Tadiran Electronic
Industries, LLC as of December 31, 2004 and the consolidated financial position
of Tadiran Electronic Industries, LLC and Subsidiary as of December 31, 2003,
and the results of their operations and their 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 of America.

Our audits were conducted for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The additional information
on pages 13 through 16 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 consolidated
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 consolidated financial statements
and, in our opinion, is fairly stated in all material respects when considered
in relation to the basic consolidated 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
a material effect on the results of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2004.

                          /s/ Hoberman, Miller, Goldstein & Lesser, CPA'S, P.C.


January 21, 2005
New York, New York


                                     F-131
<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 Subsidiary

We have audited the accompanying consolidated balance sheet of Microwave
Networks, Inc. and Subsidiary as of December 31, 2004 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year 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 audit to obtain reasonable assurance about whether the
financial statements of material mismanagement. 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 Subsidiary as of December 31, 2004, and the results of their
operations and their cash flows for the year 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
a material effect on the results of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2004.

                         /s/ Hoberman, Miller, Goldstein & Lesser, CPA'S, P.C.


January 21, 2005
New York, New York


                                     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

                                KOOR TRADE LTD.

         We have audited the accompanying balance sheets of Koor Trade Ltd.
("the Company") as of December 31, 2004 and 2003 and the related statements of
operations, changes in shareholder's equity and cash flows for each of the
three years in the period ended December 31, 2004 (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 companies the
investment in which based on the equity method of accounting, amounted to NIS
49 million and NIS 34.1 million as of December 31, 2004 and 2003, respectively,
and the Company's equity in their income amounted to NIS 8.7 million, NIS 5.6
million and NIS 6.5 million for the years ended December 31, 2004, 2003 and
2002, respectively. Those financial statements which presented in accordance
with U.S. 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 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
subsidiaries to Israel generally accepted accounting principles from U.S.
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 financial statements referred to above present fairly, in all material
respects, the financial position of the Company at December 31, 2004 and 2003,
and the results of its operations and its cash flows for each of the three
years in the period ended of December 31, 2004, in conformity with accounting
principles generally accepted in Israel, which differ in certain respects from
those followed in the United States, as described in Note 7 to the financial
statements.

                                         /s/ Kost, Forer Gabbay & Kasierer

Tel-Aviv, Israel                             KOST, FORER GABBAY & KASIERER
March 21, 2004                              A Member of Ernst & Young Global



                                     F-133
<PAGE>

            [Letterhead of Blick Rothenberg, Chartered Accountants]

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE
SHAREHOLDERS OF BALTON CP LIMITED

We have audited the accompanying consolidated balance sheets of Balton CP
Limited (the "Company") and its subsidiaries as of December 31, 2004 and 2003,
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, 2004 (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 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, 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 at 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 of December 31, 2004, in conformity with
accounting principles generally accepted in United States.


/s/ Blick Rothenberg
Blick Rothenberg
Chartered Accountants and Registered Auditors
London, England

20 March 2005


                                     F-134
<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 of
December 31, 2004 and 2003, 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, 2004 (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. 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
to Israel generally accepted accounting principles and to U.S. 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 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, 2004 and 2003, and the consolidated results of their operations
and cash flows for each of the three years in the period ended of December 31,
2004, in conformity with Australian generally accepted accounting principles,
which differ in certain respects from those followed in the United States and
in Israel as described in Note 1 to the consolidated financial statements.


Dated at Sydney the 8th day of March 2005

/s/ Einfeld Symonds Vince
EINFELD SYMONDS VINCE

Chartered Accountants


/s/ Graham B. Einfeld
GRAHAM B. EINFELD
Partner


                                     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

                         LUXEMBURG PHARMACEUTICAL LTD.

         We have audited the accompanying consolidated balance sheets of
Luxemburg Pharmaceutical Ltd. ("the Company") and its subsidiaries as of
December 31, 2004 and 2003, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the two
years in the period ended December 31, 2004 (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. 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 consolidated
financial statements to U.S. 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 and the report of
other auditors 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, 2004 and 2003, and the consolidated results of their operations
and cash flows for each of the two years in the period ended of December 31,
2004, in conformity with Israel generally accepted accounting principles, which
differ in certain respects form 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 17, 2005                            A Member of Ernst & Young Global


                                     F-136
<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 NATURAL PRODUCTS INDUSTRIES LTD.

         We have audited the accompanying consolidated balance sheets of
Lycored Natural Products Industries Ltd. ("the Company") and its subsidiaries
as of December 31, 2004 and 2003, 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, 2004 (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,
whose assets included in consolidation constitute approximately 18% and 16% of
total consolidated assets as of December 31, 2004 and 2003, and whose revenues
included in consolidation constitute approximately 37% and 35% of total
consolidated revenues for the two years ended December 31, 2004. 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, 2004 and 2003, 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, 2004
and 2003, is based solely on the reports of 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 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 and the report of other auditors 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, 2004 and 2003, and the consolidated results of their operations
and cash flows for each of the three years in the period ended of December 31,
2004, in conformity with Israel generally accepted accounting principles, which
differ in certain respects form 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 24, 2005                              A Member of Ernst & Young Global


                                     F-137
<PAGE>

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                             To the shareholders of

                                Nutriblend LTD.


         We have audited the accompanying balance sheets of Nutriblend Ltd.
("the Company") as at December 31, 2004 and 2003, and the related statements of
operations, changes in shareholder's equity and cash flows for each of the two
years in the period ended December 31, 2004 (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 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, 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, 2004 and 2003, and the results of its operations
and its cash flows for each of the two years in the period ended of December
31, 2004, in conformity with accounting principles generally accepted in United
Kingdom, which differ in certain respects from those followed in the United
States, as described in Note 22 to the financial statements.



/s/ Goodman Jones
London                                              Goodman Jones
January 20,  2005                       Chartered Accountants Registered Author


                                     F-138
<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-139
<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, 2004 and 2003, and the related
statements of operations, shareholders' equity and cash flows, for each of the
three years, the last of which ended December 31, 2004. 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 an affiliate, which Partnership's
investment constitute NIS 12,466 thousand and NIS 7,313 thousand, as of
December 31, 2004 and 2003, respectively, and its equity in losses constitute
NIS 329 thousand for the years ended December 31, 2004, 2003 and 2002,
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 the affiliate, 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. 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 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 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, 2004 and 2003 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, 2004 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 dates and reporting periods that 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 form accounting principles generally accepted in the United States of
America. (US GAAP). Information relating to the nature and effect of such
differences is presented in Note 8 to the financial statements.

                                           /s/ Kost, Forer Gabbay & Kasierer

Tel-Aviv, Israel                              KOST, FORER GABBAY & KASIERER
March 20, 2005                               A Member of Ernst & Young Global



                                     F-140
<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 Network Technologies Ltd


We have audited the accompanying balance sheets of Scopus Network Technologies
Ltd ("the Company") as of December 31, 2004 and 2003 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, 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 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 consolidated financial position of the Company as of
December 31, 2004 and 2003, and the consolidated results of its operations,
changes in its shareholders' equity and its cash flows for the three years, in
the period ended December 31, 2004, 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 respects from accounting principles generally accepted in Israel. As
stated in Note 2Q, for purposes of these financial statements, the application
of the latter would not have materially effected the Company's net loss for
each of the three years in the period ended December 31, 2004, and its
shareholders' equity and its financial position as of December 31, 2004 and
2003 as reported in these financial statements.

/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants
A member firm of Deloitte Touche Tohmatsu
Tel Aviv, Israel
February 17, 2005


                                     F-141
<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, 2004 and 2003 and the related consolidated 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 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, 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 as of December 31, 2004 and
2003, and the results of operations and cash flows of the Company 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(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 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 (U.S. GAAP). Information relating to the nature and effect of such
differences is presented in Note 8 to the financial statements.

/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants (Isr.)
A member firm of Deloitte Touche Tohmatsu
Tel Aviv, March 9, 2005


                                     F-142
<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 financial 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) 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 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 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 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. The effect of the application of the latter on the consolidated
financial 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-143
<PAGE>

           [Letterhead of Kost, Forer Gabbay & Kasierer, a Member of
                             Ernst & Young Global]

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                            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, 2004 and 2003, and the
related statements of operations, changes in venturers' deficiency and cash
flows for the years then ended (not presented separately herein). These
financial statements are the responsibility of the Joint Venturer'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. 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, 2004 and 2003 and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles in Israel (which principles differ in certain respects
from accounting principles generally accepted in the United States - see Note
18).

         As described in Note 2A, the financial statements as of the dates and
for the reported periods subsequent to December 31, 2003, are presented in
reported amounts, in conformity with Accounting Standards of the Israel
Accounting Standards Board. The financial statements as of the dates and for
the reported periods until the aforementioned date are presented in values that
were adjusted until that date according to the changes in the general
purchasing power of the Israeli currency, in accordance with pronouncements of
the Institute of Certified Public Accountants in Israel.


                                           /s/ Kost, Forer Gabbay & Kasierer

Tel-Aviv, Israel                               KOST, FORER GABBAY & KASIERER
March 2, 2005                                A Member of Ernst & Young Global


                                     F-144
<PAGE>



                                                Makhteshim-Agan Industries Ltd.

Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


CONTENTS


                                                                           PAGE


Auditors' Report                                                          F-146


Consolidated Balance Sheets                                               F-147


Company Balance Sheets                                                    F-149


Consolidated Statements of Income                                         F-150


Company Statements of Income                                              F-151


Statements of Changes in Shareholders' Equity                             F-152


Consolidated Statements of Cash Flows                                     F-153


Company Statements of Cash Flows                                          F-155


Notes to the Financial Statements                                         F-157


Appendix to the Financial Statements - Schedule of Investee Companies     F-231




                                    F-145
<PAGE>


      [Letterhead of Somekh Chaikin, a Member Firm of KPMG International]



AUDITORS' REPORT TO THE SHAREHOLDERS OF
MAKHTESHIM-AGAN INDUSTRIES LTD.

We have audited the accompanying balance sheets of Makhteshim-Agan Industries
Ltd. (the Company) as at 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 income, changes in shareholders' equity and cash flows -
Company and consolidated - for each of the three years, the last of which ended
December 31, 2004. 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, whose assets
constitute 5% and 4% of the total consolidated assets as at December 31, 2004
and 2003, respectively, and whose revenues constitute 4%, 6% and 1% of the
total consolidated revenues for each of the three years last of which ended
December 31, 2004, respectively. The financial statements of those subsidiaries
were audited by other auditors whose reports thereon were furnished to us. Our
opinion, insofar as it relates to the amounts included for those companies, is
based solely on the said reports of the other auditors.

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 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 and the 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, as
mentioned above, 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 at
December 31, 2004 and 2003, and the results of the operations, the changes in
the shareholders' equity and the cash flows - Company and consolidated - for
each of the three years, the last of which ended December 31, 2004, in
conformity with generally accepted accounting principles in Israel.
Furthermore, these statements have, in our opinion, been prepared in accordance
with the Securities Regulations in Israel (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 2(A), since the Company's functional currency is the U.S.
dollar, the financial statements are prepared in U.S. dollars.


Somekh Chaikin
Certified Public Accountants (Isr.)

March 8, 2005, except for Note 34, as to which the date is July 13, 2005.
Tel-Aviv, Israel


                                    F-146
<PAGE>


<TABLE>
<CAPTION>

Consolidated Balance Sheets
---------------------------------------------------------------------------------------------


                                                                    As at December 31
                                                             --------------------------------
                                                                      2004              2003
                                                             -------------    ---------------
                                                  Note       US$ thousands     US$ thousands
                                             ------------    -------------    ---------------
<S>                                                 <C>         <C>                <C>
Current assets
Cash and cash equivalents                                        40,477             49,849
Short-term investments                                            1,563              1,100
Trade receivables                                   3           369,209            301,694
Other receivables                                   4            77,219             54,538
Inventories                                         6           460,870            360,993
                                                             -------------    ---------------
                                                                949,338            768,174


Long-term investments, loans and receivables        8            22,070             18,044
                                                             -------------    ---------------

Fixed assets                                        9
Cost                                                            824,544            786,416
Less - accumulated depreciation                                 388,805            359,671
                                                             -------------    ---------------
                                                                435,739            426,745
                                                             -------------    ---------------
Other assets and deferred charges                  10

Cost                                                            743,310            612,275
Less - accumulated amortization                                 215,890            163,873
                                                             -------------    ---------------

                                                                527,420            448,402
                                                             -------------    ---------------



                                                             -------------    ---------------

                                                              1,934,567          1,661,365
                                                             =============    ===============
</TABLE>


                                    F-147
<PAGE>

<TABLE>
<CAPTION>

                                                                  Makhteshim-Agan Industries Ltd.

-------------------------------------------------------------------------------------------------


                                                                        As at December 31
                                                                 --------------------------------
                                                                          2004              2003
                                                                 -------------    ---------------
                                                      Note       US$ thousands     US$ thousands
                                                 ------------    -------------    ---------------
<S>                                                     <C>         <C>                <C>
Current liabilities
Credit from banks                                       11          140,021            142,817
Trade payables                                          12          325,945            243,070
Other payables                                          13          192,405            150,541
Proposed dividend                                                    11,200              7,000
                                                                 -------------    ---------------

                                                                    669,571            543,428
                                                                 -------------    ---------------

Long-term liabilities
Loans from banks                                        14           93,023            269,233
Convertible debentures                                  15          150,000                  -
Other long-term liabilities                             16            9,337              2,470
Deferred taxes, net                                     17           54,354             43,778
Employee severance benefits, net                        18           26,709             24,774
                                                                 -------------    ---------------

                                                                    333,423            340,255
                                                                 -------------    ---------------


Minority interest                                                    18,756              6,436
                                                                 -------------    ---------------

Commitments and contingent liabilities                  19

                                                                 -------------    ---------------
Convertible debentures                                  15           38,322             77,705
                                                                 -------------    ---------------

Shareholders' equity                                    21          874,495            693,541
                                                                 -------------    ---------------







                                                                 -------------    ---------------

                                                                  1,934,567          1,661,365
                                                                 =============    ===============



/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


Date of approval of the financial statements: March 8, 2005, except for Note 34, as to which the date is July 13, 2005.


The notes and appendix to the financial statements are an integral part thereof.

</TABLE>

                                    F-148
<PAGE>

<TABLE>
<CAPTION>
                                                                      Makhteshim-Agan Industries Ltd.

Company Balance Sheets
-----------------------------------------------------------------------------------------------------



                                                                            As at December 31
                                                                     --------------------------------
                                                                              2004              2003
                                                                     -------------    ---------------
                                                          Note       US$ thousands     US$ thousands
                                                     ------------    -------------    ---------------
<S>                                                         <C>         <C>                <C>
Current assets
Cash and cash equivalents                                                   2,649              3,191
Short-term investments                                                      1,900              5,454
Other receivables                                             4            11,699             12,945
Loans to investee companies                                   5            30,959             16,111
                                                                     -------------    ---------------
                                                                           47,207             37,701
                                                                     -------------    ---------------
Long-term investments, loans and receivables
Investee companies                                            7         1,008,999            735,005
Bank deposits                                                 8            19,016             29,101
Deferred taxes, net                                          17             6,674              1,095
                                                                     -------------    ---------------
                                                                        1,034,689            765,201
                                                                     -------------    ---------------

Office furniture and equipment, net                                           601                472
                                                                     -------------    ---------------

Deferred charges                                             10             2,458              1,618
                                                                     -------------    ---------------
                                                                        1,084,955            804,992
                                                                     =============    ===============

Current liabilities
Credit from banks                                            11                 -              4,500
Other payables                                               13             6,760              6,373
Proposed dividend                                                          11,200              7,000
                                                                     -------------    ---------------
                                                                           17,960             17,873
                                                                     -------------    ---------------
Long-term liabilities
Loans from banks                                             14                 -             12,375
Convertible debentures                                       15           150,000                  -
Employee severance benefits, net                             18             4,591              3,911
                                                                     -------------    ---------------
                                                                          154,591             16,286
                                                                     -------------    ---------------

Commitments and contingent liabilities                       19

Convertible debentures                                       15            37,909             77,292
                                                                     -------------    ---------------
Shareholders' equity                                         21           874,495            693,541
                                                                     -------------    ---------------

                                                                        1,084,955            804,992
                                                                     =============    ===============



----------------------------------             -----------------------              -----------------------
Danny Biran                                    Shlomo Yanai                         Eli Assraf
Chairman of the Board of Directors             Chief Executive Officer              Chief Financial Officer


Date of approval of the financial statements: March 8, 2005, except for Note 34, as to which the date is July 13, 2005.


The notes and appendix to the financial statements are an integral part thereof.

</TABLE>


                                    F-149
<PAGE>

<TABLE>
<CAPTION>
                                                                                               Makhteshim-Agan Industries Ltd.

Consolidated Statements of Income
------------------------------------------------------------------------------------------------------------------------------



                                                                                      For the year ended December 31
                                                                          ----------------------------------------------------
                                                                                   2004               2003              2002
                                                                 Note     US$ thousands      US$ thousands     US$ thousands
                                                               --------   --------------     -------------     ---------------
<S>                                                                <C>        <C>               <C>                  <C>
Revenues                                                           23         1,539,702         1,177,255            890,863
Cost of sales                                                      24           943,908           730,305            564,763
                                                                          --------------     -------------     ---------------

Gross profit                                                                    595,794           446,950            326,100
                                                                          --------------     -------------     ---------------

Expenses
Research and development, net                                      25            19,480            16,820             15,175
Selling and marketing                                              26           220,212           163,836            128,986
General and administrative                                         27            66,915            53,899             42,803
                                                                          --------------     -------------     ---------------

                                                                                306,607           234,555            186,964
                                                                          --------------     -------------     ---------------

Operating income                                                                289,187           212,395            139,136

Financing expenses, net                                            28            27,571            37,956             34,406
                                                                          --------------     -------------     ---------------

Income before other expenses, net                                               261,616           174,439            104,730

Other expenses, net                                                29            42,735            38,245             31,770
                                                                          --------------     -------------     ---------------

Income before taxes on income                                                   218,881           136,194             72,960

Taxes on income                                                    17            52,334            32,618             12,458

Income after taxes on income                                                    166,547           103,576             60,502

Minority interest in income of
 subsidiaries, net                                                               (1,020)             (802)              (424)
                                                                          --------------     -------------     ---------------

Net income                                                                      165,527           102,774             60,078
                                                                          --------------     -------------     ---------------



                                                                                    US$               US$                US$
                                                                          --------------     -------------     ---------------


Earnings per share                                                  31
Basic earnings per NIS 1 par value of shares                                       0.39              0.26              0.17
                                                                          ==============     =============     ===============

Fully diluted earnings per NIS 1 par value
 of shares                                                                         0.37              0.25              0.15
                                                                          ==============     =============     ===============




The notes and appendix to the financial statements are an integral part thereof.

</TABLE>


                                    F-150
<PAGE>

<TABLE>
<CAPTION>


                                                                                              Makhteshim-Agan Industries Ltd.

Company Statements of Income
-----------------------------------------------------------------------------------------------------------------------------



                                                                                      For the year ended December 31
                                                                          ---------------------------------------------------
                                                                                   2004               2003              2002
                                                                 Note     US$ thousands      US$ thousands     US$ thousands
                                                               --------   --------------     -------------     --------------
<S>                                                                <C>        <C>               <C>                  <C>
Income
Company's equity in income of investee
 companies, net                                                                 163,406           104,015             59,682
Management fees from investee companies                                          13,559            10,007              9,227
                                                                          --------------     -------------     --------------

                                                                                176,965           114,022             68,909
                                                                          --------------     -------------     --------------

Expenses
Research and development, net                                                         -               401                233
General and administrative                                         27            15,371            13,927              8,992
                                                                          --------------     -------------     --------------

                                                                                 15,371            14,328              9,225
                                                                          --------------     -------------     --------------

Operating income                                                                161,594            99,694             59,684

Financing income, net                                              28            (5,036)             (598)            (1,726)
                                                                          --------------     -------------     --------------

Income before other expenses (income), net                                      166,630           100,292             61,410

Other expenses (income), net                                                      1,850                (4)             1,118

Income before taxes on income (tax benefit)                                     164,780           100,296             60,292

Taxes on income (tax benefit)                                      17              (747)           (2,478)               214
                                                                          --------------     -------------     --------------

Net income                                                                      165,527           102,774             60,078
                                                                          ==============     =============     ==============



                                                                                    US$               US$               US$
                                                                          --------------     -------------     --------------


Earnings per share                                                 31
Basic earnings per NIS 1 par value of
 shares                                                                            0.39              0.26              0.17
                                                                          ==============     =============     ==============

Fully diluted earnings per NIS 1 par value
 of shares                                                                         0.37              0.25              0.15
                                                                          ==============     =============     ==============




The notes and appendix to the financial statements are an integral part thereof.

</TABLE>

                                    F-151
<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 of December 31, 2001                             101,757         357,090            4,046          (3,978)
Employee options exercised                                       47             234                -               -
Adjustments deriving from translation of
  financial statements of investee companies                      -               -                -          (3,700)
Realization of Company shares held by a
  subsidiary (see Note 21C)                                       -               -                -               -
Capital reserve from acquisition of
   convertible debenture by a subsidiary                          -               -                -             399
Dividend                                                          -               -                -               -
Proposed dividend subsequent to
   the balance sheet date                                         -               -                -               -
Net income for the year ended December 31, 2002                   -               -                -               -
                                                       -------------   --------------   -------------   -------------
Balance as of 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                                                 -               -                -               -
Proposed dividend subsequent to
  the balance sheet date                                          -               -                -               -
Net income for the year ended December 31, 2003                   -               -                -               -
                                                       -------------   --------------   -------------   -------------
Balance as of 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 Company shares held by a
  subsidiary (see Note 21C)                                       -           3,304                -               -
Dividend                                                          -               -                -               -
Proposed dividend                                                 -               -                -               -
Proposed dividend subsequent                                      -               -                -               -
   to the balance sheet date
Net income for the year ended December 31, 2004                   -               -                -               -
                                                       -------------   --------------   -------------   -------------
Balance as of December 31, 2004                             109,258         417,487            3,009         *(2,568)
                                                       =============   ==============   =============   =============

Composition of capital reserves: *                                                                      US$ thousands
                                                                                                        -------------

Capital reserve in the framework of the arrangement plan (Note 1B(2))                                            257
Adjustments deriving from translation of financial statements of investees                                    (1,425)
Adjustment of commitment to purchase Company shares                                                           (1,799)
Capital reserve from acquisition of convertible debentures by a subsidiary                                       399
                                                                                                        -------------
                                                                                                              (2,568)
                                                                                                        =============
<CAPTION>

[table continued]

                                                           Proposed
                                                           dividend
                                                         subsequent                          Company
                                                         to balance         Retained     shares held
                                                         sheet date         earnings   by subsidiary            Total
                                                      -------------    -------------   -------------    -------------
                                                      US$ thousands    US$ thousands   US$ thousands    US$ thousands
                                                      -------------    -------------   -------------    -------------

<S>                                                                         <C>             <C>              <C>
Balance as of December 31, 2001                                  -          115,862         (18,004)         556,773
Employee options exercised                                       -                -               -              281
Adjustments deriving from translation of
  financial statements of investee companies                     -                -               -           (3,700)
Realization of Company shares held by a
  subsidiary (see Note 21C)                                      -                -           2,576            2,576
Capital reserve from acquisition of
   convertible debenture by a subsidiary                         -                -               -              399
Dividend                                                         -           (8,500)              -           (8,500)
Proposed dividend subsequent to
   the balance sheet date                                    9,500           (9,500)              -                -
Net income for the year ended December 31, 2002                  -           60,078               -           60,078
                                                       -------------   --------------   -------------   -------------
Balance as of 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                                                -           (7,000)              -           (7,000)
Proposed dividend 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 of 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 Company shares held by a
  subsidiary (see Note 21C)                                      -                -           4,196            7,500
Dividend                                                    (7,200)         (25,700)              -          (32,900)
Proposed dividend                                                -          (11,200)              -          (11,200)
Proposed dividend subsequent                                12,700          (12,700)              -                -
   to the balance sheet date
Net income for the year ended December 31, 2004                  -          165,527               -          165,527
                                                       -------------   --------------   -------------   -------------
Balance as of December 31, 2004                             12,700          345,841         (11,232)         874,495
                                                       =============   ==============   =============   =============


Composition of capital reserves: *


Capital reserve in the framework of the arrangement plan (Note 1B(2))
Adjustments deriving from translation of financial statements of investees
Adjustment of commitment to purchase Company shares
Capital reserve from acquisition of convertible debentures by a subsidiary


The notes and appendix to the financial statements are an integral part thereof.


</TABLE>


                                    F-152
<PAGE>

<TABLE>
<CAPTION>
                                                                                              Makhteshim-Agan Industries Ltd.

Consolidated Statements of Cash Flows
-----------------------------------------------------------------------------------------------------------------------------

                                                                                     For the year ended December 31
                                                                           --------------------------------------------------
                                                                                    2004              2003               2002
                                                                           -------------     -------------      -------------
                                                                           US$ thousands     US$ thousands      US$ thousands
                                                                           -------------     -------------      -------------
<S>                                                                             <C>               <C>                 <C>
Cash flows from operating activities
Net income                                                                      165,527           102,774             60,078
Adjustments to reconcile net income to net cash flows
 from operating activities (see A. below)                                        50,126           146,466             48,152
                                                                           -------------     -------------      -------------

Net cash provided by operating activities                                       215,653           249,240            108,230
                                                                           -------------     -------------      -------------

Cash flows from investing activities
Acquisition of fixed assets                                                     (38,823)          (33,606)           (42,612)
Investment grant received                                                           686             1,937              1,282
Additions to other assets and deferred charges, net                             (33,749)          (20,463)           (31,565)
Purchase of products and intangible assets                                            -           (50,876)          (142,054)
Short-term investments, net                                                        (463)             (241)               767
Investments in newly consolidated companies (see B. below)                      (72,152)           (3,282)           (19,955)
Proceeds from disposal of fixed and other assets                                    574             2,049                900
Proceeds from sale of long-term investments                                       2,819               406              1,883
Other long-term investments                                                        (828)           (2,963)            (2,036)
Acquisition of minority interest in subsidiaries                                 (1,056)                -               (603)
                                                                           -------------     -------------      -------------

Net cash used in investing activities                                          (142,992)         (107,039)          (233,993)
                                                                           -------------     -------------      -------------

Cash flows from financing activities
Receipt of long-term loans from banks                                            24,700            97,693            186,566
Repayment of long-term loans and liabilities from banks
 and others                                                                    (227,851)         (148,251)          (109,948)
Issuance of convertible debentures less issuance expenses                       147,450                 -             29,309
Realization (acquisition) of Company debentures by a subsidiary                       -             4,301             (3,257)
Increase (decrease) in short-term credit from banks and
 others, net                                                                      4,222           (84,801)            33,181
Proceeds from options exercised                                                   9,647             1,473                  -
Proceeds from employee options exercised                                              -                 -                281
Dividend to shareholders                                                        (39,900)          (26,100)           (11,500)
Dividend to minority shareholders in subsidiaries                                  (301)             (241)              (549)
                                                                           -------------     -------------      -------------

Net cash (used in) provided by financing activities                             (82,033)         (155,926)           124,083
                                                                           -------------     -------------      -------------

Translation differences in respect of cash in autonomous units                        -                 -               (272)
                                                                           -------------     -------------      -------------

Decrease in cash and cash equivalents                                            (9,372)          (13,725)            (1,952)

Cash and cash equivalents at beginning of the year                               49,849            63,574             65,526
                                                                           -------------     -------------      -------------

Cash and cash equivalents at end of the year                                     40,477            49,849             63,574
                                                                           =============     =============      =============
</TABLE>


The notes and appendix to the financial statements are an integral part thereof.



                                    F-153
<PAGE>

<TABLE>
<CAPTION>
                                                                                              Makhteshim-Agan Industries Ltd.

Consolidated Statements of Cash Flows (cont'd)
-----------------------------------------------------------------------------------------------------------------------------

                                                                                     For the year ended December 31
                                                                           --------------------------------------------------
                                                                                    2004              2003               2002
                                                                           -------------     -------------      -------------
                                                                           US$ thousands     US$ thousands      US$ thousands
                                                                           -------------     -------------      -------------
<S>                                                                             <C>               <C>                 <C>
A.       Adjustments to reconcile net income to net
         cash flows from operating activities:

Revenues and expenses not affecting operating cash flows
Depreciation and amortization                                                    82,624            75,673             58,105
Adjustment of long-term liabilities to banks and others                           1,791             2,537              3,765
Minority interest in income of subsidiaries, net                                    998               802                424
Increase in employee severance benefits, net                                      1,973             4,358              1,058
Deferred taxes, net                                                                (163)            3,233              6,287
Amortization of discount on convertible debentures                                  916               978              1,272
Capital loss on disposal of fixed and other assets, net                             511               858                331
Provision for loss with respect to options granted to
 employees of subsidiaries                                                        2,090               330                  -
Gain on issuance of a subsidiary to a third party                                  (926)                -                  -

Changes in operating assets and liabilities
Decrease (increase) in trade and other receivables                              (53,236)          (48,358)            59,069
Increase in inventories                                                         (69,345)          (15,323)           (38,398)
Increase (decrease) in trade and other payables                                  82,893           121,378            (43,761)
                                                                           -------------     -------------      -------------

                                                                                 50,126           146,466             48,152
                                                                           =============     =============      =============


B.       Investments in newly consolidated companies

Working capital (excluding cash and cash equivalents)                            (6,485)           (2,777)            1,355
Fixed assets, net                                                                (2,258)             (506)           (1,625)
Other assets, net                                                               (63,081)                -            (6,168)
Goodwill created on acquisition                                                 (41,851)              (43)          (19,714)
Long-term liabilities                                                            33,896                44             2,213
Contingent liability                                                                  -                 -             3,984
Exercise of Company shares held by a subsidiary                                   7,500                 -                 -
Minority interest                                                                 6,398                 -                 -
                                                                           -------------     -------------      -------------

                                                                                (65,881)           (3,282)          (19,955)

Repayment of liability in respect of investee company
 previously acquired                                                             (6,271)                -                 -
                                                                           -------------     -------------      -------------

                                                                                (72,152)           (3,282)          (19,955)
                                                                           =============     =============      =============


C.       Non-cash activities

Acquisition of other assets on supplier credit                                   6,287              1,516             52,913
                                                                           =============     =============      =============

Acquisition of fixed assets on supplier credit                                       -              3,904              2,204
                                                                           =============     =============      =============
</TABLE>


                                    F-154
<PAGE>

<TABLE>
<CAPTION>
                                                                                              Makhteshim-Agan Industries Ltd.

Consolidated Statements of Cash Flows
-----------------------------------------------------------------------------------------------------------------------------

                                                                                     For the year ended December 31
                                                                           --------------------------------------------------
                                                                                    2004              2003               2002
                                                                           -------------     -------------      -------------
                                                                           US$ thousands     US$ thousands      US$ thousands
                                                                           -------------     -------------      -------------
<S>                                                                             <C>               <C>                 <C>
Cash flows from operating activities
Net income                                                                      165,527          102,774             60,078
Adjustments to reconcile net income to cash flows from
 operating activities (see A. below)                                           (130,946)         (67,443)           (49,962)
                                                                           -------------     -------------      -------------
Net cash provided by operating activities                                        34,581           35,331             10,116
                                                                           -------------     -------------      -------------

Cash flows from investing activities
Investment in investee companies                                                 (3,938)          (5,501)              (931)
Long-term loans to investee companies                                          (135,582)            (326)           (49,704)
Repayment of long-term loans to investee companies                                    -           21,623                  -
Short-term credit to investee companies, net                                     (9,056)           2,850             (5,350)
Acquisition of fixed assets                                                        (431)            (221)              (279)
Investment in short-term bank deposits, net                                       3,554            3,687             (9,141)
Realization of long-term bank deposits                                           10,000           25,000                  -
Proceeds from sales of fixed assets                                                   8               10                  -
                                                                           -------------     -------------      -------------
Net cash (used in) provided by investing activities                            (135,445)          47,122            (65,405)
                                                                           -------------     -------------      -------------

Cash flows from financing activities
Issuance of convertible debentures less issuance expenses                       147,450                -             29,309
Proceeds from options exercised                                                   9,647            1,473                  -
Dividend to shareholders                                                        (39,900)         (26,100)           (11,500)
Proceeds from employee options exercised                                              -                -                281
Receipt of long-term loans from banks                                                 -                -             22,500
Repayment of long-term loans from banks                                         (16,875)          (4,500)           (46,725)
Receipt of long-term loan from investee company                                       -                -             11,500
Increase (decrease) in short-term credit from banks, net                              -          (50,684)            50,084
                                                                           -------------     -------------      -------------
Net cash (used in) provided by financing activities                             100,322          (79,811)            55,449
                                                                           -------------     -------------      -------------

Increase (decrease) in cash and cash equivalents                                   (542)           2,642                160

Cash and cash equivalents at beginning of the year                                3,191              549                389
                                                                           -------------     -------------      -------------

Cash and cash equivalents at end of the year                                      2,649            3,191                549
                                                                           =============     =============      =============
</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
                                                                           --------------------------------------------------
                                                                                    2004              2003               2002
                                                                           -------------     -------------      -------------
                                                                           US$ thousands     US$ thousands      US$ thousands
                                                                           -------------     -------------      -------------
<S>                                                                             <C>               <C>                 <C>
A.       Adjustments to reconcile net income to net cash
         flows from operating activities

Revenues and expenses not affecting operating cash flows:
---------------------------------------------------------

Depreciation and amortization                                                     1,235              741                717
Capital loss (gain) on disposal of fixed assets                                      25               (4)                 2
Company's equity in undistributed earnings of investee
 companies, net                                                                (122,931)         (74,153)           (49,401)
Increase in employee severance benefits, net                                        680            1,660                188
Amortization of discount on convertible debentures                                  916              978              1,272
Adjustment of long-term investments                                              (5,333)             731              3,907
Adjustment of long-term bank loans                                                    -                -             (3,304)
Deferred taxes, net                                                                (749)          (2,507)               214

Changes in operating assets and liabilities:
--------------------------------------------
Decrease (increase) in other receivables                                         (5,143)           2,362             (3,556)
Increase (decrease) in other payables                                               354            2,749                 (1)
                                                                           -------------     -------------      -------------

                                                                               (130,946)         (67,443)           (49,962)
                                                                           =============     =============      =============
</TABLE>



The notes and appendix to the financial statements are an integral part thereof.


                                    F-156
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

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, whose
                  consolidated         financial statements are consolidated,
                  companies            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
                  shareholders         (Financial Statement Presentation of
                                       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, 2004, Koor
                  holds 38.6% of the Company's shares whereas on December 31,
                  2003, Koor held 48.6% of the Company's shares. In addition,
                  at that time Koor had a voting agreement, that was not of a
                  temporary nature, with two other shareholders who hold
                  together 3.82% of the Company's shares. In July 2004, the
                  voting agreements was cancelled.

                  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-157
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

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-158
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


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, were translated
                           according to the exchange rate of the dollar on
                           their date of acquisition or creation. The following
                           items were 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)
                           were 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, were translated according to the
                           exchange rate of the dollar on the date of the cash
                           flow. The erosion in monetary balances is 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 gain, etc.).

                  c)       Company 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 were
                           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-159
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 2 - Reporting Principles and Accounting Policy (cont'd)

         B.       Proposed dividend 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 rules 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 relating to
         non-monetary items that were translated based on the historical
         exchange rates according to which the corresponding non-monetary items
         were translated. 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. 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-160
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 2 - Reporting Principles and Accounting Policy (cont'd)

         D.       Consolidated financial statements

         (1)      The financial statements of the Company are consolidated with
                  the 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 charges" and is
                  amortized in the "other expenses" item (regarding the
                  amortization period, see Section L., 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)      Material 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-161
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


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 at 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.


         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 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)      Regarding goodwill amortization - see Note 2M.


                                    F-162
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 2 - Reporting Principles and Accounting Policy (cont'd)

         L.       Fixed assets

         (1)      The 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 specifically capitalized.

         (3)      The cost of the self-constructed assets includes materials
                  and labor costs 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. The investment grant is
                  amortized to the statement of income based on the rate of
                  depreciation of the assets in respect of which it was
                  received.

         (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 know-how - 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 from time to time in accordance with
the estimated expected benefit period of the assets.


                                    F-163
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


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", in accordance with the higher
         of the liability or capital value.

         Convertible debentures issued by the Company and held by a subsidiary,
         are included net of the liability value of the debentures issued. The
         difference between the acquisition cost and the liability value which
         was deducted, is recorded in a capital reserve in the shareholders'
         equity category.


         O.       Company shares held by subsidiary

         Company shares held 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 along with transfer of the main 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

         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 calculation of the 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 which involves additional tax to the
         Group.


                                    F-164
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 2 - Reporting Principles and Accounting Policy (cont'd)

         S.       Earnings per share

         The earnings per share data is 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 Company.


         T.       Derivative financial instruments

         The results of derivative financial instruments held as hedge for
         existing assets and liabilities are recognized concurrently with the
         results of the hedged assets and liabilities.

         The results of derivative financial instruments held as a hedge for
         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 earmarked 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 a 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 Company applies Accounting Standard No. 15 - Impairment in Value
         of Assets (hereinafter - "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 Company
         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.


         W.       Balances in foreign currency and linked balances

         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.

                                    F-165
<PAGE>

<TABLE>
<CAPTION>
                                                                                   Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
------------------------------------------------------------------------------------------------------------------


Note 2 - Reporting Principles and Accounting Policy (cont'd)

         W.       Balances in foreign currency and linked balances (cont'd)

         Data regarding the representative exchange rate of the US dollar and
         the Consumer Price Index are as follows:

                                         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, 2004                 107.44             4.308             2.654              0.733
         December 31, 2003                 106.16             4.379             2.889              0.791

         Changes during the year:
         ------------------------
         2004                               1.21%            (1.62%)           (8.13%)            (7.33%)
         2003                               (1.9%)            (7.5%)           (18.2%)            (16.9%)
         2002                                6.5%              7.3%             52.3%             (15.9%)
</TABLE>

         X.       Disclosure of the impact of new accounting standards in the
                  period prior to their application

         In July 2004, the Israeli Accounting Standards Board published
         Accounting Standard No. 19, "Taxes on Income". The Standard provides
         that a liability for deferred taxes is to be recorded for all
         temporary differences subject to tax, except for a limited number of
         exceptions. In addition, a deferred tax asset is to be recorded for
         all temporary differences that may be deducted, losses for tax
         purposes and tax benefits not yet utilized, if it is anticipated that
         there will be taxable income against which they can be offset, except
         for a limited number of exceptions. The new Standard applies to
         financial statements for periods beginning on January 1, 2005. The
         Standard provides that it is to be implemented by means of a
         cumulative effect of a change in accounting method. First time
         application of the said Standard will have a net non-recurring impact,
         as at January 1, 2005, of increasing the net income by approximately
         US$ 11.6 million (which mainly derives from recording deferred taxes
         in respect of unrealized profits which are anticipated to be realized
         in the near future).


Note 3 - Trade Receivables

<TABLE>
         Consolidated

         Composition:
<CAPTION>
                                                                                          December 31
                                                                                ---------------------------------
                                                                                          2004               2003
                                                                                --------------      -------------
                                                                                 US$ thousands      US$ thousands
                                                                                --------------      -------------
         <S>                                                                           <C>                <C>
         Open accounts -
          Foreign                                                                      312,661            242,292
          Domestic (Israel)                                                             14,812             10,710
         Checks receivable                                                               5,796              8,868
         Subordinated capital note and receivables related to sale of
          trade receivables in a securitization transaction (1)                         60,586             57,203
                                                                                --------------      -------------
                                                                                       393,855            319,073
         Net of allowance for doubtful debts                                            24,646             17,379
                                                                                --------------      -------------
                                                                                       369,209            301,694
                                                                                ==============      =============
</TABLE>


                                    F-166
<PAGE>

<TABLE>
<CAPTION>

                                                                                   Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
------------------------------------------------------------------------------------------------------------------

Note 3 - Trade Receivables (cont'd)

         (1)      Sale of trade receivables in a securitization transaction:
                  ----------------------------------------------------------
                                                                                          December 31
                                                                                ---------------------------------
                                                                                          2004               2003
                                                                                --------------      -------------
                                                                                 US$ thousands      US$ thousands
                                                                                --------------      -------------
         <S>                                                                          <C>                <C>
                  Trade receivables included in the securitization transaction
                   as at the balance sheet date                                       202,832            182,529
                  Less - proceeds in respect of such receivables, net (*)             141,654            115,769
                  Subordinated capital note                                            61,178             66,760
                  Trade receivables which were collected and the
                   proceeds in respect thereof were paid subsequent
                   to the balance sheet date, net                                        (592)            (9,557)
                  Subordinated capital note and receivables related to sale of
                   trade receivables in a securitization transaction                   60,586             57,203


                  (*)  As at the balance sheet date cash proceeds in the amount of US$ 142.2 million were
                       received in respect of the sale of trade receivables in a securitization
                       transaction (December 31, 2003 - approximately US$ 125.3 million).
</TABLE>

                  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 which was set up for
                  this purpose and which is not owned or controlled by the
                  Makhteshim Agan Industries Group (hereinafter - "the
                  Acquiring Company").

                  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 US$
                  250 million (as opposed to US$ 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.


                                    F-167
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

Note 3 - Trade Receivables (cont'd)

         (1) Sale of trade receivables in a securitization transaction: (cont'd)
             ---------------------------------------------------------

             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.

             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 main principle of 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.


                                    F-168
<PAGE>


<TABLE>
<CAPTION>

                                                                                             Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
-----------------------------------------------------------------------------------------------------------------------------

Note 4 - Other Receivables

                                                                 Consolidated                            Company
                                                        --------------------------------     --------------------------------
                                                                  December 31                          December 31
                                                        --------------------------------     --------------------------------
                                                                 2004               2003              2004               2003
                                                        -------------      -------------     -------------      -------------
                                                        US$ thousands      US$ thousands     US$ thousands      US$ thousands
                                                        -------------      -------------     -------------      -------------
         <S>                                                  <C>                <C>                  <C>                <C>
         Claims from the government in
          respect of participations and
          tax refunds                                         28,277             15,410                 -                  -
         Advance tax payments, net of
          provisions                                          11,071              7,895                 -                  -
         Employees (1)                                         1,376              1,259                 6                 49
         Deferred taxes (Note 17G)                            17,037             10,256               325              5,155
         Current maturities of long-term
          receivables                                            420                380                 -                  -
         Prepaid expenses and accrued
          income                                              10,372              9,819               168                741
         Dividend receivable                                       -                  -            11,200              7,000
         Other                                                 8,666              9,519                 -                  -
                                                        -------------      -------------     -------------      -------------

                                                              77,219             54,538            11,699             12,945
                                                        =============      =============     =============      =============
         (1)  Includes a non-linked bank deposit
                designated for the purpose of
                granting loans to employees and
                bearing annual interest at the
                rate of 5%                                       417                566                 -                  -
                                                        =============      =============     =============      =============


Note 5 - Loans to Investee Companies

         Company
                                                                      December 31
                                                            --------------------------------
                                                                     2004               2003
                                                            -------------      -------------
                                                            US$ thousands      US$ thousands
                                                            -------------      -------------

         Current maturities of long-term loans                         -              4,500
         Short-term loans (1)                                     16,056              2,500
         Current accounts (2)                                     14,903              9,111
                                                            -------------      -------------
                                                                  30,959             16,111
                                                            =============      =============
</TABLE>

         (1)   The loan is a dollar loan and bears interest of 1.8% - 2.4%.
         (2)   The accounts are mainly linked to the US dollar and are
               non-interest bearing.

                                    F-169
<PAGE>

 >


                                                 Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


Note 6 - Inventories

       Consolidated
                                                          December 31
                                                --------------------------------
                                                         2004               2003
                                                -------------      -------------
                                                US$ thousands      US$ thousands
                                                -------------      -------------

       Finished products                             263,579            225,678
       Work in progress                               29,117             23,772
       Raw materials                                 115,046             76,100
       Packing materials                               4,863              3,078
       Spare parts and maintenance materials          12,820             13,739
                                                -------------      -------------
                                                     425,425            342,367
       Purchased products                             35,445             18,626
                                                -------------      -------------

                                                     460,870            360,993
                                                =============      =============


Note 7 - Investments in Investee Companies

<TABLE>
         Company

         A.       Composition
<CAPTION>

                                                                      December 31
                                                            --------------------------------
                                                                     2004               2003
                                                            -------------      -------------
                                                            US$ thousands      US$ thousands
                                                            -------------      -------------
<S>                                                              <C>                <C>
         Subsidiaries -
         Cost of shares                                          424,865            417,623
         Company's equity in retained earnings and
          capital reserves accumulated from date of
          acquisition, net                                       351,475            232,744
         Adjustments deriving from translation of
          financial statements of investee companies              (1,425)            (4,250)
                                                            -------------      -------------
                                                                 774,915            646,117

         Less - investment in Company shares held by
          subsidiary                                             (11,232)           (15,428)

         Capital reserve from acquisition and sale of
          debentures convertible into shares of the
          Company by a subsidiary                                    399                399
                                                            -------------      -------------
                                                                 764,082            631,088

         Loans - C(1)                                            242,417            101,417
         Perpetual loan - C(2)                                     2,500              2,500
                                                            -------------      -------------

                                                               1,008,999            735,005
                                                            =============      =============
</TABLE>

                                    F-170
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


Note 7 - Investments in Investee Companies

         Company

         B.       Movement during the year
                                                                           2004
                                                                  -------------
                                                                  US$ thousands
                                                                  -------------
         Balance at beginning of year                                  735,005
         Company's equity in net earnings
            of investee companies, net                                  163,406
         Adjustments deriving from translation of
            financial statements of investee companies                   2,825
         Dividend                                                      (44,675)
         Realization of Company shares held by a subsidiary              4,196
         Additional investments, net                                     7,242
         Change in loans and capital notes, net                        141,000
                                                                  -------------

         Balance at end of year                                      1,008,999
                                                                  =============

         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 which
                  ranges between 0.8% and 2%. The loans as at December 31, 2004
                  are presented net of current maturities in the amount of US$
                  4.5 million.

         (2)      The perpetual loan is non-linked and does not bear interest.

         D.       Additional information

         (1)      Acquisition of companies during the year of the report:

                  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 US$ 67 million (the consideration is
                       after an amendment to the original agreement made in
                       December 2004). Approximately US$ 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 US$ 4.2 million).

                       The excess cost created on the acquisition date amounted
                       to US$ 51.4 million, of which $28.4 million was
                       attributed to intangible assets (mainly licensing and
                       licenses), US$ 0.5 million was attributed to deferred
                       tax liability, US $0.6 million was attributed to
                       inventory and the balance, in the amount of US$ 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 which, in the Company's
                       estimation, represents the period of economic benefit to
                       be derived therefrom.


                                    F-171
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 7 - Investments in Investee Companies (cont'd)

       Company

       D.       Additional information (cont'd)

       (1)      Acquisition of companies during the year of the report: (cont'd)

                a.     (cont'd)

                       The statements of income and cash flows of the Companies
                       Acquired were consolidated as of May 1, 2004.

                       The effect of the first time consolidation of the
                       activities acquired on the consolidated statements of
                       income is an increase in revenues of US$ 24.1 million
                       for the period ended December 31, 2004, and an increase
                       to net income (after amortization of goodwill) of US$
                       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 US$ 77.5 million.

                b.     During the year of the report, the Company signed,
                       through subsidiaries, agreements for acquisition of
                       three marketing companies, as follows:

                       1)  In June 2004, the Company, through a wholly owned
                           and controlled subsidiary, signed an agreement for
                           acquisition of 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 US$ 1.5
                           million and US$ 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.

                       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-172
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 7 - Investments in Investee Companies (cont'd)

          D.    Additional information (cont'd)

          (1)   Acquisition of companies during the year of the report: (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 US$ 41 million. The excess cost created
                on the acquisition date amounted to US$ 31.1 million, of which
                US$ 15 million was attributed to intangible assets (mainly
                licensing and licenses), US$ 3.5 million was attributed to
                deferred tax liability, US$ 0.7 million was attributed to
                inventory and the balance, in the amount of US$ 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 statements of income and cash flows of the three marketing
                companies acquired were consolidated as of their acquisition
                dates. 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 US$ 46.2 million
                for the period ended December 31, 2004 and a reduction of net
                earnings (after goodwill amortization) of US$ 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 US$ 72.8 million.

                (2) Subsequent to the balance sheet date, in January 2005, the
                Company signed an agreement by means of a company it wholly
                owns and controls, for acquisition of 49% of the shares and
                rights of Makhteshim Agan Benelux & Nordic B.V. ("Mabeno"), a
                Dutch company that serves as the exclusive distributor of
                herbicides of the Makhteshim Agan Group in the areas of Benelux
                and Scandinavia. In accordance with the agreement, the
                acquisition will be executed in exchange for an issuance of
                Company shares in the amount of (euro) 2,940 thousand,
                according to the market price of the share on the day of the
                transfer. In addition, the Company received an option to
                increase its holdings in Mabeno to 55%.

                (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 87.72%.


                                    F-173
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 7 - Investments in Investee Companies (cont'd)

         E.     Convertible securities in investee companies (cont'd)

         (2)    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%.

         (3)    As at the balance sheet date, exercise of the said options is
                reasonable and if all of the options are exercised (see Note
                7E (1) (2)), the Company will sustain a loss from decline in
                the holdings' percentage, in the amount of US$ 2 million. The
                financial statements include a provision for this amount.


Note 8 - Long-Term Investments, Loans and Receivables

<TABLE>
         A.       Composition
<CAPTION>
                                                            Consolidated                            Company
                                                    -----------------------------      ------------------------------
                                                      December 31     December 31        December 31      December 31
                                                             2004            2003               2004             2003
                                                    -------------   -------------      -------------    -------------
                                                    US$ thousands   US$ thousands      US$ thousands    US$ thousands
                                                    -------------   -------------      -------------    -------------
         <S>                                              <C>             <C>                <C>              <C>
         Long-term investments, loans and
          receivables [B(1)]                              23,265          18,349                  -                -
         Bank deposits [B(2)]                                  -               -             19,016           29,101
                                                    -------------   -------------      -------------    -------------
                                                          23,265          18,349             19,016           29,101
         Net of allowance for doubtful debts               1,500           1,500                  -                -
                                                    -------------   -------------      -------------    -------------
                                                          21,765          16,849             19,016           29,101
         Less - current maturities                           420             380                  -                -
                                                    -------------   -------------      -------------    -------------
                                                          21,345          16,469             19,016           29,101
         Other investments [B(3)]                            725           1,575                  -                -
                                                    -------------   -------------      -------------    -------------

                                                          22,070          18,044             19,016           29,101
                                                    =============   =============      =============    =============
</TABLE>

         B.    Additional information

         (1)   Long-term investments, loans and receivables
               --------------------------------------------

<TABLE>
               A.       Linkage terms and interest rates
<CAPTION>
                                                                        Consolidated
                                                                -------------------------------
                                                                  December 31       December 31
                                                                         2004              2003
                                                                -------------     -------------
                                                                US$ thousands     US$ thousands
                                                                -------------     -------------
               <S>                                                    <C>
               In Israeli currency - not linked                        2,353                 -
               In dollars                                              1,710             5,485
               In Brazilian reals                                     15,715             7,699
               In Argentine pesos                                      2,352             4,319
               Other foreign currency                                  1,135               846
                                                                -------------     -------------
                                                                      23,265            18,349
                                                               =============     =============
</TABLE>

          The above investments, loans and receivables are non-interest bearing.


                                    F-174
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


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)                         420
                                                                 -------------

                  Second year                                           6,333
                  Third year                                            2,865
                  Fourth year                                           2,180
                  Fifth year                                              662
                  With no defined repayment date                      *10,805
                                                                 -------------
                                                                       22,845
                                                                 -------------

                                                                       23,265
                                                                 =============


         *  Including restricted deposits and other assets in the amount of
            $5.3 million.

<TABLE>
         (2)      Bank deposits
                  ------------
<CAPTION>

                                                                      Company
                                        Interest rate     --------------------------------
                                        as at balance       December 31        December 31
                                           sheet date              2004               2003
                                        -------------     -------------      -------------
                                                    %     US$ thousands      US$ thousands
                                        -------------     -------------      -------------
<S>                                              <C>           <C>                <C>
                  Dollar deposits                 4.0           10,711             20,799
                  Dollar deposits                 5.1            8,305              8,302
                                                          -------------      -------------
                                                                19,016             29,101
                                                          =============      =============
</TABLE>

                  During the years 2001 and 2000, the Company made deposits in
                  a Brazilian bank in the amount of US$ 8,300 thousand and US$
                  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 and 2005,
                  respectively. 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 US$ 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. In the year
                  of account the subsidiary provided the amount of US$ 1.1
                  million as impairment in value of these investments.

                                    F-175
<PAGE>

<TABLE>
<CAPTION>

                                                                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------------------------------------------------------


Note 9 - Fixed Assets

         A.       Composition

         Consolidated
                                                                                                    Office
                                           Land and          Plant and             Motor         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 the
           beginning of the year           123,345            635,438             4,824            22,809            786,416
         Additions net of grants             6,979             26,174             1,101             3,835             38,089
         Newly consolidated
          company                              809                635               587             1,252              3,283
                                      -------------      -------------     -------------     -------------      -------------
         Disposals                            (408)              (925)           (1,513)             (398)            (3,244)
         Balance as at
          the end of the year              130,725            661,322             4,999            27,498            824,544
                                      -------------      -------------     -------------     -------------      -------------

         Accumulated
          depreciation
         Balance as at the
          beginning of the year             44,304            297,561             2,812            14,994            359,671
         Additions                           4,059             22,717               719             3,132             30,627
         Newly consolidated
          company                               82                264               227               351                924
         Eliminated on
          disposals                           (408)              (589)           (1,158)             (262)            (2,417)
                                      -------------      -------------     -------------     -------------      -------------
         Balance as at
          the end of the year               48,037            319,953             2,600            18,215            388,805
                                      -------------      -------------     -------------     -------------      -------------

         Net book value
         As at
          December 31, 2004                 82,688            341,369             2,399             9,283            435,739
                                      -------------      -------------     -------------     -------------      -------------

         As at
          December 31, 2003                 79,041            337,877             2,012             7,815            426,745
                                      =============      =============     =============     =============      =============
</TABLE>

<TABLE>
<CAPTION>
                                                                                                      December 31
                                                                                             --------------------------------
                                                                                                      2004               2003
                                                                                             -------------      -------------
                                                                                             US$ thousands      US$ thousands
                                                                                             -------------      -------------
<S>                                                                                                <C>                <C>
         Cost of assets includes:
         Buildings and development on freehold land                                                83,289             75,970
         Buildings and development on land held under capitalized leases                           47,436             47,375
         Capitalized financing expenses                                                            19,019             19,019
         Fully-depreciated equipment                                                              107,741            106,639
         Cost of assets is net of grants received                                                  99,015             98,559
</TABLE>

                                    F-176
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


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 and Deferred Charges

<TABLE>
       A.       Composition:

       Consolidated
<CAPTION>

                                                                              December 31, 2004
                                                                --------------------------------------------------
                                                                                    Accumulated        Unamortized
                                                                         Cost      amortization            balance
                                                                -------------     -------------      -------------
                                                                US$ thousands     US$ thousands      US$ thousands
                                                                -------------     -------------      -------------
<S>                                                                  <C>               <C>                <C>
       Product registration and acquisition of know-how              265,719           110,206            155,513
       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                                               36,099            10,705             25,394
       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
                                                                =============     =============      =============



                                                                               December 31, 2003
                                                               --------------------------------------------------
                                                                                    Accumulated        Unamortized
                                                                         Cost      amortization            balance
                                                                -------------     -------------      -------------
                                                                US$ thousands     US$ thousands      US$ thousands
                                                                -------------     -------------      -------------

       Product registration and acquisition of know-how              178,855            94,483             81,386
       Goodwill on acquisition of subsidiaries                       111,056            37,093             73,963
       Intangible assets on purchase of products                     281,223            23,063            258,160
       Marketing rights                                               36,099             7,870             31,215
       Debenture issuance expenses                                     2,466               848              1,618
       Non-competition and confidentiality agreement                   2,576               516              2,060
                                                                -------------     -------------      -------------
                                                                     612,275           163,873            448,402
                                                                =============     =============      =============

</TABLE>

                                    F-177
<PAGE>

<TABLE>
<CAPTION>

                                                                  Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------------------------


Note 10 - Other Assets and Deferred Charges (cont'd)

         Company
                                                             December 31, 2004
                                               --------------------------------------------------
                                                                   Accumulated        Unamortized
                                                        Cost      amortization            balance
                                               -------------     -------------      -------------
                                               US$ thousands     US$ thousands      US$ thousands
                                               -------------     -------------      -------------
<S>                                                   <C>               <C>                <C>
         Debenture issuance expenses                  3,730             1,272              2,458
                                               =============     =============      =============



                                                             December 31, 2003
                                               --------------------------------------------------
s                                                                  Accumulated        Unamortized
                                                        Cost      amortization            balance
                                               -------------     -------------      -------------
                                               US$ thousands     US$ thousands      US$ thousands
                                               -------------     -------------      -------------

         Debenture issuance expenses                  2,466               848              1,618
                                               =============     =============      =============
</TABLE>


         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 acquisition of a
                  number of products, licenses and distribution rights in the
                  area of vegetation protection. The total consideration for
                  acquisition of the products amounted to US$ 185.3 million,
                  which is presented in the "other assets and deferred
                  expenses" category.
                  Approximately US$ 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 US$ 144.1 million was allocated to acquisition
                  of the products in the framework of a "going concern", which
                  constitutes goodwill on the acquisition 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 US$ 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 US$105 million, and it is included in the "other
                  assets and deferred charges" category. Of the amount paid,
                  US$20 million was attributed to registration costs and
                  licensing, which are amortized over a period of 20 years in
                  the "selling and marketing expenses" category, US$2.5 million
                  was attributed to the purchase of agreements with third
                  parties, which is 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 amortized over a period of 20 years under other
                  expenses. The price of the marketing and distribution rights
                  was US$5 million and is amortized over a period of 9 years.


                                    F-178
<PAGE>


                                                 Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


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

<TABLE>
         A.     Composition
<CAPTION>
                                                                    Consolidated                            Company
                                                         --------------------------------     --------------------------------
                                                                   December 31                          December 31
                                                         --------------------------------     --------------------------------
                                                                  2004              2003              2004               2003
                                                         -------------      -------------     -------------      -------------
                                                         US$ thousands      US$ thousands     US$ thousands      US$ thousands
                                                         -------------      -------------     -------------      -------------
<S><S>                                                           <C>                <C>
         Credit from banks
         Overdrafts                                            55,613             54,656                  -                 -
         Short-term loans                                      57,366             24,946                  -                 -
                                                         -------------      -------------     -------------      -------------
                                                              112,979             79,602                  -                 -
         Current maturities of long-term loans                 27,042             63,215                  -             4,500
                                                         -------------      -------------     -------------      -------------
                                                              140,021            142,817                  -             4,500
                                                         =============      =============     =============      =============
</TABLE>


<TABLE>
         B.     Linkage terms and interest rates
<CAPTION>
                                                                   Consolidated                            Company
                                                         --------------------------------     --------------------------------
                                           Weighted                December 31                          December 31
                                      interest rate      --------------------------------     --------------------------------
                                         at balance               2004              2003              2004               2003
                                         sheet date      -------------      -------------     -------------      -------------
                                                  %      US$ thousands     US$ thousands     US$ thousands      US$ thousands
                                      -------------      -------------      -------------     -------------      -------------
<S>                                             <C>             <C>                 <C>                <C>                <C>
         Credit from banks
         Overdrafts:
         ----------
         In Israeli currency                    1.8             2,892               543                 -                  -
         In US dollars                          4.0            39,272            33,996                 -                  -
         In Euro                                4.5            11,350            17,228                 -                  -
         In Brazilian currency                 16.9             1,814             2,408                 -                  -
         In other currencies                                      285               481                 -                  -
                                                         -------------      -------------     -------------      -------------
                                                               55,613            54,656                 -                  -
                                                         -------------      -------------     -------------      -------------
         Short-term credit:
         -----------------
         In Euro                                                    -             1,807                 -                  -
         In dollars (1)                         3.5            51,677            18,895                 -                  -
         In other currencies                    4.7             5,689             4,244                 -                  -
                                                         -------------      -------------     -------------      -------------
                                                               57,366            24,946                 -                  -
                                                         -------------      -------------     -------------      -------------
                                                              112,979            79,602                 -                  -
                                                         =============      =============     =============      =============


         (1) The loans mainly bear variable interest at an annual rate of between 0.8% and 1.7% above the LIBOR.
</TABLE>


         C. Regarding collateral - see Note 20A.



                                    F-179
<PAGE>

<TABLE>
<CAPTION>

                                                                                        Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------------------------------------------------


Note 12 - Trade Payables

    Consolidated
                                                                                                   December 31
                                                                                         --------------------------------
                                                                                                 2004               2003
                                                                                         -------------      -------------
                                                                                         US$ thousands      US$ thousands
                                                                                         -------------      -------------
<S>                                                                                          <C>                <C>
    Open accounts                                                                            325,770            242,795
    Checks payable                                                                               175                275
                                                                                         -------------      -------------
                                                                                             325,945            243,070
                                                                                         =============      =============
</TABLE>



<TABLE>
Note 13 - Other Payables
<CAPTION>

                                                              Consolidated                            Company
                                                    --------------------------------     --------------------------------
                                                              December 31                          December 31
                                                    --------------------------------     --------------------------------
                                                             2004              2003              2004               2003
                                                    -------------      -------------     -------------      -------------
                                                    US$ thousands      US$ thousands     US$ thousands      US$ thousands
                                                    -------------      -------------     -------------      -------------
<S>                                                      <C>                <C>                <C>                <C>

    Salaries and payroll accruals                        32,591             29,852             2,627              4,550
    Accrued income taxes, net of
     advance payments                                    38,047             17,819                 -                  -
    Government agencies                                   5,804              7,058               142                327
    Subsidiaries - current account                            -                  -                33                 56
    Liability for securities sold short (1)               5,627             15,418                 -                  -
    Payables in respect of currency
     transactions                                         9,608              9,956                 -                  -
    Accrued expenses and deferred
     income                                              63,672             34,180             3,209                687
    Payables in respect of acquisition
     of subsidiary                                        6,500              6,300                 -                  -
    Others                                               30,556             29,958               749                753
                                                    -------------      -------------     -------------      -------------

                                                        192,405            150,541             6,760              6,373
                                                    =============      =============     =============      =============
</TABLE>

    (1)      Subsidiary borrows marketable bonds 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,
             is presented based on the market value of the bonds as at the
             balance sheet date.



                                    F-180
<PAGE>


<TABLE>
<CAPTION>

                                                                                         Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------------------------------------------------


Note 14 - Long-Term Loans from Banks

         A.       Composition

                                                              Consolidated                            Company
                                                    --------------------------------     --------------------------------
                                                              December 31                          December 31
                                                    --------------------------------     --------------------------------
                                                             2004              2003              2004               2003
                                                    -------------      -------------     -------------      -------------
                                                    US$ thousands      US$ thousands     US$ thousands      US$ thousands
                                                    -------------      -------------     -------------      -------------

<S>                                                      <C>                <C>                                   <C>
         Loans from banks*                               120,065            332,448                  -            16,875

         Less - current maturities                        27,042             63,215                  -             4,500
                                                    -------------      -------------     -------------      -------------

                                                          93,023            269,233                  -            12,375
                                                    =============      =============     =============      =============

         * After the deduction of an
             investment in bank deposits (see
             Note 8B2) in the amount of:                  19,016             29,101                  -                 -
                                                    =============      =============     =============      =============
</TABLE>


<TABLE>
         B.       Linkage terms and interest rates
<CAPTION>
                                                                   Consolidated                            Company
                                                         --------------------------------     --------------------------------
                                           Weighted                December 31                          December 31
                                      interest rate      --------------------------------     --------------------------------
                                         at balance               2004              2003              2004               2003
                                         sheet date      -------------      -------------     -------------      -------------
                                                  %      US$ thousands      US$ thousands     US$ thousands      US$ thousands
                                      -------------      -------------      -------------     -------------      -------------

<S>                                             <C>         <C>               <C>                                   <C>
         In US dollars                          3.6         103,124              313,148                  -            16,875
         In Euro                                3.5           9,189                9,396                  -                 -
         In Israeli currency                    7.4           1,548                2,633                  -                 -
         In other foreign
          currency                              5.2           6,204                7,271                  -                 -
                                                         -------------      -------------     -------------      -------------

                                                            120,065              332,448                  -            16,875
                                                         =============      =============     =============      =============
</TABLE>
         * Most of the loans bear interest at the Libor rate plus a margin.


         C.       Maturities

                                                         Consolidated
                                                        -------------
                                                        US$ thousands
                                                        -------------

         First year - current maturities                      27,042
         Second year                                          51,015
         Third year                                           19,282
         Fourth year                                          11,830
         Fifth year                                            5,896
         Sixth year and thereafter                             5,000
                                                        -------------

                                                             120,065
                                                        =============




                                    F-181
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


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>
         A.       Presented in the "long-term liabilities" category
                  -------------------------------------------------
<CAPTION>

                                                     Consolidated                            Company
                                           --------------------------------     --------------------------------
                                                     December 31                          December 31
                                           --------------------------------     --------------------------------
                                                    2004              2003              2004               2003
                                           -------------      -------------     -------------      -------------
                                           US$ thousands      US$ thousands     US$ thousands      US$ thousands
                                           -------------      -------------     -------------      -------------

<S>                                             <C>                    <C>           <C>                    <C>
                  Debenture principal           150,000                  -           150,000                 -
                                           =============      =============     =============      =============
</TABLE>


                  1.   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
                       US$ 150 million par value (including US$ 5 million which
                       was issued to the underwriters in April 2004), 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 which the
                       Company intends to register for trading.

                       The total issuance expenses with respect to the
                       aforementioned debentures amounted to US$ 2.5 million.

                  2.   As at the balance sheet date, conversion of the said
                       debentures is not expected and, accordingly, they
                       are presented in the balance sheet as part of the
                       "long-term liabilities" category.



                                    F-182
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


Note 15 - Convertible Debentures (cont'd)

         B.    Presented in a separate category between "long-term liabilities"
               and "shareholders' equity"

<TABLE>
<CAPTION>
                                                     Consolidated                            Company
                                           --------------------------------     --------------------------------
                                                     December 31                          December 31
                                           --------------------------------     --------------------------------
                                                    2004              2003              2004               2003
                                           -------------      -------------     -------------      -------------
                                           US$ thousands      US$ thousands     US$ thousands      US$ thousands
                                           -------------      -------------     -------------      -------------
<S>                                              <C>                <C>               <C>               <C>
               Debenture principal               39,474             81,950            39,474            81,950
               Discount balance, net             (1,152)            (4,245)          (1,565)            (4,658)
                                           -------------      -------------     -------------      -------------

                                                 38,322             77,705            37,909            77,292
                                           =============      =============     =============      =============
</TABLE>


               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 10.03 par value.

                    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.

                    As a result of dividend distributions, the exercise price
                    was updated and, as at the balance sheet date, it stands at
                    NIS 10.03

                    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 US$ 62.5 million, of which US$ 58.5 million was
                    attributed to the debentures (Series A) and US$ 4.0 million
                    was attributed to the options (Series 1).


                                    F-183
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


Note 15 - Convertible Debentures (cont'd)

          B.   Presented in a separate category between "long-term
               liabilities" and "shareholders' equity" (cont'd)
               ------------------------------------------------


               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 US$ 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 June 2002, a subsidiary acquired on the stock exchange,
                    approximately NIS 16,684 thousand par value of debentures
                    (Series A), for a consideration of US$ 3.2 million. The
                    difference between the acquisition cost and the liability
                    value of the debentures acquired on the books, in the
                    amount of US$ 0.4 million, was recorded as a capital
                    reserve in the shareholders' equity section. During June
                    2003, all the above-mentioned debentures were sold for a
                    consideration of US$ 4.3 million.

               4.   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 US$ 1,270 thousand, with a premium of US$
                    11,331 thousand.

                    In the year of account, 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 US$ 3,974 thousand, with a
                    premium of US$ 35,581 thousand. Subsequent to the balance
                    sheet date and proximate to the date of authorization of
                    the financial statements, NIS 12,839 thousand par value of
                    debentures (Series A) were converted into 1,280 thousand
                    ordinary shares of NIS 1 par value.

               5.   As at the balance sheet date, 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.



                                    F-184
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


Note 16 - Other Long-Term Liabilities

         Consolidated

         Linkage terms and interest rates

                                      Weighted
                                 interest rate
                                 as of balance             December 31
                                    sheet date    ------------------------------
                                 -------------             2004             2003
                                             %    US$ thousands    US$ thousands
                                 -------------    -------------    -------------


          Liabilities linked
           to the US dollar                  2           9,195             400
          Liabilities linked
           to the Brazilian Real                             -           1,880
          Liabilities linked to
           another currency                4.5             142             190
                                                  -------------    -------------
                                                         9,337           2,470
                                                  =============    =============


          The liabilities are schedule for repayment in the years 2006 - 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 2008. 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-185
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


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%.

<TABLE>
         G.       Deferred taxes
<CAPTION>
                                                                 Consolidated                            Company
                                                       --------------------------------     --------------------------------
                                                                 December 31                          December 31
                                                       --------------------------------     --------------------------------
                                                                2004              2003              2004               2003
                                                       -------------      -------------     -------------      -------------
                                                       US$ thousands      US$ thousands     US$ thousands      US$ thousands
                                                       -------------      -------------     -------------      -------------
<S>                                                           <C>
         (1)      Movement

                  Balance at beginning
                   of year                                   33,522             30,289            (6,250)            (3,743)
                  Included in statement
                   of income                                   (163)             3,233              (749)            (2,507)
                  Newly consolidated                          3,958                  -                 -                  -
                                                      -------------      -------------     -------------      -------------

                  Balance at end of year                     37,317             33,522            (6,999)            (6,250)
                                                      =============      =============     =============      =============

                  Classified as:

                  Other receivables                         (17,037)           (10,256)             (325)            (5,155)
                  Long-term liabilities (in the
                   balances of the long-term
                   debt)                                     54,354             43,778            (6,674)            (1,095)
                                                      -------------      -------------     -------------      -------------

                                                             37,317             33,522            (6,999)            (6,250)
                                                      =============      =============     =============      =============
</TABLE>


                                    F-186
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


Note 17 - Taxes on Income (cont'd)

         G.       Deferred taxes (cont'd)
<TABLE>
         (2)      Composition
<CAPTION>
                                                                  Consolidated                            Company
                                                       --------------------------------      --------------------------------
                                                                 December 31                          December 31
                                                       --------------------------------      --------------------------------
                                                                2004              2003              2004               2003
                                                       -------------      -------------      -------------      -------------
                                                       US$ thousands      US$ thousands      US$ thousands      US$ thousands
                                                       -------------      -------------      -------------      -------------
                  Deferred taxes in respect of:
<S>                                                           <C>                <C>
                  Depreciable assets                          81,606             81,876                 -                  -
                  Carryforward tax losses                    (19,864)           (33,233)           (5,343)            (4,077)
                  Inventories                                (17,615)            (7,124)                -                  -
                  Employee severance
                   benefits, net                             (11,467)           (11,142)           (1,656)            (2,097)
                  Other temporary
                   differences                                   699              3,145                 -                (76)
                  Newly consolidated                           3,958                  -                 -                  -
                                                       -------------      -------------      -------------      -------------

                                                              37,317             33,522            (6,999)            (6,250)
                                                       =============      =============      =============      =============


                  In the consolidated balance sheet, deferred taxes are computed at rates ranging between
                  approximately 29% and 35% (Company - 29%).
</TABLE>


         H.       Composition of tax expense (benefit)

<TABLE>
         Consolidated
<CAPTION>

                                                                   For the year ended December 31
                                                           --------------------------------------------------
                                                                    2004              2003               2002
                                                           -------------     -------------      -------------
                                                           US$ thousands     US$ thousands      US$ thousands
                                                           -------------     -------------      -------------
         Taxes in respect of the reported period:
<S>                                                              <C>               <C>                <C>
         Current                                                 51,228            24,702             10,334
         Deferred                                                (3,034)            3,173              4,371
                                                                 48,194            27,875             14,705

         Taxes in respect of prior years:
          Current                                                 1,269             4,683             (4,793)
          Deferred                                                2,871                60              2,546
                                                                  4,140             4,743             (2,247)
                                                           -------------     -------------      -------------

                                                                 52,334            32,618             12,458
                                                           =============     =============      =============
</TABLE>


                                    F-187
<PAGE>

                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


Note 17 - Taxes on Income (cont'd)

         H.       Composition of tax expense (benefit) (cont'd)

          Company

                                   For the year ended December 31
                           --------------------------------------------------
                                    2004              2003               2002
                           -------------     -------------      -------------
                           US$ thousands     US$ thousands      US$ thousands
                           -------------     -------------      -------------

         Current                      2                29                  -
         Deferred                  (749)           (2,507)               214
                           -------------     -------------      -------------
                                   (747)           (2,478)               214
                           -------------     -------------      -------------


         I.       Theoretical tax

         Following is a reconciliation between the theoretical tax and the tax
         expense included in the statement of income:

<TABLE>
         Consolidated
<CAPTION>

                                                                    For the year ended December 31
                                                           --------------------------------------------------
                                                                    2004              2003               2002
                                                           -------------     -------------      -------------
                                                                     35%               36%               36%
                                                           -------------     -------------      -------------
                                                           US$ thousands     US$ thousands      US$ thousands
                                                           -------------     -------------      -------------
<S>                                                             <C>              <C>                <C>
         Tax expense computed at regular tax rate               76,608           49,030             26,266
         Tax benefit for approved enterprises                  (10,203)          (3,727)            (5,985)
         Benefit for plants in development areas                     -           (2,109)            (1,723)
         Difference between financial statement
          measurement of income and tax basis                    2,559           (4,868)             4,388
         Change in rate of deferred taxes                       (1,912)           2,384                  -
         Income taxable at other tax rates                     (20,732)         (14,490)            (9,672)
         Taxes in respect of previous years                      4,140            4,743             (2,247)
         Nondeductible expenses and other differences            1,874            1,655              1,431
                                                           -------------     -------------      -------------
                                                                52,334           32,618             12,458
                                                           =============     =============      =============


         Company

                                                                    For the year ended December 31
                                                           --------------------------------------------------
                                                                    2004              2003               2002
                                                           -------------     -------------      -------------
                                                                     35%               36%               36%
                                                           -------------     -------------      -------------
                                                           US$ thousands     US$ thousands      US$ thousands
                                                           -------------     -------------      -------------
         Tax expense computed at regular tax rate               57,673           36,107             21,705
         Difference between financial statement
           measurement of income and tax basis                     353              166                166
         Equity in earnings of investee companies, net         (57,192)         (37,446)           (21,486)
         Nondeductible expenses and other differences           (1,581)          (1,305)              (171)
                                                           -------------     -------------      -------------
                                                                  (747)          (2,478)               214
                                                           =============     =============      =============
</TABLE>



                                    F-188
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


Note 17 - Taxes on Income (cont'd)


         J.     Final assessments

         The Company, Makhteshim, Agan and Lycored have received final tax
         assessments up to and including the 2001 tax year. Luxembourg and
         Bio-Dar Ltd. have received final tax assessments up to and including
         1998. Other companies in Israel have not received tax assessments
         since their inception.

         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 US$ 66
         million.

         The Company has recorded a deferred tax asset with respect to the
         accrued losses, in the amount of US$ 19.9 million, based on
         Management's estimation that there is a high level of certainty that
         such losses will be utilized in the upcoming years.


         L.     Additional Information

         Regarding fiscal claims against Milenia - see Note 19D(3).



Note 18 - Employee Termination Benefits, Net

<TABLE>
         A.       Composition
<CAPTION>
                                                                   Consolidated                            Company
                                                       --------------------------------      --------------------------------
                                                                 December 31                          December 31
                                                       --------------------------------      --------------------------------
                                                                2004              2003              2004               2003
                                                       -------------      -------------      -------------      -------------
                                                       US$ thousands      US$ thousands      US$ thousands      US$ thousands
                                                       -------------      -------------      -------------      -------------
<S>                                                        <C>                <C>                <C>                <C>
         Accrued severance pay and
          retirement grants                                26,576             23,831             4,591              3,911
         Less - deposits in severance pay funds            15,957             13,763                 -                  -
                                                      -------------      -------------      -------------      -------------
                                                           10,619             10,068             4,591              3,911

         Early retirement pension                          13,248             12,399                 -                  -

         Accrual for unutilized sick leave                  2,842              2,307                 -                  -
                                                      -------------      -------------      -------------      -------------

                                                           26,709             24,774             4,591              3,911
                                                      =============      =============      =============      =============
</TABLE>


                                    F-189
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


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 Company Management, the above-mentioned law will
         have no effect on the Company's liabilities for early retirement in
         connection with its employees who left prior to reaching retirement
         age.


                                    F-190
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


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 US$ 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)      A subsidiary has a long-term supply contract with an
                  international company in the annual amount of US$ 17 million
                  for a five-year period (2001 - 2006). Based on the contracts,
                  a multi-national company participates in part of the
                  manufacturing costs.

         (4)      Regarding undertakings of the Company and its subsidiaries as
                  part of a securitization transaction - see Note 3(1).

         (5)      Regarding undertakings with interested parties - see Note
                  30A.

         B.       Contingent liabilities

         (1)      In accordance with the Law for the Encouragement of Capital
                  Investments, 1959, subsidiaries received grants from the
                  State of Israel in respect of investments made in fixed
                  assets as part of plant expansion projects authorized by the
                  Investment Center. Receipt of grants is conditional upon
                  fulfillment of the terms of the letter of approval which
                  include, among other things, exports at certain rates. If the
                  companies do not comply with the required terms, the grants
                  will have to be refunded, together with interest from the
                  date of their receipt. Management believes that the
                  subsidiaries are in compliance with the conditions for
                  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 US$ 6 million.


                                    F-191
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


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 US$ 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. Furthermore,
                  in accordance with legislative trends it is anticipated that
                  the Stamp Duty Law will be gradually annulled and that by
                  2008 it will be completely annulled.

                  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.

                  In the opinion of management of the Company, which is based
                  on the opinion of its legal counsel, the Company does not
                  stand before any material exposure in respect of any demand
                  arising from the Stamp Duty Law.



                                    F-192
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


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
                  experts, 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, 2004, 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, the Company 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 about 3 years. In the estimation of the
                  subsidiary's management, the aggregate construction cost will
                  be between US$ 30 million and US$ 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 which 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 said 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. 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 the waste treatment facilities of the
                  Council.


                                    F-193
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


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 December 29, 2004, a preliminary hearing was held with
                  respect to the petition and it was determined that the
                  hearing on the petition will be held on March 7, 2005.

                  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-194
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


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)      A claim has been submitted against Milenia on the grounds
                  that a certain process it uses is a protected trade secret,
                  which was copied from the plaintiff. Accordingly, Milenia is
                  demanded to indemnify the plaintiff for unfair competition at
                  an amount of approximately US$ 9 million (based on a
                  calculation of the amount of the material used). Furthermore,
                  the plaintiff demands that Milenia be fined US$ 25 per day,
                  in respect of the unlawful use of trade secrets.

                  In February 2004, Milenia and the plaintiff reached a
                  settlement with no indemnity to the parties, under which each
                  of the parties paid fees to their own attorneys. The total
                  cost to Milenia amounted to approximately US$ 0.2 million.

         (2)      In 1995, a claim was submitted against Milenia and a number
                  of other parties for a total amount of approximately US$ 36
                  million by a group which 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 US$ 2 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.


                                    F-195
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


Note 19 - Commitments and Contingent Liabilities (cont'd)

         D.       Claims against subsidiaries (cont'd)

         (3)      Administrative proceedings as well as civil and other fiscal
                  claims have been submitted against Milenia totaling
                  approximately US$ 48.5 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.

         (4)      A claim was filed against Agan in the District Labor Court,
                  for payment of approximately US$1 million, in respect of
                  severance pay. The plaintiff contends that he was a salaried
                  employee of Agan and that the payments made by Agan to a
                  company which he owned must be considered his determining
                  salary for purposes of payment of severance pay. Agan
                  submitted a statement of defense. In the estimation of Agan's
                  Management based on the opinion of its legal advisors, the
                  claim's chances are remote. No provision has been included in
                  the financial statements in respect of this claim.

         (5)      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 1999-2002, discharges of materials were
                  measured in the exhaust vents in Makhteshim's factory in
                  Ramat Hovav in forbidden concentrations which created strong
                  pollution. Makhteshim does not admit to the allegations
                  stated in the complaint. In the estimation of Makhteshim and
                  its legal advisors, in light of the early stage of the
                  proceedings, it is not possible to predict the results of the
                  complaint and/or the related exposure and, therefore, no
                  provision has been recorded in the books in respect thereof.

         (6)      A number of other claims have been filed against Agan, the
                  total amount of which is US$ 3.5 million, in respect of
                  damages which, according to the plaintiffs, were caused due
                  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.

         (7)      A number of other claims have been filed against Makhteshim,
                  the total amount of which is US$ 1.4 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.



                                    F-196
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


Note 19 - Commitments and Contingent Liabilities (cont'd)


         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 US$ 51 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 US$ 42 million.

         (3)      Makhteshim and Agan have guaranteed the liabilities to banks
                  of subsidiaries in the amount of US$ 15 million.

         (4)      Foreign suppliers and banks have provided credit lines in the
                  approximate amount of US$ 137 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, 2004, amounted to approximately US$ 91
                  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 US$ 98 million, of which approximately US$ 80
                  million was a commitment for indemnification of Milenia and
                  approximately US$ 18 million was a commitment for
                  indemnification of the Company and Milenia (December 31, 2003
                  - approximately US$ 85 million, of which approximately US$ 55
                  million was a commitment for indemnification of Milenia and
                  approximately US$ 30 million was a commitment for
                  indemnification of the Company and Milenia).



                                    F-197
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


Note 20 - Liens and Collaterals

         A. Following are details of collateralized liabilities to banks:

                                                                    December 31
                                                                           2004
                                                                  US$ thousands
                                                                  -------------

         Current liabilities                                                 -
                                                                  =============

         Long-term liabilities (including current maturities)           78,632
                                                                  =============



         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.

         -        A foreign subsidiary has deposited with banks, documents for
                  collection amounting to US$ 17 million and other foreign
                  subsidiary companies have registered charges on some of their
                  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.

                  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.


                                    F-198
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


Note 20 - Liens and Collaterals (cont'd)

         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
                         1.0.

                  -      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.

                  In the opinion of the management of the Company and it's
                  subsidiary, as at the balance sheet date the company and it's
                  subsidiary are in compliance with the aforementioned
                  financial ratios.



Note 21 - Shareholders' Equity

<TABLE>
         A.       Share capital
<CAPTION>
                                                                   December 31
                                                 --------------------------------------------------
                                                    2004-2003               2004               2003
                                                 -------------      ------------       ------------
                                                               Number of shares
                                                 --------------------------------------------------
                                                   Authorized              Issued and paid-up
                                                 -------------      -------------------------------
<S>                                               <C>                <C>                <C>

    Ordinary shares of NIS 1 par value            500,000,000        402,088,045        377,916,876
                                                 =============      ============       ============
</TABLE>


    All of the shares are registered for trading on the Tel Aviv Stock Exchange.


         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. In accordance with this plan, the said
                  employees will be allotted 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
                  US$ 1.882 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 to be issued to a trustee pursuant
                  to the plan. 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 after the
                  elapse of one year from the determining date and the balance
                  after the elapse of two years from the determining date.


                                    F-199
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


Note 21 - Shareholders' Equity (cont'd)

         B.       Employee stock options (cont'd)

                  The options of each portion can be exercised after the elapse
                  of one year from the date of entitlement, and they expire
                  after the elapse of five years from the date of the beginning
                  of the exercise period of each portion.

                  Pursuant to the option plan, at the time of exercise of the
                  options the Company will issue shares in a number which
                  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 will be 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 2,551,247 of the Company's ordinary shares of
                  NIS 1 par value each.

                  In 2004, 4,159,719 options were exercised by Company
                  employees for 2,505,938 of the Company's ordinary shares of
                  NIS 1 par value each.

                  Subsequent to the balance sheet date and proximate to the
                  date of authorization of the financial statements,
                  approximately 262 thousand options were exercised by Company
                  employees for 171 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 -
                  "the Plan"), 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 the Plan, 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 the Plan, Company employees who were
                  issued options under the Company's prior employee
                  compensation plan, which was adopted on April 23, 2001
                  (hereinafter - "the Prior Plan") were offered to convert the
                  options issued to them under the Prior Plan into 12,180,000
                  options under the Plan. The offer was not accepted by any of
                  the Company's employees.


                                    F-200
<PAGE>



                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


Note 21 - Shareholders' Equity (cont'd)

         B.       Employee stock options (cont'd)

         2.       (cont'd)

                  The right to exercise the options, with respect to offerees
                  who are not included with those who received options under
                  the Prior Plan and are converting them to options issued
                  under the Plan, 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 the framework of the Plan, the former CEO of the Company
                  was entitled to convert the options issued to him pursuant to
                  the Prior Plan into 980,000 options pursuant to the Plan,
                  which are exercisable for up to 980,000 of the Company's
                  ordinary shares of NIS 1 par value each and which constitute
                  5.8% of the total options issued in the framework of the
                  Plan. The Company's former CEO did not convert the options.

                  In addition, in the framework of the Plan, 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.

                  In addition, in the framework of the Plan, the Company's
                  directors were issued a total of 1,800,000 options which
                  constitute 10% of the total options issued in the framework
                  of the Plan.

                  In 2004, 1,420,000 options were distributed to Company
                  directors and employees.

                  In 2004, 105,663 options were exercised by Company employees
                  for 64,746 of the Company's ordinary shares of NIS 1 par
                  value.

                  Subsequent to the balance sheet date and proximate to the
                  date of authorization of the financial statements, Company
                  employees exercised 8,000 options for 5,000 of the Company's
                  ordinary shares of NIS 1 par value.

         3.       Subsequent to balance sheet date, on March 8, 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. Pursuant to the plan they will be issued up
                  to 20,000,000 options exercisable into up to 20,000,000
                  ordinary shares of the Company of a par value of NIS 1 each,
                  of which up to 3,000,000 options will be issued to the
                  Company's CEO and directors.

                  Regardless of the aforementioned, the assumption regarding
                  the full exercise of the options is purely theoretical, since
                  the offerees that exercise the options will not actually be
                  issued the full amount of the shares deriving from them, but
                  only 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.

                  The options are offered to the offerees at no cost. The
                  options will be issued to the offerees in three equal
                  portions, with the vesting period of the first portion of the
                  plan beginning after the third and last vesting period of the
                  employee stock option plan from 2003 (meaning after April 14,
                  2006).


                                    F-201
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


Note 21 - Shareholders' Equity (cont'd)

         B.       Employee stock options (cont'd)

         3.       (cont'd)

                  The exercise price is NIS 25.10, 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 8, 2005).

                  The options of the plan will be issued to the offerees
                  according to the provisions of Section 102 of the Income Tax
                  Ordinance under the capital track.

                  The issuance under this plan is subject to the publication of
                  all the reports required by the Securities Law - 1968 and its
                  related regulations, the Company's General Meeting approving
                  the issuance of the options to directors, the Income Tax
                  Commission approving the issuance being executed according to
                  the provisions of Section 102 under the capital track and the
                  Stock Exchange approving registration for trading of the
                  shares issued upon exercise of the options.



         C.       Acquisition of Company shares by a subsidiary

         As at December 31, 2003, a subsidiary holds 7,017,152 of the Company's
         shares.

         In March 2004, a subsidiary transferred to a third party, in an
         off-market transaction, 7 million shares of the Company which it held.
         Pursuant to the agreement, the consideration will be paid by the end
         of one year from the transfer date, whether in cash, linked to the
         share price at the same date on the stock market, or in Company shares
         plus 0.5% of price of the shares on the stock market. Since the
         consideration has not yet been received in cash, issuance of the
         shares in respect of the shares transferred has not yet been recorded.

         During the second quarter, 1,908 thousand of the aforementioned shares
         were returned, for purposes of payment of the consideration in respect
         of acquisition of a group of companies in the United States, as stated
         in Note 7D(1)a above.

         As at the balance sheet date, the subsidiary holds 5,108,755 of the
         Company's shares, which constitute 1.3% of the Company total issued
         and paid-up share capital.

         Regarding acquisition of Mabeno, subsequent to the balance sheet date,
         in exchange for transfer of shares of an investee company by a
         subsidiary - see Note 7D(2).


                                    F-202
<PAGE>



                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


Note 21 - Shareholders' Equity (cont'd)

         D.       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 net annual
         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 the 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.

         In March 2004, the Company's Board of Directors decided to distribute
         a dividend in respect of the earnings of 2003, in the amount of US$
         7,200 thousand.

         During 2004, the Company's Board of Directors decided to make three
         interim dividend distributions, in the total amount of US$ 36,900
         thousand.

         Subsequent to the balance sheet date, the Company's Board of Directors
         decided to distribute a dividend in the amount of US$ 12,700 thousand.


         E. 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 15A.

         In the year of account, 4,018,625 options (Series 1) were converted
         into 4,018,625 ordinary shares of NIS 1 par value, based on a
         conversion rate of 10.03 per share. The total share capital issued as
         a result of the conversion was US$ 913 thousand, at a premium of US$
         9,637 thousand.

         Subsequent to the balance sheet date and proximate to the date of
         authorization of the financial statements, 909 thousand options were
         converted into 909 thousand ordinary shares of NIS 1 par value.

         Regarding conversion of the debentures - see Note 15B(4).



                                    F-203
<PAGE>


                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements as at December 31, 2004
--------------------------------------------------------------------------------


Note 22 - Linkage Terms of Monetary Balances

<TABLE>
Consolidated
<CAPTION>

                                 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, 2004
Assets:
Cash and cash equivalents             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         442,737
Long-term investments,
 loans and other receivables           1,710             328          15,715           1,239           2,353          21,345
                                -------------   -------------   -------------   -------------    -------------   -------------
                                     139,099          90,505         155,964          63,660          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
                                =============   =============   =============   =============    =============   =============
December 31, 2003
Assets:
Cash and cash equivalents             27,662           8,392           4,457           6,875           2,463          49,849
Short-term investments                 1,034              39               -              27               -           1,100
Trade and other receivables           74,126          98,078          91,149          48,061          28,500         339,914
Long-term investments,
 loans and other receivables           5,485             333           7,699           2,517             435          16,469
                                -------------   -------------   -------------   -------------    -------------   -------------
                                     108,307         106,842         103,305          57,480          31,398         407,332
                                =============   =============   =============   =============    =============   =============
Liabilities:
Credit from banks                     52,883          19,035           2,408           4,733             543          79,602
Trade and other payables              83,708         147,209          40,562          32,606          81,694         385,779
Proposed dividend                      7,000               -               -               -               -           7,000
Long-term bank loans and
 other (including current
 maturities)                         313,548           9,586           1,880           7,271           2,633         334,918
Liability for employee
 severance benefits, net                 246             134             324              24          24,046          24,774
                                -------------   -------------   -------------   -------------    -------------   -------------
                                     457,385         175,964          45,174          44,634         108,916         832,073
                                =============   =============   =============   =============    =============   =============
</TABLE>


With respect to futures transactions in foreign currency, see Note 32.


                                    F-204
<PAGE>

<TABLE>
<CAPTION>

                                                                                              Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------


Note 23 - Revenues

         Consolidated
                                                                                   For the year ended December 31
                                                                           --------------------------------------------------
                                                                                    2004              2003               2002
                                                                           -------------     -------------      -------------
                                                                           US$ thousands     US$ thousands      US$ thousands
                                                                           -------------     -------------      -------------
         Foreign sales -
<S>                                                                           <C>               <C>                  <C>
           Industrial                                                         1,351,450         1,001,435            732,085
           Commercial                                                            85,007            89,303             77,628
                                                                           -------------     -------------      -------------
                                                                              1,436,457         1,090,738            809,713
                                                                           -------------     -------------      -------------
         Domestic sales -
           Industrial                                                            47,461            40,268             34,232
           Commercial                                                            55,784            46,249             46,918
                                                                           -------------     -------------      -------------
                                                                                103,245            86,517             81,150
                                                                           -------------     -------------      -------------

                                                                              1,539,702         1,177,255            890,863
                                                                           =============     =============      =============

         Foreign sales by geographic area:
         Latin America                                                          428,638           308,628            248,756
         Europe                                                                 649,859           525,851            350,430
         North America                                                          198,035           142,280            117,450
         Far East                                                                55,467            41,398             37,931
         Africa and Australia                                                   104,458            72,581             55,146
                                                                           -------------     -------------      -------------
                                                                              1,436,457         1,090,738            809,713
                                                                            =============     =============      =============



Note 24 - Cost of Sales

         Consolidated
                                                                                   For the year ended December 31
                                                                           --------------------------------------------------
                                                                                    2004              2003               2002
                                                                           -------------     -------------      -------------
                                                                           US$ thousands     US$ thousands      US$ thousands
                                                                           -------------     -------------      -------------
         Industrial:
         Materials                                                              674,675           443,565            363,144
         Labor                                                                   71,534            63,606             59,932
         Subcontractors                                                           5,822             6,286              9,050
         Other manufacturing expenses                                           111,624            83,611             62,548
         Depreciation                                                            25,891            24,571             22,864
                                                                           -------------     -------------      -------------
                                                                                889,546           621,639            517,538

         Less - expenses capitalized to fixed assets (mainly
          engineering salaries)                                                     848               958                988
         Change in work in progress and finished
         products inventories                                                   (43,246)           (7,528)           (52,440)
                                                                           -------------     -------------      -------------
                                                                                845,452           613,153            464,110
         Commercial:
         Cost of merchandise sold                                                98,456           117,152            100,653
                                                                           -------------     -------------      -------------

                                                                                943,908           730,305            564,763
                                                                           =============     =============      =============
</TABLE>


                                    F-205
<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
                                                                           --------------------------------------------------
                                                                                    2004              2003               2002
                                                                           -------------     -------------      -------------
                                                                           US$ thousands     US$ thousands      US$ thousands
                                                                           -------------     -------------      -------------
<S>                                                                              <C>                <C>                <C>

         Payroll and related expenses                                            10,508             9,868              9,633
         Materials                                                                  267             1,210                931
         Other expenses                                                           9,758             6,738              5,601
                                                                                 20,533            17,816             16,165
         Less -
         Government participation in R&D expenses                                 1,053               996                990
                                                                           -------------     -------------      -------------
                                                                                 19,480            16,820             15,175
                                                                           =============     =============      =============



Note 26 - Selling and Marketing Expenses

         Consolidated
                                                                                   For the year ended December 31
                                                                           --------------------------------------------------
                                                                                    2004              2003               2002
                                                                           -------------     -------------      -------------
                                                                           US$ thousands     US$ thousands      US$ thousands
                                                                           -------------     -------------      -------------


         Payroll and related expenses                                            52,460            37,678             30,547
         Commissions and delivery costs                                          70,480            51,268             42,055
         Advertising                                                             14,049             9,957              5,043
         Depreciation and amortization                                           24,685            20,916             15,806
         Registration                                                            11,504             7,568              6,170
         Professional services                                                    6,263             6,069              3,315
         Insurance to the Chief Scientist                                         6,474             5,746              3,688
         Royalties                                                                4,758             2,802              2,483
         Other                                                                   29,539            21,832             19,879
                                                                           -------------     -------------      -------------
                                                                                220,212           163,836            128,986
                                                                           =============     =============      =============



Note 27 - General and Administrative Expenses

         Consolidated
                                                                                    For the year ended December 31
                                                                           --------------------------------------------------
                                                                                    2004              2003               2002
                                                                           -------------     -------------      -------------
                                                                           US$ thousands     US$ thousands      US$ thousands
                                                                           -------------     -------------      -------------


         Payroll and related expenses                                           24,743             22,549            17,687
         Administrative services and directors' fees to Koor                     2,557              2,676             2,548
         Depreciation and amortization                                           3,359              3,446             3,577
         Bad and doubtful accounts                                              11,481              7,752             2,655
         Professional services                                                  12,058              6,756             6,770
         Insurance                                                               1,925                950             1,262
         Other                                                                  10,792              9,770             8,304
                                                                           -------------     -------------      -------------
                                                                                66,915             53,899            42,803
                                                                           =============     =============      =============
</TABLE>


                                    F-206
<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
                                                                           --------------------------------------------------
                                                                                    2004              2003               2002
                                                                           -------------     -------------      -------------
                                                                           US$ thousands     US$ thousands      US$ thousands
                                                                           -------------     -------------      -------------
<S>                                                                             <C>                <C>                <C>

         Payroll and related expenses                                           6,073              7,401              2,713
         Administrative services and directors' fees to Koor                    2,557              2,676              2,548
         Depreciation and amortization                                            269                276                234
         Professional services                                                  3,607              1,234              2,112
         Other                                                                  2,865              2,340              1,385
                                                                          -------------     -------------      -------------

                                                                               15,371             13,927              8,992
                                                                          =============     =============      =============


Note 28 - Financing Expenses, Net

         Consolidated
                                                                                    For the year ended December 31
                                                                           --------------------------------------------------
                                                                                    2004              2003               2002
                                                                           -------------     -------------      -------------
                                                                           US$ thousands     US$ thousands      US$ thousands
                                                                           -------------     -------------      -------------


         In respect of long- term liabilities, net                              17,885             17,604            13,804
         In respect of short-  term liabilities and credit, net                  9,686             20,352            23,417

         Less - Interest capitalized to fixed assets                                 -                  -             2,815
                                                                          -------------     -------------      -------------

         Financing expenses, net                                                27,571             37,956            34,406
                                                                          =============     =============      =============



         Company
                                                                                   For the year ended December 31
                                                                           --------------------------------------------------
                                                                                    2004              2003               2002
                                                                           -------------     -------------      -------------
                                                                           US$ thousands     US$ thousands      US$ thousands
                                                                           -------------     -------------      -------------


         Expenses: (*)
         In respect of long-term liabilities                                     5,193              3,815             4,074
         In respect of short-term liabilities and credit                             -                936             1,217
                                                                                 5,193              4,751             5,291
         Less:
         Financing income                                                       10,229              5,349             7,017
                                                                          -------------     -------------      -------------

         Financing income, net                                                   5,036                598             1,726
                                                                          =============     =============      =============
</TABLE>


         *   See Note 32C.


                                    F-207
<PAGE>


<TABLE>
<CAPTION>

                                                                                              Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements
------------------------------------------------------------------------------------------------------------------------------


Note 29 - Other Expenses, Net

         Consolidated

                                                                                    For the year ended December 31
                                                                           --------------------------------------------------
                                                                                    2004              2003               2002
                                                                           -------------     -------------      -------------
                                                                           US$ thousands     US$ thousands      US$ thousands
                                                                           -------------     -------------      -------------
<S>                                                                               <C>               <C>                 <C>
         Expenses with respect to devaluation of the currency
          and bad debts in Argentina (Note 32C)                                      -                 -             10,886
         Expenses in respect of early retirement of employees
          and payment of early pension benefits                                  4,802             6,721              4,055
         Expenses relating to sale of trade receivables
          as part of securitization transaction                                  1,825                 -                  -
         Loss on sale of trade receivables as part
          securitization transaction                                             4,374             3,850              4,366
         Loss on sale of fixed assets and other, net                             1,099               858                331
         Provision for loss with respect to options granted to
          employees of subsidiaries                                               2,090               330                  -
         Amortization of goodwill in investee companies                          14,396             9,826              8,179
         Amortization of goodwill on acquisition of products                     10,164            11,782              4,557
         Write-off of fixed and other assets                                      2,555             2,667                  -
         Sundry expenses (income), net                                            1,430             2,211               (604)
                                                                           -------------     -------------      -------------

                                                                                 42,735            38,245             31,770
                                                                           =============     =============      =============
</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). It is impracticable to
                  identify the abovementioned related parties and to separately
                  record these transactions in the accounting records.
                  Therefore, 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.

         (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 (see Note 27).

                  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(10), below.



                                    F-208
<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% of the annual
                  revenues. In 2003, this agreement was revised for management
                  fees at the rate of 1.8% of the annual revenues. In 2004,
                  Makhteshim and Agan paid management fees to the Company
                  amounting to US$ 13.5 million (2003 - US$ 10.0 million, 2002
                  - US$ 9.2 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, provided that up to this time he complies with
                  his obligation as stated.

                  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 decided to
                  appoint 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.

                  In a case of transfer of control of the Company up to July 1,
                  2005, where as a result the CEO's employment is discontinued,
                  in circumstances under which he is entitled to severance
                  benefits pursuant to law, the CEO is entitled to an annual
                  salary, including the accompanying benefits.

         (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, 2004, 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, 2004, 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.

                                    F-209
<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. Set forth below are details of the
                  transactions:

<TABLE>
         Consolidated
<CAPTION>
                                                                             For the year ended December 31
                                                                    --------------------------------------------------
                                                                             2004              2003               2002
                                                                    -------------     -------------      -------------
                                                                    US$ thousands     US$ thousands      US$ thousands
                                                                    -------------     -------------      -------------
<S>                                                                      <C>                 <C>                <C>

         Management services and directors fees to Koor                  2,557               2,676              2,548
                                                                    =============     =============      =============

         Other related parties:
         Revenues -                                                      5,638               7,542              5,626
                                                                    =============     =============      =============
         Expenses -
          Selling                                                        1,863               1,593              1,439
                                                                    =============     =============      =============
          Financing                                                          -                   -                 29
                                                                    =============     =============      =============



         B.       Benefits to interested parties
                                                                             For the year ended December 31
                                                                    --------------------------------------------------
                                                                             2004              2003               2002
                                                                    -------------     -------------      -------------
                                                                    US$ thousands     US$ thousands      US$ thousands
                                                                    -------------     -------------      -------------

         Fees to interested parties employed by the Group (*)             1,147             *3,656             1,179
                                                                    =============     =============      =============
         Number of interested parties                                       **4                 5                  4
                                                                    =============     =============      =============
         Fees to directors appointed by Koor Industries Ltd.                 57               176                 48
                                                                    =============     =============      =============
         Number of directors                                                  4                 5                  4
                                                                    =============     =============      =============
         Fees to other directors                                             75                57                 58
                                                                    =============     =============      =============
         Number of directors                                                  6                 5                  5
                                                                    =============     =============      =============
</TABLE>


         (*)      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 A7 and A8 above.




                                    F-210
<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>
         Consolidated
         ------------
<CAPTION>
                                                                                  December 31       December 31
                                                                                         2004              2003
                                                                                -------------     -------------
                                                                                US$ thousands     US$ thousands
                                                                                -------------     -------------
<S>                                                                                    <C>              <C>
         Trade receivables (1) -
          Related parties                                                              3,403            4,062
                                                                                =============     =============

         Trade payables -
          Related parties                                                                445              410
                                                                                =============     =============

         Other payables
          Koor Industries Ltd.                                                           748              753
                                                                                =============     =============

         Severance pay fund administered by related companies                          2,331            2,126
                                                                                =============     =============

         (1)      Highest balance during the year - trade receivables                  3,403            4,062
                                                                                =============     =============
</TABLE>


         Bank Hapoalim Ltd. and Bank Leumi Ltd. are related parties of the
         Company due to their holdings in the Company through mutual funds and
         provident funds which they manage. Financing transactions with these
         parties are conducted in the ordinary course of business under normal
         commercial terms.



Note 31 - Earnings per Share

<TABLE>
         Share capital and net income used as the basis for the computation of
         basic earnings per share are as follows:
<CAPTION>
                                                                                        For the year ended December 31
                                                                             ------------------------------------------------
                                                                                   2004               2003               2002
                                                                             ----------         ----------        -----------
<S>                                                                             <C>               <C>                <C>

         Weighted-average par value of share capital
          (in thousands)                                                        432,776           410,373            361,815
                                                                             ==========         ==========        ===========

         Net income used for the computation
          (US$ thousands)                                                       166,900           105,809             60,078
                                                                             ==========         ==========        ===========

         Interest rates used in computing earnings per share
          (linked to the US dollar)                                                2.5%               1.0%               2.5%
                                                                             ==========         ==========        ===========
</TABLE>



                                    F-211
<PAGE>



                                                Makhteshim-Agan Industries Ltd.

Notes to the Financial Statements
--------------------------------------------------------------------------------



Note 31 - Earnings per Share (cont'd)

<TABLE>
         Share capital and net income used as the basis for the computation of
         fully diluted earnings per share are as follows:
<CAPTION>

                                                                                        For the year ended December 31
                                                                             ------------------------------------------------
                                                                                   2004               2003               2002
                                                                             ----------         ----------        -----------
<S>                                                                             <C>               <C>                <C>
         Weighted-average par value of share capital
          (in thousands)                                                        457,548           427,772            433,215
                                                                             ==========         ==========        ===========

         Net income used in computing earnings per share
          (US$ thousands)                                                       168,817           106,118             64,112
                                                                             ==========         ==========        ===========

         Interest rates used in computing earnings per share
          (linked to the US dollar)                                                2.5%              1.0%                2.5%
                                                                             ==========         ==========        ===========
</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.

         Subsidiaries execute swap transactions in order to reduce the exposure
         to exchange rate fluctuations. In 2004 a subsidiary entered into
         transactions with banks for swapping dollar liabilities (loans and
         supplier credit) amounting to a principal of $ 60 million with
         liabilities in Brazilian reals at a variable interest rate of a
         weighted average of 6%. The transactions will expire in 2005.

         In 2004 another subsidiary and a bank entered into transactions
         swapping a long-term loan denominated in Colombian pesos with a
         variable interest of 7.7% amounting to a principal of 13 million pesos
         with a dollar loan bearing variable interest of the Libor rate minus
         0.1%. The transactions expire in semi-annual amounts until the end of
         2006.


                                    F-212
<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 at the balance sheet date, 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:

<TABLE>
<CAPTION>

                                                                                        Foreign-          Foreign-
                                                                                        currency          currency
                                                                      Futures            options           options
                                                                 transactions          purchased              sold
                                                                 ------------          ---------          --------

<S>                                                                       <C>                <C>              <C>
         Acquisition of dollars in exchange for:
         Shekels                                                          6.0                4.0              21.5
         Pounds sterling                                                  6.3               27.5               7.9
         Euro                                                               -              236.3              14.0
         Brazilian reals                                                  3.5               10.0              10.0
         South African rands                                              6.2                3.1                 -
         Japanese yen                                                     2.3                2.4               1.3
         Australian dollars                                               2.0               17.6                 -
         Swiss francs                                                       -                  -               6.9
         Polish zloty                                                     6.5               11.5               1.0
         Korean Yuan                                                        -                  -              40.0
         Swedish krona                                                      -                  -               3.0
                                                                 -------------         ---------           --------
                                                                         32.8              312.4             105.6
                                                                 =============         =========           ========


                                                                                        Foreign-          Foreign-
                                                                                        currency          currency
                                                                      Futures            options           options
                                                                 transactions          purchased              sold
                                                                 ------------          ---------          --------

         Sale of dollars in exchange for:
         Shekels                                                            -               26.5              20.5
         Pounds sterling                                                    -                2.0              23.6
         Euro                                                             6.6               32.1             269.6
         Swedish krona                                                      -                3.0               1.5
         South African rands                                                -                  -               3.1
         Japanese yen                                                       -                1.4               2.5
         Australian dollars                                                 -                  -              16.6
         Swiss francs                                                       -                7.0               3.6
         Polish zloty                                                       -                  -              11.5
         Korean Yuan                                                        -               40.0                 -
                                                                 -------------         ---------           --------
                                                                          6.6              112.0             352.5
                                                                 =============         =========           ========
</TABLE>


                                    F-213
<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. 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. Commencing from July 2004, the Company
         discontinued the said insurance because of it not being worthwhile.

         Subsequent to balance sheet date, a subsidiary in Brazil purchased a
         credit insurance policy which insures deliveries made in Brazil as of
         January 1, 2005. The indemnity of the insurer is limited to 85% of
         the debt per event in respect of the insured customers. The total
         amount of insurance is anticipated to amount to an overall amount of
         US$ 20 million per year.

         Economic Crisis in Argentina
         ----------------------------

         A serious deterioration in the political and economic situation in
         Argentina began in December 2001, and a situation of paralysis of the
         political and economic systems in the country has developed, together
         with almost complete uncertainty as to the future, followed by a
         temporary discontinuation of foreign currency trading. In January
         2002, the Congress empowered the President to execute a devaluation
         of the Argentine Peso as against the dollar (to which the Peso was
         linked under the law for a period of about ten years). Following
         approval by Congress, the Argentine Government declared a devaluation
         of 29% (namely, Peso 1.4 for US$ 1).

         During February 2002, the law was changed in Argentina providing for
         total flexibility in the rate of exchange, and that the exchange rate
         of 1.4 to the dollar applying to importers and exporters no longer
         exists. Foreign currency trading was resumed on January 11, 2002, and
         the exchange rate was fixed at Peso 1.7 = US$ 1. This rate is the
         applicable rate at December 31, 2001. As a result of the devaluation,
         the assets of the subsidiary in Argentina (mainly trade and other
         receivables) were eroded by US$ 15 million. Furthermore, in view of
         the economic and political situation in the country in 2001, the
         subsidiary in Argentina recorded a one-time write-off of US$ 8
         million, mainly in respect of bad debts.

         In 2002, the severe economic crisis in Argentina continued. The Peso
         was devalued by additional 98% (from the rate of US$ 1 = Peso 1.7, at
         December 31, 2001, to US$ 1 = Peso 3.37, at December 31, 2002).

         In March 2002, the Argentine government issued Regulation 10/02 to
         the Conversion Law, pursuant to which trade receivables resulting
         from the sale of agricultural inputs, are to be paid on the basis of
         the same exchange rate applying to the consideration received from
         the export sale of the agricultural products in respect of which
         those inputs were used.




                                    F-214
<PAGE>


                                               Makhteshim-Agan Industries Ltd.


Notes to the Financial Statements
-------------------------------------------------------------------------------


Note 32 - Financial Instruments and Risk Management (cont'd)

         C.       Credit risks (cont'd)

         In July 2002, the Argentine government issued Regulations 143/02 and
         24/02, which cancel Regulation 10/02 and which provide the various
         rates for linking customer debt to the dollar in such a manner that
         trade receivables resulting from the sale of agricultural inputs
         denominated in dollars, are to be paid on the basis of the dollar
         exchange in effect on the date of payment, less a discount at rates
         between 25%-60%, in accordance with those products which used the
         agricultural inputs as detailed in these Regulations.

         Due to the devaluation and the continuing economic crisis in
         Argentina, and in light of the accumulated experience regarding
         application of Regulations 143/02 and 24/02, in 2002, the subsidiary
         included an additional provision, in the amount of US$ 10.8 million,
         with respect to bad debts and erosion of its assets in Argentina.

         In the estimation Company Management, after the additional
         write-downs made in 2001 and 2002, no further material effect is
         expected on the results of operations and the financial position of
         the subsidiary in Argentina.

         The Company and the subsidiaries are guarantors for the subsidiary's
         liabilities to banks in Argentina, in the aggregate amount of
         approximately US$ 10 million.


         D.       Currency risks

         As at December 31, 2004, monetary assets in excess of monetary
         liabilities in Brazilian reals amounted to approximately US$ 90
         million, monetary assets in Israeli shekels in excess of monetary
         liabilities in Israeli shekels amounted to approximately US$ 75
         million, and monetary liabilities in excess of monetary assets in
         Euro amounted to approximately US$ 78.

         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-215
<PAGE>


                                               Makhteshim-Agan Industries Ltd.


Notes to the Financial Statements
-------------------------------------------------------------------------------


Note 33 - Segment Information

         A.       Geographical segments according to location of assets

         For the year ended December 31, 2004

<TABLE>
<CAPTION>

                                             Israel      Latin America           Europe*       Adjustments       Consolidated
                                      US$ thousands      US$ thousands     US$ thousands     US$ thousands      US$ thousands
                                      -------------      -------------     -------------     -------------      -------------

<S>                                        <C>                <C>               <C>          <C>                  <C>

         Income
         Income from
          external sources                 937,769            337,123           264,810                 -          1,539,702
         Inter-segment
          income                            95,558             13,084            25,722          (134,364)                 -
                                       ------------       -----------       ------------     -------------        -----------
         Total income                    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
                                       ===========        ===========       ===========      ============         ===========

         *    Mainly products manufactured by non-Group companies.

         **   Includes amortization of goodwill on the acquisition of products and amortization of goodwill and other
              assets arising on the acquisition of subsidiaries.
</TABLE>



                                    F-216
<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>
         For the year ended December 31, 2003
<CAPTION>

                                             Israel      Latin America           Europe*       Adjustments       Consolidated
                                      US$ thousands      US$ thousands     US$ thousands     US$ thousands      US$ thousands
                                      -------------      -------------     -------------     -------------      -------------
<S>                                        <C>                <C>               <C>               <C>              <C>
         Income
         Income from
          external sources                 684,619            246,757           245,879                 -          1,177,255
         Inter-segment
          income                            57,431             18,360                 -           (75,791)                 -
                                       ------------       -----------       ------------     -------------        -----------
         Total income                      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
                                       ===========        ===========       ===========      ============         ===========

         *    Mainly products manufactured by non-Group companies.

         **   Includes amortization of goodwill on the acquisition of products and amortization of goodwill and other
              assets arising on the acquisition of subsidiaries.

</TABLE>


                                    F-217
<PAGE>


                                               Makhteshim-Agan Industries Ltd.


Notes to the Financial Statements
-------------------------------------------------------------------------------



Note 33 - Segment Information

         A.       Geographical segments according to location of assets

<TABLE>
         For the year ended December 31, 2002:
<CAPTION>

                                             Israel      Latin America             Other       Adjustments       Consolidated
                                      US$ thousands      US$ thousands     US$ thousands     US$ thousands      US$ thousands
                                      -------------      -------------     -------------     -------------      -------------
<S>                                        <C>                <C>                <C>         <C>                   <C>

         Income
         Income from
          external sources                 616,470            196,804            77,589                 -            890,863
         Inter-segment
          income                            43,500              7,820                 -           (51,320)                 -
                                       ------------       -----------       ------------     -------------        -----------
         Total income                      659,970            204,624            77,589           (51,320)           890,863
                                       ===========        ===========       ===========      ============         ===========

         Segment results*                   98,302             25,026             3,750              (678)           126,400
                                       ===========        ===========       ===========      ============         ===========

         Additional
          information
         Assets utilized by
          the segment                    1,055,519            323,230           244,807                 -          1,623,556
                                       ===========        ===========       ===========      ============         ===========

         Liabilities of
          the segment                      590,604            213,214           206,175                 -          1,009,993
                                       ===========        ===========       ===========      ============         ===========

         Capital
          investments                      278,215             12,174             1,270                 -            291,659
                                       ===========        ===========       ===========      ============         ===========

         Depreciation and
          amortization                      46,048              9,309             2,748                 -             58,105
                                       ===========        ===========       ===========      ============         ===========


         *  Includes amortization of goodwill on the acquisition of products and amortization of goodwill and other assets
            arising on the acquisition of subsidiaries.

         - Regarding the breakdown of sales based on geographic area - see Note 23.

</TABLE>


                                    F-218
<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
                                                                           ---------------------------------------------------
                                                                                    2004              2003               2002
                                                                           -------------     -------------      --------------
                                                                           US$ thousands     US$ thousands      US$ thousands
                                                                           -------------     -------------      --------------

<S>                                                                           <C>               <C>                  <C>
         Sales by products

         Plant protection products                                            1,357,913         1,034,702            775,563

         Others (non-plant protection products)                                 181,789           142,553            115,300
                                                                           ------------       -----------        ------------

                                                                              1,539,702         1,177,255            890,863
                                                                           ============       ===========        ============

</TABLE>

<TABLE>
<CAPTION>

                                                                       December 31, 2004                    December 31, 2003
                                                         -------------------------------     --------------------------------
                                                               Assets                               Assets
                                                          utilized by                          utilized by
                                                                  the            Capital               the            Capital
                                                               sector        investments            sector        investments
                                                        -------------      -------------     -------------      -------------
                                                        US$ thousands      US$ thousands     US$ thousands      US$ thousands
                                                        -------------      -------------     -------------      -------------

<S>                                                         <C>                 <C>             <C>                   <C>

         Segment assets and
          capital investments

         Plant protection products                          1,722,458           133,188         1,438,007             53,680
         Others (non-plant protection
          products)                                           212,109            22,297           223,358              9,621
                                                         ------------       -----------       -----------       ------------

                                                            1,934,567           155,485         1,661,365             63,301
                                                         ============       ===========       ===========       ============

</TABLE>


                                    F-219
<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
         differs in certain material 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.

         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:

                  Deferred taxes should be provided 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-220
<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 (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 no 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 balances 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, where in the first year of
         implementation the impairment test was on January 1, 2002.



                                    F-221
<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 (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 t 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
         fair value of a reporting unit exceeds its carrying amount, including
         goodwill. If the fair value of a reporting unit exceeds its carrying
         amount, goodwill of the reporting unit is considered not impaired,
         thus the second step of the impairment test is unnecessary. 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-222
<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 (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 deduction 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 would be presented as other long-term assets and
         the amount of the liability would be 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 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-223
<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 (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 dilutive potential effect of
         ordinary share options 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-224
<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 (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-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 (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
                                                                             -----------------------------------------------
                                                                                2004              2003              2002
                                                                                              US$ thousands
                                                                             -----------------------------------------------

<S>                                                                           <C>                <C>                <C>

                  Net income as reported, according to
                   Israeli GAAP                                               165,527            102,774            60,078
                                                                             ---------          ---------          ---------

                  Deferred taxes (A1)                                         (15,861)           (21,171)           (2,069)
                  Share-based payments to employees (A2)                      (26,185)           (28,004)                -
                  Financial derivatives (A3)                                  (10,374)            (2,030)           (4,573)
                  Amortization of goodwill (A4)                                10,569              5,277             8,178
                  Stock option issues by investee companies (A5)                1,760                330                 -
                  Capitalization of licensing costs (A6)                       (5,325)            (3,835)          (11,314)
                                                                             ---------          ---------          ---------
                                                                              120,111             53,341            50,300
                  Income tax in respect of the above differences                3,736              2,790             3,389
                  Minority interest in respect of the
                   above differences                                             (109)               (60)             (130)
                                                                             ---------          ---------          ---------
                  Net income according to US GAAP                             123,738             56,071            53,559
                                                                             =========          =========          =========

</TABLE>


                  b) Earnings per ordinary share

<TABLE>
<CAPTION>

                                                                                         Year ended December 31
                                                                             -----------------------------------------------
                                                                                2004              2003              2002
                                                                                              US$ thousands
                                                                             -----------------------------------------------

<S>                                                                                 <C>              <C>               <C>

                 Basic earnings per ordinary share:
                 As reported according to Israeli GAAP                              0.39             0.26              0.17
                                                                              ==========       ==========          =========
                 As reported according to US GAAP                                   0.32             0.15              0.15
                                                                              ==========       ==========          =========
                 Weighted average of number of shares and
                  share equivalents according to US GAAP                         383,907          363,308           361,815
                                                                              ==========       ==========          =========
                 Fully diluted earnings per ordinary share:
                 As reported according to Israeli GAAP                              0.37             0.25              0.15
                                                                              ==========       ==========          =========
                 As reported according to US GAAP                                   0.28             0.14              0.13
                                                                              ==========       ==========          =========
                 Weighted average of number of shares and
                   equivalents according to US GAAP                              446,098          401,109           399,071
                                                                              ==========       ==========          =========

</TABLE>


                                    F-226
<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 (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, 2004                               December 31, 2003
                                 ---------------------------------------------   -------------------------------------------
                                  As reported     Adjustments         US GAAP    As reported     Adjustments         US GAAP
                                 ------------     -----------         --------   -----------     -----------         -------
                                               US$ thousands                                   US$ thousands
                                 ---------------------------------------------   -------------------------------------------

<S>                                   <C>              <C>            <C>             <C>             <C>            <C>

Other receivables(1)                  77,219           5,323          82,542          54,538          3,872          58,410

Long-term
investments, loans
and receivables (4)                   22,070          15,957          38,027          18,044         13,763          31,807

Intangible assets after
amortization(2)(3)(6)(10)            527,420          26,161         553,581         448,402         17,907         466,309

Other payables(3)(5)                 192,405          14,685         207,090         150,541          1,196         151,737

Deferred taxes, net(1)                54,354           8,674          63,028          43,778         (4,902)         38,876

Employee severance
 benefits, net(4)                     26,709          15,957          42,666          24,774         13,763          38,537

Minority interest(7)(12)              18,756          (1,981)         16,775           6,436           (330)          6,106

Capital reserve(8)(9)(10)             (2,568)        128,993         126,425          (5,393)       102,913          97,520

Proposed dividend
 subsequent to balance
 sheet date(11)                       12,700         (12,700)              -           7,200         (7,200)              -

Retained earnings((1)2)              345,841        (106,187)        239,654         229,914        (69,898)        160,016

Shareholders' equity                 874,495          10,106         884,601         693,541         25,815         719,356



(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.

</TABLE>


                                    F-227
<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 (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" consists of the change, during the current
         period, in Company's shareholder equity that does not derive from
         shareholders' investments or from the distribution of income to
         shareholders.

         Comprehensive income include 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.

<TABLE>
<CAPTION>

                                                                            Year ended December 31
                                                                      -----------------------------------
                                                                        2004          2003        2002
                                                                      ---------    ---------    ---------
                                                                                 US$ thousands
                                                                      -----------------------------------

<S>                                                                   <C>           <C>           <C>
        Net income according to US GAAP                               123,738       56,071        53,559
                                                                      ---------    ---------    ---------

        Other comprehensive income, net of nil tax:
        Adjustments from translation of financial statements
         of investee companies                                          2,825        1,886        (3,700)
                                                                      ---------    ---------    ---------

        Total comprehensive income                                     126,563       57,957       49,859
                                                                      ========     =========    =========
</TABLE>


4.       Statements of cash flows
<TABLE>
<CAPTION>

                                                                              Year ended December 31
                                                                 -------------------------------------------
                                                                       2004            2003            2002
                                                                 -------------------------------------------
                                                                                  US$ thousands
                                                                 -------------------------------------------
        Net cash flows generated by operating activities:
<S>                                                                 <C>             <C>             <C>
        According to Israeli GAAP                                   215,653         249,240         108,230
        Effect of change in exchange rate on cash (A14a)             (1,997)         (5,434)          1,654
        Classification of securitization transaction (A14b)               -         (48,226)         (6,242)
                                                                 -------------------------------------------
        According to US GAAP                                        213,656         195,580         103,642
                                                                 ===========================================
        Net cash flows generated by financing activities:
        According to Israeli GAAP                                   (82,033)       (155,926)        124,083
        Classification of securitization transaction                      -          48,226           6,242
        (A14b)
                                                                 -------------------------------------------
        According to US GAAP                                        (82,033)       (107,700)        130,325

</TABLE>

                                     F-228
<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 (cont'd)

         B.       The effect of the material differences between Israeli and
                  US GAAP on the financial statements (cont'd)

         4.       Statements of cash flows (cont'd)

         Translation differences in respect of cash balances of autonomous
         foreign investee companies:
<TABLE>
<CAPTION>

                                                                              Year ended December 31
                                                                 -------------------------------------------
                                                                       2004            2003            2002
                                                                 -------------------------------------------
                                                                                  US$ thousands
                                                                 -------------------------------------------

<S>                                                                    <C>             <C>             <C>
         Translation differences in respect of cash balances:
         According to Israeli GAAP                                        -               -            (272)
         Effect of change in exchange rate on cash (A14a)             1,997           5,434          (1,654)

         According to US GAAP                                         1,997           5,434          (1,926)
</TABLE>


Note 35 - Events (Unaudited) Subsequent to the Date of the Independent Auditors'
          Report

         1.       Subsequent to the date of the Independent Auditors' Report
                  and proximate to July 13, 2005, NIS 5,359 thousand par value
                  debentures (Series A) were converted into 539 thousand of
                  the Company's ordinary shares of NIS 1 par value, and US$
                  133,650 thousand par value of the debentures that were
                  allotted in March 2004 in a private placement to
                  institutional investors (hereinafter - "The Debentures")
                  were converted into 29,429 thousand shares of the Company's
                  ordinary shares of NIS 1 par value. Furthermore, at the
                  aforesaid period, 2,182 thousand options (Series 1) were
                  exercised for 2,182 thousand of the Company's ordinary
                  shares of NIS 1 par value.

         2.       Until December 31, 2004 it was not anticipated that The
                  Debentures would be converted and accordingly they were
                  presented according to their liability value as part of the
                  long-term liabilities. Proximate to July 13, 2005,
                  management of the Company believes that conversion of The
                  Debentures is probable and accordingly the balance of The
                  Debentures will be classified (together with the Series A
                  debentures) at their liability value as a separate balance
                  sheet item between the long-term liabilities and the
                  shareholders' equity.

         3.       As described in Note 21B(3), on March 8, 2005, the Company's
                  Board of Directors decided to adopt a new option plan for
                  officers and employees of the Company and its subsidiaries.
                  Pursuant to the plan, 14,900,000 option warrants exercisable
                  into up to 14,900,000 ordinary shares of the Company of a
                  par value of NIS 1 each were issued on March 14, 2005. Of
                  these, 800,000 option warrants were issued to the CEO of the
                  Company, 9,600,000 to the employees of the Company in
                  Israel, 2,000,000 to the employees of the Company abroad and
                  2,500,000 were deposited with a trustee for future
                  distribution.


                                     F-229

<PAGE>

                                               Makhteshim-Agan Industries Ltd.


Notes to the Financial Statements
-------------------------------------------------------------------------------


Note 35 - Events (Unaudited) Subsequent to the Date of the Independent Auditors'
          Report (cont'd)

         4.       Subsequent to the date of the Independent Auditors' Report
                  and proximate to July 13, 2005, Company employees exercised
                  approximately 714 thousand options granted in April 2001 (as
                  described in Note 21B(1)) for 493 thousand of the Company's
                  ordinary shares of NIS 1 par value each.

         5.       Subsequent to the date of the Independent Auditors' Report
                  and proximate to July 13, 2005, Company employees exercised
                  approximately 166 thousand options granted in April 2003 (as
                  described in Note 21B(2)) for approximately 119 thousand of
                  the Company's ordinary shares of NIS 1 par value.

         6.       In May 2005, the Company's Board of Directors resolved to
                  distribute an interim dividend, in the amount of US$ 18.3
                  million, to be paid on September 1, 2005.



                                    F-230
<PAGE>


                                               Makhteshim-Agan Industries Ltd.

Appendix to the Financial Statements
-------------------------------------------------------------------------------



Rate of Control and Ownership in Subsidiaries as at December 31, 2004

A.       Domestic consolidated subsidiaries

<TABLE>
<CAPTION>

                                                                                                             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)               100
                                                 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
                                                 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

Proficol S.A.                                    Proficol Venezuela S.A.                                            100

Proficol Andina N.V.                             Rice Co. LLC (USA)                                                50.1


</TABLE>

                                    F-231
<PAGE>



                                               Makhteshim-Agan Industries Ltd.

Appendix to the Financial Statements
-------------------------------------------------------------------------------



B.       Foreign consolidated subsidiaries (cont'd)

<TABLE>
<CAPTION>

                                                                                                             Control and
                                                                                                               ownership
                                                                                                              of holding
Holding company                                  Investee company                                                company
---------------                                  ----------------                                            -----------
                                                                                                                       %
                                                                                                             -----------

<S>                                              <C>                                                               <C>

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

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.                                            45

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-232