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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 20-F

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

                  For the fiscal year ended December 31, 2004

                      Commission file number    1-9178
                                             ------------

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

                                     Israel
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                (Jurisdiction of incorporation or organization)

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

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

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

      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
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                                (Title of Class)

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

                                      None
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                                (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
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<PAGE>

                                PRELIMINARY NOTE

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

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

         In this annual report, unless otherwise specified or unless the
context otherwise requires, all references to "$" or "dollars" are to U.S.
dollars and all references to "NIS" are to New Israeli Shekels. Unless
otherwise stated, certain amounts reported in adjusted NIS on Koor's
consolidated financial statements for the year ended December 31, 2004 have
been translated into U.S. dollars for the convenience of the reader at the
exchange rate of the dollar on December 31, 2004 (NIS 4.308 = $1.00), as
published by the Bank of Israel (see Note 2B to our consolidated financial
statements included elsewhere in this annual report). Therefore, it is possible
to compute the dollar equivalent of any of the figures in adjusted NIS by
dividing such NIS by the rate of exchange at December 31, 2004.

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

                                       i
<PAGE>

<TABLE>
<CAPTION>
                                           TABLE OF CONTENTS

                                                 PART I

<S>         <C>                                                                                     <C>
Item 1.     Identity of Directors, Senior Management and Advisers.....................................1
Item 2.     Offer Statistics and Expected Timetable...................................................1
Item 3.     Key Information...........................................................................1
Item 4.     Information on the Company...............................................................15
Item 5.     Operating and Financial Review and Prospects.............................................48
Item 6.     Directors, Senior Management and Employees...............................................69
Item 7.     Major Shareholders and Related Party Transactions........................................81
Item 8.     Financial Information....................................................................84
Item 9.     The Offer and Listing....................................................................90
Item 10.    Additional Information...................................................................92
Item 11.    Quantitative and Qualitative Disclosures About Market Risk..............................109
Item 12.    Description of Securities Other than Equity Securities..................................112

                                                PART II

Item 13.    Defaults, Dividend Arrearages and Delinquencies.........................................113
Item 14.    Material Modifications to the Rights of Security Holders and Use of Proceeds............113
Item 15.    Controls and Procedures.................................................................113
Item 16A.   Audit Committee Financial Expert........................................................113
Item 16B.   Code of Ethics..........................................................................113
Item 16C.   Principal Accountant Fees and Services..................................................114
Item 16D.   Exemptions from the Listing Standards for Audit Committees..............................115
Item 16E.   Purchases of Equity Securities by the Issuer and Affiliated Purchasers..................115

                                               PART III

Item 17.    Financial Statements....................................................................116
Item 18.    Financial Statements....................................................................116
Item 19.    Exhibits................................................................................116

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

Index to Consolidated Financial Statements of Makhteshim-Agan Industries Ltd......................F-142

Index to Consolidated Financial Statements of ECI Telecom Ltd.....................................F-228

</TABLE>

                                                 ii
<PAGE>

                                     PART I

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

         Not Applicable.


Item 2.  Offer Statistics and Expected Timetable.
         ----------------------------------------
         Not Applicable.


Item 3.  Key Information.
         ----------------
Selected Financial Data

         The following selected consolidated financial data as of December 31,
2003 and 2004 and for the years ended December 31, 2002, 2003 and 2004 have
been derived from our audited consolidated financial statements included in
this annual report. These financial statements have been prepared in accordance
with generally accepted accounting principles in Israel, or Israeli GAAP, which
differ in certain respects from U.S. GAAP (see Note 28 to our consolidated
financial statements included elsewhere in this annual report), and audited by
KPMG Somekh Chaikin, independent registered public accountants. As described in
Note 28 to our financial statements included elsewhere in this annual report,
we have restated the reconciliation of material differences between Israeli
GAAP and U.S. GAAP for the years ended December 31, 2002 and 2003. The
consolidated selected financial data as of December 31, 2000, 2001 and 2002 and
for the years ended December 31, 2000 and 2001 have been derived from other
audited consolidated financial statements not included in this annual report
and have also been prepared in accordance with Israeli GAAP and audited by KPMG
Somekh Chaikin, except for the U.S. GAAP data for these periods that have been
restated as explained above. The selected consolidated financial data set forth
below should be read in conjunction with and are qualified by reference to
"Item 5, Operating and Financial Review and Prospects" and the consolidated
financial statements and notes thereto and other financial information included
elsewhere in this annual report.

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


                                      1
<PAGE>

<TABLE>
<CAPTION>
                                                                      Year Ended December, 31
                                      -------------------------------------------------------------------------------------------
                                         2000            2001            2002           2003            2004             2004
                                      ----------      ----------      ----------     -----------     -----------     -----------
                                                          (In thousands, except share and per share data)
                                                Adjusted NIS as of December 31, 2003                      NIS         US Dollars
                                      ----------------------------------------------------------     -----------     -----------
<S>                                    <C>             <C>             <C>             <C>             <C>             <C>
Operating Data:
Israeli GAAP:
Revenue from sales and services        8,292,026       7,463,419       7,099,790       7,690,430       9,228,673       2,142,218
Gross profit........................   2,094,776       1,697,733       1,784,010       2,297,486       2,940,994         682,682
Operating earnings..................     713,507         358,437         479,864         896,285       1,242,786         288,483
Financing expenses, net.............     323,051         432,437         408,437         228,200         271,362          62,990
Other income (expenses), net........     168,037        (622,660)          5,824        (219,721)        (78,759)        (18,282)
Minority  interest in  consolidated
  companies' results, net...........     (54,102)          8,367         (60,049)       (202,807)       (432,888)       (100,485)
Net earnings (loss) from
  continuing activities.............      56,722      (2,621,648)       (766,969)         46,362         144,990          33,656
Result of discontinued
  activities, net...................     226,928         (29,279)              -               -               -               -
Net earnings (loss).................     283,650      (2,650,927)       (766,969)         46,362         144,990          33,656

Basic earnings (loss) per share.....       18.44         (174.54)         (50.55)           2.95           8.851           2.054
Weighted average number of shares
  used in computing basic earnings
  (loss) per share..................  15,384,206      15,188,463      15,173,291      15,716,725      16,381,279      16,381,279
Diluted earnings (loss) per share...       18.36         (174.54)         (50.55)           2.95           8.851           2.054
Weighted average number of shares
  used in computing diluted
  earnings (loss) per share.........  15,597,253      15,188,463      15,173,291      15,716,725      16,381,279      16,381,279

U.S. GAAP (1):
Net income (loss)...................     245,658      (2,599,987)       (762,511)       (108,924)        111,572          25,899
Basic earnings (loss) per ordinary
  share.............................       15.96         (171.17)         (50.25)          (7.04)           7.05            1.64
Basic earnings (loss) per ADS.......        3.19          (34.23)         (10.05)          (1.41)           1.41            0.33
Diluted earnings (loss) per
  ordinary share....................       15.90         (171.17)         (50.65)          (7.82)           4.89            1.14
Diluted earnings (loss) per ADS.....        3.18          (34.23)         (11.75)          (1.56)           0.98            0.23

Balance Sheet Data:
Israeli GAAP:
Working capital.....................   1,047,465       1,859,986       1,160,293       1,046,276       1,086,450         252,193
Total assets........................  15,704,961      13,514,082      13,432,798      11,869,757      13,147,566       3,051,896
Short-term debt.....................   2,856,290       1,811,662       2,315,499       1,577,402       1,738,456         403,541
Long-term debt......................   3,518,561       4,934,834       4,339,578       3,119,837       2,341,115         543,434
Shareholder's equity................   4,563,106       2,195,834       1,727,169       1,740,393       1,876,467         435,577

U.S. GAAP (1):
Total assets (2)....................  15,694,727      13,818,527      13,788,604      12,012,241       6,360,235       1,476,378
Shareholder's equity................   4,349,412       2,065,672       1,626,469       1,582,122       1,767,850         410,364
Number of shares outstanding........  15,192,379      15,168,884      15,173,377      15,741,160      15,824,185      15,824,185
</TABLE>

                                                                2
<PAGE>

(1) U.S. GAAP amounts for the years ended December 31, 2000, 2001, 2002 and
2003 have been restated. See Note 28 to our consolidated financial statements
included elsewhere in this annual report.

(2) MA Industries' financial statements are not included in our consolidated
financial statements as of and for the year ended December 31, 2004 for U.S.
GAAP, but rather are recognized according to the equity method. See also Note
28 to our consolidated financial statements included elsewhere in this annual
report.

Exchange Rate Information

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

     Month                             High (NIS)          Low (NIS)
     ------------------             ---------------     ---------------
     January 2005..................      4.414               4.352
     February 2005.................      4.392               4.357
     March 2005....................      4.379               4.299
     April 2005....................      4.395               4.360
     May 2005......................      4.416               4.348
     June 2005.....................      4.574               4.405

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

     Year                                                Average (NIS)
     --------------                                     ---------------
     2000..............................................      4.078
     2001..............................................      4.203
     2002..............................................      4.738
     2003..............................................      4.530
     2004..............................................      4.482

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

Dividends

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

         We did not pay or declare any dividend for 2004, 2003, 2002 or 2001.
 We paid final dividends of NIS4.10 per share in 2000.

                                      3
<PAGE>

Risk Factors

         Risks Related to Koor

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

         We conduct our business primarily through our wholly and partially
owned subsidiaries and affiliates, and are partially dependent upon management
fees and cash distributions from our subsidiaries and affiliates as a source of
cash flow for funding our corporate level activities. We received management
fees in the amount of NIS 22 million and NIS 25 million in 2004 and 2003,
respectively, pursuant to management agreements between us and several of our
subsidiaries and affiliates. In addition, in 2004 and 2003 we received NIS 135
million and NIS 28 million, respectively, in distributions from subsidiaries
and affiliates, of which NIS 68 million and NIS 18 million, respectively, was
received from Makhteshim-Agan Industries Ltd., or MA Industries. Of the NIS 135
million in distributions we received in 2004, NIS 67 million was received as a
liquidating distribution in respect of our wholly-owned subsidiary, Tadiran
Ltd.

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

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

Continuing adverse conditions in the telecommunications industry and in the
market for telecommunications equipment have led to decreased demand for our
products and have harmed and may continue to harm our business, financial
condition and results of operations.

         For the years ended December 31, 2004 and 2003, our telecommunication
equipment business accounted for approximately 6.7% and 10.4%, respectively, of
our consolidated net sales. Our business in this industry is primarily
conducted through our proportionately


                                      4
<PAGE>


consolidated subsidiary Telrad Networks Ltd., or Telrad. We also own
approximately 30.2% of ECI Telecom Ltd., or ECI, a publicly traded company
engaged in the telecommunication equipment business, whose results are not
consolidated in our financial statements, but are accounted for based on the
equity method. Telrad's equipment and ECI's systems are used by
telecommunications carriers and service providers. From 2001 through the first
half of 2003, many telecommunications carriers and service providers in markets
throughout the world experienced substantial declines in sales and revenues and
incurred significant operating losses. In addition, many carriers and service
providers stopped deploying new networks or ceased operations completely and
are no longer potential users of Telrad's products or ECI's products. The
general worldwide economic downturn has curtailed the ability of existing and
prospective carriers and service providers to finance purchases of products
such as Telrad's and ECI's, leading to a sharp decline in orders for new
telecommunications equipment. For these reasons, Telrad and to a lesser extent
ECI, have experienced severe declines in sales since the beginning of 2001 and
were forced to take substantial measures to reduce expenses since 2001,
including downsizing manpower, streamlining operations and divestiture of
non-core businesses. As a result of the losses incurred by ECI during 2001 and
2002, we wrote-down the book value of our investment in ECI below its equity
value to us and wrote-off the excess goodwill relating to that investment.
Following a valuation of ECI performed by an independent appraiser in November
2003, we reversed the loss from decline in value of approximately NIS 73
million. The reversal of this loss was charged against the capital reserve from
foreign currency translation adjustments (credit), which was realized when the
provision was created. Under U.S. GAAP, however, this loss was not reversed. As
of December 31, 2004, the balance of our investment in ECI was approximately
NIS 673 million, reflecting our share in ECI's equity.

         Since the second half of 2003, there has been an improvement in the
general market for telecommunications equipment. However, we are unable to
predict the duration of this trend or the extent of any impact that it may have
on our revenues or results of operations. Any return to a prolonged and
substantial curtailment of growth in the telecommunications industry will
likely have an adverse impact, which may be material, on our business,
financial condition and results of operations. In addition, market perception
that these conditions could have an impact upon us may harm the trading price
of our ordinary shares, whether or not our business or results of operations
are actually affected.

We need to develop and introduce new products in the telecommunication
equipment and defense electronics businesses in order to remain competitive in
those industries. We are also partially dependent on licensed technology.

         For the years ended December 31, 2004 and 2003, our telecommunication
equipment and defense electronics businesses together accounted for
approximately 19.3% and 27.1%, respectively, of our consolidated net sales, and
48.8% and 60.9%, respectively, of our total consolidated research and
development expenses. In addition, as of December 31, 2004 and 2003, our
investment in ECI accounted for 76.3% and 60.9%, respectively, of our total
investments in the telecommunications equipment industry, and our investment in
Tadiran Communications Ltd., or Tadiran Communications accounted for 73.9% of
our total investments in the defense electronics industry as at December 31,
2004. The businesses and markets in these segments are characterized by rapid
technological development. Consequently, the ability to anticipate changes in
technology and to develop and introduce new and enhanced products


                                      5
<PAGE>


incorporating such new technologies on a timely basis will be significant
factors in the ability of these businesses to grow and remain competitive.
Several of our competitors in the defense electronics industry have
significantly greater resources (monetary, research and development and
personnel), and may be able to exert political pressures on potential customers
to further their interests. Furthermore, mergers that took place between
companies in the defense industries world-wide, may impede our ability to
compete in this industry. In contrast to our competitors in the defense
industry, which offer their customers a range of equipment and systems, Tadiran
Communications' business is focused largely on military communication
equipment, and Elisra Group's business is focused largely on electronic
warfare, therefore they are more vulnerable to changes in the industry than
their competitors We cannot assure you that we will be able to develop new
products and technologies on a timely basis in order to remain competitive in
the telecommunication equipment and defense electronics industries. In
addition, one of our objectives is to continue to seek to apply several of the
advanced technologies developed in our defense electronic businesses to new
commercial products. However, we cannot assure you that such technologies will
be successfully applied or that markets will develop for such products.
Furthermore, although we believe that there will be continued use of existing
products in the defense electronics industry (subject to improvements) we
cannot be certain that there will not be a transition to new product types that
may diminish the market for our existing products.

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

         Telrad, one of our significant investees, is substantially dependent
upon its relationship with Nortel as a key supplier of technology and as a key
customer of Telrad's products. For the years ended December 31, 2004 and 2003,
approximately 2.5% and 4.4 %, respectively, of our consolidated net sales and
50.0% and 51.4%, respectively, of Telrad's sales were derived from sales to
Nortel. Accordingly, Telrad's sales volume is directly influenced by Nortel's
sales forecasts and actual purchases. Although we and Telrad believe that the
relationship with Nortel is generally good, if such relationship was to be
terminated or diminished for any reason, it could have a material adverse
affect on Telrad's business, financial condition or results of operation, which
may have an adverse effect on our business as a whole.

We rely on the expiration of patents and depend on regulatory approval in the
agrochemicals industry.

         For the years ended December 31, 2004 and 2003, our agrochemicals
business accounted for approximately 74.7% and 67.5%, respectively, of our
consolidated net sales. Our business in this industry is conducted through our
subsidiary Makhteshim-Agan Industries Ltd., or MA Industries. As of January 1,
2005 MA Industries will no longer be consolidated in our financial statements,
but will be accounted for according to the equity basis. See Note 27(4) to the
consolidated financial statements included elsewhere in this annual report.

         Several of MA Industries' subsidiaries specialize in the improvement
and production of generic agrochemical products, which are products that are
based on expired patents. Development of new generic products requires
substantial expenditures for research and development, product registration,
construction of production lines and marketing in support of new product
introduction. An important component for the growth of the agrochemicals
business is the successful introduction of new generic chemical products to the
market in a


                                      6
<PAGE>


timely manner (promptly after patents expire). Reintroduction of any new
legislation to extend the life of patents on chemical products could adversely
affect the ability of the agrochemicals business to introduce new products.

         Patent protection in Europe is valid for 20 years from the date of
application. During the beginning of any patent term, the companies that own
patents deal in licensing products in various countries. In February 1997,
offices of the European Authority approved an extension of the validity of
patents filed for registration since 1985. The extension of the patent term for
an additional period ensures patent owners an additional period of exclusivity
of 15 years from the date of receipt of first license, provided that the
addition may not be greater than 5 years. In most countries, marketing of new
products is conditional upon obtaining licensing from the competent authority.
The obtaining of licenses is a lengthy process with substantial costs. A
possible delay in the development of new products or in obtaining requisite
licenses could have a negative effect on our results of operation and financial
status.

         Most countries require us to obtain regulatory approval prior to
selling newly introduced products, which is both time consuming and expensive.
Any delay in the development or introduction of new products or in obtaining
regulatory approval from the countries in which our agrochemicals business
markets its products may have a material adverse effect on our results of
operations and financial condition. In addition, new developments in the field
of trans-genetic plant species that are toxic to insects, and plant species
that are resistant to fungal disease, may have an adverse effect on our
agrochemicals business.

Economic instability in the emerging markets of South America and Central and
Eastern Europe poses a risk to our agrochemicals business.

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


                                      7
<PAGE>


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

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

Concentration of manufacturing in a limited number of manufacturing facilities
could pose a risk for our agrochemicals business.

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

Our operations are exposed to environmental risks and are subject to
environmental regulation.

         The operations of several of our subsidiaries are exposed to the risk
of harming the environment, as they manufacture, use, transmit, store and sell
toxic and other materials. We believe that these subsidiaries are in compliance
with applicable environmental laws and regulations and we have born
considerable costs and investments in order to ensure such compliance. We
cannot estimate the size or impact of additional expenditures that may be
required in the event of amendments to applicable environmental laws or adverse
decisions of applicable regulatory authorities. In addition, the risks of
causing environmental damage are not insurable risks.

         MA Industries possesses various permits from environmental regulatory
authorities that stipulate conditions for the operation of its manufacturing
facilities. The expansion of the facilities requires new or additional permits.
The terms of the permits may be altered and/or revoked by the environmental
regulatory authorities and this may have a negative impact on our agrochemicals
business.

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

The activities of MA Industries are exposed to risk relating to product
liability claims. MA Industries has insurance coverage for third party
liability and defective products of up to $265 million per annum. In the event
that MA Industries would be found liable in a lawsuit concerning product
liability, its insurance coverage may not be sufficient to cover the damages,
and this may have a significant negative impact on our agrochemicals business.
Furthermore, publication of the existence of such a claim could have a negative
impact on the reputation of MA Industries, and this could have a negative
impact on its business.


                                      8
<PAGE>


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

         Koor Corporate Venture Capital, or Koor CVC, is the venture capital
arm of Koor Industries. As at December 31, 2004 Koor CVC's portfolio comprised
of 10 companies, a limited partnership in Pitango venture capital fund and a
27% interest in Scopus Network Technologies Ltd., with a total book value of
NIS 181 million (approximately $42 million).

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

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

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

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

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

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

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

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

We are under investigation by the Israeli Office of Restrictive Trade
Practices.

         On February 2, 2005, we received a notice from the Office of
Restrictive Trade Practices ( the Israeli Anti-Trust Authority) that it was
considering the possibility of prosecuting us, together with seven other
companies that are not members of the Koor Group (including two companies that
had been owned by Koor on the relevant dates, and were later sold to third
parties) and nine executives (including two executives who had been salaried
employees of Koor on the relevant dates), for violations of the Law for
Restrictive Trade Practices, 1988 (the Israeli Anti-Trust Law). On June 7,
2005, we received a bill of indictment from the Israeli Anti-Trust Authority in
accordance with the abovementioned notice. The bill came in the wake of an
investigation opened by the Israeli 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 Israeli Anti-Trust
Authority claims that the two companies that


                                      9
<PAGE>


belonged to the Koor Group in the past had colluded with two other companies in
the years 1992-1998.

         Under the Israeli Anti-Trust Law, penalties may be imposed against an
entity which has violated the law. In addition, should it be proven that
violations were committed, civil lawsuits may be filed against us and we may be
subject to civil penalties, if damages can be proven as a result of a violation
of the law. At this early stage, it is not possible to predict the likelihood
that any fines will be imposed on us or any civil lawsuits will be filed
against us, nor whether any such fines or lawsuits would have an adverse effect
on our business, financial condition or results of operations.

         See also Note 18A1(b) to our consolidated financial statements
included elsewhere in this annual report.

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

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

Reduction in worldwide spending for military products may adversely affect our
profit.

         For the years ended December 31, 2004 and 2003, sales of military
products accounted for approximately 12.6% and 16.8%, respectively, of our
consolidated net sales. Around the world and in Israel demand for military
products has been generally declining during the past few years. This ongoing
trend has negatively affected the size and rate of receipt of orders and
resulted in a decrease in backlog to NIS 2.0 billion as of December 31, 2004
compared to NIS 2.2 billion as of December 31, 2003. In order to counter the
decrease in the Israeli budget, we are seeking to increase our position in
international markets by identifying additional potential avenues for growth;
however, we may not be successful in doing so. In the event that general
military expenditures continue to decline worldwide and are reduced in Israel
for systems or projects of the type we produce or perform, and are not offset
by greater foreign sales or other new systems or products, there will be a
reduction in the volume of contracts or subcontracts we are awarded. Such
reductions may result in a material adverse effect on our results of operations
and financial condition.

Revocation of security clearance and/or permits and licenses could have a
significant negative impact on our defense electronics business.

         Companies in our defense electronics business have security clearance
in the United States and Germany that enables them to carry out classified
projects in these countries. Furthermore, these companies have licenses to
export and permits to conduct marketing activities from the governments of
Israel, the United States and Germany. The revocation of this security
clearance and/or these permits and licenses could have a material adverse
effect of our defense electronics business.


                                      10
<PAGE>


The trend towards regulatory control standards in the defense electronics
industry could have an adverse effect on our market share in this industry.

         Today there are no regulatory standards for certain classified
technologies in the defense electronics industry and each company develops its
own proprietary technology. In Europe, there has been a recent trend toward the
setting of regulatory standards for such technologies, which may not be
accessible to our defense electronics companies due to security clearance. If
this occurs our market share in the defense electronics industry may be
negatively impacted.

Risks Related to Israel

Exchange rate fluctuations and inflation in Israel impact our business.

         A significant portion of the sales of our major subsidiaries and
affiliates are made outside Israel in dollars or other non-Israeli currencies
while these companies incur significant portions of their expenses in NIS.
Alternatively, some subsidiaries and affiliates whose sales are principally in
NIS incur expenses in dollars or in other non-Israeli currencies. For example,
a significant portion of the sales of our telecommunication equipment, defense
electronics and the agrochemicals businesses are in dollars, whereas a
significant portion of these businesses expenses are incurred in NIS and are
partially linked to the Israeli CPI. In addition, certain borrowings are linked
to the dollar or other non-Israeli currencies or to the CPI. During the
calendar years 2002, 2003 and 2004, the annual rate of inflation was
approximately 6.5%, -1.9% and 1.2%, respectively, while the NIS depreciated
against the dollar by approximately 7.3% in 2002 and appreciated against the
dollar by approximately 7.6% and 1.6% in 2003 and 2004, respectively.
Consequently, during the calendar years 2002, 2003 and 2004, the annual rate of
inflation as adjusted for devaluation was approximately -0.7%, 6.2% and 2.8%,
respectively. Continued delay in or lack of any devaluation of the NIS in
relation to the dollar or other currencies may have a material adverse effect
on our results of operations and financial condition.

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

Conditions in Israel may affect our operations.

         We and our principal subsidiaries and affiliates are incorporated
under the laws of the State of Israel, where our principal offices and a
substantial portion of our operations are located. We are directly influenced
by the political, economic and military conditions affecting Israel.
Accordingly, any major hostilities involving Israel, the interruption or
curtailment of trade between Israel and its present trading partners, a
significant increase in inflation or a significant downturn in the economic or
financial condition of Israel could have a material adverse effect on our
business, our results of operations and our financial condition. In addition,
there are


                                      11
<PAGE>


a number of countries, particularly in the Middle East, which restrict business
with Israel or Israeli companies. There can be no assurance that restrictive
laws or policies directed toward Israel or Israeli businesses will not have an
adverse impact on the expansion of our business.

The increased hostilities in the West Bank and Gaza Strip affect tourism and
other businesses.

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

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

         Generally, Israeli adult male citizens and permanent residents through
the age of 48 are obligated to perform up to 36 days of military reserve duty
annually. Some of our directors, officers and employees are currently obligated
to perform annual reserve duty. Additionally, under emergency circumstances,
all such persons are subject to being called to active duty at any time. We
have operated effectively under these requirements since we began operations.
No assessment can be made, however, as to the full impact of these requirements
on our workforce or business if conditions should change and we cannot predict
the effect on us of any expansion or reduction of these obligations.

Israel's economy may be destabilized.

         Israel's economy has been subject to a number of destabilizing
factors. These include a period of severe inflation in the early to mid-1980s,
low foreign exchange reserves, fluctuations in world commodity prices, military
conflicts and civil unrest. For these and other reasons, the Government of
Israel has intervened in different sectors of the economy. Such intervention
has included employing fiscal and monetary policies, import duties, foreign
currency restrictions and controls of wages, prices and foreign currency
exchange rates. The Israeli government has periodically changed its policies in
all of these areas. Changes in these policies may make it more difficult for us
to operate our business as we have in the past.

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

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

         There is doubt as to the enforceability of civil liabilities under the
Securities Act of 1933, as amended, or Securities Act, and the Securities
Exchange Act of 1934, as amended, or the


                                      12
<PAGE>


Exchange Act, in original actions instituted in Israel. However, subject to
certain time limitations and other conditions, Israeli courts may enforce final
judgments of United States courts for liquidated amounts in civil matters,
including judgments based upon the civil liability provisions of the Securities
Act and the Exchange Act.

We depend on the availability of certain government benefits and programs. If
any of the companies in which we have invested and which have been granted such
benefits fail to comply with the requisite conditions, we may be required to
return benefits previously received or may be unable to utilize tax benefits.

         We derive and expect to continue to derive benefits from various
programs and laws in Israel including tax benefits relating to our "approved
enterprise" programs and grants from the Office of the Chief Scientist, or OCS,
for research and development. For the years ended December 31, 2004 and 2003,
our consolidated companies received government grants in the fields of research
and development of approximately NIS 16 million and NIS 21 million,
respectively. To be eligible for these grants, programs and tax benefits, we
must continue to meet certain conditions, including making certain specified
investments in fixed assets from our equity. From time to time, the Israeli
government has discussed reducing or eliminating the availability of these
grants, programs and benefits. A change in government policy in these areas
would likely have a negative affect on our results of operation and financial
condition.

         Under this program, by virtue of the "approved enterprise" status
granted to several of our subsidiaries and several of the companies in which we
have invested, these companies are entitled to various tax benefits. The income
derived from these companies during a period of up to 10 years, from the year
in which these companies 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 reduced corporate tax rate ranging from 0-25%.
These companies with "approved enterprise" status are also entitled to an
accelerated amortization deduction for fixed assets serving these companies,
mainly in respect of equipment that is usually amortized over a period of three
to five years.

         In the event that one of our subsidiaries or investee companies
distributes a dividend to shareholders out of income attributable to revenues
from an approved enterprise which has received a tax exemption, the company
that distributes the dividend is usually taxed at a rate of 25% of the profit
distributed. However, we did not record deferred taxes in respect of income
from approved enterprises that may in future be distributed as a dividend,
since it is our policy not to initiate a distribution of a dividend that
involves an additional tax liability to us.

         Benefits are conditional upon the fulfillment of terms set forth by
law or in deeds of approval. Non-fulfillment of such terms could cause
cancellation of the approved enterprise benefits, in whole or in part, and the
return of previously provided benefits plus interest and linkage differentials.
As of December 31, 2004, the managements of our subsidiaries and the companies
in which we have invested which have been granted "approved enterprise" status
believe that these companies will comply with the terms set forth above and
will not be required to return any benefits previously received.


                                      13
<PAGE>


         As security for the implementation of the approved projects and
compliance with the conditions of the approval by subsidiaries that received
investment grants, a charge has been registered on the above subsidiaries'
assets in favor of the State of Israel.

         The amount by which our taxes would increase depends on the difference
between the then-applicable tax rate for non-approved enterprises and the rate
of tax, if any, that our subsidiaries and the companies in which we have
invested would otherwise pay as an approved enterprise, and the amount of any
taxable income that they may earn in the future.

         On March 29, 2005 the Israeli parliament approved a reform of the
Encouragement of Capital Investments Law - 1959, or the Reform, applicable as
of April 1, 2005. The Reform includes changes to the criteria for eligibility
for tax benefits as well as certain procedural changes under the "Alternative
Benefits" (tax benefits) track, mainly cancellation of the requirement for
prior approval from the Investment Center and authorization of the eligibility
for tax benefits within the framework of the income tax audit. The main
criteria for eligibility for tax benefits are existence of an industrial plant;
certain marketing restrictions; and investment in production equipment in
accordance with stipulated amounts.

         The Reform grants the following additional benefit alternatives under
the "Alternative Benefits" (tax benefits) track, subject to certain
restrictions:

    o    Corporate tax of 11.5% for ten years, and additional tax of only 4% on
         dividend distributions for a foreign investor, or 15% for an Israeli
         investor; and

    o    Companies with consolidated revenues exceeding NIS 13 billion and an
         investment of at least NIS 600 million in an industrial company that
         has an approved enterprise in a preferred area, will be exempt from
         corporate tax for ten years, and dividends distributed from these
         earnings will be tax exempt.

         We believe that our relevant subsidiaries and investees meet the
criteria of the Reform.

         If our subsidiaries and the companies in which we have invested are
required to pay a significant amount of additional taxes, our business,
financial condition and results of operation could be materially adversely
affected.

Risks Related to Our Ordinary Shares

Our share price may be volatile and may decline.

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


                                      14
<PAGE>


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

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


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

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

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

General

         We are a diversified investment holding company. We are engaged,
through our direct and indirect, wholly and partially owned subsidiaries and
affiliates, in the following core businesses: telecommunication equipment,
defense electronics and agrochemicals as well as in other businesses. We are
also engaged in investment in new technologies in the telecom and life science
fields. For the years ended December 31, 2004 and 2003, international sales
represented approximately 85.0% and 86.7%, respectively, of our consolidated
net sales. A majority of our sales are derived from businesses in which we are
the leading producer or provider of such goods and services in Israel. For the
year ended December 31, 2004, we reported consolidated net sales of
approximately NIS 9,229 million ($2.1 billion), consolidated operating profit
of approximately NIS 1,243 million ($288 million) and consolidated net income
of approximately NIS 145 million ($34 million).

Business Overview

         Strategy

         In October 1997, as a result of several transactions, the Claridge
Group (comprised of Claridge Israel Ltd. and affiliated entities) became our
largest shareholder. During January 1999, Claridge Israel Ltd. transferred its
holdings to Claridge Israel L.L.C. which, during December 2003, transferred
half of its holdings to Esarbee Investments Limited. As of June 30, 2005,
Claridge Israel L.L.C. and Esarbee Investments Limited together held
approximately 28.8% of our outstanding ordinary shares (14.7% held by Claridge
Israel L.L.C. and 14.1% held by Esarbee Investments Limited). Beginning in July
1998, we initiated an extensive corporate


                                      15
<PAGE>


restructuring program, designed to transform Koor into a diversified investment
holding company with controlling stakes in leading high-growth, export-oriented
Israeli companies. Based on these criteria, we have made the strategic decision
to focus on three businesses: telecommunication equipment, defense electronics
and agrochemicals. Despite the downturn in the telecom industry, we still
believe that our holdings in these businesses have the potential to grow
internally, as well as through mergers and acquisitions.

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

         During 2004, we and our portfolio companies continued to take active
measures to adapt to the changing business climate and to continue to implement
our strategic plan. These measures include bringing in new strategic partners;
identifying new market opportunities; focusing on core competencies, while
divesting non-core assets; and streamlining group operations. During 2004, our
portfolio companies took the following steps in implementing our strategic
plan:

    o    MA Industries built on its strategy for generating growth through
         acquisitions and in-house development, while strengthening its
         presence mainly in the Australian and North American markets. In 2004,
         MA Industries acquired ownership and control in a group of three
         companies which are engaged in the registration, import and marketing
         of agrochemicals in the U.S. for a total purchase price of
         approximately NIS 303 million. Also in 2004, MA Industries acquired
         three marketing companies, two in the U.S. and one in Australia, for
         an aggregate purchase price of approximately NIS 186 million.

    o    ECI continued to implement its strategic plan, which included:
         focusing on its core optical networks, bandwidth management and
         broadband access businesses; exiting non-core activities; streamlining
         operations while improving the organizational structure; strengthening
         its financial position; and entering into strategic partnerships. As
         part of this plan, in May 2004, ECI distributed the majority of its
         shares in ECtel Ltd., or ECtel, to its shareholders, reducing its
         holdings of ECtel's shares from approximately 58.4% to approximately
         16.0%. In November 2004, ECI signed an agreement with Redback Networks
         Inc., or Redback, for the delivery of enhanced triple play (voice,
         video and data) services over broadband and IP (Internet Protocol)
         networks. In December 2004, ECI entered into a strategic partnership
         with Chiaro Networks Ltd., or Chiaro, the developer of the Enstara(TM)
         IP/MPLS routing platform. This platform is designed to enable
         telecommunications service providers to consolidate multiple existing
         networks into a single, simpler network that offers greater
         operational efficiency, increased scalability and significant cost
         advantages.


                                      16
<PAGE>


    o    Telrad conducted major reorganization measures after our sale of 19.5%
         of our shares in the company to a strategic partner, Fortissimo GP
         Capital Fund L.P. The plan included reducing expenses through staff
         reduction and the merger of businesses.

    o    The Elisra Group countered challenging international defense markets
         and domestic budget cuts by initiating a comprehensive aggressive
         sales and marketing effort. Elisra expanded of its international
         customer base, and broadened its geographic sales mix.

    o    Koor CVC continued to work closely with its portfolio companies to
         seek out new markets and attract new investors. In 2004, Koor CVC
         received approximately $8.8 million in proceeds from the sale of its
         holdings in its portfolio companies Riverhead Networks and Envara.

         Our Telecommunication Equipment Business

         Our telecommunication equipment business is conducted primarily
through ECI and Telrad.

         Excluding sales of ECI, which are not consolidated in our results of
operations, our telecommunication equipment business generated NIS 615 million
($143 million) and NIS 796 million ($185 million) of sales in 2004 and 2003,
respectively, representing 6.7% and 10.4%, respectively, of our consolidated
net sales for such years. Excluding sales of ECI, international sales accounted
for 92.6% and 90.7% of our telecommunication equipment business' sales for 2004
and 2003, respectively.

         Excluding sales of ECI, a large portion of the sales made by our
telecommunication equipment business are made to one principal customer:
Nortel. In 2004 and 2003, sales to Nortel represented 38% and 42%,
respectively, of our telecommunication equipment business' sales.

         The principal companies in our telecommunication equipment business
are:

                         Percentage
                         Of Equity
                         Ownership      Principal Products and Services
                         ----------     ---------------------------------------
ECI Telecom Ltd.           30.2%        Telecommunication equipment and systems
Telrad Networks Ltd.       80.5%        Telecommunication equipment and systems


         ECI Telecom Ltd. (ECI)

         ECI is a provider of network and access solutions for digital
communications networks. ECI designs, develops, manufactures, markets and
supports digital telecommunications solutions for evolving new services and
converging networks. ECI's products and platforms are designed to create and
manage bandwidth, maximize revenues for network operators, reduce operating
expenses, expand capacity, improve performance and enable new revenue-producing
services. In doing so, they enhance the capabilities of existing networks to
support voice, data, video,


                                      17
<PAGE>


multimedia services. ECI's equipment is marketed world-wide to over 300
wireline and wireless service providers.

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

    o    The Broadband Access Division which develops, manufactures, markets
         and sells innovative access products that enable telecommunications
         service providers to mass deploy broadband networks and offer a
         variety of new advanced services. The division's primary product is
         the Hi-FOCuS, a Multi-Service Access Gateway solution based on a
         variety of transmission technologies and networking protocols.
         Facilitating the demand for bandwidth and advanced services, Hi-FOCuS
         supports interactive TV, or iTV, over digital subscriber lines, or
         DSL; games over DSL; video broadcast; video on demand and teleworking
         (including remote local area network, or LAN, access and video
         conferencing); small office/home office, or SOHO, applications;
         transmission of digital video over copper lines; and voice over DSL,
         among other residential subscriber applications. The Broadband Access
         Division's customers are principally incumbent local exchange carriers
         and large operators and include Deutsche Telekom AG and France
         Telecom.

    o    The Optical Networks Division which provides telecommunications
         service providers with metropolitan and regional intelligent and
         flexible multi-service optical transmission solutions. Its products
         enable end-to-end transport of voice and data circuits from the user's
         premises to high-capacity optical backbones, support the process of
         streamlining the use of optical networks and allow telecommunications
         service providers to offer additional services with greater
         efficiency. Its primary product is the XDM, a multi-service
         provisioning platform, or MSPP. The XDM integrates, within a single
         shelf, the functions of dense wavelength division multiplexing, or
         DWDM, a method of multiplexing signals by transmitting them at
         different wavelengths through the same optic fiber, intelligent
         optical networking multiplexer, broadband, narrowband, wideband and
         digital cross connects, IP, L2 switching and asynchronous transport
         mode, or ATM, switching as well as streaming support and synchronous
         digital hierarchy, or SDH, add-drop multiplexers. This all-in-one
         optical platform enables a significant savings in network deployment
         costs.

         On June 6, 2005, ECI announced that it completed the acquisition of
Laurel Networks Inc, a provider of Next-Generation IP/MPLS Multi-Service Edge
Routers, which became ECI's Data Networking Division. ECI paid $88 million in
cash for Laurel. Laurel has approximately 150 employees, and its sales for the
twelve months ended April 30, 2005 totaled $18 million.

         In addition, ECI operates in the areas of next generation telephony
solutions and fraud prevention solutions via its minority interests in the
following companies:

    o    Veraz Networks Inc., or Veraz, a private company in which ECI holds a
         43% interest. Veraz designs, markets and sells carrier-class packet
         telephony solutions. These solutions help telecommunications service
         providers in establishing the carrier-class new voice infrastructure
         necessary to provide toll quality, large scale, international and
         national, IP telephony services (including voice, fax and voice band
         data traffic). Its holding in Veraz enables ECI to maintain a foothold
         in an important strategic market, while at the same time


                                      18
<PAGE>


         focusing internal resources on ECI's core businesses. In addition to
         its packet telephony products, Veraz also operates in the DCME market
         of bandwidth optimization solutions, with more than 11,000 traffic
         compression systems (DTXTM-600 and DTX-360) installed in 140
         countries. DCME systems simultaneously compress toll quality voice,
         fax, voice band data, native data, and signaling. The system improves
         transmission media efficiency and helps achieve maximum bandwidth
         utilization and guaranteed QoS provision of traffic payloads. Veraz
         was formed in December 2002, by the combination of the principal
         activities of ECI's NGTS operations with those of NexVerse Networks,
         Inc.

    o    ECtel Ltd. or ECtel, is a developer and global provider of revenue
         assurance solutions for circuit-switched and packet-switched wireline
         and wireless networks. Its revenue assurance solutions equip
         telecommunications service providers with comprehensive data gathering
         and analysis capabilities to improve their operational efficiency and
         profitability by detecting and preventing fraud, monitoring the
         quality of service over their networks and supporting billing
         assurance/mediation functions or interconnection arrangements. ECtel
         experienced a sharp decline in revenues in 2003 and, in order to focus
         on its telecom business, in March 2004, it sold its government
         surveillance business to Verint Systems Inc. for $35.0 million in
         cash.

         ECtel was previously a majority owned subsidiary of ECI; however, on
May 10, 2004, ECI distributed 7.6 million of its shares in ECtel to its
shareholders, including us, reducing its holdings in ECtel from approximately
57.9% to approximately 16.0%. As a result, ECI no longer consolidates ECtel's
results and the activities of ECtel for prior periods are treated in ECI's
financial statements as discontinued operations. In addition, as a result of
this distribution, we acquired a direct ownership interest in ECtel of
approximately 12.9%. Our investment in ECtel is presented in our consolidated
financial statements by the cost method, and is classified as
available-for-sale under FAS 115 for U.S. GAAP purposes, therefore ECtel's
results are not included in our results of operations.

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

         In December 2003, ECI entered into a strategic relationship agreement
with Nortel Networks. Under the agreement, ECI and Nortel agreed to deliver
broadband access networking solutions that will address the increasing global
demand for multimedia and triple play services (voice, video and data).

         In November 2004, ECI signed an agreement with Redback Networks Inc.,
or Redback, for the delivery of enhanced triple play (voice, video and data)
services over broadband and IP networks. Under the agreement, the two companies
will offer a comprehensive IP solution that includes ECI's Multi-Service Access
Gateway (MSAG) solutions together with Redback's multi-service edge and
broadband portfolio. Pursuant to the terms of the agreement, ECI and Redback
will initially target joint customers and will work together to address
customer needs and requirements for the move to triple play and other advanced
services.

         In December 2004, ECI entered into a strategic partnership with Chiaro
Networks Ltd., or Chiaro, the developer of the Enstara(TM) IP/MPLS routing
platform. This platform is designed to


                                      19
<PAGE>


enable telecommunications service providers to consolidate multiple existing
networks into a single, simpler network that offers greater operational
efficiency, increased scalability and significant cost advantages. According to
ECI's agreements with Chiaro and its shareholders: (i) ECI received exclusive,
global distribution rights for the Enstara platform for a period expiring in
February 2008; (ii) ECI provided financing to Chiaro in the aggregate amount of
$6.0 million, repayable in full in March 2008 with interest at an annual rate
of LIBOR + 2.3% ($3 million of the financing being convertible, at ECI's
option, at any time into convertible preferred shares of Chiaro); and (iii) ECI
received an option to acquire Chiaro in the future at a price to be determined
based on the revenues derived from the Enstara product. The term of the option
expires in February 2008 and it may be exercised within three defined 90-day
exercise windows during its term.

         Under U.S. GAAP, for the year ended December 31, 2004, ECI reported
revenues of $497 million, gross profit of $196 million, income from continuing
operations of $14 million and net income of $10 million. Under Israeli GAAP,
ECI's net loss for the year ended December 31, 2004 was $1 million. ECI is
included in our financial statements on an equity basis only. As of December
31, 2004, our equity interest in ECI was approximately 30.21%.

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

         Telrad Networks Ltd. (Telrad)

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

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

    o    Telrad ODM (original development manufacturer), which is similar to an
         OEM (original equipment manufacturer), is the division responsible for
         research and development as well as sales and support in wireline,
         wireless, enterprise and optical networks. The division develops
         carrier-grade quality products with a rapid time-to-market deployment.
         This division was created in 2004 through the consolidation of
         Telrad's former Telrad Network Solutions, or TNS, and Telrad Optical
         Networks, or TON, divisions.

    o    Public Network Integrator, or PNI, provides end-to-end solutions for
         telecom and service providers. PNI specializes in Telrad and Nortel
         Networks technology and its operations include the planning, design
         and development of switching products, project management integration
         and delivery of turnkey telecommunications projects, as well as
         third-party equipment.

    o    Advanced Operations Solutions, or AOS, provides advanced operations
         solutions and services, including NPI management, System House
         Services and complete Supply Chain Management, or SCM, for companies.


                                      20
<PAGE>


         In addition, Telrad has interests in several start-up companies and
new subsidiaries offering various products and services, which have been
established as independent subsidiaries of Telrad. These companies offer next
generation solutions in the telecommunications industry.

         On September 28, 2004, we entered into an agreement to sell 39% of our
holdings in Telrad to Fortissimo GP Capital Fund L.P., or Fortissimo, for $21
million. The agreement provided that the sale will be effected in two stages.
In the first stage, which closed in November 2004, we transferred 19.5% of
Telrad's shares to Fortissimo for consideration of $10.5 million. In the second
stage, which we expected to close during the second half of 2005, Fortissimo
was to transfer the balance of the consideration, amounting to $10.5 million,
and we were to transfer the balance of the Telrad shares we sold in this
transaction, amounting to 19.5% of Telrad's shares. See also "Recent
developments" below.

         Under the terms of the agreement, 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 of Telrad from us, provided that
Fortissimo's total holdings will not exceed 49% of Telrad's shares. The
exercise price for this option will be determined according to the value of
Telrad, which will not be less than its shareholders' equity in the financial
statements on the exercise date.

         Pursuant to the agreement, we agreed to use the proceeds of the sale
to extend loans to Telrad, and upon the closing of the first stage of the sale,
we transferred $9.5 million of the proceeds to Telrad as a loan. Upon the
closing of the second stage, we will extend an additional $11.5 million loan to
Telrad. These loans will bear interest at an annual rate of LIBOR+2%, and will
mature 20 years from the closing date of the first stage.

         As of December 31, 2004, based on estimates by our management,
forecasts on the operating results of Telrad and the indemnification we
provided Fortissimo in the transaction, our management assessed that the value
of the $9.5 million loan to Telrad loan was impaired and a provision was
recorded in our consolidated financial statements.

         Under the terms of the agreement, we and Fortissimo agreed to vote our
respective shares of Telrad so that following the completion of the second
stage, Telrad's board of directors will consist of seven directors and will be
comprised of three directors nominated by us, three directors nominated by
Fortissimo and one director jointly nominated by us and Fortissimo. In
addition, the agreement stipulates a list of matters which must be approved by
our and Fortissimo's joint consent, including the approval of Telrad's budget,
the appointment of Telrad's executives and the determination of their terms of
employment and the distribution of dividends. These rights confer on
Fortissimo, as the minority shareholder, the right to actually participate in
significant decisions related to the Telrad's normal course of business, and,
therefore, prevent us, as the majority shareholder, from exercising actual
control over Telrad and require our and Fortissimo's joint consent in decisions
on matters that are critical for the operating objectives of Telrad.

         Under the terms of the agreement, in the event Fortissimo does not
transfer the entire balance of the consideration in the second stage, it will
receive shares of Telrad on a basis proportionate to the consideration actually
paid. In such event, the agreement provides for a


                                      21
<PAGE>


formula for appropriate changes to be made to the composition of Telrad's board
of directors, the voting rights granted to Fortissimo, the loan amounts we
extend to Telrad and the terms of Fortissimo's option to purchase additional
shares, as described above.

         As a result of this transaction, since the closing of the first stage
in November 2004, Telrad has been included in our financial statements,
according to Israeli GAAP and according to U.S. GAAP, by the proportionate
consolidation method, at a rate of 80.5%.

         Recent developments

         On June 22, 2005 we completed the second stage of the sale of shares
of Telrad, amounting to 19.5% of Telrad's shares, thereby completing the sale
of 39% of Telrad's shares. As a result of the accelerated reorganization
measures implemented at Telrad (as described below under "Cost Reduction
Plan"), we and Fortissimo entered into an amendment to the original agreement,
pursuant to which the terms of the second stage of the transaction were
changed. International private equity fund HarbourVest International Private
Equity Partners and Israeli based Poalim Ventures joined Fortissimo Capital in
this investment. Under the amended terms of the transaction, we received $6.25
million for the 19.5% of Telrad's shares transferred in the second stage,
instead of the $10.5 million provided for in the original agreement. However,
instead of extending a loan to Telrad with the proceeds from the sale in the
second stage as provided in the original agreement, under the amended terms of
the transaction, we retained these proceeds. Under the amended terms of the
transaction, we were also relieved from certain of our indemnification
obligations to Fortissimo under the original agreement. As a result of this
transaction, as of the closing of the second stage in June 2005, Telrad will be
included in our financial statements, according to Israeli GAAP and according
to U.S. GAAP, by the equity method.

         Reorganization plans

         Beginning in November 1998, Telrad's board of directors approved a
series of reorganization plans which included the reduction in the number of
employees through early retirement plans. The reorganization plans were
completed without disturbances to labor relations. In 2004, Telrad's board of
directors approved an additional reorganization plan that included the
reduction of approximately 85 additional employees. For 2004, 2003 and 2002,
our financial statements include expenses of NIS 29 million, NIS 2 million and
NIS 107 million, respectively, recorded under the item "Other income
(expenses), net". The 2004 reorganization plan was completed in 2005, with an
expense of NIS 40 million included in our financial statements for the first
quarter of 2005. As a result of these reorganizations, Telrad has reduced its
workforce to be in line with its current sales volume and requirements.

         Start-ups and new subsidiaries

         comMATCH Ltd., a wholly-owned subsidiary of Telrad, is a leading
provider of Last-Mile over IP solutions for telecommunications operators,
creator of DUET Carrier Grade VoIP (Voice over Internet Protocol, Gateways
portfolio. comMATCH is a spin-off of Telrad Networks. The company's mission is
to deliver carrier class VoIP and Media over IP solutions


                                      22
<PAGE>


enabling Multi-Service Operators and alternative carriers to deliver reliable,
high-quality and feature-rich telephony services over IP and TDM networks.

         The DUET family of products enables customers to seamlessly bridge
Legacy Public Switched Telephone Network, or PSTN, and IP networks via various
alternative infrastructures, like Cable TV, xDSL, fixed broadband wireless,
Gigabit Passive Optical Networks (GPON) and more. The company's technology
provides connectivity and interoperability for Next Generation Access and
Public Networks. comMATCH's sales in 2004 and 2003 totaled $3.9 million and
$1.8 million, respectively.

         Telrad Connegy Communications Inc. (Connegy). Telrad holds 52% of its
U.S. based subsidiary, Connegy, whose main products consist of the UNITe Family
of Business Systems and IP and LAN telephony solutions, including the advanced
i.Picasso 6000 IP telephone and the CNS 3200 Enhanced Hosted Communications
Platform. Connegy provides enterprise customers, carriers and others with a
comprehensive family of digital and VoIP telecommunication solutions and
applications. In 2004 and 2003, Connegy's net sales were $21.9million $21.0
million, respectively.

         Relationship with Nortel

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

         Credit Risk Exposure

         As part of the above mentioned agreements with Nortel, Telrad retained
the receivables from the related sales that typically include extended credit
terms to customers in countries that involve certain risks in light of their
political and economic conditions. These countries include Ethiopia, Myanmar,
Honduras, Chile, Bolivia and Georgia.

         As of December 31, 2004 and 2003, Telrad's long-term credit risk
exposure from these agreements amounted to NIS 22 million and NIS 27 million,
respectively. During the first quarter of 2005, Telrad further reduced its
long-term credit risk exposure by collecting an additional NIS 3 million in
receivables.

         Cost Reduction Plan

         After completing the first stage of the sale of 39% of the shares of
Telrad to Fortissimo, in addition to the reorganization plans and retirement
plans discussed above, Telrad implemented cost reduction measures, including
the consolidation of Telrad's former TNS and TON divisions into the ODM
division.


                                      23
<PAGE>


         Other Telecommunication Equipment Business

         In addition to ECI and Telrad, a small portion of our
telecommunication equipment business is conducted by Microwave Networks Inc.,
or MNI, in the United States. For the years ended December 31, 2004 and 2003,
MNI had sales of approximately NIS 145 million ( $ 33.6 million) and NIS 126
million ($29.2 million), respectively.

         As described above, we also have direct ownership of approximately
12.9% in ECtel, following the distribution by ECI, on May 10, 2004, of 7.6
million of its shares in ECtel to its shareholders, including us.

         Our Defense Electronics Business

         Our defense electronics business is conducted through the Elisra
Defense Group, or Elisra Group, and Tadiran Communications Ltd., or Tadiran
Communications.

         The Elisra Group includes Elisra Electronic Systems Ltd., or Elisra,
Tadiran Electronic Systems Ltd., or Tadiran Electronic, and Tadiran Spectralink
Ltd., or Tadiran Spectralink. The Elisra Group designs, develops, manufactures,
integrates and supports advanced system solutions for air, sea and land
deployment in over 25 countries.

         Excluding sales of Tadiran Communications, which are not consolidated
in our results of operations, for the years ended December 31, 2004 and 2003,
our defense electronics business had sales of NIS 1,166 million ($271 million)
and NIS 1,286 million ($299 million), respectively, representing 12.6% and
16.7%, respectively, of our consolidated net sales during these periods. In
2004 and 2003, the majority of sales of our defense electronic business were
made to defense-related customers.

         In 2004, the Elisra Group's sales to the Israeli Ministry of Defense,
or IMDF represented approximately 31% of the Elisra Group's sales.

         The principal companies in our defense electronics business are:

<TABLE>
<CAPTION>
                                       Percentage
                                       Of Equity
                                       Ownership        Principal Products and Services
                                       ---------        --------------------------------------------------
<S>                                    <C>              <C>
Elisra Electronic Systems Ltd.         70.0             Holding Company; Electronic warfare, equipment and
                                                        systems
Tadiran Electronic Systems Ltd.        100.0(1)         Command, control, communications and intelligence
                                                        systems for defense applications
Tadiran Spectralink Ltd.               100.0(1)         Advanced data and video links for military use
Tadiran Communications Ltd.            30.8 (2)         Communications devices and systems mainly for
                                                        military use
</TABLE>

(1)  Indicates the percentage of direct ownership by Elisra Electronic Systems
     Ltd.
(2)  Fully diluted, taking into consideration the exercise of outstanding stock
     options. As a result of our sale of shares in April 2005 our interest in
     Tadiran Communications decreased to 18.6%. See "Recent Developments"
     below.


                                      24
<PAGE>


         Elisra Group

         The Elisra Defense Group, managed and controlled by Elisra,
principally is involved in the design, manufacture, distribution and support of
a wide range of advanced electronic systems, primarily for the modern military.
The Elisra Group's companies are ranked among the most sophisticated defense
suppliers of Electronic Warfare systems, or EW, Command, Control, Communication
and Computing Intelligence systems, or C(4)I, and training simulators. The
Elisra Group's companies are suppliers to the Israel Defense Forces and are
deployed by modern armed forces around the world. The Elisra Group's companies
focus on the development of new and innovative technologies for a large range
of platforms with a professional staff of experienced engineers, software
programmers and highly skilled technicians.

         As of December 31, 2004, our defense electronics business had an
aggregate backlog of confirmed orders of NIS 2.0 billion ($462 million)
compared to NIS 2.2 billion ($513 million) as of December 31, 2003.

         Elisra Electronic Systems Ltd. (Elisra)

         Elisra designs, develops and produces electronic warfare and
surveillance systems for military purposes, as well as a range of electronic
and microwave components for the commercial market. Elisra offers a diversified
range of combat-proven electronic warfare systems, or EW, including radar
warning systems, active countermeasure systems, comprehensive self-protection
systems, electronic intelligence systems, or ELINT, and sophisticated
communication links, complemented by extremely light-weight components. Elisra
also develops a wide range of active and passive microwave components.
Microwave and Radio Frequency, or RF, components are essential to nearly all
intricate electronic equipment, as well as microwave telecommunication and
satellite systems.

         In July 2002, we entered into an agreement with Elta Systems Ltd. or
Elta, a wholly-owned subsidiary of Israel Aircraft Industries, to sell to Elta
30% of Elisra's shares for $100 million. In addition, we entered into a
shareholders' agreement with Elta to govern the relationship between us and
Elta as the shareholders of Elisra, including voting on the composition of
Elisra's board of directors and its decision making process, and the imposition
of certain limitations on the sale of Elisra's shares.

         Tadiran Electronic Systems Ltd. (Tadiran Electronic)

         Tadiran Electronic is engaged in providing solutions for a variety of
customers in the field of C(4)I, electronic warfare COMINT systems and spectrum
management and control systems.

         An array of electronic hardware and computer software is incorporated
into the C(4)I systems, which enable the collection, processing, analysis and
display of large quantities of information to facilitate effective
dissemination and accelerate decision making for better Battle Management
capabilities.


                                      25
<PAGE>


         Tadiran Electronic has developed a simulator for a Tactical Ballistic
Missile, or TBM, Defense Battle Management Center for the U.S. Ballistic
Missile Defense Organization, or BMDO, and the Israeli Ministry of Defense. The
simulator is currently operating and providing information for both
organizations.

         Tadiran Electronic is also a supplier of the Battle Management Center
of the Israeli Arrow Defense weapons system.

         Tadiran Electronics' activities in the field of electronic warfare
systems involve the design, development and distribution of a broad range of
strategic and tactical electronic warfare systems for ground, naval and
airborne platforms. Passive electronic warfare systems analyze and display
incoming signals and weapons information, while active electronic warfare
systems render hostile communication ineffective through electronic
countermeasure techniques.

         Based on electronic warfare technology, a new range of commercial
applications has evolved in the area of spectrum management control. Integrated
spectrum management and monitoring systems provide nationwide solutions to
various telecommunication administrations.

         Tadiran Spectralink Ltd. (Tadiran Spectralink)

         Tadiran Spectralink develops and manufactures data and video links for
a variety of applications, including unmanned aerial vehicles, guided weapons
and satellite systems for locating and rescuing downed pilots. Based on these
links, command and control systems for airborne and naval applications are
developed.

         In March 2001, a fire broke out at the plants of Tadiran Electronic
and Tadiran Spectralink, both of which are now wholly-owned by Elisra. The
management of these two companies estimate on the basis of, among other things,
the opinion of their legal advisers in this matter, that the indemnity from the
insurance companies would not be less than the book value of the damaged
property of approximately $36 million. During 2003, these two companies filed a
claim of $96 million to receive insurance payments for the equipment, building,
inventory and projects in progress damaged as a result of the fire. As of
December 31, 2003, we had received advances from the insurance companies
amounting to approximately $10 million. During the second quarter of 2004,
Tadiran Electronic and Tadiran Spectralink filed a motion with the district
court in Tel Aviv to issue a partial ruling of $33 million (in addition to the
$10 million in advances already paid by the insurance company), based on the
admission by the insurance company and its representatives of their liability
deriving from the insurance event, while the dispute focuses on the level of
damages. In December 2004, pursuant to a ruling of the district court in Tel
Aviv, the parties consented to the opening of a separate bank account, in which
the insurance company would deposit $15 million. Any withdrawal from this
account would require the court's approval until the conclusion of the
proceedings in the lawsuit. The lawsuit was sent to arbitration and the court
proceedings will be postponed until the end of the arbitration.


                                      26
<PAGE>


         Tadiran Communications Ltd. (Tadiran Communications)

         On September 10, 2004 we signed an agreement to acquire approximately
33% of the shares of Tadiran Communications (approximately 31% on a fully
diluted basis taking into consideration the exercise of outstanding stock
options) from Trefoil Israel Partners II, L.P., First Israel Mezzanine Fund
L.P. and First Israel Mezzanine Fund (in Israel) Limited Partnership for
approximately NIS 637 million (approximately $144 million). Our acquisition of
these shares, which closed in November 2004, was financed through a loan from
an Israeli bank secured by these shares.

         Tadiran Communications develops, manufactures and markets
communication devices and systems mainly for military purposes in over 50
countries world-wide. It provides a comprehensive range of integrated
communication solutions, offering one of the widest ranges of military
communication equipment on the market, including HF and VHF radios,
telecommunication systems, and military computers which also serve as
communication and navigation terminals. These product lines feature highly
immune, secure digital radio communication systems for voice and data.

         Tadiran Communications' products are in the fields of RF design and
development in frequencies ranging from 1.5 MHz - 5 GHz, Spread Spectrum
techniques (e.g. frequency hopping and direct sequence), crypto algorithms,
wireless data transfer application modems, error detection and correction
adapted to radio channels, advanced synchronization techniques, communications
protocols and radio channel control.

         Tadiran Communications is the Israel Defense Force's signal corps'
main supplier of communications equipment. Furthermore, Tadiran Communications
utilizes its expertise for civilian applications, which consist of Bluetooth
networks developed by its subsidiary TADLYS and Commercial HF radios designed
by its MOBAT division.

         Headquartered in Israel, Tadiran Communications has two foreign
subsidiaries: Talla-Com Tallahassee Communications Industries Inc.
("Talla-Com") and Telefunken Radio Communication Systems Co. KG ("Telefunken").
Talla-Com and its subsidiary, Tallahassee Technologies Inc., are both fully
owned. Based in Tallahassee, Fla., they serve as Tadiran Communications' U.S.
production and marketing vehicle, and a vehicle for increased participation in
Foreign Military Support ("FMS") projects. Telefunken is 75% owned by Tadiran
Communications. Based in Germany, Telefunken supplies technology and HF radio
products to the German army. Tadiran Communications is publicly traded on the
Tel Aviv stock Exchange under the symbol TDCM.

         Recent Developments

         On December 27, 2004, we entered into a series of agreements with
Elbit Systems Ltd., or Elbit, and with Federmann Enterprises Ltd., or
Federmann. Under the terms of an agreement with Elbit, we agreed to sell our
entire holdings in Tadiran Communications (approximately 33%) to Elbit for
approximately $146 million. Concurrently, pursuant to an agreement with
Federmann, we agreed to acquire approximately 9.8% of Elbit's share capital
from Federmann


                                      27
<PAGE>


for approximately $99 million and we will have the right to appoint 20% of
Elbit's directors, one of whom will serve as Vice Chairman of the Board.

         The two sales, which are interconnected and will be completed in two
stages, are subject to several conditions, including approval of the applicable
anti-trust regulators and approval of Elbit's shareholders.

         In the first stage, we will sell approximately 13.8% of the
outstanding share capital of Tadiran Communications to Elbit for approximately
$63 million, and concurrently, we will acquire approximately 5.3% of the
outstanding share capital of Elbit from Federmann for approximately $53
million. In the second stage, we will sell the balance of our holdings in
Tadiran Communications (approximately 19.2%) to Elbit for approximately $83
million and concurrently, we will acquire approximately 4.5% of the outstanding
share capital of Elbit from Federmann for approximately $46 million. The second
stage is contingent, among other things, on the closing of a transaction in
which Tadiran Communications will acquire from us our entire holdings
(approximately 70%) in Elisra. 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 we and Elbit will have "joint control" of
Tadiran Communications, meaning that we and Elbit will have an equal number of
directors, and there will be rotation of two-year terms for the chairman of the
board.

         On April 18, 2005, following receipt of the requisite approvals, the
first stage of the transaction was closed. Following the closing of the first
stage, we held approximately 18.6% of the outstanding share capital of Tadiran
Communications and approximately 5.3% of the outstanding share capital of
Elbit, and we and Elbit have an identical number of directors on the board of
Tadiran Communications. The closing date for the second stage was scheduled for
September 30, 2005. If all the other contingent 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.

         On July 6, 2005 we signed an amendment to these agreements, pursuant
to which we will sell our entire holdings in Elisra to Elbit, instead of to
Tadiran Communications as per the original agreements, for approximately $70
million and additional consideration following receipt of future insurance
proceeds. We also received the right to acquire Dekolink Ltd., a start-up
company in the cellular field that is wholly-owned by Elisra. As originally
agreed, we will sell the balance of our holdings in Tadiran Communications to
Elbit for $83 million. However, under the amended terms of the transactions,
contrary to the terms of the original agreement, this sale will be conducted in
two parts, and we and Elbit will share joint control of Tadiran Communications,
as described above, following the sale of the first 5%. The sale of our
remaining shares in Tadiran Communications is contingent on the execution of
our sale of our 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, we will acquire only an additional 2.3% of Elbit from Federmann for
$25 million, regardless of whether the sale of Elisra is approved by the
Israeli Anti-Trust


                                      28
<PAGE>


Commissioner. Upon completion of all the stages of these transactions, we will
hold approximately 7.6% of Elbit.

         Our Agrochemicals Business

         Our agrochemicals business is conducted through the direct and
indirect subsidiaries of Makhteshim-Agan Industries Ltd., or MA Industries. MA
Industries is the world's leading generic manufacturer of crop protection
products. After a long period of coordination and cooperation as separate
publicly-traded entities, Makhteshim and Agan formally merged in May 1998. The
new MA Industries replaced its predecessors on the Tel Aviv Stock Exchange and
now has several wholly-owned subsidiaries which include Makhteshim Chemical
Works Ltd., or Makhteshim, Agan Chemical Manufacturers Ltd., or Agan, and
Milenia Agro Ciensias S.A., or Milenia, all of which are collectively referred
to as "the MA Group." These companies are leading international suppliers of
generic crop protection products. The MA Group produces a full range of crop
protection chemicals, including acaricides, insecticides, fungicides,
herbicides as well as plant growth regulators. The company is also engaged in
the development, production and marketing of fine chemicals, intermediates,
specialty aroma chemicals, industrial chemicals, antioxidants and
nutraceuticals. For the years ended December 31, 2004 and 2003, our
agrochemicals business had sales of NIS 6,895 million ($1,601 million) and NIS
5,192 million ($1,205 million), respectively, representing 74.7% and 67.5%,
respectively, of our consolidated net sales during such periods. International
activities, primarily sales in Europe, North America and Latin America,
accounted for 93.3% and 92.6% of our agrochemicals business' sales in 2004 and
2003, respectively.

         The principal companies in our agrochemicals business are:

<TABLE>
<CAPTION>
                                       Percentage
                                       Of Equity
                                       Ownership        Principal Products and Services
                                       ---------        --------------------------------------------------
<S>                                    <C>              <C>
Makhteshim-Agan Industries Ltd.         38.6(1)(2)      Holding Company
Makhteshim Chemical Works Ltd.         100.0 (3)        Insecticides and fungicides and other chemicals
Agan Chemical Manufacturers Ltd.       100.0 (3)        Herbicides and synthetic aroma chemicals
Milenia Agro Ciensias S.A.             100.0 (3)        Formulation and distribution of crop
                                                        protection chemicals
</TABLE>

(1)  The ordinary shares of MA Industries are traded on the Tel Aviv Stock
     Exchange, or TASE.
(2)  As a result of our sale of 15.9 million shares of MA Industries on
     February 3, 2005 and the issuance of additional shares by MA Industries in
     the second quarter of 2005 upon the conversion of convertible debentures
     and the exercise of stock options including employee stock options, our
     interest in MA Industries decreased to approximately 32.0% as of June 30,
     2005 (approximately 28.6% on a fully diluted basis taking into
     consideration the exercise of outstanding stock options and the conversion
     of outstanding convertible debentures).
(3)  Indicates the percentage of direct ownership by MA Industries.

         MA Industries results were included in our consolidated financial
statements according to Israeli GAAP as of and for the year ended December 31,
2004 despite the decrease in our


                                      29
<PAGE>


ownership to below 50% since, in our management's opinion, we continued to
exercise effective control over MA Industries as of December 31, 2004, as
described below. However, under U.S. GAAP, MA Industries' financial statements
are not included in our consolidated financial statements as of and for the
year ended December 31, 2004, but rather are recognized according to the equity
method. See also Note 28 to our consolidated financial statements included
elsewhere in this annual report.

         The Agrochemicals Business Environment in 2004

         After several years in which the agrochemicals market underwent
significant structural changes, recovery in the past two years has been
indicated by increased demand for plant protection chemicals and improved
business results of most companies. In 2004, growth has continued in the
agrochemical market, and the market has reached $30.7 billion (an increase of
15% over 2003).The principal factors affecting the market in 2004 were high
demand, excellent harvests in the USA, good weather conditions in northern
Europe, improving economic conditions in South America (mainly Brazil), and an
outbreak of soybean rust in South America. Other contributing factors were the
weak US dollar and low levels of stocks at the beginning of the year. Even
after eliminating the effects of currency fluctuations and inflation, all
regions showed growth in real terms except for North America, where the market
remained stable.

         The agrochemicals market has become more concentrated since the recent
years' trend of mergers of the multinational companies. At present, six large
companies hold approximately 85% of the conventional agrochemicals market. This
process of consolidation has led to large gaps between the two leading
companies - Syngenta and Bayer - and the rest of the companies. In the
short-to-medium term, the process has stabilized the market by reducing the
number of competitors and has tempered the falling prices.

         Crop Protection

         Generic agrochemicals offer an alternative source for widely utilized
chemicals previously manufactured under patents by larger research-based
chemical manufacturers. Research-based chemical manufacturers often focus their
resources on developing new agrochemicals and supply of additional chemicals by
generic manufacturers, such as MA Industries, to supplement their capacity. In
the next few years, as a result of decreased resources committed to research
and development of new agrochemicals products and the expiration of existing
patents, a significant number of widely used agrochemicals are expected to lose
patent protection in many geographic regions (primarily South America),
substantially increasing the available market for sales by generic
manufacturers. The off patent component of the agrochemical industry grew in
recent years to approximately 67% as of December 31, 2003 and is expected to
exceed 70% of the agrochemical market by 2007. In addition, the modernization
of the agricultural industries of Eastern Europe and other developing countries
offers increasing sales opportunities for both research-based and generic
agrochemical manufacturers.

         The major competitors in the international market for agrochemicals
are major international research-based chemical producers. These major
international chemical producers have significant influence on the prices of
most of MA Industries' products. In the Israeli


                                      30
<PAGE>


market, MA Industries competes with importers with respect to most of its
products, and competes with both importers and Israeli producers with respect
to non-pesticide products.

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

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

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

         The MA Group markets its crop protection chemicals primarily to
national distributors and foreign manufacturers, who use such chemicals in the
formulation of a wide range of products and sell the formulations to
distributors and end users. The MA Group manufactures over 70 different active
ingredients, which are sold as technical grade materials and "ready"
formulations. These technical grade materials are used in the formulation of a
wide range of herbicides, insecticides, fungicides and plant growth regulators.
The "ready" formulations are sold to distributors. Agan sells its synthetic
aroma chemicals principally to the detergent, soap and cosmetics industries. No
single product manufactured and sold by the MA Group accounted for more than
10% of MA Industries' total sales in 2004 and 2003.


                                      31
<PAGE>

         Foreign Activities

         As part of our strategy to focus on our core businesses and increase
market penetration in the agrochemicals industry, we have continued to expand
our agrochemicals business abroad.

         In October 2001, MA Industries and several of its subsidiaries entered
into a securitization transaction, pursuant to which the subsidiaries agreed to
sell all their accounts receivable to several foreign companies which were
established for this purpose, but which are not owned or controlled by MA
Industries or its subsidiaries. The acquisition of the accounts receivable by
these companies was financed by a United States affiliate of the Bank of
America Group. On September 28, 2004, MA Industries and certain subsidiaries
signed an agreement with Bank of America to terminate the securitization
undertaking. On that same date, they entered into a new agreement with Rabobank
International for the sale of trade receivables in a securitization transaction
to replace the previous agreement with Bank of America. The new agreement is
similar in principle to the prior agreement with several changes, including,
among others, that in the new agreement additional MA Indusries subsidiaries
are included in the transaction. The volume expected to be at the disposal of
the companies purchasing the accounts receivable is approximately $250 million
(compared with $150 million in the previous securitization agreement), on a
current basis, so that the considerations received from the customers whose
debts were sold will be used to purchase new debts. Under the terms of the
securitization agreements, MA Industries will handle collection of the sold
debts for these companies in consideration of a fee, which is to be determined
in accordance with such agreements. The period in which the companies will sell
their trade receivables will be one year from the closing date of the
transaction. This period may be extended, with the consent of all the parties,
for additional one-year periods, up to a maximum of four extensions. Under the
terms of the agreement, MA Industries undertook to meet certain financial
covenants, mainly a ratio of liabilities to capital and profitability ratios,
and as of December 31, 2004 and June 30, 2005, MA Industries is in compliance
with these covenants. As of December 31, 2004, MA Industries received cash
proceeds of approximately $142.5 million from this securitization transaction.

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

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


                                      32
<PAGE>


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

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

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

         In March 2004, MA Industries issued non-marketable convertible
debentures in a private placement to institutional investors in the amount of
$150 million par value, in consideration for their par value. The debentures
are for a seven-year period and bear annual interest at the rate of 1.75%, to
be paid annually, in the month of March. The debentures may be converted into
ordinary shares of MA Industries, par value NIS 1.00 per share, at a conversion
rate of NIS 20.5 per share, according to a fixed exchange rate of NIS 4.514 per
$1.00. The ordinary shares to be issued upon conversion of the debentures will
be listed for trading on the Tel Aviv Stock Exchange. On March 22, 2007, the
debenture holders will have the right, by serving prior written notice to MA
Industries (between 30 and 60 days prior to March 22, 2007), to demand
redemption of the debentures (principal and interest balance at such date). MA
Industries will have the right to force the conversion of the debentures,
beginning March 22, 2007, as long as the average trading price of MA
Industries' ordinary shares 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. As of June 30, 2005, $121.5 million of the $150
million debentures were converted into approximately 27.8 million shares.

         On January 14, 2004, we sold 27 million shares of MA Industries to UBS
Securities Israel Ltd. for approximately NIS 418 million. The sale generated a
capital gain, before tax, of NIS 160 million in the first quarter of 2004, and
our percentage ownership in MA Industries decreased to 41.29%. Additionally, as
a result of the sale, we utilized a deferred tax asset of NIS 59 million that
had been created in 2003, because of expectations to utilize carryforward tax
losses.

         As a result of this transaction, and following the issuance by MA
Industries of additional shares upon the conversion of convertible securities
issued by MA Industries, including the convertible debentures mentioned above,
our ownership percentage in MA Industries decreased to 38.6% as of December 31,
2004.

         In the opinion of our management, the broad dispersal of voting rights
among the other shareholders of MA Industries, the low level of shareholding by
the other shareholders of MA Industries, the low likelihood of the creation of
a block of votes opposing our interests at shareholder meetings and past
experience related to the attendance at shareholder meetings, as well as the
voting percentages and opposition at the meetings indicate that the economic
substance that stood and continues to stand as the basis of the relationship
between us and MA Industries immediately before and after the transactions
described above demonstrates our effective control of MA Industries, as
measured by our ability to determine the financial and


                                      33
<PAGE>


operational policies of MA Industries. Therefore, MA Industries' financial
statements continue to be included in our consolidated financial statements for
the year ended December 31, 2004. However, under U.S. GAAP, MA Industries'
financial statements are not included in our consolidated financial statements
in 2004, but rather are recognized according to the equity method. See also
Note 28 to our consolidated financial statements included elsewhere in this
annual report.

         Recent Developments

         On February 3, 2005, we sold 15.9 million shares of MA Industries to
Merrill Lynch International for approximately NIS 374 million. The sale
generated a capital gain, before tax, of approximately NIS 201 million in the
first quarter of 2005. Additionally, as a result of the sale, we utilized a
deferred tax asset of approximately NIS 69 million that had been created in
2004, because of expectations to utilize carryforward tax losses. Under the
terms of the sale, we undertook not to sell additional shares of MA Industries
for a nine-month period from the date of sale. As a result of this sale, and
following the issuance by MA Industries of additional shares in the second
quarter of 2005 upon the conversion of convertible securities and the exercise
of employee stock options, our ownership percentage in MA Industries decreased
to 32% as of June 30, 2005 (28.6% on a fully diluted basis taking into
consideration the exercise of outstanding stock options and the conversion of
outstanding convertible debentures).

         Following the sale of the shares in February 2005, we evaluated the
implication for continuing to consolidated MA Industries in our financial
statements, beginning from the first quarter of 2005. Based on an evaluation of
the range of circumstances created as a result of the February 2005 sale, we
decided that continuation of the consolidation of MA Industries is not
consistent with the economic substance. Therefore, beginning from the first
quarter of 2005, the consolidation of MA Industries in our financial statements
was discontinued, and our investment in MA Industries is accounted for
according to the equity method.

         On March 8, 2005, the board of directors of MA Industries resolved to
adopt a new option plan for its officers and employees and those of its
subsidiaries. Under the terms of the plan, on March 14, 2005, MA Industries
issued stock options exercisable for up to 14,900,000 ordinary shares of MA
Industries. Assuming all the options are exercised, the plan recipients will
hold approximately 3.05% of MA Industries share capital, including 2,500,000
options that were deposited with a trustee for future distribution. However,
the offerees 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.

Our Venture Capital Business

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


                                      34
<PAGE>


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

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

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

         As of December 31, 2004, Koor CVC's future commitment to invest in its
venture capital fund (Pitango) totaled approximately $5 million. This amount
may be drawn upon by the fund at any time over the next 1-3 years, based upon
their needs.

         During 2004, Koor CVC recorded NIS 58 million of provisions. These
provisions were as a result of depreciation in value for some of the Koor CVC
portfolio companies and portfolio funds.

         During 2004, Koor CVC transferred approximately $9.1 million in
follow-on investments in its portfolio start-up companies and its portfolio
venture capital funds, and received approximately $8.8 million in proceeds from
the sale of its holdings in its portfolio companies, Riverhead Networks and
Envara.

         As of December 31, 2004, the book value of Koor CVC's investments in
its start-up companies, a venture capital fund and Scopus Network Technologies,
or Scopus, in which Koor CVC holds a 27% interest on a fully-diluted basis,
totaled approximately NIS 181 million ($42 million).

Our Other Businesses

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

         The principal companies in our other businesses are:

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

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


                                      35
<PAGE>


         Tourism

         Our interests in Israel's tourism industry include ownership and
management of hotels and resorts, and other tourism-related services, such as
airlines. For the years ended December 31, 2004 and 2003, our tourism business
had sales of NIS 430 million ($100 million) and NIS 309 million ($72 million),
respectively.

         Sheraton Moriah (Israel) Ltd. (Sheraton Moriah)

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

         Following the continuous crisis due the escalation of violence in
Israel since October 2000, since April 2003, a positive trend has developed in
the incoming tourism market. Tourist entries are still over 40% less than 2000,
but the improvement is consistent. As a result of the environment, Sheraton
Moriah's management has continued its strict control on expenses while
emphasizing revenue enhancement, including focusing on direct sales via a local
central reservations office, hard-sale local web-site, and leverage of its
international brand to increase the market share in both the domestic tourism
and incoming tourism markets.

         Knafaim-Arkia Holdings Ltd. (Knafaim)

         On September 29, 2004 we signed two agreements to sell 16% of the
shares of Knafaim for approximately NIS 121 million, and a third agreement for
the sale of an additional 3% of the shares of Knafaim for approximately NIS 23
million. As a result of these sales, our shareholding in Knafaim decreased from
approximately 28.3% to approximately 9.2%. Accordingly, for Israeli GAAP
purposes, the investment in Knafaim is stated by the cost method, beginning
from the date of the sale, and is classified as available-for-sale under FAS
115 for U.S. GAAP purposes. In the statement of operations for 2004, we
recorded a gain of NIS 51 million. Since we intend to sell the remainder of the
shares in Knafaim, the investment is presented within current assets. As a
result of management's intention to sell the remainder of its holding in
Knafaim, we recorded deferred taxes of approximately NIS 8 million 2004 in
respect of the anticipated utilization of carryforward tax losses.

          Knafaim was incorporated in 1980. Knafaim owns a variety of
businesses in the travel and tourism industry, including Arkia Israeli Airlines
Ltd. (75%), Israel's largest domestic airline. Arkia also purchases and leases
back aircraft and operates charter flights to Europe. Knafaim also holds other
companies that supply various tourism services, both domestically and
internationally.

         During 2003 and the first half of 2004, Knafaim acquired shares and
options of El Al Israel Airlines Ltd., or El Al, which was majority-owned by
the Israeli government. During the second quarter of 2004, after receiving the
requisite approval to increase its stake in the shares of El Al above 5%,
Knafaim exercised some of the options. Following this exercise, Knafaim held
22% of El Al's issued share capital, and pursuant to a third-party voting
agreement, Knafaim held 24.9% of the voting rights of El Al. During the third
quarter of 2004, Knafaim filed a request


                                      36
<PAGE>


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 Knafaim and El-Al, with restrictive conditions, mainly regarding the
sale of Knafaim's aviation activities to an independent third party.

         On December 22, 2004, Knafaim 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, Knafaim
exercised part of the purchase option so that as of March 31, 2005, Knafaim
holds approximately 39.6% of the issued and paid shares of El Al and
approximately 42.6% of the voting rights in El Al according to authorization
that was granted to Knafaim by a third-party. The third-party authorization
expired on May 2, 2005 with no other arrangement formulated in respect of the
third party's securities and since May 2, 2005 Knafaim has no voting rights in
connection with the third party's securities.

         Real Estate

         Tadiran's Real Estate

         In March 2002, Tadiran's real estate was transferred to us as a
liquidating dividend. We sold most of the real estate assets to a group of
investors headed by Denisra International Ltd. and Ranitech Ltd for
consideration of approximately NIS 273 million, and we recognized a capital
gain of approximately NIS 29 million. As a result of the sale of this real
estate, we realized a tax reserve of approximately NIS 44 million, created in
respect of those assets, and we paid taxes of approximately NIS 40 million.

         The remaining balance of the real estate assets we received from
Tadiran, in the amount of NIS 42 million, was recorded under "Assets designated
for sale" in our consolidated balance sheet as at December 31, 2004.

         Koor Properties Ltd. (Koor Properties)

         Koor Properties, our wholly-owned subsidiary, owns and develops
directly and indirectly real estate in Israel. As of December 31, 2004, Koor
Properties owned directly and indirectly an aggregate of approximately 52
thousand square meters of real property in different stages of development.
Most of the land is commercially developed.

         During 2004, Koor Properties sold most of its remaining real estate
assets for NIS 3 million. We recorded a gain of NIS 2 million from this sale.

         Trade

         Koor Trade Ltd. (Koor Trade)

         Koor Trade, our wholly-owned subsidiary, imports, exports and
distributes a broad range of industrial, agricultural and consumer products
through its worldwide network of offices, including offices in Europe, Asia,
Latin America and Australia. For the years ended December


                                      37
<PAGE>


31, 2004 and 2003, Koor Trade had sales of NIS 112 million and NIS 96 million,
respectively. Koor Trade owns a 49% equity interest in Balton C.P limited, an
English international trading company, which is engaged in trading activities
in seven countries in Africa relating to agricultural, telecommunications,
electromechanical and air-conditioning equipment, construction and other
projects.

Suppliers

         The companies engaged in our businesses purchase the materials and
components used in their products from numerous independent suppliers. These
materials and components are not normally purchased under long-term contracts.
Most of the items purchased by these businesses are obtainable from a variety
of suppliers, and such businesses normally maintain alternative sources for
major items. In some cases these companies have annual purchasing agreements
with their major suppliers, which establish prices, quality thresholds and
delivery schedules.

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

Research and Development

         The companies in our telecommunication equipment, defense electronics,
venture capital investment and in the agrochemicals businesses are actively
engaged in research and development programs intended to develop new products,
manufacturing processes, systems and technologies and to enhance existing
products and processes. Research and development is conducted through our
subsidiaries and affiliates, and is funded by a combination of our own
resources and grants from the Israeli Government. We believe our research and
development effort has been an important factor in establishing and maintaining
our competitive position.

         The following table sets forth the percentage of gross research and
development expenditures incurred by our principal businesses in 2003 and 2004
as a percentage of the total sales of these businesses:

                                                 2003            2004
                                               --------        --------
            Telecommunications Equipment        10.2%            8.4%
            Defense Electronics                  5.5%            4.4%
            Agrochemicals                        1.7%            1.6%

         Our updated research and development efforts have resulted in an
increase in the sales of internally designed products. We believe that research
and development in high technology areas, such as our telecommunications
equipment, defense electronics and agrochemicals businesses, is important to
our future growth, particularly with respect to products targeted for


                                      38
<PAGE>


export markets. Accordingly, we anticipate that these businesses will account
for a majority of our research and development efforts in the future. As part
of our research and development programs, we not only seek to develop new
products, but also to apply newly developed technologies to improve our
existing products.

         In each of the last three fiscal years, we received grants from the
Government of Israel through the Office of the Chief Scientist, or OCS, for the
development of certain products. We generally receive from the OCS 20% to 66%
of certain research and development expenditures for particular projects. Under
the terms of the Israeli Government participation, a royalty of 2% to 5% of the
net sales of products developed from a project funded by the OCS is generally
required to be paid, beginning with the commencement of sales of products
developed with grant funds and ending when 100% to 150% of the grant is repaid.
We have paid in the past, and currently pay, royalties on sales of such
products. The terms of the Israeli Government participation also require that
the research and development be conducted by the applicant for the grant as
specified in the grant application and that the manufacturing of products
developed with government grants be performed in Israel, unless a special
approval has been granted. Separate Israeli Government consent is required to
transfer to third parties technologies developed through projects in which the
government participates. Such restrictions, however, do not apply to exports
from Israel of products developed with such technologies. From time to time the
Government of Israel has revised its policies regarding the availability of
grants and participation, and there can be no assurance that the Government's
support of research and development will continue in the future. In addition,
in order to be eligible for the governmental grants, programs and tax benefits,
we must continue to meet certain additional conditions, including making
specified investments in fixed assets. Should we fail to meet such conditions
in the future, we could be required to refund grants or tax benefits, together
with interest and inflation adjustments.

         The following table shows, for each of the periods indicated, our
gross research and development expenses, the portion of such expenses that were
funded by the Israeli Government (primarily through the OCS) and the net cost
to us of our research and development expenses:

<TABLE>
<CAPTION>
                                                              Year ended December 31,
                                                 ---------------------------------------------------
                                                   2002          2003          2004           2004
                                                 --------      --------      --------       --------
                                                                                             ($ in
                                                     (Adjusted NIS in thousands)            thousands)

<S>                                               <C>           <C>           <C>            <C>
Gross research and development expenses           257,101       219,391       226,335        52,538
Portion funded by the Israeli Government(1)           788        (1,952)       14,220         3,301
Net research and development expenses             256,313       221,343       212,115        49,237
</TABLE>
___________________________

(1) Net of royalties.

Competition

         In 2004, the majority of our sales from telecommunications equipment,
defense electronics and agrochemicals businesses were derived from
international sales. The companies comprising these businesses are focusing on
developing new markets to increase international sales. The worldwide marketing
of products in each of these businesses is highly competitive


                                      39
<PAGE>


and certain competitors are substantially larger and have substantially greater
financial, production and research and development resources, more extensive
marketing and selling organizations, greater name recognition and longer
selling experience than us. Some of our competitors are also able to provide
their customers with more direct financing or greater access to long-term,
relatively low-cost government loans to finance equipment purchases.

Patents and Intellectual Property

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

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

Regulation

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

         Monopoly and Pricing Regulations

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

         Environmental, Health and Safety Matters

         General

         We are subject to laws and regulations concerning environmental
conditions, product safety, health and safety matters and the regulation of
chemicals in countries where we manufacture and sell our products. These
requirements include regulation of the handling,


                                      40
<PAGE>


manufacturing, transporting and use and disposal of certain materials, as well
as regulation concerning the discharge of pollutants into the environment. In
the normal course of our businesses, we are exposed to risks relating to the
possible release of hazardous substances into the environment, which may cause
environmental or property damage or personal injuries. In Israel, where we
maintain our principal production facilities, losses and damages relating to
continuous environmental pollution are currently uninsurable.

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

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

         In recent years, the operations of our businesses have become subject
to increasingly stringent legislation and regulation related to occupational
safety and health, product registration and environmental protection. Such
legislation and regulations are complex and constantly changing, and there can
be no assurance that such regulatory changes in the future will not require us
to make significant capital expenditures to modify, supplement or replace
equipment, or to change methods of disposal or discharge, or the manner in
which we manufacture products or operate our businesses. In Israel, in
particular, we anticipate that increasingly stringent requirements will result
in substantial expenditures, particularly for improvements of environmental
controls at older facilities. We have generally adopted, or intend to adopt in
our


                                      41
<PAGE>


newer facilities, environmental control standards comparable to those set by
the German Technische Anleitung Luft air emission regulations. These
regulations set forth strict controls on air emissions from industrial
facilities. The Israeli government has looked to these standards as a basis for
upgrading its air pollution requirements and has applied the standards to some,
but not all, facilities in Israel.

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

         Agrochemical Industry

         The distribution and use of agricultural chemical products, including
crop protection chemicals such as those produced by the agrochemicals business,
are regulated in most parts of the world, and require extensive testing,
quality control and compliance with registration procedures. The strictest
standards are applied in the United States, where the Environmental Protection
Agency, or EPA, is the leading regulator, and in Japan and Western Europe. The
granting of a registration involves consideration of health, safety and
environmental issues, as well as the performance and benefits of the product.
The registration for an agricultural chemical product in the U.S. and in
Western Europe is often subject to data call-in or process. Usually, updating
the registration necessitates the submission of additional data by the MA
Group, our agrochemical division. Re-registrations, which permit the continued
sales of pesticides for an additional period, are frequently granted as a
matter of course, subject to compliance during the term of the registration
period. While the MA Group is not aware of any immediate intent to cancel any
of its registrations, there can be no assurance that the MA Group will not face
a revocation process or encounter difficulties in renewing the registrations
for its products for additional periods.

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

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


                                      42
<PAGE>


         Most of the manufacturing activities of the MA Group take place at the
two production facilities in Israel. The board of directors of MA Industries
appointed an Ecology Committee to receive regular reports from all the
subsidiaries where manufacturing takes place (Israel, Brazil, Colombia, Greece
and Spain). The subsidiaries control the environmental issues pertinent to
their particular products, which differ from site to site and from country to
country. The investment in meeting environmental standards amounted to about
$19 million in 2002, $23 million in 2003 and $24 million in 2004, and it is
estimated that the annual investment will be between $18 and $22 million in the
coming years, including expenditures as described below.

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

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

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

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

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


                                      43
<PAGE>


program for its implementation. In addition, in 1998 the MA Group also adopted
the German standard Ta Luft (air pollution) at its Ramat Hovav and Ashdod
sites.

         Over the past several years various tests have been performed by
different agencies to test the ground contamination in the Ramat Hovav area as
well as the area surrounding the subsidiary's premises in Be'er Sheva. As of
December 31, 2004, MA Industries' management did not expect a significant
impact with respect to MA Industries from implementation of the report's
recommendations, and, therefore, no provision has been included in the
financial statements.

         In May 2004, a subsidiary of MA Industries owning plants at the Ramat
Hovav site, received notice of a change in the terms of its business license,
pursuant to which the plants were required to change the method used to treat
sewage from the existing treatment, and to do so independently through the
implementation of vaporization processes. These terms include demands that,
within a short period of time, the plants conduct research and development for
the purpose of customizing the process to the composition of each plant's
sewage, and later, to build a suitable facility. Additionally, formulation
processes are to be implemented, whereby the plants must present the Ministry
of Environmental Protection with a research and development program for the
purpose of implementing the process with respect to the sewage. At the same
time, the Ministry of Environmental Protection set January 1, 2008 as the date
by which the plants must treat the sewage in the requisite format and to stop
the flow of sewage into the Ramat Hovav Industrial Council's vaporization pools
and treatment facilities.

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

         In the estimation of MA Industries' management, based on advice of its
legal counsel, in view of the preliminary stage of the process, it is not
possible at this time to estimate the prospects of the mediation. In the
estimation of MA Industries' management, 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 MA Industries' management is unable to
estimate at this time.

         On November 28, 2004, the Israeli government reached a decision
approving a plan to reduce air and water pollution deriving from the Ramat
Hovav industrial area. The plan calls for, among other things, (i) more
restrictive rules regarding the treatment of sewage by the plants in the area
(derived from the additional business license conditions that are the subject
of the administrative appeal described above) to be complied with in two
stages, the first by June 30, 2006 and the second by December 31, 2007; (ii)
the drying and rehabilitation of the vaporization pools in the area by the
Ramat Hovav Industrial Council, to be completed no later than December 31,
2012; and (iii) the formulation and implementation by the Ministry of


                                      44
<PAGE>


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

         In the estimation of MA Industries' management, based on advice from
its legal counsel, in view of the preliminary stage of the process, it is not
possible at this time to estimate the costs of complying with the Israeli
government's plan.

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

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

         Defense and Government Contracts

         Our businesses which sell products to military and governmental
markets are subject to various statutes, regulations and administrative rules
governing defense and government contracts and the manufacture and sale of
defense products in the United States, Israel and other countries throughout
the world.

         Defense electronics subsidiaries export a number of military systems
and products in accordance with the military export policy of the State of
Israel. Current Israeli policy encourages exports to approved customers of
military systems and products similar to those manufactured by us, provided
that such exports do not run counter to Israeli Government policy, including
national security considerations. A permit is required to initiate a sale
proposal and an export license is necessary for the actual sale transaction. To
date, we have not encountered significant difficulties in obtaining or
retaining the necessary permits or licenses, but no assurance can be given that
we will continue to be able to obtain or retain such permits or licenses or
that one or more permits or licenses will not be revoked, or that governmental
policy with respect to military exports will not be altered. Difficulties in
obtaining or retaining such permits or licenses, if encountered in the future,
could have a material adverse effect upon our business.

         In addition, the revocation of a required permit or license, after
having been granted, would likely preclude us from fulfilling our contractual
obligations. In such a case, we might be unable to assert the defense of force
majeure (or a similar defense) relating to any resulting


                                      45
<PAGE>


breach of contract claim and might therefore be held liable for damages, or
subject to other penalties. Substantial damages arising from such a claim could
have a material adverse effect upon our results of operations and financial
condition. In addition, suspension or disbarment of us as a government
contractor is among the possible penalties that could be imposed for defaulting
on a contractual obligation due to the revocation of a license.

Joint Ventures, Subcontracting and Teaming Arrangements

         Several of our military projects are conducted through joint ventures,
subcontracting and other "teaming" arrangements pursuant to which we are
responsible for a portion, but less than all, of a project. In certain
instances, we are not permitted to participate, or even assist, in portions of
projects for which we are not responsible. Notwithstanding the foregoing, in
the event of a termination of, or a default under, certain prime contracts or
subcontracts (whether or not we are a party to such prime contract or
subcontract), including a termination for cause or convenience or a default on
the part of a joint venture partner, prime contractor, subcontractor or
"teaming" partner (for which termination or default neither we nor such other
person is responsible and which termination or default may be beyond our
control and such other person's control), we might be held liable for damages,
or subject to other penalties, which could be very substantial and might have a
material adverse effect on our results of operations and financial condition.
Moreover, certain joint ventures, subcontracting or other "teaming" agreements
to which we are a party, deny or limit the right of the non-defaulting party to
seek damages or indemnification from the defaulting party in such
circumstances.

         Contract Financing

         There are various types of financing terms applicable to defense
contracts (and in some cases, large telecommunications contracts). In some
cases, we receive progress or milestone payments according to the percentage of
progress in our performance or the achievement of specific milestones. In
certain cases, work is performed prior to receipt of any payment, which means
that we finance the project. In other cases, we receive advance payments prior
to incurring the costs of fulfilling a contract, which creates a positive
project cash flow. In this latter case, the customer normally requires
financial guarantees against advance payments. We often receive substantial
advances from our customers. In the event that a contract under which an
advance has been paid is canceled, we may be required to return all or a
portion of such advances to the customer.

         Fixed Price Contracts

         Approximately 90% of our defense contracts are made on a fixed price
basis. Such contracts are subject to the risk that actual costs may exceed
those anticipated at the time the contracts are executed, particularly when the
products to be sold pursuant to the contracts require a substantial amount of
development.


                                      46
<PAGE>


Organizational Structure

         The following is a list of all of our significant subsidiaries and
affiliates as of December 31, 2004, including the name, country of
incorporation or residence, proportion of ownership interest and, if different,
proportion of voting power held.

<TABLE>
<CAPTION>
                                        Country of         Percentage     Percentage of voting
                                     Incorporation or     of ownership     power (if different
  Name of Subsidiary/Affiliate          residence           interest         from ownership)
---------------------------------    ----------------     ------------    --------------------
<S>                                       <C>                 <C>                 <C>
Koor Corporate Venture Capital            Israel              100%                N/A
Elisra Electronic Systems Ltd.            Israel               70%                N/A
Makhteshim-Agan Industries Ltd.           Israel             38.6%(1)             N/A
Tadiran Communications Ltd.               Israel             30.8%(2)             N/A
ECI Telecom Ltd.                          Israel             30.2%                N/A
Telrad Networks Ltd.                      Israel             80.5%                N/A
ECtel Ltd.                                Israel             12.9%                N/A
Sheraton Moriah (Israel) Ltd.             Israel             55.0%                N/A
Knafaim-Arkia Holdings Ltd.               Israel              9.2%                N/A
Koor Trade Ltd.                           Israel              100%                N/A
</TABLE>
______________________

(1)  As a result of our sale of 15.9 million shares of MA Industries on
     February 3 ,2005 and the issuance of additional shares by MA Industries in
     the second quarter of 2005 upon the conversion of convertible debentures
     and the exercise of stock options including employee stock options, our
     interest in MA Industries decreased to approximately 32.0% as of June 30,
     2005 (approximately 28.6% on a fully diluted basis taking into
     consideration the exercise of outstanding stock options and the conversion
     of outstanding convertible debentures).
(2)  Fully diluted, taking into consideration the exercise of outstanding stock
     options. As a result of our sale of shares in April 2005, our interest in
     Tadiran Communications decreased to 18.6%. See "Our Defense Electronics
     Business - Recent Developments" above.


Property, Plants and Equipment

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

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

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

         Most of the industrial land utilized by us is under 49-year leases
from the Israel Lands Authority with options for an additional 49 years in a
significant number of cases. Land rent on


                                      47
<PAGE>


uncapitalized leases is generally equal to 4% of the value of the land per
annum and is subject to revaluation every seven years.


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

         The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and
related notes included elsewhere in this annual report. Our financial
statements have been prepared in accordance with Israeli GAAP, which differ in
significant respects from U.S. GAAP. See Note 28 to our consolidated financial
statements, included elsewhere in this annual report, for a description of the
principal differences between Israeli GAAP and U.S. GAAP as they relate to us.

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

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

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

Critical Accounting Policies

         Our consolidated financial statements included elsewhere in this
annual report have been prepared in accordance with Israeli GAAP, which differ
in significant respects from U.S. GAAP. See Note 28 to our consolidated
financial statements, included elsewhere in this annual report, for a
description of the principal differences between Israeli GAAP and U.S. GAAP as
they relate to us.

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


                                      48
<PAGE>


discussion of the significant accounting policies which we follow in preparing
our financial statements is set forth in Note 2 to our financial statements
included elsewhere in this annual report.

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

Revenue Recognition

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

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

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

    o    the revenues are known or can be reliably estimated;

    o    the collection of revenues is expected;

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

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

    o    the percentage of completion may be reliably estimated.

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

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


                                      49
<PAGE>


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

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

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

Inventories

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

Investments in Non-consolidated Subsidiaries and Affiliates

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

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

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


                                      50
<PAGE>


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

Intangible Assets and Deferred Expenses

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

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

Recently Issued Accounting Pronouncements in Israel

         In July 2004, the IASB published Accounting Standard No. 19, "Taxes on
Income," or Standard 19, 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. Standard No. 19, which applies to financial
statements beginning on January 1, 2005, was adopted as the cumulative effect
of a change in accounting method. Our annual financial statements as of
December 31, 2004 includes footnote disclosure regarding the anticipated effect
of the first-time application of Standard No. 19 of an increase in net earnings
of NIS 19 million, primarily due to the recording of deferred taxes in an
investee for intercompany revenues. However, as a result of a reexamination of
Standard No. 19 by the investee, regarding the creation of deferred taxes for
unrealized intercompany sales, the investee's management reached the conclusion
that continuing to apply the "deferral approach," whereby it would continue to
allocate taxes to this income based on the tax rate applicable to the seller
company, is consistent with the provisions of Opinion No. 57 of the Institute
of Certified Public Accountants in Israel. Accordingly, our first-time
application of Standard No. 19 during the first quarter of 2005 had a one-time
cumulative effect, as at January 1, 2005, of reducing our net earnings for the
year ended December 31, 2004 by approximately NIS 3


                                      51
<PAGE>


million, as a result of the revised application of Standard No. 19 by the
investee as described above.

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

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

<TABLE>
<CAPTION>
                       Israeli           Israeli        Closing Exchange        Annual       Annual Inflation
Year Ended            Consumer          Inflation         Rate of the        Devaluation       Adjusted for
December 31,       Price Index (1)    Price Rate (2)       Dollar (3)          Rate (4)       Devaluation (5)
-----------        ---------------    --------------    ----------------     -----------     ----------------
<C>                    <C>                 <C>                 <C>              <C>                 <C>
2000                   168.53              0.0             NIS 4.041            (2.7)               2.8
2001                   170.91              1.4             NIS 4.416             9.3               (7.2)
2002                   182.01              6.5             NIS 4.737             7.3               (0.7)
2003                   178.58             (1.9)            NIS 4.379            (7.6)               6.2
2004                   180.74              1.2             NIS 4.308            (1.6)               2.8
</TABLE>
__________________

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


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

         The relationship between our monetary assets and liabilities, and the
extent to which these are linked to a particular currency or price index,
affects our financial results. In the event of a devaluation of the NIS in
relation to the dollar, we would report a financial expense to the extent that
our dollar-denominated or dollar-linked monetary liabilities exceed our
dollar-denominated or dollar-linked monetary assets or, conversely, we would
report financial income if our dollar-denominated or dollar-linked monetary
assets exceeded our dollar-denominated or dollar-linked monetary liabilities.
On December 31, 2004, the excess of our foreign currency denominated or linked
monetary liabilities over our foreign currency denominated or linked monetary
assets was NIS 1,773 million (the majority of which was dollar-denominated or
dollar-linked).

         In addition, we and certain of our subsidiaries have entered into
financial agreements with major Israeli banks and other financial institutions
in order to reduce the overall exposure of assets and liabilities denominated
in foreign currencies, and commitments for the purchase of raw materials and
the sale of goods in currencies other than the dollar arising from foreign
currency exchange rates. Such agreements include forward sales, purchase
contracts, sale


                                      52
<PAGE>


options and swap transactions. For more details regarding the balance of our
hedging agreements as of December 31, 2004, see Note 21 to our consolidated
financial statements included elsewhere in this annual report. The caption
"Financing expenses, net" in our consolidated financial statements includes the
impact of these factors on monetary assets and liabilities, as well as regular
interest expense.


                                      53
<PAGE>


Results of Operations

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

<TABLE>
<CAPTION>
                                                                                                 Translation
                            CPI - adjusted NIS as of December     2003/2002                         into      2004/2003
                                         31, 2003                  Changes            NIS          Dollars     Changes
                            ------------------------------------  ---------   -----------------  -----------  ---------
                               2002       %       2003       %        %          2004       %        2004          %
                            ---------  ------  ---------  ------  ---------   ---------  ------  -----------  ---------
                               (In                (In                           (In                 (In
                            thousands)         thousands)                     thousands)          thousands)
<S>                           <C>       <C>      <C>       <C>        <C>       <C>        <C>       <C>          <C>
REVENUES FROM SALES AND
SERVICES

Telecommunication equipment   814,108   11.47    796,059   10.35      (2.22)    615,057    6.66      142,771      (22.74)
Defense electronics         1,687,551   23.77  1,286,432   16.73     (23.77)  1,165,998   12.63      270,659       (9.36)
Agrochemicals               4,140,471   58.32  5,191,913   67.51      25.39   6,895,238   74.72    1,600,566       32.81
Other                         457,660    6.44    416,026    5.41      (9.10)    552,380    5.99      128,222       32.78
                            ---------  ------  ---------  ------  ---------   ---------  ------  -----------  ----------

Total                       7,099,790   100    7,690,430   100         8.32   9,228,673   100      2,142,218       20.00
                            =========  ======  =========  ======  =========   =========  ======  ===========  ==========

OPERATING EARNINGS (LOSS):

Telecommunication equipment  (178,623) (34.43)     3,158    0.34    (101.77)    (64,491)  (5.02)     (14,970)   (2142.15)
Defense electronics            78,853   15.2      (4,294)  (0.46)   (105.45)     30,865    2.40        7,164     (818.79)
Agrochemicals                 658,507  126.93    949,290  102.61      44.16   1,312,534  102.10      304,674       38.26
Venture capital investments    (7,894)  (1.52)    (1,445)  (0.16)    (81.69)     (1,457)  (0.11)        (338)       0.83
Other                         (32,062)  (6.18)   (21,536)  (2.33)    (32.83)      8,030    0.63        1,864     (137.29)
                            ---------  ------  ---------  ------  ---------   ---------  ------  -----------  ----------

Total                         518,781   100      925,173   100        78.34   1,285,481   100        298,394       38.94

Joint general expenses        (38,917)           (28,888)            (25.77)    (42,695)              (9,911)      47.79
                            ---------          ---------          ---------   ---------          -----------  ----------

Total operating earnings      479,864            896,285              86.78   1,242,786              288,483       38.66
                            =========          =========          =========   =========          ===========  ==========

CAPITAL EXPENDITURES:

Telecommunication equipment    15,554    1.19      7,173    2.25     (53.88)     21,015    2.39        4,878      192.97
Defense electronics            45,753    3.48     28,210    8.85     (38.34)     21,408    2.44        4,969      (24.11)
Agrochemicals               1,241,091   94.53    277,195   86.94     (77.67)    816,287   92.90      189,482      194.48
Other                          10,464    0.8       6,262    1.96     (40.16)     19,991    2.27        4,641      219.24
                            ---------  ------  ---------  ------  ---------   ---------  ------  -----------  ----------

Total                       1,312,862   100      318,840   100       (75.71)    878,701   100        203,970      175.59


CORPORATE ASSETS                  108                392             262.96         423                   98        7.91
                            ---------          ---------          ---------   ---------          -----------  ----------

                            1,312,970            319,232             (75.69)    879,124              204,068      175.39
                            =========          =========          =========   =========          ===========  ==========

EXPORTS OF KOOR PRODUCTS BY
BUSINESSES (1)

Telecommunication equipment   695,962   13.49    721,957   12.23       3.74     569,701    8.20      132,243      (21.09)
Defense electronics         1,056,968   20.49    760,964   12.89     (28.01)    549,440    7.91      127,539      (72.20)
Agrochemicals               3,404,650   66.02  4,419,795   74.88      29.82   5,828,607   83.89    1,352,973       31.88
                            ---------  ------  ---------  ------  ---------   ---------  ------  -----------  ----------

Total                       5,157,580   100    5,902,716   100        14.45   6,947,748    100     1,612,755       17.70
                            =========  ======  =========  ======  =========   =========  ======  ===========  ==========

REVENUES FROM SALES AND
SERVICES BY DESTINATION (2)

North America               1,125,915   15.86  1,152,009   14.98       2.32   1,542,409   16.71      358,034       33.89
Europe                      1,864,012   26.26  2,473,635   32.17      32.70   3,150,853   34.14      731,396       27.38
South America               1,213,485   17.09  1,670,256   21.72      37.64   2,056,261   22.28      477,312       23.11
Asia and Australia          1,123,387   15.82  1,050,873   13.66      (6.45)    842,986    9.13      195,679      (19.78)
Africa                        228,632    3.22    323,206    4.20      41.37     256,010    2.77       59,427      (20.79)
Israel                      1,544,359   21.75  1,020,451   13.27     (33.92)  1,380,154   14.96      320,370       35.25
                            ---------  ------  ---------  ------  ---------   ---------  ------  -----------  ----------

Total                       7,099,790   100    7,690,430   100         8.32    9,228,673   100     2,142,218       20.00
                            =========  ======  =========  ======  =========   ==========  =====  ===========  ==========
</TABLE>
____________________________

(1)  Including foreign industrial operations.

(2)  Destination to which shipment is made.


                                      54
<PAGE>


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

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

         Revenues from sales and services. Revenues from sales and services
increased 20.0% to NIS 9,229 million in 2004 compared to NIS 7,690 million in
2003. The increase was mainly due to an increase of NIS 1,703 million in MA
Industries' revenues and a slight increase in the revenues of Sheraton Moriah
and Isram (NIS 121 million), partially offset by decreases in the revenues of
Telrad (NIS 186 million) and the Elisra Group (NIS 120 million).

          Export and international operations, representing 85% of our net
revenues in 2004, increased 17.7% in 2004 compared to 2003, primarily as a
result of a NIS 1,620 million increase in MA Industries' exports , partially
offset by decreases in the exports of Telrad (NIS 171 million) and the Elisra
Group (NIS 212 million).

         Gross profit. Gross profit increased 28.0% to NIS 2,941 million in
2004 compared to NIS 2,297 million in 2003. The increase in gross profit was
primarily attributable to improved profits at MA Industries (NIS 680 million),
partially offset by a decrease in the gross profit of Telrad (NIS 119 million).
Gross profit as a percentage of revenues was 31.9% in 2004 compared to 30.0% in
2003.

         Operating earnings. Operating earnings increased 38.7% to NIS 1,243
million in 2004 compared to NIS 896 million in 2003. The increase in operating
earnings was mainly due to an increase in the operating earnings of MA
Industries (NIS 363 million), partially offset by Telrad's operating loss.
Operating earnings as a percentage of revenues was13.5% in 2004 compared to
12.0% in 2003.

         Financing expenses, net. Financing expenses, net were NIS 271 million
in 2004 compared to NIS 228 million in 2003. Despite the decrease in our
consolidated net debt, financing expenses increased in 2004 compared to 2003
due to the impact of the increase in the CPI on our CPI-linked long-term loans
following the discontinuation of the adjustment of our financial statements for
inflation as of January 1, 2004.

         Other income (expenses), net. Other expenses, net, amounted to NIS 79
million in 2004 compared to NIS 220 million in 2003. Other expenses, net, in
2004 included:

    o    Capital gains of NIS 223 million from sale of investments, mainly the
         sale of 7% of our equity interest in MA Industries and the sale of 19%
         of our equity interest in Knafaim. In 2003 we recorded capital gains
         of NIS 33 million from the sale of investments, mainly from the sale
         by Telrad of certain investments, and our sale of 2.6% of our equity
         interest in MA Industries;

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


                                      55
<PAGE>


    o    Provision for severance compensation of NIS 54 million, primarily at
         MA Industries (NIS 22 million) and Telrad (NIS 24 million), compared
         to NIS 28 million in 2003; and

    o    Goodwill amortization and write-off of NIS 136 million, primarily at
         MA Industries (NIS 131 million) and Elisra (NIS 4 million), compared
         to NIS 119 million in 2003.

         Income tax. Income tax recorded in 2004 amounted to NIS 287 million
compared to NIS 85 million in 2003. The increase was mainly due to increases of
NIS 84 million and NIS 21 million in the tax expenses of MA Industries and
Elisra, respectively, as well as an increase of NIS 42 million in the tax
expense of Telrad, mainly as the result of the impairment of a deferred tax
asset. In addition, tax expenses at the parent company level increased by NIS
37 million, mainly due to the realization of a deferred tax asset, created in
2003 in connection with the sale of shares of MA Industries in 2004. Taxes on
income as a percentage of revenues in 2004 and 2003 were 3.1% and 1.1%,
respectively.

         Group's equity in the operating results of affiliates, net. The
Group's equity in the operating results of affiliates, net in 2004 was a loss
of NIS 28 million compared to a loss of NIS 114 million in 2003. This item
mainly included the write-off of NIS 20 million of the purchase price of
Tadiran Communications allocated to in-process research and development, and
our equity share in the net loss of ECI in the amount of NIS 15 million,
compared with NIS 101 million in 2003. In 2004, our equity share in the
earnings of Knafaim was negligible, compared to a loss of NIS 11 million in
2003.

         Minority interest in consolidated companies' results, net. Minority
interest in consolidated companies' results, net amounted to earnings of NIS
433 million in 2004 compared to earnings of NIS 203 million in 2003. The
increase was mainly due to MA Industries (NIS 191 million) and Telrad (NIS 26
million).

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

         Telecommunications Equipment Business

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                  -----------------------------------------------
                                                      2003            2004             2004
                                                  -------------  -------------   ----------------
                                                       (NIS in thousands)        ($ in thousands)

<S>                                                 <C>             <C>               <C>
Revenues from sales and services............        796,059         615,057           142,771
Operating earnings (loss)...................          3,158         (64,491)          (14,970)
</TABLE>

         Revenues from sales and services from our telecommunication equipment
business decreased 22.7% in 2004 to NIS 615 million from NIS 796 million in
2003. The decrease was primarily due to a decrease of NIS 186 million in sales
of Telrad, continuing the decline in orders for new telecommunications
equipment that Telrad has experienced over the past few years. Telrad's
decrease in sales was partially offset by an increase of NIS 18 million in
sales of Microwave Networks Inc., a U.S. subsidiary.


                                      56
<PAGE>


         Sales from our telecommunication equipment business attributable to
sales of telecommunication equipment to Nortel were NIS 232 million in 2004
compared to NIS 440 million in 2003, or 38% compared to 42% of total
telecommunication equipment business sales in 2004 and 2003, respectively.

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

          Operating loss from our telecommunication equipment business was NIS
64 million in 2004 compared to operating earnings of NIS 3 million in 2003. The
operating loss in 2004 resulted from the decrease in Telrad's sales.

         Defense Electronics Business

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                  -----------------------------------------------
                                                      2003            2004             2004
                                                  -------------  -------------   ----------------
                                                       (NIS in thousands)        ($ in thousands)

<S>                                                 <C>            <C>               <C>
Revenues from sales and services............        1,286,432      1,165,998          270,659
Operating earnings (loss)                              (4,294)        30,865            7,164
</TABLE>

         Revenues from sales and services from our defense electronics business
decreased 9.4% to NIS 1,166 million in 2004 from NIS 1,286 million in 2003
primarily as a result of a major reduction in the Israeli defense budget, as
well as a lag in new orders and delays by subcontractors.

         Operating earnings from our defense electronics business amounted to
NIS 31 million compared to operating loss of NIS 4 million in 2003 primarily as
a result of reduction of costs due to implementation of efficiency measures in
2003.

         Agrochemicals Business

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                  -----------------------------------------------
                                                      2003            2004             2004
                                                  -------------  -------------   ----------------
                                                       (NIS in thousands)        ($ in thousands)

<S>                                                 <C>            <C>              <C>
Revenues from sales and services............        5,191,913      6,895,238        1,600,566
Operating earnings..........................          949,290      1,312,534          304,674
</TABLE>

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

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


                                      57
<PAGE>


         Operating earnings from our agrochemicals business increased 38.3% to
NIS 1,313 million in 2004 from NIS 949 million in 2003 as a result of increased
sales and, to a lesser extent, as a result of the strengthening of primary
trading currencies against the Dollar partially offset by an increase in raw
material costs.

         As of January 1, 2005 MA Industries will no longer be consolidated in
our financial statements, but will be accounted for according to the equity
basis. See Note 27(4) to the consolidated financial statements included
elsewhere in this annual report.

         Venture Capital Business

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                  -----------------------------------------------
                                                      2003            2004             2004
                                                  -------------  -------------   ----------------
                                                       (NIS in thousands)        ($ in thousands)

<S>                                                   <C>            <C>               <C>
Revenues from sales and services............             --              --              --
Operating loss..............................         (1,445)         (1,457)           (338)
</TABLE>

         This segment was established for the first time in 2000, when we
established the Koor Corporate Venture Capital Partnership, or Koor CVC. As of
December 31, 2004, the book value of Koor CVC's investments in its start-up
companies, a venture capital fund and Scopus Network Technologies, or Scopus,
in which Koor CVC holds a 27% interest on a fully-diluted basis, totaled
approximately NIS 181 million ($42 million). During 2004, Koor CVC recorded NIS
58 million of provisions for the decline in value of several of its portfolio
companies. This expense was recorded in our consolidated financial statements
under the caption "Other income (expenses), net".

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

         Other Businesses

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                  -----------------------------------------------
                                                      2003            2004             2004
                                                  -------------  -------------   ----------------
                                                       (NIS in thousands)        ($ in thousands)

<S>                                                   <C>            <C>              <C>
Revenues from sales and services............          416,026        552,380          128,222
Operating earnings (loss)...................          (21,536)         8,030            1,864
</TABLE>

         Revenues from sales and services from our other businesses increased
32.8% to NIS 552 million in 2004 from NIS 416 million in 2003. This increase
was primarily attributable to the increase in sales of Sheraton Moriah as a
result of the increase in tourism to Israel, as well as the increase in the
sales of Isram.

         Operating earnings from other businesses were NIS 8 million in 2004,
compared to operating loss of NIS 22 million in 2003, mainly due to the
increase in sales of Sheraton Moriah.


                                      58
<PAGE>


Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

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

          Revenues from sales and services. Revenues from sales and services
increased 8.3% to NIS 7,690 million in 2003 from NIS 7,100 million in 2002. The
increase consists of a NIS 1,051 million increase in MA Industries' revenues
and a NIS 42 million increase in Telrad's revenues, which were partially offset
by decreases in the revenues of the Elisra Group (NIS 401 million), Tadiran
Electronic (NIS 68 million) and Sheraton Moriah (NIS 27 million).

         Export and international operations, representing 87% of our net
revenues, increased 20.1% in 2003 compared to 2002, primarily as a result of a
NIS 1,015 million increase in MA Industries' exports due to improved prices of
agricultural commodities, good weather conditions in North America and Asia and
the improving South American economy (mainly Brazil), which were partially
offset by harsh weather conditions in Europe, the increasing market share of
genetically-engineered seeds and the strengthening of most currencies against
the dollar. The increase in exports was also partially offset by a NIS 296
million decline in Elisra's exports.

         Gross profit. Gross profit increased 28.8% to NIS 2,297 million in
2003 from NIS 1,784 million in 2002. The increase in gross profit is primarily
attributable to improved profits at MA Industries (NIS 450 million) and Telrad
(NIS 180 million), which were partially offset by a decline in the gross profit
of Elisra (NIS 109 million). As a percentage of revenues, gross profit
increased from 25.1% in 2002 to 30.0% in 2003.

         Operating earnings. Operating earnings increased 86.8% to NIS 896
million in 2003 from NIS 480 million in 2002. The increase in operating
earnings is mainly due to an increase in the operating earnings of MA
Industries (NIS 291 million) and Telrad (NIS 166 million), partially offset by
a decline in the operating earnings of Elisra (NIS 77 million). As a percentage
of revenues, operating earnings increased from 6.8% in 2002 to 12.0% in 2003.

         Financing expenses, net. Financing expenses, net decreased 44.1% to
NIS 228 million in 2003 from NIS 408 million in 2002. The decrease in financing
expenses in 2003 is primarily attributable to the repayment of debt, primarily
at the parent company level, the depreciation of the dollar against the NIS and
a negative CPI.

         The dollar cost of our operations in Israel is influenced by the
extent to which any increase in the rate of inflation in Israel is not offset
(or is offset on a lagging basis) by a devaluation of the NIS in against the
dollar. During 2003, the shekel was strengthened against the dollar by 7.6%
while the CPI decreased by 1.9%, compared to 2002, during which there had been
a devaluation of 7.3% of the shekel against the dollar while the CPI increased
by 6.5%.

         Other income (expenses), net. Other expenses, net, amounted to NIS 220
million in 2003 compared to other income, net of NIS 6 million in 2002. Other
expenses, net, in 2003 included:

         An NIS 33 million capital gain following the sale of investments,
mainly at Telrad and our sale of 2.6% of our equity interest in MA Industries.
In 2002 we recorded a capital gain of NIS


                                      59
<PAGE>


342 primarily resulting from the sale of 30% of Elisra's shares to Elta and the
partial sale of Tadiran's real-estate;

    o    A NIS 107 million impairment of investments and assets, which includes
         an NIS 72 million impairment of Koor CVC's investments. In 2002, we
         recorded an NIS 165 million impairment in the value of investments and
         assets, including a NIS 93 million impairment of Koor CVC's
         investments and an NIS 35 million charge following the impairment of
         BVR Systems' goodwill;

    o    A NIS 28 million provision for severance compensation, primarily at MA
         Industries (NIS 9 million) and Elisra (NIS 9 million), compared to a
         NIS 127 million provision in 2002; and

    o    A NIS 119 million goodwill amortization and write-off, primarily at MA
         Industries (NIS 112 million) and Elisra (NIS 4 million), compared to a
         NIS 91 million write-off in 2002.

         Transfer to statement of income of translation differences of
autonomous investee in voluntary liquidation. As a result of the liquidation of
Tadiran in March 2002, we recorded an expense of approximately NIS 391 million
due to the recognition of the cumulative foreign currency translation
adjustments to the value of our investment in Tadiran. We recorded this
expense, which was previously reflected as a decrease in shareholders' equity,
in accordance with Israeli GAAP, which provides that changes in the value of
investments in subsidiaries as a result of foreign currency adjustments are not
recognized until the sale or liquidation of the subsidiary. This accounting
entry did not have any effect on our net equity.

         Income tax. Income tax decreased 40% to NIS 85 million in 2003 from
NIS 141 million in 2002. The decrease is primarily attributable to a NIS 58
million decline in Telrad's tax expense, a NIS 53 million decline in our tax
expense at the corporate parent level due to deferred tax from the sale of
shares of MA Industries, and a NIS 31 million decline in Elisra's tax expense.
These declines were partially offset by a NIS 60 million increase in MA
Industries' tax expense. Income tax as a percentage of revenues in 2003 and
2002 was 1.1% and 2.0%, respectively.

         Group's equity in the operating results of affiliates, net. The
Group's equity in the losses of affiliates, net in 2003 totaled NIS 114 million
compared with NIS 252 million in 2002. This item includes mainly our equity
share in the net loss of ECI, in the amount of NIS 101 million (partially
offset by a reversal of a NIS 73 million write-down of our investment in ECI),
compared with NIS 246 million in 2002 (including a NIS 25 million write-down of
our investment in ECI), as well as our equity share in the losses of Knafaim,
in the amount of NIS 11 million in 2003, compared with insignificant amount in
2002.

         Minority interest in consolidated companies' results, net. Minority
interest in consolidated companies' results, net amounted to NIS 203 million in
2003 compared with NIS 60 million in 2002. The increase in minority interest in
2003 derives mainly from MA Industries (NIS 122 million), Elisra (NIS 13
million) and Sheraton Moriah (NIS 12 million).

         Net earnings (loss). As a result of the above factors, we reported net
earnings of NIS 46 million in 2003, compared to a net loss of NIS 767 million
in 2002.


                                      60
<PAGE>


         Telecommunications Equipment Business

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                  -----------------------------------------------
                                                      2002            2003             2003
                                                  -------------  -------------   ----------------
                                                       (NIS in thousands)        ($ in thousands)

<S>                                                   <C>            <C>              <C>
Revenues from sales and services............          814,108       796,059          184,786
Operating earnings (loss)...................         (178,623)        3,158              733
</TABLE>

         Revenues from sales and services from our telecommunication equipment
business decreased 2.2% in 2003 to NIS 796 million from NIS 814 million in
2002. The decrease was primarily due to a decrease in sales of MNI, a
subsidiary of TEI, by approximately $13.1 million (NIS 57 million) in 2003
compared to 2002, primarily as a result of decreased demand for its products,
which was only partially offset by an increase in Telrad's sales by NIS 42
million in 2003 compared to 2002, primarily as a result of a sale of $30
million in South America.

         Sales from our telecommunication equipment business attributable to
sales of telecommunication equipment to Nortel were NIS 440 million in 2003
compared to NIS 423 million in 2002, or 55% compared to 52% of total
telecommunication equipment business sales in 2003 and 2002, respectively.

         Telecommunication equipment business exports amounted to NIS 722
million in 2003 compared to NIS 696 million in 2002. The increase in export
sales resulted primarily in Telrad for the reasons discussed above.

         Operating earnings (loss) in our telecommunication equipment business
improved from a NIS 179 million operating loss in 2002 to operating earnings of
NIS 3 million in 2003. The improvement resulted from the increase in sales at
Telrad combined with its significant cost reductions following its successful
reorganization.

         Defense Electronics Business

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                  -----------------------------------------------
                                                      2002            2003             2003
                                                  -------------  -------------   ----------------
                                                       (NIS in thousands)        ($ in thousands)

<S>                                                  <C>            <C>              <C>
Revenues from sales and services............        1,687,551      1,286,432          298,615
Operating earnings (loss)                              78,853         (4,294)            (997)
</TABLE>

         Revenues from sales and services from our defense electronics business
decreased 23.8% to NIS 1,286 million in 2003 from NIS 1,688 million in 2002
primarily as a result of a major reduction in the Israeli defense budget. Sales
from our defense electronics business were also affected by BVR whose results
were not consolidated since June 2003 subsequent to the sale of the company,
and were consolidated for the entire year in 2002, and which accounted for
approximately NIS 123 million in sales in 2002.


                                      61
<PAGE>


         Operating earnings (loss) from our defense electronics business
decreased to operating losses of NIS 4 million in 2003 from operating earnings
of NIS 79 million in 2002 primarily as a result of decrease in sales.

         Agrochemicals Business

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                  -----------------------------------------------
                                                      2002            2003             2003
                                                  -------------  -------------   ----------------
                                                       (NIS in thousands)        ($ in thousands)

<S>                                                  <C>            <C>              <C>
Revenues from sales and services............        4,140,471      5,191,913        1,205,179
Operating earnings..........................          658,507        949,290          220,355
</TABLE>

         Revenues from sales and services from our agrochemicals business
increased 25.4% to NIS 5,192 million in 2003 from NIS 4,140 million in 2002,
primarily as a result of increased sales of the MA group (see below).
Approximately 92.7% and 90.9% of the sales in 2003 and 2002, respectively, were
made outside of Israel, and approximately 26.2% and 27.9% of total sales in
2003 and 2002, respectively, were to South America.

         The increase in the MA group's sales was primarily attributable to
sales of new products, and increases in sales of existing products, as well as
improved prices of agricultural commodities, good weather conditions in North
America and Asia and the improving South American economy (mainly Brazil).
These positive effects were partially offset by harsh weather conditions in
Europe, the increasing market share of genetically-engineered seeds and the
strengthening of most currencies against the dollar.

         Operating earnings for our agrochemicals business increased 44.2% to
NIS 949 million in 2003 from NIS 659 million in 2002 as a result of increased
sales and the reduction of manufacturing expenses as a result of internal
restructuring and a decrease in raw material costs.

         Venture Capital Business

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                  -----------------------------------------------
                                                      2002            2003             2003
                                                  -------------  -------------   ----------------
                                                       (NIS in thousands)        ($ in thousands)

<S>                                                  <C>            <C>              <C>
Revenues from sales and services............             --              --              --
Operating loss..............................         (7,894)         (1,445)           (335)
</TABLE>

         This segment was established for the first time in 2000, when we
established the Koor Corporate Venture Capital Partnership, or Koor CVC. As of
December 31, 2003, the book value of Koor CVC's investments in its start-up
companies, a venture capital fund and Scopus Network Technologies, or Scopus,
in which Koor CVC holds a 27% interest on a fully-diluted basis, totaled
approximately NIS 231 million ($54 million).

         The decrease in operating loss in our venture capital business in 2003
compared to 2002 resulted primarily from a reduction in Koor CVC's operating
expenses.


                                      62
<PAGE>


         Other Businesses

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                  -----------------------------------------------
                                                      2002            2003             2003
                                                  -------------  -------------   ----------------
                                                       (NIS in thousands)        ($ in thousands)

<S>                                                  <C>            <C>              <C>
Revenues from sales and services............          457,660        416,026           96,571
Operating loss..............................          (32,062)       (21,536)          (4,999)
</TABLE>

         Revenues from sales and services from our other businesses decreased
9.1% to NIS 416 million in 2003 from NIS 458 million in 2002. This decrease was
primarily attributable to the decline in sales of Sheraton Moriah as a result
of the sharp decline of tourism in Israel due to increased hostilities in the
West Bank and Gaza.

         Operating loss of our other businesses was NIS 22 million in 2003
compared to NIS 32 million in 2002, primarily due to the decrease in sales of
Sheraton Moriah.

Quarterly Results

         The following table presents unaudited quarterly financial information
for each of the four quarters of the year ended December 31, 2004. Such
information has been prepared on the same basis as our consolidated financial
statements.

<TABLE>
<CAPTION>
                                                          Quarter Ended                          Year Ended
                                    ---------------------------------------------------------  --------------
                                        March         June        September       December        December
                                      31, 2004      30, 2004       30, 2004       31, 2004        31, 2004
                                    ------------  -------------  -------------  -------------  --------------
                                                            (in millions of NIS)
<S>                                    <C>           <C>            <C>             <C>             <C>
Revenues from sales and services...    2,400         2,227          2,202           2,400           9,229
Gross profit.......................      780           686            708             767           2,941
Research and development, net......       49            54             53              56             212
Operating earnings ................      372           289            290             292           1,243
Net earnings.......................       94            20             14              17             145
</TABLE>

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

Recent Developments

Koor Industries Ltd.
--------------------


                                      63
<PAGE>


         On February 3, 2005, we sold 15.9 million shares of MA Industries to
Merrill Lynch International for approximately NIS 374 million. The sale
generated a capital gain, before tax, of approximately NIS 201 million in the
first quarter of 2005. Additionally, as a result of the sale, we utilized a
deferred tax asset of approximately NIS 69 million that had been created in
2004, because of expectations to utilize carryforward tax losses. Under the
terms of the sale, we undertook not to sell additional shares of MA Industries
for a nine-month period from the date of sale. As a result of this sale, and
following the issuance by MA Industries of additional shares upon the
conversion of convertible securities and the exercise of employee stock
options, our ownership percentage in MA Industries decreased to 34% as of March
31, 2005 (28.6% on a fully diluted basis).

         Following the sale of the shares in February 2005, we evaluated the
implication for continuing to consolidate MA Industries in our financial
statements, beginning from the first quarter of 2005. Based on an evaluation of
the range of circumstances created as a result of the February 2005 sale, we
decided that continuation of the consolidation of MA Industries is not
consistent with the economic substance. Therefore, beginning from the first
quarter of 2005, the consolidation of MA Industries in our financial statements
was discontinued, and our investment in MA Industries is accounted for
according to the equity method.

          On April 10, 2005, as part of a private placement to Israeli
institutional investors, we issued NIS 400 million in aggregate principal
amount of debentures for NIS 400 million in cash, as well as 800,000 options
without consideration. The debentures bear annual interest at a rate of 3.75%,
linked to the CPI, which is paid on April 30 and October 31 of each year. The
debentures are required to be repaid in a balloon payment on April 30, 2010.
Each of the 800,000 options we issued in this transaction is exercisable for
one of our ordinary shares at an exercise price of NIS 300 and expires on April
30, 2010. We intend to register the ordinary shares we issue upon the exercise
of these options for trading on the Tel-Aviv Stock Exchange.

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

ECI Telecom
-----------

         In February 2005, ECI entered into a preliminary agreement to sell all
of its long-term receivables to ABN Amro Bank for the sum of approximately $96
million in cash, plus potentially a further amount of approximately $3.3
million. In April 2005, the approvals for the sale were received and the
transaction was completed. As a result, during the second quarter of 2005, ECI
recognized a net gain of approximately $10.4 million (excluding additional
profit resulting from the contingent amount). Our equity in this gain is
approximately NIS 14 million.

         On June 6, 2005, ECI announced that it completed the acquisition of
Laurel Networks, a provider of Next-Generation IP/MPLS Multi-Service Edge
Routers, which became ECI's Data Networking Division. ECI paid $88 million in
cash for Laurel. Laurel had approximately 150 employees, and the company's
sales for the twelve months ended April 30, 2005, totaled $18 million.


                                      64
<PAGE>


Effective Corporate Tax Rate

         We do not file a consolidated tax return with our subsidiaries, and we
are taxed only on our own income. Most of our subsidiaries file their own tax
returns, based on their own taxable income. Our income tax obligations and our
Israeli subsidiaries' income tax obligations are based on profits determined in
nominal NIS for Israeli statutory purposes, adjusted for tax purposes, in terms
of end-of-year Israeli currency, in accordance with changes in the CPI. The tax
provision in our financial statements does not directly relate to income shown
on such statements. See Note 16 to our consolidated financial statements
included elsewhere in this annual report for the reconciliation between the
theoretical and actual tax expense. Non-Israeli subsidiaries are taxed based
upon tax laws in their respective countries of residence. The effective
corporate tax rate is affected mainly by tax benefits arising from reduced tax
rates applied to approved enterprises, utilization of tax loss carry forwards
for which no deferred taxes were recorded, the effect of the Inflationary
Adjustment Law on Israeli companies, whose functional currency is the dollar,
and the disallowance of provisions for anticipated losses from the sale of
assets. In 2004, we had a profit before taxes of NIS 893 million. See Note 16A
to our consolidated financial statements included elsewhere in this annual
report.

Liquidity and Capital Resources

         We finance our corporate level activities principally through the
proceeds from divestitures, management fees and dividends we receive from our
subsidiaries and affiliates and through debt financing. In 2004 and 2003, we
received management fees in the amount of NIS 22 million and of NIS 25 million,
respectively. In addition, in 2004 and 2003 we received NIS 135 million and NIS
28 million, respectively, in distributions from subsidiaries and affiliates, of
which NIS 68 million and NIS 18 million, respectively, was received from
Makhteshim-Agan Industries Ltd., or MA Industries. Of the NIS 135 million in
distributions we received in 2004, NIS 67 million was received as a liquidating
distribution in respect of our wholly-owned subsidiary, Tadiran Ltd.

         Our shareholders' equity at December 31, 2004 increased 7.8% to NIS
1,876 million, compared to NIS 1,740 million at December 31, 2003. The increase
in 2004 was primarily due to the increase in our net earnings.

         Working capital at December 31, 2004 was NIS 1,086 million compared to
NIS 1,046 million at December 31, 2003 and NIS 1,160 million at December 31,
2002.

         Long-term debt totaled NIS 3,152 million at December 31, 2004, or
24.0% of total assets on that date, compared to NIS 3,460 million at December
31, 2003, or 29.1% of total assets on that date. See Note 15C(1) to our
consolidated financial statements included elsewhere in this annual report.

         Total debt at December 31, 2004 decreased 2.9% to NIS 4,891 million,
or 37.2% of total assets, compared to NIS 5,038 million, or 42.4% of total
assets, at December 31, 2003.

         In accordance with several of our financing agreements, we and several
of our subsidiaries and affiliates, undertook to maintain certain financial
covenants, including minimum shareholders' equity and debt capital, ratio of
shareholders' equity to debt capital, and a ban on


                                      65
<PAGE>


creating pledges or furnishing guarantees without the advance consent of the
banks providing the financing. We also undertook to use the proceeds from the
sale of certain assets to repay a portion of our existing debt. As of December
31, 2004 and June 30, 2005, we and our relevant subsidiaries and affiliates are
in compliance with the above covenants. See also Note 18 to our consolidated
financial statements included elsewhere in this annual report.

Summary of our Contractual Obligations and Commercial Commitments

         For purposes of presenting the approximate cash flows that will be
required to meet our material contractual obligations, the following table
presents a summary of those obligations, as of December 31, 2004:

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

                                                             Less Than        2-3          4-5         After
         Contractual Obligations               Total          1 Year         Years        Years       5 Years
----------------------------------------   -------------    -----------    ---------    ---------    ---------
<S>            <C>                             <C>             <C>           <C>            <C>           <C>
Debt From Banks(1)......................       3,945           1,736         1,884          235           90
Debentures(1)...........................         811              --           165            -          646
Operating Lease Obligations.............         133              42            55            9           27
Other Obligations.......................         135               2            38           22           73
Total Contractual Cash Obligations......       5,024           1,780         2,142          266          836
</TABLE>

(1)   See Note 15 to our financial statements included elsewhere in this
      annual report for applicable interest rates and linkage bases.


         For purposes of presenting the approximate cash flows that will be
required to meet our other commercial commitments, the following table presents
a summary of those commitments, as of December 31, 2004:

<TABLE>
<CAPTION>
                                                         Amount of Commitment Expiration Per Period
                                           -------------------------------------------------------------------
                                                                     (in millions of NIS)

                                              Total          Less Than        2-3          4-5         After
         Contractual Obligations            Commitment        1 Year         Years        Years       5 Years
----------------------------------------   -------------    -----------    ---------    ---------    ---------
<S>            <C>                             <C>             <C>           <C>            <C>           <C>
Guarantees(1).........................           678             138           185           43          312
Commitments for environmental
expenditures(2)                                  172                           172
Commitments for the Purchase of Fixed
Assets................................            22              22            --           --           --
Commitments for investment in Venture
Capital Funds(3)......................            20              15             5           --           --
Total Commercial Commitments                     892             175           362           43          312
</TABLE>

(1)  Includes:(i) a guarantee Bezeq (Israeli telecommunications company)
     received from Koor in the amount ofNIS 125 million; (ii) a guarantee
     totaling NIS 172 million issued by Telrad to a major customer; (iii)
     guarantees in respect of advances received from customers amounting to NIS
     266 million; and (iv) guarantees


                                      66
<PAGE>


     by us for affiliates and other non-consolidated companies in the amount of
     approximately NIS 115 million. See Note 22E to our consolidated financial
     statements included elsewhere in this annual report.

(2)  This amount represents MA Industries' estimation of the cost of
     construction of facilities for the biological treatment of waste pursuant
     to an agreement with the Ministry of Environmental Protection.

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


Cash Flows

         Cash and cash equivalents increased by NIS 24 million in 2004 compared
to 2003.

         Cash flows from operating activities in 2004 were NIS 891 million,
compared to NIS 775 million in 2003. The increase in cash flows from operating
activities stems mainly from net earnings of NIS 145 million in 2004 compared
to NIS 46 million in 2003.

         Cash flows used in investment activities in 2004 were NIS 723 million,
compared to cash generated by investment activities of NIS 267 million in 2003.
Cash used for the acquisition of subsidiaries (mainly by MA Industries) and
affiliates (mainly the acquisition of Tadiran Communications) was NIS 946
million, compared to NIS 21 million in 2003. Proceeds from sale of investee
companies (mainly the sale of shares of MA Industries) and proceeds from sale
of subsidiary's shares that became proportionately consolidated (Telrad) were
NIS 636 million and NIS 38 million respectively, compared to NIS 124 million in
2003. The investment in fixed assets, net after deduction of investment grants,
amounted to NIS 225 million, compared to NIS 185 million in 2003. The principal
investments in fixed assets in the reporting period were in MA Industries.
Investment in intangible assets amounted to NIS 153 million in 2004, compared
to NIS 313 million in 2003, mainly as a result of investments by MA Industries.
Investments in venture capital companies amounted to NIS 35 million, compared
to NIS 14 million last year. Furthermore, in 2003, cash generated by repayment
of loans by affiliates and by the decrease in short-term deposits and
investments amounted to a total of NIS 653 million, compared to a negligible
amount in 2004.

         Financing activities during 2004 consumed NIS 128 million, compared to
NIS 1,210 million during 2003. Long-term loans received in 2004 amounted to NIS
1,063 million, compared to NIS 949 million in 2003. The loans were received
mainly at Koor (the parent company). Repayment of long-term loans in 2004
amounted to NIS 1,791 million compared to NIS 1,892 million in 2003. Loans were
repaid mainly at Koor (the parent company) and MA Industries. Proceeds from
issuance of convertible debentures by MA Industries amounted to NIS 666 million
in 2004.

         Short-term credit, net, increased by NIS 26 million in 2004, compared
to a decrease of NIS 268 million in 2003.

Impact of Inflation and Currency Fluctuations

         The dollar cost of our operations in Israel is influenced by the
extent to which any increase in the rate of inflation in Israel is not offset
(or is offset on a lagging basis) by a


                                      67
<PAGE>


devaluation of the NIS in relation to the dollar. The inflation rate in Israel
was 1.2 % in 2004 as compared to -1.9% in 2003. At the same time, the
appreciation of the NIS against the dollar was 1.6% in 2004 as compared to 7.6%
in 2003. The increase in the dollar cost of our operations in Israel relates
primarily to the cost of salaries in Israel, which are paid in NIS, and
constitutes a substantial portion of our expenses.

Trend Information

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

Off-Balance Sheet Arrangements

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


                                      68
<PAGE>


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

Directors and Senior Management

         The following table sets forth, as of June 20, 2005, the name, age and
position of each of our directors and executive officers:

Charles R. Bronfman                 75      Chairman of the Board of Directors

Rolando Eisen(1)(2)(3)              64      Director

Paulette Eitan(1)(2)(4)             60      Director

Ron Feinstein(1)                    68      Director

Andrew Hauptman(3)                  37      Director

Chemi Peres                         48      Director

Dan Propper(3)                      64      Director

David Rubner                        66      Director

Prof. Gabriela Shalev(1)(3)         64      Director

Jonathan B. Kolber                  44      Chief Executive Officer

Danny Biran                         63      President

Yuval Yanai(5)                      54      Senior Vice President and Chief
                                            Financial Officer

Aaron Zuker                         60      Vice President

Shlomo Heller                       62      General Counsel and Corporate
                                            Secretary
_________________________________

(1)  Member of the Audit Committee.

(2)  External director. Under the Israeli Companies Law, 1999, publicly held
     companies in Israel are required to appoint at least two "external
     directors" who serve for three-year terms, as described below. Our
     external directors were appointed in June 2002 and pursuant to the
     Companies Law, their terms expired on June 24, 2005. At our annual general
     meeting of shareholders held on July 3, 2005, our shareholders voted to
     re-appoint our external directors for a second term of three years.
(3)  Member of the Remuneration Committee.
(4)  Serves as the Audit Committee Financial Expert.
(5)  On May 24, 2005, Mr. Yanai announced his intention to resign from office
     in August 2005.


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

         Charles R. Bronfman has been Chairman of the Board of Directors of
Koor since November 1997. Mr. Bronfman is Chairman of the Board of Directors of
Claridge Israel L.L.C., Chairman of Andrea and Charles Bronfman Philanthropies
Inc., Co-Chairman of Birthright Israel International and Co-Chairman of the
Board of Trustees, McGill Institute For the Study of Canada. Mr. Bronfman is a
former Co-Chairman of the Seagram Company Ltd. and a former Chairman of the
United Jewish Communities.


                                      69
<PAGE>


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

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

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

         Andrew Hauptman has been a director of Koor since November 1997. Mr.
Hauptman is the Co-Chairman and Chief Executive Officer of Andell Holdings LLC,
a private investment firm. Mr. Hauptman serves on the Board of Directors of
several privately held and publicly traded companies, including Elizabeth Arden
Spas LLC, Dick Clark Productions Inc. and Canyon Ranch Holdings LLC. Mr.
Hauptman also serves as the Chairman of the Board of Storage Mobility LLC, as
well as Andell Entertainment LLC and Mission Pictures LLC. In addition, Mr.
Hauptman serves on the Board of Trustees of the Los Angeles County Museum of
Art, the Zoe Saidye Hauptman Memorial Fund and The Hauptman Family Foundation.
Prior to joining Andell Holdings LLC, Mr. Hauptman worked in restructuring and
mergers and acquisitions with Alex. Brown & Sons in New York and served as a
Director of Business Development and Strategic Planning at Universal Studios
Holdings (UK) Ltd. Mr. Hauptman holds an M.B.A. from Harvard University and a
B.A. in History from Yale University. Mr. Hauptman is the son-in-law of Charles
R. Bronfman, our Chairman of the Board.

         Chemi Peres has been a director of Koor since June 2000. Mr. Peres is
a co-founder and Managing Director of Pitango Venture Capital, an Israeli
venture capital fund. In 1992, Mr. Peres founded and managed the Mofet Israel
Technology Fund, a venture capital fund publicly traded on the Tel Aviv Stock
Exchange. Prior to founding Mofet, Mr. Peres served as Vice President of
Marketing and Business Development at Decision Systems Israel Ltd, and as a
Senior Consultant to Israel Aircraft Industries Ltd. Mr. Peres currently serves
on the board of several Pitango portfolio companies, including Go Networks
Ltd., Mercado Software Ltd., Provigent Ltd., Radwin Ltd. and Voltaire Ltd.. Mr.
Peres also serves as a board member of the Israel Venture Association, the
Ministry of Industry, the Trade Seed Fund and the Weizman


                                      70
<PAGE>


Institute of Science. Mr. Peres holds an M.B.A. and a B.Sc. in Industrial
Engineering and Management from Tel Aviv University.

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

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

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

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

         Danny Biran has been President of Koor since July 1, 1998. Mr. Biran
currently serves as Chairman of the Board and Chief Executive Officer of Elisra
Electronic Systems Ltd. and as Chairman of the Board of A Industries, Isrex
(94) Ltd., Koor Trade, R.M. Renaissance Management (1993) Ltd., Tadiran
Electronic, Tadiran Spectralink and Dekolink Wireless Ltd. Mr. Biran is also a
director of ECI and Sheraton-Moriah. Mr. Biran is a graduate of the Law faculty
of the Tel Aviv University and a member of the Israeli Bar.

         Yuval Yanai has been Senior Vice President and Chief Financial Officer
of Koor since October 1, 2000. He served as Senior Vice President and Chief
Financial Officer of NICE Systems Ltd. from April 1998 to September 2000. From
1991 to April 1998, he was the Vice President, Finance and Chief Financial
Officer of Elscint Ltd. and director of several of Elscint's


                                      71
<PAGE>


subsidiaries, as well as a director of certain public and private companies. He
joined Elscint in 1985 and served as Corporate Controller and Corporate
Treasurer through 1991. Mr. Yanai is a director of MA Industries, Tadiran
Communication, Elisra, Tadiran Electronic, Tadiran Spectralink and Telrad. Mr.
Yanai holds a B.Sc. in Accounting and Economics from the Tel Aviv University.
As described above, on May 24, 2005, Mr. Yanai announced his intention to
resign from office in August 2005.

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

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

Compensation

         The aggregate compensation paid to or accrued on behalf of all our
directors and executive officers as a group (15 persons) during 2004 consisted
of approximately $2.75 million, in salaries, fees, bonuses, commissions and
directors' fees and $0.6 million in amounts set aside or accrued to provide
pension, retirement or similar benefits, excluding expenses (including business
travel, professional and business association dues and expenses) reimbursed to
officers and other fringe benefits commonly reimbursed or paid to such officers
and directors by companies in Israel.

         The directors associated with Claridge Israel L.L.C. (two directors in
2004) assigned their directors' compensation to Claridge Israel L.L.C. These
directors received compensation identical to that received by our other
directors. All of our directors received compensation identical to that
received by our external directors as described below.

         Compensation and reimbursement for external directors (as described
below) is statutorily determined pursuant to a formula stated by the Israeli
Companies Law, 1999, which became effective on February 1, 2000, and which we
refer to in this annual report as the Companies Law, and we adopted the highest
compensation payable pursuant to the formula. Compensation and reimbursement of
all other directors who do not serve as officers are the same as the statutory
rates paid to external directors pursuant to a decision of our shareholders at
our annual general meeting. For additional information concerning the
compensation of directors, see Note 25C to our consolidated financial
statements included elsewhere in this annual report.

         In addition, according to decisions of our shareholders at the annual
general meetings of shareholders held on July 23, 2003, and September 12, 2004,
eight directors (including the external directors) who are not associated with
Claridge Israel L.L.C. or with Esarbee Investments Limited and who are not
related to the controlling shareholders, have each been


                                      72
<PAGE>


granted 50,000 options under the 2003 Stock Option Plan which is described
below. One of these directors has since resigned.

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

Board Practices

         Composition of Board; Election of Directors

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

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

         External Directors; Independent Directors

         Israeli Companies Law Requirements

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

    o    an employment relationship;

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

    o    control; and

    o    service as an office holder.

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


                                      73
<PAGE>


external director or may otherwise interfere with the person's ability to serve
as an external director.

         Under a recent amendment to the Companies Law, at least one of the
external directors is required to have "financial and accounting expertise" and
the other external directors are required to have "professional expertise".
These requirements are subject to regulations to be promulgated in which the
terms "financial and accounting expertise" and "professional expertise" would
be defined.

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

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

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

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

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

         New York Stock Exchange Requirements

         Our ADSs are listed on the New York Stock Exchange, or NYSE, and we
are subject to the rules of the NYSE applicable to listed companies. Under the
current NYSE rules, we are required to have an audit committee consisting of at
least three directors, all of who must be independent. The independence
standard under the NYSE rules generally excludes (1) any person who is an
employee of a company or its affiliates or any person who is an immediate
family member of an executive officer of a company or its affiliates, until the
lapse of three years from the termination of such employment, (2) any person
who is a partner, controlling shareholder or executive officer of an
organization that has a business relationship with a company or who has a
direct business relationship with a company, unless the board of directors of
the company determines that the business relationship does not interfere with
such person's independent judgment, or unless three years have lapsed from the
termination of such relationship or his status as a partner, controlling
shareholder or executive officer, and (3) any person who is employed as an
executive of another corporation where any of the company's executives serves
on that corporation's compensation committee. See "- Audit Committee - New York
Stock Exchange Requirements" for a description of the NYSE rules that become
effective with respect to Koor on July 31, 2005.


                                      74
<PAGE>


         Audit Committee

         Israeli Companies Law Requirements

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

         New York Stock Exchange Requirements

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

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

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

         The SEC has defined "affiliate" for non-investment companies as "a
person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the person
specified." The term "control" is intended to be consistent with the other
definitions of this term under the Securities Exchange Act of 1934, as "the
possession, direct or indirect, of the power to direct or cause the direction
of the management and policies of a person, whether through the ownership of
voting securities, by contract, or otherwise." A safe harbor has been adopted
by the SEC, under which a person who is not an executive officer, director or
10% shareholder of the issuer would be deemed not to have control of the
issuer. The


                                      75
<PAGE>


SEC has also provided certain limited exceptions for an audit committee member,
who also sits on the board of directors of an affiliate to a listed issuer, so
long as, except for being a director on such board of directors, the audit
committee member otherwise meets the independence requirements for each entity.

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

         Remuneration Committee

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

         Internal Auditor

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

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

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

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

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


                                      76
<PAGE>


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

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

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

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

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

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

         Equity Compensation Plans: Under Section 303A.08 of the LCM,
shareholders must be given the opportunity to vote on all equity-compensation
plans and material revisions thereto, with certain limited exemptions as
described in the Rule. We intend to follow the requirements of the Companies
Law under which requirement for shareholder approval is generally limited to
cases where our directors would be entitled to receive equity under the
equity-compensation plan.


                                      77
<PAGE>


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

Employees

         At December 31, 2004, we had 6,559 employees worldwide, which
represented an increase of 4% from year-end 2003.

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


                           Latin
               Israel     America      USA     Europe     Others      Total

     2002       5,201       1,020      344        257         77      6,899
     2003       4,605         993      311        329         90      6,328
     2004       4,732         965      369        373        120      6,559

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

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

         We are subject to various Israeli labor laws, collective bargaining
agreements, Israeli labor practices, as well as orders extending certain
provisions of collective bargaining agreements between the Histadrut (currently
the largest labor organization in Israel) and the Coordinating Bureau of
Economic Organizations (the federation of employers' organizations). Such laws,
agreements and orders have a wide scope, including minimum employment standards
(including, among other things, working hours, minimum wages, vacation and
severance pay), and special issues, such as equal pay for equal work, equal
opportunity in employment, and employment of women, youth and army veterans.
According to the National Insurance Law, Israeli employers and employees are
required to pay predetermined sums to the National Insurance Institute, an
organization similar to the United States Social Security Administration. These
contributions entitle the employees to benefits during periods of unemployment,
work


                                      78
<PAGE>


injury, maternity leave, disability, reserve military service, and bankruptcy
or the winding-up of the employer, in addition to health insurance. The
National Health Insurance Law 1994 imposes a health tax at a rate of
approximately 4.8% of an employee's base wage.

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

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

         In 2004, our total labor costs (including temporary employees)
amounted to approximately NIS 1,484 million, which represented approximately
16.1% of our total net sales, as compared to NIS 1,345 million in 2003. The
majority of our labor costs are denominated in NIS and are affected by the
periodic changes in the inflation rate in Israel.

Share Ownership

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

         As of June 30, 2005, our executive officers, in the aggregate, held
11,787 ordinary shares and options under our stock option plans to purchase up
to 386,957 ordinary shares. These options have an exercise price of NIS 95 per
share and an expiration date of December 31, 2010.

         Employee Benefit Plans

         As of June 30, 2005, options granted, or approved for grant, to all
our directors and employees to purchase up to 887,228 ordinary shares were
outstanding.

         The 1997 Stock-Based Compensation Plan

         On May 27, 1997, 5,039 stock options were granted under this plan, and
on November 6, 1997 another 31,282 stock options were granted. All of the stock
options outstanding under this plan were exercised as of June 30, 2005.


                                      79
<PAGE>


         The 1998 Stock-Based Compensation Plan

         On August 30, 1998, at an extraordinary general meeting of
shareholders, our shareholders approved a private placement of 400,000 stock
options, free of charge, to our employees. The options are exercisable for up
to 400,000 of our ordinary shares. All stock options under the 1998 plan were
granted on different dates, and after expiration of some options and exercise
of others, 670 options remained outstanding for exercise as of June 30, 2005.

         Under the terms of the 1998 plan, each stock option is theoretically
exercisable for one share, subject to adjustments. However, in practice,
offerees who exercise the options will not be allotted the full quantity of
shares underlying each option, but only shares which reflect the amount of the
monetary bonus inherent in their option, computed on the date of exercise.
Accordingly, the exercise price of each stock option is intended only for
computation of the bonus component (above and hereafter - the "Bonus Component
Method").

         The options outstanding under the 1998 plan have an exercise price of
NIS 101.38 per share and an expiration date of July 16, 2006.

         The 2000 Stock-Based Compensation Plan

         On August 6, 2000, our board of directors approved the 2000
Stock-Based Compensation Plan, which was previously approved by our audit
committee. A framework was approved for the allotment of 400,000 stock options
exercisable for up to 400,000 of our ordinary shares, out of which only 165,000
options have been granted, and after expiration of some options and exercise of
others, 1,734 options remained outstanding for exercise as of June 30, 2005.

         The options are exercisable for shares in a quantity reflecting the
amount of the monetary bonus inherent in the options, according to the Bonus
Component Method.

         The options outstanding under the 2000 plan have an exercise price of
NIS 101.38 per share and an expiration date of June 14, 2007.

         Pursuant to the terms of the 2000 plan, the remaining 235,000 stock
options, which were approved, but were not granted under the plan, expired on
June 14, 2005.

         The 2003 Stock Based Compensation Plan

         On July 27, 2003, at our annual general meeting of shareholders, our
shareholders approved the 2003 Stock-Based Compensation Plan, which had been
previously approved by our audit committee and by our board of directors, on
May 25, 2003 and June 5, 2003, respectively. A framework was approved for the
allotment of up to 1,200,000 stock options exercisable for up to 1,200,000 of
our ordinary shares, out of which 1,102,903 options have been granted.

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

         The options are designated for directors and employees who are not
related parties and will not become related parties as a result of allotment of
the stock options. In any event, the total


                                      80
<PAGE>


number of offerees under Plan 2003 will not exceed 35 offerees, excluding our
directors and chief executive officer.

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

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

         As of June 30, 2005, 887,228 options to purchase our ordinary shares
were outstanding under the 2003 plan, which have an exercise price of NIS 96
per share and an expiration date of December 31, 2010.

         Option Plans of Certain Subsidiaries

         In April 2001, the board of directors of MA Industries decided to
distribute options to employees of MA Industries and its consolidated
companies. According to this plan, during 2002 and 2003, 17,400,000 options
were allocated, each of which is exercisable into one ordinary share of MA
Industries. Following the exercise of options, as of March 31, 2005, 4,987,294
options to purchase shares of MA Industries were outstanding under this plan.

         In April 2003, the board of directors of MA Industries approved a
framework for the allotment of 17,000,000 stock options, each of which is
exercisable into one ordinary share of MA Industries. Out of the framework,
3,400,000 options were allotted to the Chief Executive Officer and to directors
of MA Industries, and following the exercise of options, 4,679,020 options
remained outstanding as of March 31, 2005.

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

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


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

Major Shareholders


                                      81
<PAGE>


         The following table sets forth certain information with respect to the
beneficial ownership of our ordinary shares as of June 30, 2005 with respect to
each person known to us to be the beneficial owner of 5% or more of our
outstanding ordinary shares. None of our major shareholders has any different
voting rights than any other shareholder.

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

All officers and directors as a group (14 persons) (5)............    1,130,925              7.02%
</TABLE>
_______________________

(1)  Based upon 16,118,784 ordinary shares issued and outstanding on June 30,
     2005, which amount excludes 15,799 ordinary shares held by one of our
     wholly-owned subsidiaries, which according to the Companies Law do not
     confer voting rights while held by a subsidiary. The respective numbers of
     ordinary shares listed as beneficially owned in the table above, and the
     percentage of outstanding ordinary shares represented thereby, do not give
     effect to ordinary shares issuable upon exercise of options granted
     pursuant to the 1998, 2000 and 2003 plans, which are exercisable within 60
     days of this annual report. See "Item 6. Directors, Senior Management and
     Employees," and Note 20 to our consolidated financial statements included
     elsewhere in this annual report.

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

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

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


                                      82
<PAGE>


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

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

(4)  IDB Development Corporation Ltd., or IDBD is controlled (66%) by IDB
     Holding Corporation Ltd., or IDBH. Both IDBD and IDBH are public Israeli
     companies traded on the Tel Aviv Stock Exchange. Approximately 51.7% of
     the outstanding share capital of IDBH is owned by a group comprised as
     follows: (i) 31.02% is held by Ganden Investments I.D.B. Ltd., a private
     Israeli company controlled by Nochi Dankner and his sister, Shelly
     Bergman; (ii) 10.34% is held by Manor Investments-IDB Ltd., a private
     Israeli company controlled by Ruth Manor; and (iii) 10.34% is held by
     Avraham Livnat Investments (2002) Ltd., a private Israeli company
     controlled by Avraham Livnat. The members of this group entered into a
     shareholders agreement relating to, among other things, their joint
     control of IDBH, the term of which expires in May 2023. In addition to her
     holdings as a controlling shareholder in one of the members of this group,
     as described above, Shelly Bergman separately holds approximately 4.9% of
     IDBH's outstanding share capital.

(5)  Includes (i) 508,439 options to purchase our ordinary shares held by
     several of our directors and officers, which are exercisable within 60
     days of the date of this annual report, (ii) 74,584 ordinary shares held
     by several of our directors and officers and (iii) 547,902 ordinary
     shares, representing 3.4% of our outstanding ordinary shares, held by
     Anfield, Ltd., a company registered in Israel and owned by Jonathan B.
     Kolber, our Chief Executive Officer. The holdings of Anfield in our
     ordinary shares were pledged in favor of Bank Hapoalim as a guarantee for
     a loan that was given to Anfield by Bank Hapoalim. Does not include the
     ordinary shares held by Claridge Israel L.L.C., which may be deemed
     beneficially owned by Ellen J. Bronfman Hauptman and Andrew Hauptman as
     described in footnote 3 above, or the ordinary shares held by Esarbee
     Investments Limited described in footnote 4 above.


         As of December 31, 2004, we had 50 ADS holders of record in the United
States, holding ADSs representing approximately 4.4% of our outstanding
ordinary shares, as reported by The Bank of New York, the depositary for our
ADSs.

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


                                      83
<PAGE>


Related Party Transactions

         For details regarding transactions and loans between us and related
parties, please see Note 25 to our consolidated financial statements included
elsewhere in this annual report.


Item 8.  Financial Information.
         ----------------------
Consolidated Statements and Other Financial Information

         See "Item 17. Financial Statements" and pages F-1 through F-141.

Legal Proceedings

         Claims against Telrad

         In October 1994, a claim was filed by the Engineers Union against
Telrad, for an unspecified amount. The claim pertains to the recognition and
applicability to Telrad engineers of the salary tables included in the general
collective bargaining agreements, which were signed in 1994 and 1995 between
the Engineers Union and the employers in the public service sector. Various
legal proceedings took place in connection with this claim and in March 2005
the National Labor Court dismissed the claim with the consent of the parties.

         In 1999, a claim was filed against Telrad by employees who are members
of our workers' committee. The employees sued for access to Telrad's accounts
so that they could examine the calculation of the distribution of profits to
employees and for a declaratory judgment that Telrad is obliged to draw up new
accounts for the distribution of profits. Various legal proceedings took place
in connection with this claim and in March 2005 the National Labor Court
dismissed the claim with the consent of the parties.

         Restrictive Trade Practices

         TTL/Telrad/Tadiran

         During October 1997, following the publication of a newspaper article
containing details about alleged violations of the Law for Restrictive Trade
Practices, 1988 (the Israeli Anti-Trust Law) regarding price coordination and
lack of competition between Tadiran, TTL (a former subsidiary of Tadiran which
merged with ECI in 1999) and Telrad, the Israeli Anti-Trust Commissioner
conducted an investigation at the offices of Tadiran, TTL and Telrad and at our
offices during which documents were confiscated, employees were questioned and
additional information was requested and provided.

         On September 7, 2004, the Israeli Anti-Trust Commissioner agreed to
issue an order according to Section 50B of the Anti-Trust Law pursuant to 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 Israeli Anti-Trust Commissioner would
not take any further action against the companies and/or their officers. The
order was approved by the court. In


                                      84
<PAGE>


accordance with the agreement with the Israeli Anti-Trust Commissioner, a
provision of NIS 8 million was included in our consolidated financial
statements as of December 31, 2004.

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

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

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

         On February 2, 2005, we received a notice from the Office of
Restrictive Trade Practices ( the Israeli Anti-Trust Authority) that it was
considering the possibility of prosecuting us, together with seven other
companies that are not members of the Koor Group (including two companies that
had been owned by Koor on the relevant dates, and were later sold to third
parties) and nine executives (including two executives who had been salaried
employees of Koor on the relevant dates), for violations of the Israeli
Anti-Trust Law. On June 7, 2005, we received a bill of indictment from the
Israeli Anti-Trust Authority in accordance with the abovementioned notice. The
bill came in the wake of an investigation opened by the Israeli 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 Israeli Anti-Trust Authority claims that the two companies that
belonged to the Koor Group in the past had colluded with two other companies in
the years 1992-1998.

         Under the Israeli Anti-Trust Law, penalties may be imposed against an
entity which has violated the law. In addition, should it be proven that
violations were committed, civil lawsuits may be filed against us and we may be
subject to civil penalties, if damages can be proven as a result of a violation
of the law. At this early stage, it is not possible to predict the likelihood
that any fines will be imposed on us or any civil lawsuits will be filed
against us, nor whether any such fines or lawsuits would have an adverse effect
on our business, financial condition or results of operations.

         Environmental

         Pursuant to an agreement with the Ministry of Environmental
Protection, subsidiaries of MA Industries decided to construct facilities for
the biological treatment of waste. Construction of these facilities is expected
take approximately three years. In the estimation of MA


                                      85
<PAGE>


Industries' management, the aggregate construction cost will be between $30
million and $40 million.

         One of MA Industries' plants is located in Ramat Hovav, along with
other chemical plants, since the government determined that the geological
layers in that particular area are completely impenetrable to liquid or
pollution. The Ministry of Environmental Protection conducted examinations,
which determined that there is data indicating subterranean pollution in Ramat
Hovav. The examiners recommended the taking of measures to prevent the
continuation of leakages from active and inactive plants, which are liable to
constitute a source of pollution of the water table, in the area. MA Industries
may be required to clean up the relevant areas or subterranean layers if it is
found that MA Industries is responsible for the contamination. Over the past
several years, various tests have been performed by different agencies to test
the ground contamination in the Ramat Hovav area as well as the area
surrounding the subsidiary's premises in Be'er Sheva. As of December 31, 2004,
MA Industries' management did not expect a significant impact with respect to
MA Industries from implementation of the report's recommendations, and,
therefore, no provision has been included in MA Industries' financial
statements. At this stage, MA Industries cannot estimate the costs involved of
implementing a solution, if, as a result of the research that will be carried
out, a solution will be found. Furthermore, the local municipality at Ramat
Hovav is continuing to take rehabilitation steps relating to past incidents.

         In May 2004, a subsidiary of MA Industries owning additional plants at
the Ramat Hovav site, received notice of a change in the terms of its business
license, pursuant to which the plants were required to change the method used
to treat sewage from the existing treatment, and to do so independently through
the implementation of vaporization processes. These terms include demands that,
within a short period of time, the plants conduct research and development for
the purpose of customizing the process to the composition of each plant's
sewage, and later, to build a suitable facility. Additionally, formulation
processes are to be implemented, whereby the plants must present the Ministry
of Environmental Protection with a research and development program for the
purpose of implementing the process with respect to the sewage. At the same
time, the Ministry of Environmental Protection set January 1, 2008 as the date
by which the plants must treat the sewage in the requisite format and to stop
the flow of sewage into the Ramat Hovav Industrial Council's vaporization pools
and treatment facilities.

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

         In the estimation of MA Industries' management, based on advice from
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 mediation. In the
estimation of MA 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 MA Industries is unable to estimate at this
time.


                                      86
<PAGE>


         On November 28, 2004, the Israeli government reached a decision
approving a plan to reduce air and water pollution deriving from the Ramat
Hovav industrial area. The plan calls for, among other things, (i) more
restrictive rules regarding the treatment of sewage by the plants in the area
(derived from the additional business license conditions that are the subject
of the administrative appeal described above) to be complied with in two
stages, the first by June 30, 2006 and the second by December 31, 2007; (ii)
the drying and rehabilitation of the vaporization pools in the area by the
Ramat Hovav Industrial Council, to be completed no later than December 31,
2012; and (iii) the formulation and implementation by the Ministry of
Environmental Protection of a plan to prevent exceptional emission of hazardous
materials into the air from the Ramat Hovav industrial area.

          In the estimation of MA Industries' management, based on advice from
its legal counsel, in view of the preliminary stage of the process, it is not
possible at this time to estimate the costs of complying with the Israeli
government's plan.

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

         Claims filed against Tadiran and its subsidiaries

         In October 1999, Bezeq filed a claim against Tadiran asserting various
losses incurred by Bezeq due to delays in the performance of works which were
ordered under development and application contracts originally entered into
between Bezeq and TTL in the amount of approximately $8.6 million.

         Alternatively, Bezeq is suing for the balance of arrearage penalties
to which it alleges is entitled pursuant to the same contracts, and which were
not paid in full, in the amount of approximately $1.7 million.

         In an arbitration judgment entered on February 17, 2000, all of
Bezeq's arguments regarding TTL's liability for the principal claim were
dismissed. The arbitration judgment determined that pursuant to the engagement
contracts 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 on February 15, 2003, the matter was
returned to the arbitrator for his decision. In the opinion of management of
Tadiran, based on the opinions of its legal counsel, Tadiran will not bear
additional substantial expenses over and above the allocations contained in the
financial statements. The negotiations between the parties for a settlement
were unsuccessful, and the matter has been returned to the arbitrator who
issued his ruling on February 26, 2004. In his ruling, the arbitrator affirmed
Tadiran's position and ruled, in


                                      87
<PAGE>


accordance with the parameters for calculating the damages that Tadiran is
meant to pay to Bezeq. The parties conducted negotiations regarding
implementation of the parameters described above, and they agreed that the
final amount would be NIS 4.6 million, which was paid on January 10, 2005.

         Claims filed against MA Industries and its foreign subsidiaries

         A claim was filed against several parties including a MA Industries
subsidiary in Brazil, for an aggregate amount of $36 million, by a group that
acquired the rights to two banks that had declared bankruptcy. With respect to
the balance of the claim, the subsidiary has been sued as the guarantor of
debts of agricultural cooperatives, which were its former shareholders.

         The position of the subsidiary is that it was removed from the
guarantee agreement under the terms of a subsequent agreement between the bank,
the previous shareholders and a subsidiary of the former shareholders. The
subsidiary's financial statements include a provision of $2 million, based on
the possibility of a compromise agreement with the plaintiffs. In the
estimation of the subsidiary, based on the opinion of its legal counsel, the
provision recorded is sufficient to cover any possible loss from this claim.

         Claims and other monetary demands have been filed against MA
Industries' subsidiary in Brazil, in the aggregate amount of $48.5 million.
Based on the opinion of its legal counsel, the subsidiary's management
estimates that the chances of the subsidiary's success in the proceedings and
its defense against the above claims and demands are high. The subsidiary
believes that the provisions recorded in its financial statements are adequate
to cover any possible damage which may result from these claims.

         Claims filed against ECI

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

         Claims filed against Sheraton Moriah

         The other shareholders in Herods Hotel Spa and Recreation Ltd., or
Herods, a proportionately consolidated company of Sheraton Moriah (Israel)
Ltd., Sheraton, filed a "motion for approval of a claim as a derivative action"
with the Tel Aviv District Court against Sheraton and Herods. The derivative
action for which they are seeking approval is for the cancellation of the
management agreement between Herods and Sheraton, 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.


                                      88
<PAGE>


         On March 16, 2005, a compromise agreement was signed between Sheraton,
Herods and the plaintiffs, whereby the parties agreed to resolve all the
disputes that arose between them, and to instill proper relations in the
management of Herods and in the management of the hotel owned by Herods. After
the signing of this agreement, the parties agreed to withdraw all the legal
proceedings they had instituted, in Israel and overseas.

         The parties signed a motion to confer the validity of a ruling on this
agreement. The agreement is in effect until June 30, 2020.

         Other Claims

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


                                      89
<PAGE>


Item 9.  The Offer and Listing.
         ----------------------
Trading in our ADSs

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

                                                                 ADSs
                                                       ------------------------
                                                           High         Low
                                                       -----------  -----------
Annual                                                      $            $
------
     2000.............................................   22.0625      13.0000
     2001.............................................   13.9375       4.1400
     2002.............................................    7.2700       2.1000
     2003.............................................    7.9600       2.0500
     2004.............................................   10.5600       7.0500

Quarterly 2003
--------------
     First Quarter....................................    2.8000       2.0500
     Second Quarter...................................    4.4000       2.6000
     Third Quarter....................................    4.2200       3.2400
     Fourth Quarter...................................    7.9600       4.2000

Quarterly 2004
--------------
     First Quarter....................................    8.5700       7.2500
     Second Quarter...................................    9.4500       7.0500
     Third Quarter....................................    9.5500       7.2500
     Fourth Quarter...................................    9.8300       7.5600

Monthly 2005
------------
     January..........................................   11.1400       9.9100
     February.........................................   12.1100      11.0500
     March............................................   12.2900      10.4500
     April............................................   12.0000      10.5400
     May..............................................   13.1800      12.1800
     June.............................................   12.9500      11.1000


         On June 30, 2005, the closing price of our ADSs was $11.10 per ADS.

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


                                      90
<PAGE>


         Trading in our Ordinary Shares

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

                                                     Ordinary Shares
                                          --------------------------------------
                                                 High                Low
                                          ------------------  ------------------
                                            NIS        $        NIS        $
                                          --------  --------  --------  --------
Annual
------
     2000..............................    455.00    111.85    255.50     62.81
     2001..............................    281.20     67.08     89.80     20.34
     2002..............................    166.60     36.92     48.60     10.26
     2003..............................    171.00     39.05     49.80     11.37
     2004..............................    224.90     52.21    165.30     38.37

Quarterly 2003
--------------
     First Quarter.....................     68.00     14.51     49.80     10.63
     Second Quarter....................     93.00     21.57     63.9      14.82
     Third Quarter.....................     95.20     21.44     70.70     15.92
     Fourth Quarter....................    171.00     39.05     91.90     20.99

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

Monthly 2005
------------
     January...........................    242.20     55.26    216.60     49.42
     February..........................    259.40     59.54    236.70     54.33
     March.............................    261.90     60.06    229.20     52.56
     April.............................    263.80     60.38    229.30     52.48
     May...............................    287.20     65.04    267.20     60.51
     June..............................    283.30     63.17    250.00     55.74


          On June 30, 2005, the closing price of our ordinary shares on the
TASE was NIS 251.00 (or $ 54.88) per share.


                                      91
<PAGE>


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

Memorandum and Articles of Association

         Organization and Register

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

         Objects and Purposes

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

         Directors

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

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

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

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


                                      92
<PAGE>


         Approval of Certain Transactions

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

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

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

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


                                      93
<PAGE>


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

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

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

    o    Any amendment to the articles of association;

    o    An increase of our authorized share capital;

    o    A merger; and

    o    Approval of interested party transactions which require shareholders
         approval.

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

         Insurance, Exemption and Indemnity of Office Holders

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

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

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

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


                                      94
<PAGE>


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

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

         Required Approvals

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

         Description of Koor's Deferred Shares

         As of June 30, 2005, we had 15,156,533 Deferred Shares, par value NIS
0.001 per share, outstanding. Holders of Deferred Shares are only entitled to
receive the nominal paid-up value of the Deferred Shares in the event of the
winding up of Koor, subject to prior payment of the nominal paid-up value of
the ordinary shares to the holders of ordinary shares. The holders of the
Deferred Shares do not have any voting rights and they are not entitled to
participate in the distribution of dividend of any kind. As of June 30, 2005,
one of our wholly-owned subsidiaries held 13,575,441 (89.6%) of our Deferred
Shares.

         Description of Koor's Ordinary Shares

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

         As of June 30, 2005, one of our wholly-owned subsidiaries held 15,799
of our ordinary shares; however, pursuant to the Companies Law these ordinary
shares do not confer voting rights while held by our subsidiary.


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

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

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

         Meetings of Shareholders

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

    o    At the direction of the Board of Directors;

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

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

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

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

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


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

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

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

         Right of Non-Israeli Shareholders to Vote

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

         Change of Control

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

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


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

Material Contracts

Elisra Shareholders' Agreement

         On November 2, 2002, we entered into a shareholders' agreement with
Elta and Elisra in order to govern the relationship between us and Elta as the
sole owners of Elisra. The shareholders' agreement includes provisions with
regard to the composition of the board of directors of Elisra, which will
consist of 10 members in addition to any outside directors as may be required.
Under the terms of the agreement, we and Elta will be able to nominate a number
of directors on a pro rata basis based on the number of shares held at such
time by us and Elta. If outside directors are required by law or stock exchange
rules, we will consult with Elta to determine which outside directors are to be
recommended by the board of directors. We and Elta may each oppose the
appointment of an outside director proposed by the board of director for
reasonable cause only and must provided reasoned notice within four business
days from the date on which the board of directors gives notice of its proposed
candidates. We have agreed with Elta to vote all of our shares for the
candidates proposed by each of us pursuant to the agreement and to vote all of
our shares for the outside director candidates nominated by the board of
directors and to vote against the removal of a member of the board whose
nomination was proposed by us or Elta unless we or Elta receive prior written
consent permitting us to vote for removal of the director. These provisions
remain in effect as long as each party owns at least 20% of the issued share
capital of Elisra or in the instance when one party fails to hold 20%, the
other party notifies the party that no longer holds 20% that the provisions
remain in effect.

         Under the terms of the agreement, as long as we and Elta each hold 20%
or more of the issued share capital of Elisra, the resolutions adopted on
several subjects listed in the agreement


                                      98
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will be adopted by a majority vote of the board of directors or general meeting
of Elisra, provided that at least one board of director appointed by each of us
and Elta voted for the resolution, and at the general meeting, we and Elta
voted for the resolution. This clause will expire on the closing date of an
initial public offering of shares of Elisra.

         The shareholders' agreement restricts our and Elta's ability to sell
shares of Elisra. In addition, the shareholders' agreement contains a right of
first offer which requires us or Elta, whoever wished to sell shares of Elisra,
to provide written notice of its wish to negotiate with the other party for the
sale of the shares. We and Elta have 15 days from the date of delivery of the
written notice to negotiate for the sale of the shares. The right of first
offer contains a right of first refusal when either we or Elta, whoever is
offered to purchase the shares, submits a bid for such shares that exceeds
$2.8275, but we do not reach an agreement within the 15 days. In addition, if
we sell all of our shares of Elisra to a third party, we have a drag-along
right to require Elta to sell all of its shares to the third party at a price
to be determined in accordance with the agreement. The drag-along provision
will expire on the closing date of an initial public offering of shares of
Elisra.

         Under the terms of the agreement, we may sell part of our holdings in
Elisra in an initial public offering and if we elect to do so, then Elta has
the right to sell shares in the initial public offering with us on a pro rata
basis. Pursuant to the agreement, Elisra is required to announce dividends of
25% of its net profits for that year, subject to a limitation for tax
liability. This provision will expire on the closing date of an initial public
offering of shares of Elisra.

Sales of MA Industries Shares

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

         On February 3, 2005, we entered into a block transfer deed, pursuant
to which we sold 15.9 million shares of MA Industries to Merrill Lynch
International for approximately NIS 374 million. Under the terms of the share
transfer deed, we undertook not to sell additional shares of MA Industries for
a nine-month period from the date of sale. As a result of this sale, and
following the issuance by MA Industries of additional shares in the second
quarter of 2005 upon the conversion of convertible securities and the exercise
of employee stock options, our ownership percentage in MA Industries decreased
to 32% as of June 30, 2005 (28.6% on a fully diluted basis taking into
consideration the exercise of outstanding stock options and the conversion of
outstanding convertible debentures).

Tadiran Communications Share Purchase Agreement

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


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Sale of Knafaim Shares

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

Koor-Elbit-Federman Transactions

         On December 27, 2004, we entered into a series of agreements with
Elbit Systems Ltd., or Elbit, and with Federmann Enterprises Ltd., or
Federmann. Under the terms of an share transfer deed with Elbit, we agreed to
sell our entire holdings in Tadiran Communications (approximately 33%) to Elbit
for approximately $146 million. Concurrently, pursuant to a share transfer deed
with Federmann, we agreed to acquire approximately 9.8% of Elbit's share
capital from Federmann for approximately $99 million . In connection with each
of these transactions we entered into a shareholders agreement with the other
party relating to, among other things, the voting of shares in the election of
directors and rights of one party in connection with certain dispositions of
shares by the other party. The two sales are interconnected and will be
completed in two stages, the first of which closed on April 18, 2005. For a
more detailed description of these transactions, see "Item 4 - Information on
the Company - Business Overview - Our Defense Electronics Business - Recent
Developments."

         On July 6, 2005 we signed an amendment to these agreements, pursuant
to which we will sell our entire holdings in Elisra to Elbit, instead of to
Tadiran Communications as per the original agreements, for approximately $70
million and additional consideration following receipt of future insurance
proceeds. We also received the right to acquire Dekolink Ltd., a start-up
company in the cellular field that is wholly-owned by Elisra. As originally
agreed, we will sell the balance of our holdings in Tadiran Communications to
Elbit for $83 million. However, under the amended terms of the transactions,
contrary to the terms of the original agreement, this sale will be conducted in
two parts, and we and Elbit will share joint control of Tadiran Communications,
as described above, following the sale of the first 5%. The sale of our
remaining shares in Tadiran Communications is contingent on the execution of
our sale of our 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, we will acquire only an additional 2.3% of Elbit from Federmann 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, we will hold approximately 7.6% of Elbit.

Exchange Controls

         Holders of ADSs are able to convert dividends and liquidation
distributions into freely repairable non-Israeli currencies at the rate of
exchange prevailing at the time of repatriation,


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pursuant to a general permit issued by the Controller of Foreign Exchange at
the Bank of Israel, or Controller, under the Currency Control Law, 1978, or
Currency Control Law, as modified by certain reforms in May 1998, provided that
Israeli income tax has been withheld by us with respect to such amounts.

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

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

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

Taxation

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

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

Israeli Tax Considerations

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


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General Corporate Tax Structure

         Israeli companies are generally subject to corporate tax on taxable
income at the rate of 35% for the 2004 tax year, 34% for the 2005 tax year, 32%
for the 2006 tax year and 30% for the 2007 tax year and thereafter and are
subject to capital gains tax at a rate of 25% for capital gains (other than
gains deriving from the sale of listed securities) derived after January 1,
2003. For capital gains derived from assets acquired prior to January 1, 2003,
the tax rate will be proportionate, based upon the corresponding periods. See
also Item 3- "Risks Related to Israel" for a discussion of tax benefits under
the Encouragement of Capital Investments Law.

Special Provisions Relating to Taxation under Inflationary Conditions

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

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

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

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

         However, during any fiscal year (or until February 28th of the
following year) in which the rate of increase of the CPI would not exceed or
shall not have exceeded, as applicable, 3%, the Israeli Minister of Finance
may, with the approval of the parliamentary Finance Committee, determine by
order that all or some of the provisions of this Law shall not apply to such
fiscal year, or, that the rate of increase of the CPI relating to such fiscal
year shall be deemed to be 0%, and to make the adjustments required to be made
as a result of such determination. No such determination was made by the
Minister in respect of 2004, even though the rate of increase of the CPI in
2004 was less than 3%.

Recent Israeli Tax Reforms

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

         The Tax Reform, aimed at broadening the categories of taxable income
and reducing the tax rates imposed on employment income, introduced the
following, among other things:

    o    Reduction of the tax rate levied on real capital gains (other than
         gains deriving from the sale of listed securities) derived after
         January 1, 2003, to a general rate of 25% for both


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         individuals and corporations. Regarding assets acquired prior to
         January 1, 2003, the reduced tax rate will apply to a proportionate
         part of the gain, in accordance with the holding periods of the asset,
         before or after January 1, 2003, on a linear basis;

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

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

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

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

Capital Gains and Income Taxes Applicable to Non-Israeli Shareholders

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

         Under the convention between the United States and Israel concerning
taxes on income (See "U.S.-Israel Tax Treaty" below), Israeli capital gains tax
will not apply to the sale, exchange or disposition of ordinary shares by a
person who qualifies as a resident of the United States (within the meaning of
the U.S.-Israel tax treaty) and is entitled to claim the benefits available to
the person by such treaty.


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

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

         Pursuant to the Tax Reform, generally, capital gains tax is imposed at
a rate of 15% on real gains derived on or after January 1, 2003, from the sale
of shares in companies (i) publicly traded on the TASE or; (ii) Israeli
companies publicly traded on a foreign stock exchange in a country with which
Israel has a tax treaty (such as the New York Stock Exchange). This tax rate
does not apply to: (1) dealers in securities; (2) shareholders that report in
accordance with the Inflationary Adjustment Law; (3) shareholders who acquired
their shares prior to an initial public offering (that are subject to a
different tax arrangement); (4) sale of shares between related parties, as
defined by law; and (5) if financing expenses are deducted for tax purposes. In
all of these cases, capital gains tax is imposed at a rate of 25%.

         The tax basis of shares acquired prior to January 1, 2003 will be
determined in accordance with the average closing share price in the three
trading days preceding January 1, 2003. However, in some cases, the actual
adjusted cost of the shares will be considered as the tax basis if it is higher
than such average price.

         In some instances where our foreign shareholders may be liable to
Israeli tax on the sale of their ordinary shares, the payment of the
consideration may be subject to the withholding of Israeli tax at the source.

         Non-residents of Israel are subject to income tax on income accrued or
derived from sources in Israel. Such sources of income include passive income
such as dividends, royalties and interest paid by an Israeli resident, and
non-passive income if the services were rendered in Israel. On distributions of
dividends by us other than bonus shares (stock dividends), income tax at the
rate of 25% (15% in the case of dividend distributed from the earnings of an
approved enterprise) is generally withheld at source, unless a different rate
is provided in a treaty between Israel and the shareholder's country of
residence.

U.S.-Israel Tax Treaty

         Pursuant to the Convention Between the Government of the United States
of America and the Government of Israel with Respect to Taxes on Income, as
amended (the "U.S.-Israel Tax Treaty"), which became effective as of January 1,
1995, the sale, exchange or disposition of ADSs or ordinary shares by a person
who qualifies as a resident of the United States within the


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meaning of the U.S.-Israel Tax Treaty and who is entitled to claim the benefits
afforded to such resident by the U.S.-Israel Tax Treaty ("Treaty U.S.
Resident") will generally not be subject to Israeli capital gains tax unless
such Treaty U.S. Resident held, directly or indirectly, shares representing 10%
or more of our voting power during any part of the 12-month period preceding
such sale, exchange or disposition, subject to certain conditions. A sale,
exchange or disposition of ADSs or ordinary shares by a Treaty U.S. Resident
who held, directly or indirectly, shares representing 10% or more of our voting
power at any time during such preceding 12-month period would be subject to
such Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax
Treaty, such Treaty U.S. Resident would be permitted to claim a credit for such
taxes against the U.S. income tax imposed with respect to such sale, exchange
or disposition, subject to the limitations in U.S. laws applicable to foreign
tax credits.

         On distributions of dividends other than bonus shares or stock
dividends, income tax is generally withheld at the source at the rate of 25%,
or 15% for dividends of income generated by an approved enterprise, unless a
different rate is provided in a treaty between Israel and the shareholder's
country of residence.

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

U.S. Federal Income Tax Considerations

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

    o    Are broker-dealers or insurance companies;

    o    Are financial institutions or financial services entities;

    o    Are tax-exempt organizations or retirement plans;

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

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



                                     105
<PAGE>


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

    o    Have elected mark-to-market accounting; and

    o    Have a functional currency that is not the dollar.

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

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

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

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

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

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

    o    A trust if:

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

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

         Taxation of Dividends

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

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


                                     106
<PAGE>


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

         Further, and subject to the discussion below under "Passive Foreign
Investment Companies," noncorporate U.S. Holders may be eligible for reduced
rates of U.S. federal income tax (currently a maximum federal tax rate of 15%)
in respect of dividends received with respect to ADSs in taxable years
beginning before January 1, 2009, provided the holders satisfy certain holding
period requirements. Please note that certain restrictions apply to the ability
of an individual U.S. Holder to benefit from the lower rates. For example, the
lower rates are only available to such an individual if such individual (i)
holds stock for at least 61 days during the 121-day period beginning on the
date that is 60 days before the date on which the share becomes ex-dividend
(disregarding any period during which the U.S. Holder has diminished the risk
of loss with respect to such stock (for example, by holding an option to sell
such stock)), and (ii) is not under an obligation to make related payments with
respect to positions in substantially similar or related property. Subject to
certain conditions and limitations, you may elect to claim a credit against
your U.S. Federal income tax liability for Israeli tax withheld from dividends
received in respect of the ADSs. Dividends generally will be treated as
foreign-source passive income or financial services income for United States
foreign tax credit purposes. The rules relating to the determination of the
foreign tax credit are complex, and you should consult your personal tax
advisors to determine whether and to what extent you would be entitled to this
credit. Alternatively, you may elect to claim a U.S. tax deduction, instead of
a foreign tax credit, for such Israeli tax, but only for a year in which you
elect to do so with respect to all foreign income taxes.

         Dispositions of ADSs

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

         Passive Foreign Investment Companies

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


                                     107
<PAGE>


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

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

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

    o    the amount allocated to each year during which we are considered a
         PFIC other than the year of the dividend payment or disposition would
         be subject to tax at the highest individual or corporate tax rate, as
         the case may be, and an interest charge would be imposed with respect
         to the resulting tax liability allocated to each such year,

    o    gain recognized upon the disposition of ADSs would be taxable as
         ordinary income,

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

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

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

         Based on our income, assets and activities for the year 2004, we
believe that we were not a PFIC for that year, nor do we expect to become a
PFIC in the foreseeable future. However, there can be no assurances that we
will not be treated as a PFIC for that year or any taxable year. If we are or
become a PFIC for any taxable year included in your holding period, we
generally will remain a PFIC for all subsequent taxable years with respect to
your holding of our ADSs.

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

         Backup Withholding and Information Reporting

         Dividend payments made with respect to ADSs and proceeds received in
connection with the sale or other disposition of ADSs may be subject to
information reporting to the U.S. Internal


                                     108
<PAGE>


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

Documents on Display

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

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


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

         Our market risk represents the risk of changes in the value of
financial instruments caused by fluctuations in foreign exchange rates,
interest rates and equity prices. From time to time, we enter into hedging
arrangements to reduce our overall exposure to market risk; however, as a
matter of policy, we do not enter into transactions of a speculative or trading
nature. Foreign currency exchange rate and interest rate exposures are
monitored by tracking actual and projected commitments and through the use of
sensitivity analysis. We do not believe that it is exposed to any material
market risk with regard to market risk sensitive instruments.


                                     109
<PAGE>


Market risk related to foreign currency exchange rates

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

         As of December 31, 2004, we had consolidated foreign currency-linked
financial liabilities of approximately NIS 4,759 million, of which
approximately NIS 3,433 million was dollar-linked and the rest, approximately
NIS 1,326 million, was linked to other currencies (mainly the Brazilian Real).

         As of December 31, 2004, our net financial liabilities in foreign
currency totaled approximately NIS 1,773 million, of which total dollar-linked
financial liabilities are approximately NIS 1,791 million, and net financial
assets linked to other foreign currencies (mainly the Brazilian real) amount to
approximately NIS 18 million. A portion of the currency exposure also stems
from the export sales included in our consolidated financial statements for the
year ended December 31, 2004, which amounted to approximately NIS 7,849
million, representing approximately 85% of our total consolidated sales for
such period, while a considerable portion of the expenses included in the
consolidated statements are stated in shekels.

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

         Our consolidated statements as of December 31, 2004 include
transactions with financial instruments that serve mainly as a hedge against
foreign currency exchange rate exposure for our subsidiary companies.

         During 2004, we bought dollars in exchange for other currencies in
forward contracts, call options, put options and swaps totaling, as of December
31, 2004: approximately NIS 140 million, NIS 1,454 million, NIS 698 million,
and NIS 25 million, respectively. At the same time, we had consolidated sales
of dollars in exchange for other currencies through forward contracts, call
options, put options and swaps totaling, as of December 31, 2004: NIS 46
million, NIS 510 million, NIS 1,626 million and NIS 258 million, respectively.
For a detailed description of transactions with financial instruments, see Note
21 to our consolidated financial statements included elsewhere in this annual
report.

Market risk related to inflation rates

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


                                     110
<PAGE>


         As of December 31, 2004, our consolidated balance sheet contained
CPI-linked loans and other liabilities totaling approximately NIS 1,500
million. As of such date, our consolidated balance sheets contained CPI-linked
financial assets totaling approximately NIS 203 million.

         Our net financial liabilities exposed to CPI-linkage amounted to
approximately NIS 1,297 million as of December 31, 2004. Should the CPI rise by
2%, our financing expenses would increase by approximately NIS 26 million.

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

Market risk related to interest rates

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

         We engage in hedge transactions against interest rate fluctuations
from time to time. As of December 31, 2004, these transactions totaled
approximately NIS 215 million at the parent company level.

         As of December 31, 2004, our consolidated balance sheet contained
loans and other liabilities in foreign currencies (mainly in U.S. dollars)
totaling approximately NIS 4,759 million, and non-index linked
shekel-denominated loans totaling approximately NIS 1,646 million. As of such
date, our consolidated balance sheets contained financial assets in foreign
currencies (mainly in U.S. dollars) totaling approximately NIS 2,986 million
and non-index linked shekel-denominated assets totaling approximately NIS 632
million.

         As of December 31, 2004, our net financial liabilities exposed to
fluctuations in the LIBOR interest rate amounted to approximately NIS 2,034
million. Should the LIBOR interest rate rise by 1%, our financing expenses
would increase by approximately NIS 20 million.

         As of December 31, 2004, our net financial liabilities exposed to
fluctuations in the interest rate in Israel is approximately NIS 870 million.
Should the interest rate in Israel rise by 2%, our financing expenses would
increase by approximately NIS 17 million.

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

Market risk related to equity prices

         We had equity marketable short-term securities at December 31, 2004 of
approximately NIS 375 million. Market risk was estimated as the potential
hypothetical decrease of 10% in the prices of these securities. Assuming such a
decrease, the fair value of the equity marketable securities would decrease by
approximately NIS 38 million.


                                     111
<PAGE>


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


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

         Not Applicable.


                                     112
<PAGE>


                                    PART II


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

         Not Applicable.


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

         Not Applicable.


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

         Disclosure Controls and Procedures. Our Chief Executive Officer and
Chief Financial Officer have evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act as of December 31, 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 files or submitted under
the Exchange Act.

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

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


Item 16B. Code of Ethics.
          ---------------

         We have adopted a written code of ethics that applies to our Chief
Executive Officer, our Chief Financial Officer and all of our other executive
officers.

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

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


                                     113
<PAGE>


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

         Audit Fees: KPMG and its affiliates charged us and our consolidated
subsidiaries an aggregate of approximately $2,436,000 for fiscal year 2004 in
connection with the professional services rendered for the audit of our annual
consolidated financial statements and our consolidated subsidiaries' annual
financial statements, review of quarterly consolidated financial statements and
services normally provided by them relating to statutory and regulatory filings
or engagements, including review of documents filed with the SEC. For fiscal
year 2003, KPMG and its affiliates billed us and our consolidated subsidiaries
an aggregate of approximately $2,064,000 for these services.

         Audit-Related Fees: KPMG and its affiliates billed us and our
consolidated subsidiaries an aggregate of approximately $148,000 in fiscal year
2004 for assurance and related services reasonably related to the performance
of our audit. In fiscal year 2003, KPMG and its affiliates charged us and our
consolidated subsidiaries an aggregate of approximately $59,000 for
audit-related services. These fees relate mainly to the issuance of special
confirmations.

         Tax Fees: KPMG and its affiliates charged us and our consolidated
subsidiaries an aggregate of approximately $124,000 in fiscal year 2004 for tax
compliance, tax advice and tax planning. KPMG and its affiliates billed us and
our consolidated subsidiaries an aggregate of approximately $115,000 for
tax-related services in fiscal year 2003.

         All Other Fees: KPMG and its affiliates billed us and our consolidated
subsidiaries an aggregate of approximately $271,000 in fiscal year 2004 for
products and services other than those comprising audit fees, audit-related
fees and tax fees. These fees mainly relate to assistance to the companies
regarding documentation of internal control over financial reporting. In fiscal
year 2003, KPMG and its affiliates charged us and our consolidated subsidiaries
an aggregate of approximately $23,000 for products and services in this
category.

         Audit Committee Pre-Approval Policy and Procedures

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

         During 2004, none of the services provided to us by our external
auditors were provided pursuant to the de minimis exception to the pre-approval
requirement provided by paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.


                                     114
<PAGE>


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

         Not Applicable.


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

         None.


                                     115
<PAGE>


                                    PART III

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

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


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

         Not Applicable.


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

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

   1.1         Memorandum of Association of Koor Industries Ltd.*
   1.2         Articles of Association of Koor Industries Ltd.*
   1.3         Amendments to Articles of Association of Koor Industries Ltd.
               Pursuant to a General Meeting of Shareholders held on June 1,
               2003.***
   2.1         Form of Ordinary Share Certificate.*
   2.2         Form of Deposit Agreement including Form of American Depositary
               Receipt.**
   4.1         Shareholders Agreement, dated November 2, 2002, by and among
               Koor Industries Ltd., Elta Systems Ltd. and Elisra Electronic
               Systems Ltd.***
   4.2         Agreement, dated January 14, 2004, between Koor Industries Ltd.
               and UBS Securities Israel Ltd.****
   4.3         Share Purchase Agreement, dated September 10, 2004, between Koor
               Industries Ltd. and Trefoil Israel Partners II, L.P., First
               Israel Mezzanine Fund L.P. and First Israel Mezzanine Fund (in
               Israel) Limited Partnership.****
   4.4         Share Transfer Deed, dated September 29, 2004, between Koor
               Industries Ltd. and Mr. Israel Borowitz.****
   4.5         Share Transfer Deed, dated September 29, 2004, between Koor
               Industries Ltd. and Ms. Tamar Borowitz.****
   4.6         Share Transfer Deed, dated September 29, 2004, between Koor
               Industries Ltd. and Mr. Avshalom Nuriel.****
   4.7         Share Transfer Deed, dated December 27, 2004, and amended July
               6, 2005, between Koor Industries Ltd. and Elbit Systems Ltd.****
   4.8         Shareholders' Agreement, dated December 27, 2004, and amended
               July 6, 2005, between Koor Industries Ltd. and Elbit Systems
               Ltd.****
   4.9         Share Transfer Deed, dated December 27, 2004, and amended July
               6, 2005, between Koor Industries Ltd. and Federmann Enterprises
               Ltd.****
   4.10        Shareholders' Agreement, dated December 27, 2004, and amended
               July 6, 2005, among Koor Industries Ltd., Federmann Enterprises
               Ltd. and Heris Aktiengesellschaft.****
   4.11        Share Transfer Deed, dated February 3, 2005, between Koor
               Industries Ltd. and Merrill Lynch International.****
   8.1         List of significant subsidiaries and affiliates.****
   12.1        Certification of the Principal Executive Officer of Koor
               Industries Ltd. pursuant to


                                     116
<PAGE>


               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.****
________________

*      Incorporated herein by reference to Koor Industries Ltd.'s Registration
       Statement on Form F-1 (Registration No. 333-97732) filed with the
       Securities and Exchange Commission on October 3, 1995.
**     Incorporated herein by reference to Koor Industries Ltd.'s Registration
       Statement on Form F-6 (Registration No. 333-97758) filed with the
       Securities and Exchange Commission on October 4, 1995.
***    Incorporated by reference to Koor Industries Ltd.'s Annual Report on
       Form 20-F for the year ended December 31, 2002 filed with the Securities
       and Exchange Commission on July 15, 2003.
****   Filed herewith.


                                     117
<PAGE>


                                   SIGNATURES

         Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Rosh
Ha'ayin, State of Israel, on the 15th day of July, 2005.


                                               KOOR INDUSTRIES LTD.


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


<PAGE>



                                  Koor Industries Ltd. (an Israeli Corporation)

Financial Statements as at December 31, 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.


                                      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)

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 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)

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
   (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 Assets and Investments

                  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 with respect to long-lived assets
                  and APB 18 with respect to equity method investees.

                  Under FAS 144 an impairment of a long-lived asset is
                  considered to be impaired only if the undiscounted cash flows
                  of the related asset do not exceed its book value.

                  Under APB 18 a loss is recorded only when the impairment of
                  the investee is other than temporary.

                  Under both FAS 144 and APB 18 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)

                  14.      Impairment of Assets and Investments (cont'd)

                  ECI's impairment:

                  In accordance with Israeli GAAP, on September 30, 2002 the
                  Company wrote down its equity method investment in ECI by NIS
                  130 million (see Note 3A(1)). Of the NIS 130 million write
                  down, the Company realized a capital reserve from foreign
                  currency translation adjustments generated by Koor in
                  relation to its investment in ECI, in the amount of NIS 105
                  million. The balance of NIS 25 million was charged to the
                  statement of income. In accordance with US GAAP, under FAS
                  52, the capital reserve from translation differences will be
                  realized only upon realization of the investment or
                  liquidation of the investee company. Accordingly, an expense
                  in respect to impairment in value was charged to the
                  statement of operations of 2002.

                  Under US GAAP, due to the fact that Koor's share in ECI's
                  shareholders' equity was higher than its investment in ECI,
                  the excess of Koor's share in the equity over the investment
                  was attributed to ECI's non-current assets.

                  From November 2003, the Company reversed the impairment under
                  Israeli GAAP. The cancellation was recorded against the
                  capital reserve from translation differences (credit) which
                  was realized when the provision was recorded. According to US
                  GAAP, the reversal of the impairment was not allowed.


                  15.      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-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)

                  16.      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.


                  17.      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-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)

                  18.      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.


                  19.      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-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)


         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                                         -                  -             4,812
                  Salary expenses in respect of share options
                   issued to employees                                          (91,318)          (185,276)              486
                  Loss (gain) from marketable securities, net                    (4,295)           (58,319)           54,145
                  Provisions for anticipated losses from realization
                   of convertible securities in investee companies               10,106             50,729              (515)
                  Amortization of discount in respect of
                   convertible debentures                                             -                (18)             (338)
                  Severance pay arising from an efficiency program               17,326            (10,181)            7,130
                  Capital gain from a decline in holding in
                   consolidated company                                          11,829                  -             6,199
                  Venture capital investments                                   (20,726)            15,790           (16,327)
                  Temporary differences resulting from recognition
                   of revenue arising from application of SAB 101                     -              7,949             2,230
                  Profit from exchange of assets                                      -                  -            15,105
                  Discontinued activities                                             -                  -               835
                  Impairment in value of assets and investments                  (1,277)            (4,983)            5,858
                  Differences from investee due to impairment
                   previously recorded                                           29,588            (19,676)          (14,342)
                  Foreign currency translation due to impairment                      -                  -          (105,124)
                  Amortization of goodwill                                       39,938             40,949            87,234
                  Expensing of licensing costs                                   (8,859)          *(16,793)         *(53,594)
                  Derivatives (FAS 133)                                           4,602            (34,002)          (12,690)
                  Other                                                             711              1,078            (4,669)
                                                                             ------------   -----------------   -----------------
                                                                                (12,375)          (212,753)          (23,565)
                  Income taxes                                                  (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(19).


                                     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)

         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(19).

                  ** Share equivalents are not reflected in US GAAP due to the
fact that they are anti-dilutive.
</TABLE>



                                     F-118
<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(19).
</TABLE>



Continued --

<TABLE>
<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-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)      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(16).

         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(19).

                                     F-120
<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


         (2)      ECI's condensed figures according to US GAAP

                                                          2004             2003
                                                --------------    --------------
                                                 US$ thousands    US$ thousands
                                                --------------    --------------

      As at December 31

      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)



                                     F-121
<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-122
<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-123
<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


                                     F-124
<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-125
<PAGE>



            [Letterhead of Brightman Almagor & Co., a Member Firm of
                          Deloitte & Touche Tohmatsu]

         Report of Independent Registered Public Accounting Firm To The
                                Shareholders of
                            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-126
<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



                                     F-127
<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


                                     F-128
<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-129
<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-130
<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-131
<PAGE>

           [Letterhead of Kost, Forer Gabbay & Kasierer, a Member of
                             Ernst & Young Global]

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                             To the shareholders of

                         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-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

                    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-133
<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-134
<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-135
<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-136
<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-137
<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-138
<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). 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 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.



                                     F-139
<PAGE>

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-140
<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-141
<PAGE>



                                                Makhteshim-Agan Industries Ltd.

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


CONTENTS


                                                                           PAGE


Auditors' Report                                                          F-143


Consolidated Balance Sheets                                               F-144


Company Balance Sheets                                                    F-146


Consolidated Statements of Income                                         F-147


Company Statements of Income                                              F-148


Statements of Changes in Shareholders' Equity                             F-149


Consolidated Statements of Cash Flows                                     F-150


Company Statements of Cash Flows                                          F-152


Notes to the Financial Statements                                         F-154


Appendix to the Financial Statements - Schedule of Investee Companies     F-226




                                    F-142
<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, including those prescribed under the Auditors' Regulations (Manner
of Auditor's Performance), 1973. Such standards require that we plan and
perform the audit to obtain reasonable assurance that the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Company's Board of Directors and by its
Management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.

In our opinion, based on our audits and on the reports of other auditors, as
mentioned above, the financial statements referred to above present fairly, all
material respects, the financial position of the Company and the consolidated
financial position of the Company and its subsidiaries, as at December 31, 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. Furthermore, these statements have, in our
opinion, been prepared in accordance with the Securities Regulations
(Preparation of Annual Financial Statements), 1993.

Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America (US GAAP). Information related to the nature and effect of such
differences is presented in Note 34 of the financial statements.

As explained in Note 2(A), since the Company's functional currency is the U.S.
dollar, the financial statements are prepared in U.S. dollars.

/s/ Somekh Chaikin

Somekh Chaikin
Certified Public Accountants (Isr.)

March 8, 2005, except for Note 34, as to which the date is July 13, 2005.



                                    F-143
<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-144
<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-145
<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-146
<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-147
<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-148
<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-149
<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-150
<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                                                    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-151
<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-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>
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-153
<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-154
<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-155
<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-156
<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-157
<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-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)


         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-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)

         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-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)

         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-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)

         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-162
<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-163
<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-164
<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-165
<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-166
<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-167
<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-168
<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-169
<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-170
<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-171
<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-172
<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-173
<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-174
<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-175
<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-176
<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-177
<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-178
<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-179
<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-180
<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-181
<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-182
<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-183
<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-184
<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-185
<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-186
<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-187
<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-188
<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-189
<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-190
<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-191
<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-192
<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-193
<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-194
<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-195
<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-196
<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-197
<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-198
<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-199
<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-200
<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-201
<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-202
<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-203
<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-204
<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-205
<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-206
<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-207
<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-208
<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-209
<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-210
<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-211
<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-212
<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-213
<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-214
<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-215
<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-216
<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-217
<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-218
<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-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 (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-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)

         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-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)

         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
                  and equivalents according to US GAAP                           446,098          401,109           399,071
                                                                              ==========       ==========          =========

</TABLE>


                                    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)

         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-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)

         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>



                                    F-224
<PAGE>



                                               Makhteshim-Agan Industries Ltd.


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



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.

         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-225
<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-226
<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-227


<PAGE>





                                                               ECI Telecom Ltd.

Consolidated Financial Statements as of December 31, 2004
--------------------------------------------------------------------------------

CONTENTS


                                                                           Page


Report of Independent Registered Public Accounting Firm                    F-229


Consolidated Balance Sheets as of
 December 31, 2004 and 2003                                                F-230


Consolidated Statements of Operations for the Years
 ended December 31, 2004, 2003 and 2002                                    F-232


Consolidated Statements of Other Comprehensive Income (Loss) for the
 Years ended December 31, 2004, 2003 and 2002                              F-233


Consolidated Statement of Changes in Shareholders' Equity for the
 Years ended December 31, 2004, 2003 and 2002                              F-234


Consolidated Statements of Cash Flows for the
 Years ended December 31, 2004, 2003 and 2002                              F-236

Notes to the Consolidated Financial Statements                             F-239



                                    F-228
<PAGE>



      [Letterhead of Somekh Chaikin, a Member Firm of KPMG International]



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF ECI TELECOM LTD.

We have audited the accompanying consolidated balance sheets of ECI Telecom
Ltd. ("the Company") and its subsidiaries as of December 31, 2004 and 2003, and
the related consolidated statements of operations, comprehensive income (loss),
changes in shareholders' equity and consolidated cash flows for each of the
years in the three-year period ended December 31, 2004. These consolidated
financial statements are the responsibility of the Company's Board of Directors
and management. Our responsibility is to express an opinion on these
consolidated 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
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the Board of Directors and
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of the Company and its subsidiaries as of December 31, 2004 and 2003,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2004, in conformity with generally
accepted accounting principles in the United States of America.

/s/ Somekh Chaikin

Somekh Chaikin
Certified Public Accountants (Israel)
Member firm of KPMG International

March 10, 2005




                                    F-229
<PAGE>

<TABLE>
<CAPTION>

Consolidated Balance Sheets as of December 31
--------------------------------------------------------------------------------------------------

                                                                          2004              2003
                                                       Note     $ in thousands    $ in thousands
                                                   ----------   --------------    ----------------
<S>                                                     <C>            <C>              <C>
ASSETS

Current assets
Cash and cash equivalents                               17A            74,182           126,411
Short-term investments                                2,17B            24,714            33,939
Receivables:
 Trade, net                                             17C           142,928           136,799
 Other                                                  17D            23,441            14,175
Prepaid expenses                                                        5,982             5,255
Work in progress                                                        3,244             3,323
Inventories                                               3           175,065           116,883
Assets - discontinued operations                         21                 -           100,743
                                                                --------------    ----------------
TOTAL CURRENT ASSETS                                                  449,556           537,528
                                                                --------------    ----------------

LONG-TERM RECEIVABLES, NET                                4            89,975           106,645
                                                                --------------    ----------------
LONG-TERM DEPOSITS AND MARKETABLE SECURITIES              2           119,359            59,199
                                                                --------------    ----------------
ASSETS HELD FOR SEVERANCE BENEFITS                       10            25,182            24,431
                                                                --------------    ----------------
INVESTMENTS                                               5            26,766            28,916
                                                                --------------    ----------------


PROPERTY, PLANT AND EQUIPMENT                             6
Cost                                                                  259,318           271,048
Less - accumulated depreciation                                       139,965           151,991
                                                                --------------    ----------------
                                                                      119,353           119,057
                                                                --------------    ----------------

SOFTWARE DEVELOPMENT COSTS, NET                           7            14,435            16,289
                                                                --------------    ----------------
GOODWILL                                                  8             1,039             1,039
                                                                --------------    ----------------
OTHER ASSETS                                            15F             9,144             8,892
                                                                --------------    ----------------
TOTAL ASSETS                                                          854,809           901,996
                                                                ==============    ================
</TABLE>


/s/ Shlomo Dovrat                            /s/ Doron Inbar
---------------------                        ----------------------------------
Shlomo Dovrat                                Doron Inbar
Chairman of the Board                        President, Chief Executive Officer


March 10, 2005


                                    F-230
<PAGE>

<TABLE>
<CAPTION>

                                                                                                ECI Telecom Ltd.

----------------------------------------------------------------------------------------------------------------

                                                                                        2004              2003
                                                                      Note    $ in thousands    $ in thousands
                                                                   --------   --------------    ---------------
<S>                                                                <C>               <C>                <C>
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Current maturities of long-term debts                              9A, 17E           30,000             30,000
Trade payables                                                                       68,364             51,004
Other payables and accrued liabilities                                 17F          149,648            100,439
Liabilities - discontinued operations                                   21                -             60,594
                                                                              --------------     --------------

TOTAL CURRENT LIABILITIES                                                           248,012            242,037
                                                                              --------------     --------------

LONG-TERM LIABILITIES
Banks loans                                                             9A                -             30,000
Other liabilities                                                       9B                -              6,015
Liability for employee severance benefits                               10           50,943             50,658
                                                                              --------------     --------------

TOTAL LONG-TERM LIABILITIES                                                          50,943             86,673
                                                                              --------------     --------------

TOTAL LIABILITIES                                                                   298,955            328,710
                                                                              --------------     --------------

MINORITY INTERESTS                                                                    4,086              3,781
                                                                              --------------     --------------

COMMITMENTS AND CONTINGENCIES                                           11

SHAREHOLDERS' EQUITY                                                    12
Ordinary shares NIS 0.12 par value per share, authorized
 200,000,000 shares; Issued and outstanding 109,391,828
 shares as of December 31, 2004 and 108,038,063 as of
 December 31, 2003                                                                    6,198              6,163
Capital surplus                                                                     642,222            662,903
Accumulated other comprehensive loss                                                (12,637)            (5,393)
Accumulated deficit                                                                 (84,015)           (94,168)
                                                                              --------------     --------------

TOTAL SHAREHOLDERS' EQUITY                                                          551,768            569,505
                                                                              --------------     --------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                           854,809           901,996
                                                                              ==============     ==============
</TABLE>

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



                                    F-231
<PAGE>

<TABLE>
<CAPTION>

                                                                                                             ECI Telecom Ltd.

Consolidated Statements of Operations for the Year Ended December 31
-------------------------------------------------------------------------------------------------------------------------------



                                                                                    2004             2003              2002
                                                                              --------------    -------------      ------------
                                                                  Note               $ in thousands, except per share amounts
                                                        ---------------       -------------------------------------------------
<S>                                                                <C>           <C>              <C>                 <C>
Revenues                                                           17G           496,712          392,567             550,434
Cost of revenues                                               17H; 20           300,971          239,298             357,116
                                                                              -------------     ------------       ------------
GROSS PROFIT                                                                     195,741          153,269             193,318

Research and development costs, net                                17I            64,870           62,041              80,179
Selling and marketing expenses                                     17J            78,423           73,643              97,309
General and administrative expenses                                17K            35,491           38,956              82,452
Amortization of acquisition-related intangible assets                                  -            1,773               1,760
Impairment of assets                                                20                 -              667               3,725
Loss from exchange of assets                                        20                 -                -               6,783
Restructuring expenses                                              19             2,585            8,394                   -
                                                                              -------------     ------------       ------------
Operating income (loss)                                                           14,372          (32,205)            (78,890)
Financial expenses                                                 17L            (6,562)          (8,534)            (17,893)
Financial income                                                   17L             9,169            7,791              23,591
Other income (expenses), net                                       17M             2,693           (5,376)            (11,074)
                                                                              -------------     ------------       ------------
Income (loss) from continuing operations
 before taxes on income                                                           19,672          (38,324)            (84,266)
Taxes on income                                                     15            (1,924)          (2,141)             (8,456)
                                                                              -------------     ------------       ------------
Income (loss) from continuing operations after
 taxes on income                                                                  17,748          (40,465)            (92,722)
Company's equity in results of investee
 companies, net                                                                   (3,387)          (4,334)             (3,055)
Minority interest in results of subsidiaries, net                                   (305)              76                 575
                                                                              -------------     ------------       ------------
Income (loss) from continuing operations                                          14,056          (44,723)            (95,202)
Cumulative effect of accounting change, net of nil                   1T                                 -                (550)
taxes
Loss on discontinued operations, net of income tax
 (tax benefit) of ($55 thousand); $38 thousand and
 $356 thousand for the years ended 2004, 2003
 and 2002, respectively                                              21           (3,903)         (26,317)            (66,716)
                                                                              -------------     ------------       ------------
Net income (loss)                                                                 10,153          (71,040)           (162,468)
                                                                              =============     ============       ============


EARNINGS (LOSS) PER SHARE                                           17O
Basic earnings (loss) per share:
Continuing operations                                                              0.13             (0.41)              (0.90)
Cumulative effect of accounting change, net                                           -                 -               (0.01)
Discontinued operations                                                           (0.04)            (0.24)              (0.63)
                                                                              --------------    -------------      ------------
Net earnings (loss) per share                                                      0.09             (0.65)              (1.54)
                                                                              ==============    =============      ------------

Diluted earnings (loss) per share:
Continuing operations                                                              0.12             (0.41)              (0.90)
Cumulative effect of accounting change, net                                           -                 -               (0.01)
Discontinued operations                                                           (0.03)            (0.24)              (0.63)
                                                                              --------------    -------------      ------------
Net earnings (loss) per share                                                      0.09             (0.65)              (1.54)
                                                                              ==============    =============      ------------
</TABLE>


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



                                    F-232
<PAGE>

<TABLE>
<CAPTION>
                                                                                                                ECI Telecom Ltd.

Consolidated Statements of Comprehensive Income (Loss) for the Year Ended December 31
-------------------------------------------------------------------------------------------------------------------------------


                                                                                    2004              2003               2002
                                                                          --------------    --------------     ---------------
                                                                          $ in thousands    $ in thousands     $ in thousands
                                                                          --------------    --------------     ---------------
Net income (loss)                                                                10,153           (71,040)          (162,468)
                                                                          --------------    --------------     ---------------
Other comprehensive income (loss):
<S>                                                                              <C>               <C>                <C>
Changes in fair value of financial instruments, net of nil taxes                 (8,303)           (4,843)            (3,632)
Realization of gain on available for sale securities, net of nil taxes           (1,282)                -                  -
Unrealized holding gains on available for sale
 securities arising during the year, net of nil taxes                             2,341             1,282                  -
                                                                          --------------    --------------     ---------------

Total other comprehensive loss                                                   (7,244)           (3,561)            (3,632)
                                                                          --------------    --------------     ---------------

Comprehensive income (loss)                                                       2,909           (74,601)          (166,100)
                                                                          ==============    ==============     ===============

</TABLE>


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




                                    F-233
<PAGE>
<TABLE>
<CAPTION>

                                                                                                                 ECI Telecom Ltd.

Statement of Changes in Shareholders' Equity
----------------------------------------------------------------------------------------------------------------------------------



                                          Number     Share     Capital    Accumulated      Accumulated    Treasury           Total
                                    of shares(1)   capital     surplus          other         earnings       stock   shareholders'
                                                                         comprehensive        (deficit)                    equity
                                                                         income (loss)      (Note 15A2)
                                   ------------- ---------   ---------   -------------    -------------  ---------   -------------
                                                              $ in thousands, except share amounts
                                   ----------------------------------------------------------------------------------------------
<S>                                   <C>            <C>       <C>              <C>            <C>         <C>           <C>
Balance at January 1, 2002            93,573,549     5,873     656,614          1,800          173,567     (82,998)      754,856

CHANGES DURING 2002 -
Net loss for the year ended
   December 31, 2002                           -         -           -              -         (162,468)          -      (162,468)
Share issuance, net                   13,160,000       263           -              -          (34,227)     82,998        49,034
Share issuance to
   employees and others                  779,063        16       1,960              -                -           -         1,976
Amortization of deferred
   compensation expenses                       -         -        (149)             -                -           -          (149)
Changes in fair value of
   financial instruments                       -         -           -         (3,632)               -           -        (3,632)
                                   ------------- ---------   ---------   -------------    -------------  ---------   ------------

Balance at December 31, 2002         107,512,612     6,152     658,425         (1,832)         (23,128)          -       639,617

CHANGES DURING 2003 -
Net loss for the year ended
   December 31, 2003                           -         -           -              -          (71,040)          -       (71,040)
Share issuance to employees              424,633         8         647              -                -           -           655
Employees stock options
   exercised and paid, net               100,818         3         263              -                -           -           266
Amortization of deferred
   compensation expenses                       -         -       3,568              -                -           -         3,568
Net unrealized gain on available
  for sale securities                          -         -           -          1,282                -           -         1,282
Changes in fair value of
  financial instruments                        -         -           -         (4,843)               -           -        (4,843)
                                   ------------- ---------   ---------   -------------    -------------  ---------   ------------

Balance at December 31, 2003         108,038,063     6,163     662,903         (5,393)         (94,168)          -       569,505
                                   ============= =========   =========   =============    =============  =========   ============
</TABLE>


(1)  Issued and outstanding



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



                                    F-234
<PAGE>

<TABLE>
<CAPTION>

                                                                                                                  ECI Telecom Ltd.
Statement of Changes in Shareholders' Equity (cont'd)
----------------------------------------------------------------------------------------------------------------------------------


                                          Number     Share     Capital    Accumulated      Accumulated    Treasury           Total
                                    of shares(1)   capital     surplus          other         earnings       stock   shareholders'
                                                                         comprehensive        (deficit)                    equity
                                                                         income (loss)      (Note 15A2)
                                   ------------- ---------   ---------   -------------    -------------  ---------   -------------
                                                              $ in thousands, except share amounts
                                   -----------------------------------------------------------------------------------------------

<S>                                 <C>              <C>       <C>             <C>             <C>                       <C>
Balance at January 1, 2004          108,038,063      6,163     662,903         (5,393)         (94,168)          -       569,505

CHANGES DURING 2004 -
Net income for the year
   ended December 31, 2004                    -          -           -              -           10,153           -        10,153
Employees stock options
   exercised and paid, net            1,353,765         35       2,445              -                -           -         2,480
Amortization of deferred
   compensation expenses                      -          -       1,650              -                -           -         1,650
Net unrealized gain on
   available for sale securities              -          -           -          2,341                -           -         2,341
Realization of gain on
   available for sale securities              -          -           -         (1,282)               -           -        (1,282)
Changes in fair value of
   financial instruments                      -          -           -         (8,303)               -           -        (8,303)
Distribution of shares of a
   subsidiary as dividend in
   kind (see Note 21B)                        -          -     (24,776)             -                -           -       (24,776)
                                   ------------  ---------   ---------   -------------    -------------  ---------    ------------
                                    109,391,828      6,198     642,222        (12,637)         (84,015)          -       551,768
                                   ============  =========   =========   =============    =============  =========    ============
</TABLE>


(1)  Issued and outstanding




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




                                    F-235
<PAGE>

<TABLE>
<CAPTION>

                                                                                                               ECI Telecom Ltd.

Consolidated Statement of Cash Flows for the Year Ended December 31
--------------------------------------------------------------------------------------------------------------------------------


                                                                                      2004              2003               2002
                                                                            ---------------   ---------------    ---------------
                                                                            $ in thousands    $ in thousands     $ in thousands
                                                                            ---------------   ---------------    ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                                 <C>              <C>               <C>
Net income (loss)                                                                   10,153           (71,040)          (162,468)

Adjustments to reconcile net income (loss) to cash
  provided by operating activities:

Depreciation and amortization                                                       35,356            41,622             56,451
Cumulative effect of accounting change, net                                              -                 -                550
Amortization of deferred compensation                                                1,650             3,568                 81
Loss (gain) on sale of property and equipment                                         (735)            1,362              1,736
Impairment of assets                                                                     -             6,686              3,725
Loss from exchange of assets                                                             -                 -              6,783
Capital losses, net                                                                  3,950             4,862              8,738
Other - net (mainly deferred taxes)                                                   (468)            7,066              6,039
Company's equity in results of investee companies                                    3,387             4,334              3,055
Minority interest in net results of subsidiaries                                       305           (16,956)             6,045
Loss (gain) from marketable securities                                                 987              (111)               852
Decrease in trade receivables (including
 non-current maturities of bank deposits and trade receivables)                     10,741            69,069            112,056
Decrease (increase) in other receivables                                            (8,806)            9,531             30,170
Decrease (increase) in prepaid expenses                                               (727)           (1,410)             4,501
Decrease in work in progress                                                            79             3,192             19,540
Decrease (increase) in inventories                                                 (58,182)           24,149            113,056
Change in net balance of discontinued operations                                       870                 -                  -
Increase (decrease) in trade payables                                               17,360            14,413            (35,217)
Increase (decrease) in other payables and accrued liabilities                       41,443           (23,500)           (38,461)
Decrease in other long-term liabilities                                             (5,015)           (2,364)            (3,194)
Increase (decrease) in liability for employee severance benefits, net                 (715)                -             (1,584)
Cumulative effect of an accounting change on discontinued operations operation           -                 -             36,646
Impairment of long-lived assets relating to the discontinued                             -                 -             22,678

                                                                              -------------    --------------     --------------
Net cash provided by operating activities                                           51,633            74,473            191,778
                                                                              -------------    --------------     --------------

CASH FLOWS USED IN INVESTING ACTIVITIES
Investments in deposits, net                                                        2,681           (22,563)              (450)
Software development costs capitalized                                            (11,151)          (11,364)           (12,935)
Investment in property, plant and equipment                                       (23,937)          (11,347)           (11,759)
Proceeds from sale of property, plant and equipment                                 1,487               878                746
Purchase of technology                                                                  -              (869)                 -
Acquisition of investee companies                                                  (1,212)             (203)            (2,584)
Long-terms loans granted                                                           (6,000)                -             (6,227)
Investment in marketable securities                                               (43,075)          (80,317)                 -
Changes in assets held for severance benefits                                        (751)              537               (497)
Acquisition of newly consolidated subsidiary (A)                                        -                 -                513
Repayment of convertible notes                                                      5,400                 -                  -
Proceed from realization of consolidated subsidiary and operations (B)                  -             9,100            (10,003)
Proceeds from realization of shares at consolidated subsidiary                          -                 -             20,302
                                                                             --------------    --------------     --------------

Net cash used for investing activities                                            (76,558)         (116,148)           (22,894)
                                                                            ---------------    --------------     --------------
</TABLE>


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



                                    F-236
<PAGE>

<TABLE>
<CAPTION>

                                                                                                             ECI Telecom Ltd.

Consolidated Statements of Cash Flows for the Year Ended December 31 (cont'd)
-----------------------------------------------------------------------------------------------------------------------------



                                                                                   2004              2003               2002
                                                                         ---------------   ---------------    ---------------
                                                                         $ in thousands    $ in thousands     $ in thousands
                                                                         ---------------   ---------------    ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
<S>                                                                             <C>              <C>                 <C>
Repayment of loans from banks                                                   (30,000)         (100,000)           (90,000)
Decrease in short-term credit, net                                                    -           (70,012)               (18)
Share issue expenses                                                                  -                 -               (646)
Exercise of stock options                                                         2,480               921             51,656
                                                                         ---------------   ---------------    ---------------

NET CASH USED FOR FINANCING ACTIVITIES                                          (27,520)         (169,091)           (39,008)
                                                                         ---------------   ---------------    ---------------

EFFECT OF CHANGE IN EXCHANGE RATE ON CASH                                           216              (508)               581
                                                                         ---------------   ---------------    ---------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                            (52,229)         (211,274)           130,457

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                  126,411           356,649            226,192
                                                                         ---------------   ---------------    ---------------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                         74,182       (*) 145,375            356,649
                                                                         ==============-   ===============    ===============


SUPPLEMENTAL DISCLOSURES:

INCOME TAXES PAID, NET OF TAX REFUNDS                                               282             7,158               (124)
                                                                         ==============-   ===============    ===============

INTEREST PAID                                                                     1,518             2,479             10,008
                                                                         ==============-   ===============    ===============


A.       ACQUISITION OF NEWLY CONSOLIDATED SUBSIDIARIES

                                                                                   2004              2003               2002
                                                                         ---------------   ---------------    ---------------
                                                                         $ in thousands    $ in thousands     $ in thousands
                                                                         ---------------   ---------------    ---------------


Net current assets (other than cash)                                                  -                 -             (1,795)
Investment in investee companies                                                      -                 -              2,482
Property, plant, equipment and other assets, net                                      -                 -               (171)
Goodwill                                                                              -                 -                 (3)
                                                                         ---------------   ---------------    ---------------
                                                                                      -                 -                513
                                                                         ==============-   ===============    ===============
</TABLE>


(*) Include $ 18,964 thousand related to discontinued operations.


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




                                    F-237
<PAGE>

<TABLE>
<CAPTION>

                                                                                                       ECI Telecom Ltd.

Consolidated Statement of Cash Flows for the Year Ended December 31 (cont'd)
------------------------------------------------------------------------------------------------------------------------


B.       Disposition of a consolidated subsidiary as dividend in kind:

                                                                                  Year ended December 31
                                                                     ---------------------------------------------------
                                                                               2004              2003               2002
                                                                     --------------    --------------     --------------
                                                                     $ in thousands    $ in thousands     $ in thousands
                                                                     --------------    --------------     --------------

<S>                                                                         <C>                  <C>                 <C>
Assets - discontinued operations                                            96,454                 -                  -
Liabilities - discontinued operations                                      (57,175)                -                  -
Investments in investee company                                            (10,822)                -                  -
Capital surplus                                                            (24,776)                -                  -
Loss from disposition                                                       (3,681)                -                  -
                                                                     --------------    --------------     --------------

                                                                                 -                 -                  -
                                                                     ==============    ==============     ==============



C.       Non-cash activities

Sale of fixed assets in return for shares in investee company                    -             1,053                  -
                                                                     ==============    ==============     ==============
</TABLE>



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




                                    F-238
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 1 - Significant Accounting Policies

         Significant accounting policies, applied on a consistent basis (except
as disclosed in Note 1T below) are as follows:

         A.       General

         (1)      ECI Telecom Ltd. ("ECI" or the "Company") is an Israeli
                  corporation that provides network and access solutions for
                  digital telecommunications networks. ECI designs, develops,
                  manufactures, markets and supports digital telecommunications
                  solutions for evolving services, including voice, data, video
                  and multimedia, and for building next generation converging
                  networks. ECI's products and platforms are designed to create
                  and manage bandwidth, maximize revenues for network
                  operators, reduce operating expenses, expand capacity,
                  improve performance and enable new revenue-producing
                  services.

         (2)      On November 7, 2000, the Board of Directors adopted a plan to
                  split ECI into five distinct companies, as follows: Inovia
                  Telecoms Ltd. ("Inovia"), ECI Telecom - NGTS Ltd. ("NGTS"),
                  Enavis Networks Ltd. ("Enavis"), Lightscape Networks Ltd.
                  ("Lightscape"), and InnoWave ECI Wireless Systems Ltd.
                  ("InnoWave") (already operating as a separate company), with
                  the parent company to serve as a holding company and
                  sub-contractor of the split-up companies.

                  The Company established the four new subsidiaries, which
                  absorbed the employees of the various divisions and were to
                  receive operating assets from the Company (for segment
                  reporting see Note 17G). The Company received a tax ruling
                  that the transfer of activities to the new companies would be
                  tax free, retroactive to the beginning of 2001.

                  The plan of demerger contemplated that the parent company
                  would continue to manufacture for the split-up companies, to
                  distribute certain of their products abroad through certain
                  subsidiaries and to hold shares in ECtel Ltd. and the various
                  start-up companies. It would also provide the split-up
                  companies with management and other services.

                  The transfer of assets to the subsidiaries was never carried
                  out. In November 2002, the Board of Directors decided to
                  reverse the split-up plan and not to transfer the assets and
                  liabilities to the subsidiaries.

                  In December 2002, the Company notified the Israeli Tax
                  Authorities of the retroactive cancellation of the split-up
                  plan.

                  During 2002, the Company's Board of Directors decided to
                  focus the Company's activities on its two core businesses,
                  which are organized in two divisions: Broadband Access
                  Division (formerly - Inovia) and Optical Network Division
                  (formerly - Lightscape and Enavis).


                                    F-239
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 1 - Significant Accounting Policies (cont'd)

         A.       General (cont'd)

         (3)      In December 2002, the Company transferred part of the NGTS
                  activities to a new company subsequently called Veraz
                  Networks Inc., which was set up with third parties and in
                  which the Company holds approximately 43 % of the share
                  capital (36 % on a fully diluted basis), see Note 5A.
                  In addition, in April 2003, the Company sold the activities
                  of InnoWave, see Note 21. Accordingly, the results of these
                  activities for all periods reported were reclassified to one
                  line in the statement of operations following the results
                  from continuing operations.

         (4)      On March 9, 2004, the Board of Directors of ECI decided,
                  in principle, that ECI would distribute 7.6 million of its
                  shares in ECtel Ltd. to ECI's shareholders.

                  On April 28, 2004, after the Company obtained court approval
                  and the consent of its banks, the Board of Directors declared
                  a distribution of 7.6 million shares of ECtel to the
                  Company's shareholders of record on May 5, 2004. The shares
                  were distributed on May 10, 2004. Before distribution, ECI
                  held approximately 10.5 million, or 58%, of ECtel's shares.
                  After distribution of the shares, ECI holds approximately 16%
                  of ECtel's outstanding shares.

                  Accordingly, the results of ECtel for all periods reported
                  were reclassified to one line in the statement of operations
                  following the results from continuing operations.

                  The assets and liabilities of ECtel as at December 31, 2003
                  were reclassified in the Company's balance sheets as assets
                  from discontinued operations and liabilities from
                  discontinued operations, respectively. See Note 21.

         (5)      The financial statements have been prepared in conformity
                  with generally accepted accounting principles (GAAP) in the
                  United States of America.

         (6)      The currency of the primary economic environment in which the
                  operations of the Company and its subsidiaries are conducted
                  is the U.S. dollar ("dollar").

                  Most of the Company's sales are made outside of Israel, in
                  dollars and other non-Israeli currencies (see Note 17G as to
                  geographical distribution). Most purchases of materials and
                  components, as well as most selling and other expenses
                  incurred outside Israel, are in dollars. In view of the
                  foregoing, the dollar has been determined to be the Company's
                  functional currency.

                  Transactions and balances denominated in dollars are
                  presented at their original amounts.
                  Non-dollar transactions and balances have been remeasured
                  into dollars in accordance with the principles set forth in
                  Statement No. 52 of the Financial Accounting Standards Board
                  (FASB) of the United States of America.

                  All exchange gains and losses from remeasurement of monetary
                  balance sheet items denominated in non-dollar currencies are
                  reflected in the statement of operations when they arise.
                  Such foreign exchange gains and losses are included in the
                  same statement of operations items as those in which the
                  related transactions are included.


                                    F-240
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 1 - Significant Accounting Policies (cont'd)

         A.       General (cont'd)

         (7)      The preparation of financial statements in conformity with
                  generally accepted accounting principles requires management
                  to make estimates and assumptions that affect the reported
                  amounts of assets and liabilities and disclosure of
                  contingent assets and liabilities at the date of the
                  financial statements and the reported amounts of revenues and
                  expenses during the reporting period. These are management's
                  best estimates based on experience and historical data,
                  however, actual results could differ from these estimates.


         B.       Principles of consolidation

         The consolidated financial statements include those of the Company and
         all of its subsidiaries. All significant intercompany accounts and
         transactions have been eliminated in consolidation.


         C.       Cash and cash equivalents

         The Company considers all highly liquid investments with a maturity of
         three months or less at date of purchase, to be cash equivalents
         (except for held to maturity debt investments).


         D.       Investments

         1.       Investee companies

                  Investments in investee companies, in which the Company has
                  significant influence (affiliated companies) are presented
                  under the equity method, that is, at cost plus the Company's
                  share of the post-acquisition gains or losses.

                  Investment in entities in which the Company does not have
                  significant influence ("other companies"), are stated as
                  follows:

                  -      Marketable securities - as stated in 2 below.

                  -      Non-marketable securities - at cost, less any
                         decline in value which is not of a temporary nature.



                                    F-241
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 1 - Significant Accounting Policies (cont'd)

         D.       Investments (cont'd)

         2.       Marketable securities

                  The Company classifies its debt securities in one of three
                  categories: Trading, available for sale or held to maturity
                  and its equity securities as trading or available for sale.
                  Trading securities are bought and held principally for the
                  purpose of selling them in the near term. Held-to-maturity
                  debt securities are those securities in which the Company has
                  the ability and intent to hold the security until maturity.
                  All debt securities not included in trading or held to
                  maturity are classified as available for sale.

                  Trading, and available-for-sale securities are recorded at
                  fair value. Held-to-maturity debt securities are recorded at
                  amortized cost, adjusted for the amortization or accretion of
                  premiums or discounts. Unrealized holding gains and losses,
                  net of the related tax effect, on available-for-sale
                  securities are excluded from earnings and are reported as a
                  separate component of other comprehensive income until
                  realized. Realized gains and losses from the sale of
                  available-for-sale securities are determined on a
                  specific-identification basis.

                  A decline in the market value of any available-for-sale or
                  held-to-maturity security below cost, that is deemed to be
                  other than temporary, results in a reduction in carrying
                  amount to fair value. The impairment is charged to earnings
                  and a new cost basis for the security is established.

                  Premiums and discounts are amortized or accreted over the
                  life of the related held-to-maturity or available-for-sale
                  security as an adjustment to yield using the
                  effective-interest method. Dividend and interest income are
                  recognized when earned.


         E.       Inventories

         Inventories are stated at the lower of cost or market. Cost is
         determined as follows:

         Raw materials (including components) - on the moving average basis.

         Work in process and finished products:

         Raw materials and components - on the moving average basis. Labor and
         overhead components - on the basis of actual manufacturing costs.


                                    F-242
<PAGE>

                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 1 - Significant Accounting Policies (cont'd)

         F.       Property, plant and equipment

         1.       Assets are stated at cost.

         2.       Depreciation is computed using the straight-line method, over
                  the estimated useful economic life of the assets as estimated
                  by the Company.

                  Annual rates of depreciation are as follows:

                  Buildings                               2.5%
                  Machinery and equipment                 10% - 33% (mainly 10%)
                  Motor vehicles                          15%
                  Office furniture and equipment          7% - 10%

                  Leasehold improvements are amortized by the straight-line
                  method over the lower of the lease term or the estimated
                  useful economic life.

         3.       Major renewals and improvements are capitalized, while
                  repairs and maintenance are expensed as incurred.

         4.       Upon the sale or retirement of equipment and leasehold
                  improvements, the cost and related accumulated depreciation
                  and amortization are eliminated from the respective accounts
                  and the resulting gain or loss is reflected in the
                  consolidated statements of operations.


         G.       Accrued warranty costs

         Accrued warranty costs are calculated in respect of products sold and
         work performed (for periods subsequent to delivery of the products or
         performance of the work) based on management's estimation and in
         accordance with the Company's prior experience. (See also Note 17F).


         H.       Allowance for doubtful debts (see also Note 17C)

         The financial statements include an allowance which Management
         believes adequately reflects the loss inherent in receivables for
         which collection is in doubt. In determining the adequacy of the
         allowance Management based its estimate on information at hand about
         specific debtors, including their financial situation, the volume of
         their operations, aging of the balance and evaluation of the security
         received from them or their guarantors.


         I.       Software development costs

         The Company capitalizes certain software development costs in
         accordance with SFAS No. 86 "Accounting for Costs of Computer Software
         to be Sold, Leased or Otherwise Marketed". Capitalization of software
         development costs begins upon the determination of technological
         feasibility as defined in the Statement and continues up to the time
         the software is available for general release to customers, at which
         time capitalized software costs are amortized to research and
         development costs on a straight-line basis over the expected life of
         the related product, generally one to two years. (for 2003 and 2002 -
         generally two to three years).


                                    F-243
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

Note 1 - Significant Accounting Policies (cont'd)

         I.       Software development costs (cont'd)

         Software development costs include costs which relate principally to
         projects which have recently been released or are not yet available
         for release to customers. Management believes that future revenues
         related to these projects will be sufficient to realize the amounts
         capitalized at December 31, 2004, and as such these amounts will be
         recovered over the lives of the related projects. It is possible,
         however, that those estimates of future revenues could be adversely
         impacted if these projects are not finally completed and released in
         the future or if market acceptance of related technology is not as
         anticipated by Management. As a result, the recovery of these
         capitalized software development costs through future revenues could
         be reduced materially. In such event, the related capitalized software
         development costs will be written-off.


         J.       Business combinations

         The Company adopted SFAS No. 141 "Business Combinations", issued in
         July 2001 which requires that the purchase method be used for all
         business combinations initiated after June 30, 2001. Separate
         recognition of intangible assets is required if they meet one of two
         criteria - the contractual-legal right criterion or the separability
         criterion. In addition to the disclosure requirements of APB Opinion
         No. 16, this Statement requires disclosure of the primary reason for
         the business combination and the allocation of the purchase price paid
         to the assets acquired and liabilities assumed by major balance sheet
         caption.

         K.       Goodwill and other intangible assets

         The Company adopted SFAS No. 142 "Goodwill and Other Intangible
         Assets", issued in July 2001. According to SFAS No. 142, goodwill and
         intangible assets that have indefinite useful lives will not be
         subject to amortization, but instead will be tested at least annually
         for impairment. Intangible assets that have finite useful lives will
         continue to be amortized over their useful lives, but without the
         constraint of an arbitrary ceiling (as was set before by APB Opinion
         No. 17, "Intangible Assets"). (See also Note 1T).


         L.       Acquisition of Company's stock

         Acquisition of Company's stock is presented as Treasury Stock in the
         statement of changes in shareholders' equity, according to the cost
         method.


         M.       Revenue recognition

         1.       System revenues are recognized when the product has been
                  delivered and when title to the system and risk of loss have
                  been substantially transferred to the customer, provided that
                  collection is reasonably assured. When the sale arrangement
                  includes customer acceptance provisions with respect to
                  network interoperability, revenue is not recognized before
                  the Company has demonstrated that the criteria specified in
                  the acceptance provisions have been satisfied.


                                    F-244
<PAGE>

                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 1 - Significant Accounting Policies (cont'd)

         M.       Revenue recognition (cont'd)

                  When a sale involves multiple elements, such as sales of
                  products that include installation and integration services,
                  the entire fee from the arrangement is evaluated under EITF
                  00-21, "Revenue Arrangements with Multiple Deliverables".
                  Accordingly, in an arrangement with multiple deliverables,
                  the arrangement consideration is allocated to each respective
                  element based on its relative fair value and recognized when
                  revenue recognition criteria for each element are met if all
                  of the following conditions are met: (1) the delivered items
                  have value to the customer on a standalone basis, (2) there
                  is objective and reliable evidence of the fair value of the
                  undelivered items, (3) if the arrangement includes a general
                  right of return, delivery or performance of the undelivered
                  items is probable and substantially in the control of the
                  Company.

         2.       The Company makes certain sales through resellers. The
                  Company recognizes revenues from sales to resellers, assuming
                  all other criteria for revenue recognition are met and
                  provided that there is no contractual right of return, either
                  (i) when it receives adequate collateral (which in almost
                  every case is a Letter of Credit) from the reseller to secure
                  payment to the Company, or (ii) in certain instances where
                  the Company has an established ongoing relationship with the
                  reseller and a proven track record of payments, when it
                  receives written evidence of the identity of the end-user and
                  the existence of an agreement by the end-user to purchase the
                  product from the reseller (e.g. a copy of a purchase order)
                  or (iii) in instances where the reseller is a major
                  internationally known corporation and the Company has an
                  established ongoing relationship with such reseller and a
                  proven track record of payments, upon delivery of the
                  products to the reseller. When the collectability from the
                  reseller is not reasonably assured or when the right of
                  return exists, revenue is recognized on a cash basis,
                  provided that the reseller has ultimately sold the products
                  to an end-user or the return privilege has substantially
                  expired.

         3.       Revenues from sales involving long-term credit arrangements
                  at less than accepted interest rates are recorded at the
                  present value of the related future cash flows. The
                  difference between the amounts receivable and their present
                  value is to be recognized as interest income over the period
                  of the debt.

         4.       Software license revenue is generally recognized at the time
                  the software is delivered to the customer, if collection is
                  probable and the Company has no significant obligations
                  remaining under the sales or licensing agreement and no
                  significant customer acceptance requirements exist subsequent
                  to software delivery.

         5.       Service revenues from product maintenance contracts and
                  separately priced extended warranty contracts are generally
                  recognized ratably over the contract period, while revenue
                  from software services generally is recognized as the
                  services are performed or, if no pattern of performance is
                  evident, ratably over the period during which they are
                  performed.

         6.       Long-term contracts are those requiring design, development,
                  engineering and modification and are of a significantly
                  longer duration than contracts for system sales. Revenue from
                  long-term contracts is recognized using the percentage of
                  completion method, which is in accordance with Statement of
                  Position (SOP 81-1). The percentage of completion is
                  determined according to the contract milestones. In the event
                  that management anticipates a loss on a particular contract,
                  such anticipated loss is provided for in full in the period
                  when the loss is first anticipated.


                                    F-245
<PAGE>

                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 1 - Significant Accounting Policies (cont'd)

         N.       Research and development

         Research and development costs, net of any grants, are charged to the
         statements of operations as incurred. Royalties paid and accrued in
         respect of the said grants are classified as cost of goods sold.


         O.       Reclassification

         1.       Certain amounts in prior years' financial statements have
                  been reclassified to conform to the current year's
                  presentation. (See also Note 21).

         2.       The results of ECtel for all periods have been reclassified
                  to one line in the statement of operations following the
                  results from continuing operations. The assets and
                  liabilities of ECtel as at December 31, 2003 have been
                  reclassified in the balance sheets as assets from
                  discontinued operations and liabilities from discontinued
                  operations, respectively, see Note 21(B).


         P.       Income taxes

         1.       The Company accounts for income taxes under Statement of
                  Financial Accounting Standards (SFAS) No. 109 "Accounting for
                  Income Taxes".

                  Under SFAS 109 deferred tax assets or liabilities are
                  recognized in respect of temporary differences between the
                  tax bases of assets and liabilities and their financial
                  reporting amounts as well as in respect of tax losses and
                  other deductions which may be deductible for tax purposes in
                  future years, based on tax rates applicable to the periods in
                  which such deferred taxes will be realized. Deferred tax
                  assets for future tax benefits from realization are included
                  when their realization is more likely than not. Valuation
                  allowances are established when necessary to reduce deferred
                  tax assets to the amount considered more likely than not to
                  be realized. Deferred tax assets and liabilities are
                  classified as current or long-term items in accordance with
                  the nature of the assets or liabilities to which they relate.
                  When there is no underlying assets or liabilities the
                  deferred tax assets and liability are classified in
                  accordance with the period of expected reversal.


                                    F-246
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 1 - Significant Accounting Policies (cont'd)

         P.       Income taxes (cont'd)

                  Deferred taxes were not recorded in respect of the following
                  matters -

                  o        Certain undistributed earnings of foreign
                           consolidated subsidiaries which are taxable upon
                           distribution by way of dividend, as no such dividend
                           distribution intention exists (for domestic
                           consolidated subsidiaries, see 2 below).

                  o        Differences between the rate of change in the
                           Israeli Consumer Price Index (which serves as a
                           basis for measurement for tax purposes) and the rate
                           of change in the NIS/US dollar exchange rate, this
                           in accordance with paragraph 9 (f) of SFAS 109.

         2.       In accordance with paragraph 33 of SFAS 109, deferred taxes
                  have not been provided for the Parent Company's temporary
                  difference relating to operations in both its domestic
                  subsidiaries and domestic "approved enterprises" as the tax
                  laws provide methods whereby the reported amounts of these
                  investments can be recovered tax-free and the parent company
                  expects that it will ultimately utilize these methods.

         -        Earnings distributed by domestic subsidiaries relating to
                  "approved enterprises? can be transferred to the Parent
                  Company by way of a tax-free merger.

         -        Earnings distributed related to the Parent Company's
                  "approved enterprises" are not taxable to the Parent Company
                  in a liquidation as such taxes would be due from the
                  shareholders.

         -        Earnings distributed by domestic subsidiaries which are not
                  attributable to an "approved enterprise" are not taxable.

         Income tax expense represents the tax payable for the period and the
         change during the period in deferred tax assets and liabilities.


         Q.       Derivative financial instruments

         The Company adopted SFAS No. 133, "Accounting for Derivative
         Instruments and Certain Hedging Activities" and SFAS No. 138,
         "Accounting for Certain Derivative Instruments and Certain Hedging
         Activity, an Amendment of SFAS 133". SFAS Nos. 133 and 138 require
         that all derivative instruments be recorded on the balance sheet at
         their respective fair values.

         The Company has significant international sales transactions in
         foreign currencies and has a policy of hedging forecasted and actual
         foreign currency risk with forward foreign exchange contracts and
         foreign exchange options. The Company's forward foreign exchange
         contracts are primarily denominated in Euro, Pounds Sterling and NIS
         and are for periods consistent with the terms of the underlying
         transactions, generally one year or less. Derivative instruments are
         employed to eliminate or minimize certain foreign currency exposures
         that can be confidently identified and quantified.


                                    F-247
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 1 - Significant Accounting Policies (cont'd)

         Q.       Derivative financial instruments (cont'd)

         On the date a derivative contract is entered into, the Company
         designates the derivative as either a hedge of the fair value of a
         recognized asset or liability or of an unrecognized firm commitment
         (fair value hedge), a hedge of a forecasted transaction or the
         variability of cash flows to be received or paid related to a
         recognized asset or liability (cash flow hedge), a foreign-currency
         fair-value or cash-flow hedge (foreign currency hedge). For all
         hedging relationships the Company formally documents the hedging
         relationship and its risk-management objective and strategy for
         undertaking the hedge, the hedging instrument, the item, the nature of
         the risk being hedged, how the hedging instrument's effectiveness in
         offsetting the hedged risk will be assessed, and a description of the
         method of measuring ineffectiveness. This process includes linking all
         derivatives that are designated as fair-value, cash-flow, or
         foreign-currency hedges to specific assets and liabilities on the
         balance sheet or to specific firm commitments or forecasted
         transactions. The Company also formally assesses, both at the hedge's
         inception and on an ongoing basis, whether the derivatives that are
         used in hedging transactions are highly effective in offsetting
         changes in fair values or cash flows of hedged items.

         When it is determined that a derivative is not highly effective as a
         hedge or that it has ceased to be a highly effective hedge, the
         Company discontinues hedge accounting prospectively.

         Changes in the fair value of a derivative that is highly effective and
         that is designated and qualifies as a fair-value hedge, along with the
         loss or gain on the hedged asset or liability or unrecognized firm
         commitment of the hedged item that is attributable to the hedged risk,
         are recorded in operations. Changes in the fair value of a derivative
         that is highly effective and that is designated and qualifies as a
         cash-flow hedge are recorded in other comprehensive income (loss) to
         the extent that the derivative is effective as a hedge, until
         operations are affected by the variability in cash flows of the
         designated hedged item. Changes in the fair value of derivatives that
         are highly effective as hedges and that are designated and qualify as
         foreign-currency hedges are recorded in either operations or other
         comprehensive income (loss), depending on whether the hedge
         transaction is a fair-value hedge or a cash-flow hedge. The
         ineffective portion of the change in fair value of a derivative
         instrument that qualifies as either a fair-value hedge or a cash-flow
         hedge is reported in operations. Changes in the fair value of
         derivative trading instruments are reported in current period
         operations.

         The Company discontinues hedge accounting prospectively when it is
         determined that the derivative is no longer effective in offsetting
         changes in the fair value or cash flows of the hedged item, the
         derivative expires or is sold, terminated, or exercised, the
         derivative is de-designated as a hedging instrument, because it is
         unlikely that a forecasted transaction will occur, a hedged firm
         commitment no longer meets the definition of a firm commitment, or
         management determines that designation of the derivative as a hedging
         instrument is no longer appropriate.


                                    F-248
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 1 - Significant Accounting Policies (cont'd)

         Q.       Derivative financial instruments (cont'd)

         When hedge accounting is discontinued because it is determined that
         the derivative no longer qualifies as an effective fair-value hedge,
         the Company continues to carry the derivative on the balance sheet at
         its fair value and no longer adjusts the hedged asset or liability for
         changes in fair value. The adjustment of the carrying amount of the
         hedged asset or liability is accounted for in the same manner as other
         components of the carrying amount of that asset or liability. When
         hedge accounting is discontinued because the hedged item no longer
         meets the definition of a firm commitment, the Company continues to
         carry the derivative on the balance sheet at its fair value, removes
         any asset or liability that was recorded pursuant to recognition of
         the firm commitment from the balance sheet, and recognizes any gain or
         loss in operations. When hedge accounting is discontinued because it
         is probable that a forecasted transaction will not occur, the Company
         continues to carry the derivative on the balance sheet at its fair
         value with subsequent changes in fair value included in operations,
         and gains and losses that were accumulated in other comprehensive
         income are recognized immediately in operations. In all other
         situations in which hedge accounting is discontinued, the Company
         continues to carry the derivative at its fair value on the balance
         sheet and recognizes any subsequent changes in its fair value in
         operations.


         R.       Comprehensive income

         The Company adopted SFAS No. 130, "Reporting Comprehensive Income"
         which establishes standards for reporting and presentation of
         comprehensive income and its components in a full set of financial
         statements. Comprehensive income consists of net income (loss) and net
         unrealized gains (losses) on securities and on the change in the fair
         value of financial instruments that are used for cash flow hedging,
         and is presented in the statement of shareholders' equity and
         comprehensive income (loss).


         S.       Stock option plan and employee purchase plan

         The Company applies the intrinsic value-based method of accounting
         prescribed by Accounting Principles Board ("APB") Opinion No. 25,
         "Accounting for Stock Issued to Employees", and related
         interpretations, including FASB Interpretation No. 44, "Accounting for
         Certain Transactions Involving Stock Compensation an Interpretation of
         APB Opinion No. 25" issued in March 2000, to account for its fixed
         plan stock options. Under this method, compensation expense is
         recorded on the date of grant only if the current market price of the
         underlying stock exceeded the exercise price.

         SFAS No. 123, "Accounting for Stock-Based Compensation", established
         accounting and disclosure requirements using a fair value-based method
         of accounting for stock-based employee compensation plans. As allowed
         by SFAS No. 123, the Company has elected to continue to apply the
         intrinsic value-based method of accounting described above, and has
         adopted the disclosure requirements of SFAS No. 123.


                                    F-249
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 1 - Significant Accounting Policies (cont'd)

         S.       Stock option plan and employee purchase plan (cont'd)

         Had compensation expenses for stock options granted under the
         Company's stock option plan been determined based on the fair value at
         the grant dates consistent with the method of SFAS No. 123, the
         Company's net income (loss) and net income (loss) per share would have
         been as follows:

<TABLE>
<CAPTION>
                                                                          For the year ended December 31
                                                                  -------------------------------------------------
                                                                       2004              2003              2002
                                                                  -----------       ------------       ------------
                                                                     $ in thousands, except per share amounts
                                                                  -------------------------------------------------
<S>                                                                   <C>              <C>               <C>
         Net income (loss), as reported                               10,153           (71,040)          (162,468)
         Add:     Stock-based employee compensation
                  expenses included in reported net
                  income (loss), net of related tax effects            1,650             3,568                286
         Deduct:  Total stock-based employee compensation
                  expense determined under the fair value
                  based method for all awards, net of
                  related tax effects                                (10,072)          (23,450)           (59,930)
                                                                  -----------       ------------       ------------

         Pro Forma net income (loss)                                   1,731           (90,922)          (222,112)
                                                                  ===========       ============       ============



         Basic earnings (loss) per share ($):
          - as reported                                                 0.09             (0.65)            (1.54)
          - pro forma                                                   0.02             (0.84)            (2.10)
         Diluted earnings (loss) per share($):
          - as reported                                                 0.09             (0.65)            (1.54)
          - pro forma                                                   0.01             (0.84)            (2.10)
</TABLE>

         T.       Accounting changes

         Effective January 1, 2002, the Company applies the provisions of SFAS
         No. 142 "Goodwill and Other Intangible Assets".

         In connection with the transitional impairment evaluation, Statement
         No. 142 required the Company to perform an assessment of whether there
         was an indication that goodwill was impaired as of January 1, 2002. To
         accomplish this, the Company was required to (1) identify its
         reporting units, (2) determine the carrying value of each reporting
         unit by assigning the assets and liabilities, including the existing
         goodwill and intangible assets, to those reporting units, and (3)
         determine the fair value of each reporting unit. If the carrying value
         of any reporting unit exceeds its fair value, detailed fair values for
         each of the assigned and unassigned assets (excluding goodwill) and
         liabilities are determined to calculate the amount of goodwill
         impairment, if any. The difference between the fair value of the
         reporting unit and the fair value of the assigned and unassigned
         assets (excluding goodwill) and liabilities related to the reporting
         unit represents the implied fair value of the goodwill. If the implied
         fair value of the goodwill is lower than its carrying value, the
         Statement required that the difference be written-off.

         In 2002, the Company performed the transitional impairment evaluation
         as provided in the said standard. Accordingly, a loss in the amount of
         $ 37,196 thousand from a decline in value of goodwill (including an
         amount of $ 36,646 thousand, which is attributed mainly to InnoWave -
         see also Note 21) was included as a cumulative effect of a change in
         accounting policy.


                                    F-250
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 1 - Significant Accounting Policies (cont'd)

         U.       Impairment or disposal of long-lived assets

         The Company adopted SFAS No. 144, "Accounting for the Impairment or
         Disposal of Long-Lived Assets" as of January 1, 2002. This Statement
         requires that long-lived assets be reviewed for impairment whenever
         events or changes in circumstances indicate that the carrying amount
         of an asset may not be recoverable. Recoverability of assets to be
         held and used is measured by a comparison of the carrying amount of an
         asset to future cash flows expected to be generated by the asset or
         used in its disposal. If the carrying amount of an asset exceeds its
         estimated future cash flows, an impairment charge is recognized.
         Assets to be disposed of are reported at the lower of the carrying
         amount or fair value less costs to sell. (See also Notes 20 and 21).


         V.       Sale of financial assets

         The Company adopted SFAS No. 140 - "Accounting for Transfers and
         Servicing of Financial Assets and Extinguishments of Liabilities". The
         Statement requires that a transfer of financial assets in which
         control is surrendered, is accounted for as a sale to the extent that
         consideration other than beneficial interests in the transferred
         assets is received in exchange. See Note 17P.

         W.       Earnings (loss) per Ordinary Share

         Basic and diluted earnings (loss) per Ordinary Share are presented in
         conformity with Statement of Financial Accounting Standard No. 128,
         "Earnings Per Share", for all years presented. Basic earnings (loss)
         per Ordinary Share are calculated by dividing the net earning (loss)
         attributable to Ordinary Shares, by the weighted average number of
         Ordinary Shares outstanding. Diluted earnings (loss) per Ordinary
         share calculation is similar to Basic Earnings Per Share except that
         the weighted average of common shares outstanding is increased to
         include the number of additional common shares that would have been
         outstanding if the dilutive potential common shares such as options,
         had been exercised.

         X.       Commitments and contingencies

         Liabilities for loss contingencies arising from claims, assessments,
         litigation, fines and penalties and other sources are recorded when it
         is probable that a liability has been incurred and the amount of the
         assessment can be reasonably estimated.

Y.       Impairment of loans

         The Company applies the provisions of SFAS No. 114 "Accounting by
         Creditors for Impairment of a Loan" as amended by SFAS No. 118
         "Accounting by Creditors for Impairment of a Loan - Income Recognition
         and Disclosures" which prescribes the accounting treatment by
         creditors with respect to impairment of loans. These standards cover
         all loans, which are restructured in a troubled debt restructuring,
         involving modifications of terms of the loans, including those
         involving a receipt of assets in partial satisfaction of a receivable.
         In accordance with FAS 114, a loan is impaired when it is probable,
         based on current information and events, that the creditor will be
         unable to collect all amounts (contractual interest and principle
         payments) due according to the contractual terms of the loan
         agreement. Loans impaired are measured based on the present value of
         the expected future cash flows, discounted at the loan's effective
         interest rate or, alternatively, based on the observable market price
         of the loan or the fair value of the collateral, if the loan is
         collateral dependent.


                                    F-251
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 2 - Investment Securities and Deposits
                                                  December 31       December 31
                                                         2004              2003
                                               --------------    --------------
                                               $ in thousands    $ in thousands
                                               --------------    --------------


     Short-term:
      Short-term deposits (see Note 17B.)              5,628          2,398

      Marketable securities:
      Trading                                              -            359
      Available for sale securities*                       -          1,282
      Held to maturity securities                     19,086         29,900
                                               --------------    --------------
                                                      24,714         33,939
                                               ==============    ==============

     Long-term:
      Long-term deposits                              11,659         15,346
      Available for sale securities*                  10,694               -
      Held to maturity securities                     97,006         43,853
                                               --------------    --------------
                                                     119,359         59,199
                                               ==============    ==============


       *    As of December 31, 2004 and 2003, the Company had net unrealized
            gains on Available for Sale Securities of $ 2,341 and $ 1,282
            thousand, respectively.

       The amortized cost, gross unrealized holding gains (loss), and fair
       value of held-to-maturity securities by major security type at
       December 31, 2004, were as follows:

<TABLE>
<CAPTION>
                                                                       Gross
                                                                  Unrealized
                                                Amortized            Holding              Fair
                                                     Cost     Gains (Losses)             Value
                                           --------------     --------------    --------------
                                           $ in thousands     $ in thousands    $ in thousands
                                           --------------     --------------    --------------
<S>                                               <C>                  <C>             <C>
       Held to maturity
        U.S. Government agencies                  46,925               (423)           46,502
        Corporate debt securities                 43,338               (525)           42,813
        Other                                     25,829                 34            25,863
                                           --------------     --------------    --------------
                                                 116,092               (914)          115,178
                                           ==============     ==============    ==============
</TABLE>


       Maturities of debt securities classified as held-to-maturity were as
       follows at December 31, 2004:

                                                     Amortized              Fair
                                                          Cost             value
                                                $ in thousands    $ in thousands
                                                --------------    --------------


      Held to maturity:
       First year                                      19,086            19,014
       Due after one year through five years           95,242            94,414
       Due after five years through ten years           1,764             1,750
                                                --------------    --------------
                                                      116,092           115,178
                                                ==============    ==============



                                    F-252
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 3 - Inventories

<TABLE>
         Consist of the following:
<CAPTION>

                                                                                               December 31        December 31
                                                                                                      2004               2003
                                                                                            --------------     --------------
                                                                                            $ in thousands     $ in thousands
                                                                                            --------------     --------------
<S>                                                                                                <C>                <C>
         Raw materials and components                                                              58,050             44,142
         Work in process                                                                           13,706             21,419
         Finished products                                                                        103,309             51,322
                                                                                            --------------     --------------
                                                                                                  175,065            116,883
                                                                                            ==============     ==============
</TABLE>


Note 4 - Long-Term Receivables, Net of Current Maturities

<TABLE>
         A.       Consist of the following:
<CAPTION>
                                                                                Weighted
                                                                        average interest
                                                                              rate as of
                                                                             December 31       December 31        December 31
                                                                                    2004              2004               2003
                                                                        ----------------    --------------     --------------
                                                                                       %    $ in thousands     $ in thousands
                                                                        ----------------    --------------     --------------
<S>                                                                               <C>             <C>                <C>
         Long-term trade receivables (1)                                          10.24%          186,604            178,903
         Less deferred interest income (*)                                                              -              7,583
                                                                                            --------------     --------------

         Total (2)                                                                                186,604            171,320
         Less - provision for doubtful debts (**)                                                  77,252             40,600
         Less - current maturities                                                                 19,377             24,075
                                                                                            --------------     --------------
                                                                                                   89,975            106,645
                                                                                            ==============     ==============
</TABLE>

         The trade receivables are denominated in U.S. dollars.

         (*)      The deferred interest income represents the difference
                  between the original amount of the receivables and their net
                  present value computed, at the transaction date, by the
                  relevant interest rate.
         (**)     See Notes 17C and 4C.

         (1)      Long-term trade receivables ("receivables") (a)(b) consist
                  mainly of receivables resulting from sales of the Company's
                  products, providing from one to ten years credit commencing
                  on the date of signing of the sales contract or the finance
                  agreement related thereto or other date as mentioned in the
                  contract. Such receivables are interest bearing and are
                  payable in quarterly or semi-annual payments. The principal
                  is paid generally after the grant of a grace period. These
                  receivables are partially secured by trade risk insurance
                  policies.

                  (a)      The long-term receivables include also certain
                           related pledged deposits, which are disclosed
                           together because the economic substance of the two
                           assets is very similar (see (b) below).

                  (b)      The deposits are pledged to a commercial bank in
                           Israel (the "commercial bank") and are mainly
                           released simultaneously with, and in amounts equal
                           to, payments on account of the loan extended by the
                           commercial bank to a foreign commercial bank (the
                           "customer bank"). The commercial bank serves the
                           customer bank as a source of financing for the
                           purpose of the sale transaction with the Company.



                                    F-253
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 4 - Long-Term Receivables, Net of Current Maturities (cont'd)

         A.       Consist of the following: (cont'd)

         (2)      As at December 31, 2004 and 2003 - includes GVT, a Brazilian
                  company, amounting to $ 86 million (including current
                  maturity) and $ 85 million, respectively (see 4C below) and
                  certain other customers whose indebtedness does not exceed $
                  3.5 million per customer as at December 31, 2004 and, $ 5
                  million as at December 31, 2003.

         (3)      In the opinion of the Company's management, due to the nature
                  of the customers and their activities, their financial
                  performance, updated financial and business data, previous
                  business relations and existing trade insurance as stated
                  above, as well as provision for doubtful debts, the Company
                  has limited risk exposure in relation to the long-term
                  receivables.


         B.       Aggregate maturities are as follows:

                                                                   December 31
                                                                          2004
                                                                --------------
                                                                $ in thousands
                                                                --------------


         First year (current maturities)                              19,377
         Second year                                                   9,041
         Third year                                                    8,121
         Fourth year                                                  19,281
         Fifth year                                                   24,700
         Thereafter                                                  106,084
                                                                --------------

                                                                     186,604
                                                                ==============

         C.    1.    In 2000, the Company and a subsidiary (InnoWave) entered
                     into an agreement for the sale to Global Village Telecom
                     ("GVT"), a Brazilian company, of wireless local loop
                     systems and services. Pursuant to the agreement, the
                     Company agreed to grant GVT long-term financing for the
                     purchase, comprising a line of credit of up to $168
                     million, based upon the progress of sales. This financing
                     was granted in conjunction with credit made available to
                     GVT by a group of other equipment vendors. The credit was
                     to be repaid (in semi-annual payments) during the years
                     2004 through 2007. The interest payable under the line of
                     credit was variable (ranging from LIBOR plus 6.5% to LIBOR
                     plus 4.5%). As security for its obligations under the
                     agreement, GVT granted the Company (together with three
                     other major international suppliers) a charge on its
                     license to operate its communications network in Brazil,
                     together with additional security including shareholders'
                     guarantees and charges on revenue and contracts.


                                    F-254
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 4 - Long-Term Receivables, Net of Current Maturities (cont'd)

         C.       (cont'd)

                  2.       As GVT's revenues were denominated in Brazilian
                           currency and its vendor debt was in dollars, this
                           negatively impacted its ability to maintain the debt
                           repayment schedule, due primarily to a significant
                           devaluation of the Brazilian currency relative to
                           the dollar. Commencing December 2002, GVT defaulted
                           in its payments to the Company. Accordingly, during
                           2002 and 2003, the Company recorded a provision for
                           doubtful debts, in the amount of $34.0 million and $
                           6.6 million, respectively with respect to this debt.

                  3.       Following extensive negotiations, agreements to
                           reschedule GVT's debt repayments were signed on
                           November 11, 2004 among GVT, its shareholders and
                           its principal creditors, including the Company.
                           These agreements, which closed on December 23, 2004,
                           encompassed GVT's commercial debt to the creditors
                           for the supply of equipment and services, the debt
                           due under the convertible notes referred in Note 5B
                           below and accumulated interest on the debts to the
                           closing. As a precondition to the closing of these
                           agreements, the sum of $5.4 million was paid to the
                           Company. The main provisions of the agreements, as
                           regards the Company, are:

                           o        All the said debts were canceled and in
                                    place thereof GVT issued to the Company
                                    notes in the aggregate sum of approximately
                                    $163 million to be paid from 2005 through
                                    2013 at variable rates of interest. Notes
                                    for an aggregate of $131 million will carry
                                    interest at rates varying from LIBOR plus
                                    2.7% at commencement to LIBOR plus 12.4% in
                                    later years. Notes for an aggregate of $32
                                    million will be interest free. The weighted
                                    average interest rate on the Notes will
                                    vary between LIBOR plus 1% at commencement
                                    and LIBOR plus 9% in later years.

                           o        The Company was granted warrants
                                    convertible, at no further consideration,
                                    into shares of GVT's parent company,
                                    equating to approximately 2.4% of its
                                    outstanding share capital.

                  4.       According to SFAS No. 114 "Accounting by Creditors
                           for Impairment of a Loan", the carrying amount of
                           the said restructured debt is presented based on the
                           present value of the expected future cash flows
                           discounted at the debt 's original contractual
                           interest rate which is LIBOR plus 6.5%.


                  See Note 22C.


                                    F-255
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 5 - Investments

         Consist of the following:

                                                December 31        December 31
                                                       2004               2003
                                             --------------     --------------
                                             $ in thousands     $ in thousands
                                             --------------     --------------

         Affiliated companies (A)                   16,259            19,646
         Convertible notes (B)                           -             5,600
         Loans (C)                                   6,000                 -
         Other                                       4,507             3,670
                                             --------------     --------------

                                                    26,766            28,916
                                             ==============     ==============



         A.       Investments in affiliated companies are comprised of:


                                                December 31        December 31
                                                       2004               2003
                                             --------------     --------------
                                             $ in thousands     $ in thousands
                                             --------------     --------------

         Cost of shares                            28,223            28,223
         Accumulated losses                       (11,964)           (8,577)
                                             --------------     --------------

                                                   16,259            19,646
                                             ==============     ==============

         In December 2002, the company closed a transaction pursuant to which
         it transferred the VoIP and other activities, including certain
         related net assets with a book value of $ 19.6 million of the NGTS
         business, plus $10 million in cash, to NexVerse Networks, in exchange
         for approximately 43% (fully diluted 36%) of the shares of NexVerse
         valued at $ 22.8 million.

         The name of the company resulting from this transaction was changed to
         Veraz Networks and ECI's investment in Veraz has been accounted for by
         the equity method. According to the agreement, Veraz became an
         exclusive distributor of ECI's DCME products which are produced by the
         Company and sold to Veraz in accordance with the terms set in the
         agreement. In addition, the Company manufactures and sells to Veraz
         certain of its VoIP products.

         As a result of the transaction, the Company recorded in 2002 a loss in
         the amount of $ 10.8 million. This loss included the amount of $ 6.8
         million related to loss from exchange of assets, $ 2.2 million from
         impairment of assets and $ 1.8 million (which was included in the cost
         of revenues) of inventory which, according to Veraz's business plan,
         were unlikely to be used. See Note 20B.


                                    F-256
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------



Note 5 - Investments (cont'd)

       A.       Investments in affiliated companies are comprised of: (cont'd)

       Summarized financial information of an affiliated company is as
       follows:

                                                          2004              2003
                                                --------------    --------------
                                                $ in thousands    $ in thousands
                                                --------------    --------------

       BALANCE SHEET INFORMATION
       Current assets                                  65,832           69,907
       Total assets                                    72,345           76,064
       Current liabilities                             40,230           38,471
       Total liabilities                               43,355           39,165
       Shareholders' equity                            28,990           36,899

       STATEMENT OF OPERATIONS INFORMATION
       Revenues                                        48,612           42,784
       Gross profit                                    36,207           30,687
       Net loss                                        (7,996)          (7,430)






                                    F-257
<PAGE>




                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 5 - Investments (cont'd)

         B.       Convertible notes

         In addition to the sale and financing agreement with GVT referred to
         in Note 4C, the Company made a loan of $ 27 million to GVT's parent
         company, GVT Holding NV, in return for convertible subordinated notes
         that carried interest at 5% per annum. The maturity date of the notes
         was in November 2003 and they carried the right to convert into
         marketable securities in certain circumstance. Conversion of the notes
         would not have given the Company significant influence in the said
         company. Due to significant concern regarding the financial ability of
         GVT Holding NV to repay the notes, during 2002, the Company included a
         provision in the amount of $ 18 million, as part of other expenses, to
         reflect an other than temporary decline in the value of this
         investment. In 2003, the Company recorded an associated $ 3.4 million
         charge, also in other expenses, for a further decline in the value of
         this investment, to reflect the expected outcome of then advanced
         discussions with GVT Holding NV with a view to restructuring this
         debt.

         Following extensive negotiations, agreements were signed on November
         11, 2004 among GVT, its parent company and other shareholders, and its
         principal creditors, including the Company. These agreements, which
         closed on December 23, 2004, encompassed GVT's commercial debt to the
         creditors for the supply of equipment and services referred in Note 4C
         above, the debt due under the said convertible notes and accumulated
         interest on the debts to the closing. As a precondition to the closing
         of these agreements, the Company was paid the sum of $ 5.4 million.


         C.       Loans

         In December 2004, the Company signed a series of transactions with
         Chiaro Networks Ltd. ("Chiaro") a developer of infrastructure-class
         IP/MPLS routing platforms. The transactions consist of: (i) a loan
         agreement (ii) a call option agreement for the acquisition of Chiaro
         by the Company (iii) a distribution agreement.

         a) Loan agreement

                  Pursuant to the terms of the loan agreement, the Company
                  provided two loans to Chiaro in the aggregate amount of $ 6
                  million. The first loan of $ 3 million bearing interest at an
                  annual rate of LIBOR + 2.3%, will be payable in full 39
                  months from the closing date of the transaction.

                  The second loan of $ 3 million will bear interest at an
                  annual rate of LIBOR + 2.3%, and will be payable in full 39
                  months from the closing date of the transaction. The Company
                  may convert the second loan at any time into convertible
                  preferred BB shares of Chiaro.

                  The loans are secured by a first-priority floating charge
                  over substantially all of Chiaro's assets.



                                    F-258
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 5 - Investments (cont'd)

         C.       Loans (cont'd)

         b) Call option agreement

                  Pursuant to the terms of the call option agreement, the
                  Company has the option to acquire Chiaro under terms defined
                  in the agreement. The term of the option is 37.5 months and
                  it may be exercised within three defined 90-day exercise
                  windows during its term.

         c)       Distribution agreement

                  Pursuant to the distribution agreement, the Company received
                  exclusive, global distribution rights for Chiaro's products,
                  for a period of 37.5 months from closing.



Note 6 - Property, Plant and Equipment

<TABLE>
         Property, plant and equipment as of December 31, 2004 consists of the following:
<CAPTION>

                                     Freehold       Machinery                          Office       Leasehold           Total
                                     land and             and           Motor   furniture and    improvements
                                    buildings       equipment        vehicles       Equipment
                                  -----------     -----------     -----------     -----------    ------------     -----------
                                  $ thousands     $ thousands     $ thousands     $ thousands     $ thousands     $ thousands
                                  -----------     -----------     -----------     -----------    ------------     -----------
<S>                                   <C>            <C>               <C>             <C>            <C>            <C>

         COST
         Balance at
          beginning of year           56,944         183,341           7,897           9,485          13,381         271,048
         Additions                       314          22,566             165             226             666          23,937
         Disposals                         -          29,498           2,278           2,929             962          35,667
                                  -----------     -----------     -----------     -----------     -----------     -----------
         Balance at end
          of year                     57,258         176,409           5,784           6,782          13,085         259,318
                                  -----------     -----------     -----------     -----------     -----------     -----------

         ACCUMULATED
          DEPRECIATION AND
          AMORTIZATION
         Balance at
          beginning of year            7,653         121,871           5,121           7,067          10,279         151,991
         Additions                     1,094          18,368           1,009             474           1,767          22,712
         Disposals                         -          29,410           2,142           2,436             750          34,738
                                  -----------     -----------     -----------     -----------     -----------     -----------
         Balance at end
          of year                      8,747         110,829           3,988           5,105          11,296         139,965
                                  -----------     -----------     -----------     -----------     -----------     -----------

         Net book value at
          December 31, 2004           48,511          65,580           1,796           1,677           1,789         119,353
                                  ===========     ===========     ===========     ===========     ===========     ===========

         Net book value at
          December 31, 2003           49,291          61,470           2,776           2,418           3,102         119,057
                                  ===========     ===========     ===========     ===========     ===========     ===========
</TABLE>


         Regarding pledge, see Note 14.



                                    F-259
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 7 - Software Development Costs, Net

<TABLE>
         Capitalization and amortization of software development costs during
         the years ended December 31, 2004, and 2003 is comprised as follows:
<CAPTION>

                                                                                        December 31        December 31
                                                                                               2004               2003
                                                                                     --------------     --------------
                                                                                     $ in thousands     $ in thousands
                                                                                     --------------     --------------
<S>                                                                                         <C>               <C>
         Balance at beginning of year                                                       16,289            20,082
         Capitalization of software development costs during the year                       11,151            11,364
         Amortization and write-offs during the year                                       (13,005)          (15,157)
                                                                                     --------------     --------------

                                                                                            14,435            16,289
                                                                                     ==============     ==============
</TABLE>


Note 8 - Goodwill

<TABLE>
         Consist of the following:
<CAPTION>
                                                                                        December 31        December 31
                                                                                               2004               2003
                                                                                     --------------     --------------
                                                                                     $ in thousands     $ in thousands
                                                                                     --------------     --------------
<S>                                                                                          <C>               <C>
         Goodwill (1)                                                                        1,039             1,039

         (1)      Original amount                                                          139,137            139,137
                  Amortization and write down due to decline in value                     (138,098)         (138,098)
                                                                                     --------------     --------------

                                                                                             1,039             1,039
                                                                                     ==============     ==============
</TABLE>


Note 9 - Long-Term Liabilities

<TABLE>
         A.       Loans
<CAPTION>
                                                                                       December 31        December 31
                                                                                               2004               2003
                                                                                     --------------     --------------
                                                                                     $ in thousands     $ in thousands
                                                                                     --------------     --------------

<S>                                                                                         <C>               <C>
         Long-term loans *                                                                  30,000            60,000
         Less - current maturities                                                          30,000            30,000

                                                                                     --------------     --------------

                                                                                                 -            30,000
                                                                                     ==============     ==============
</TABLE>

         *        The loans carry an annual interest rate of LIBOR plus 2% (the
                  LIBOR interest rate at December 31, 2004 and 2003 is 2.56%
                  and 1.2%, respectively), and are repayable quarterly.
                  According to the loan agreement, the Company repaid an amount
                  of $ 30 million during the current period. See Note 14 (for
                  assets pledged) and Note 22B.




                                    F-260
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 9 - Long-Term Liabilities (cont'd)

         B.       Other liabilities

                                                    December 31      December 31
                                                           2004             2003
                                                 --------------   --------------
                                                 $ in thousands   $ in thousands
                                                 --------------   --------------

         Provision for claim (see Note 11A(5))               -           6,000
         Other liabilities                                   -              15
                                                 --------------   --------------

                                                             -           6,015
                                                 ==============   ==============


Note 10 - Liability for Employee Severance Benefits, Net

         A.       Employees of the Company and of its consolidated subsidiaries
                  in Israel (Israeli companies)

         Under Israeli law and labor agreements, the Israeli companies are
         required to make severance and pension payments to their retired or
         dismissed employees and to employees leaving employment in certain
         other circumstances.

         1.       The liability in respect of most of its non-senior employees
                  is discharged by participating in a defined contribution
                  pension plan and making regular deposits with a pension fund.
                  The liability deposited with the pension fund is based on
                  salary components as prescribed in the existing labor
                  agreement. The custody and management of the amounts so
                  deposited are independent of the companies and accordingly
                  such amounts funded (included in expenses on an accrual
                  basis) and related liabilities are not reflected in the
                  balance sheet.

         2.       In respect of the liability to other employees, individual
                  insurance policies are purchased and deposits are made with
                  recognized severance pay funds.

                  The liability for severance pay is calculated on the basis of
                  the latest salary paid to each employee multiplied by the
                  number of years of employment. The liability is covered by
                  the amounts deposited including accumulated income thereon as
                  well as by the unfunded provision.

         3.       As to the union employees of Tadiran Telecommunication Ltd.
                  (TTL) who are covered by the labor agreements which were in
                  force in TTL, the Company's liability for severance pay is in
                  accordance with such labor agreements.

                  If the Company terminates the employment of these employees
                  up to 2011, they are entitled to additional benefits. After
                  that time, the employees will no longer be eligible for such
                  benefits.

         4.       The expenses in respect of severance and pension pay (not
                  including expenses in restructuring) for the years ended
                  December 31, 2004, 2003 and 2002 are $ 4,008, $ 5,593
                  thousand and $8,869 thousand respectively.



                                    F-261
<PAGE>




                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 10 - Liability for Employee Severance Benefits, Net (cont'd)

         A.       Employees of the Company and of its consolidated subsidiaries
                  in Israel (Israeli companies) (cont'd)

         5.       Company's liability for termination of the employer-employee
                  relationship is composed as follows: 2004 2003

                                                    December 31      December 31
                                                           2004             2003
                                                 --------------   --------------
                                                 $ in thousands   $ in thousands
                                                 --------------   --------------

                  Provision for severance pay           50,943           50,658
                  Amounts funded including
                     accumulated income                 25,182           24,431
                                                 --------------   --------------

                                                        25,761            26,227
                                                 ==============   ==============


                  Withdrawals from the funds may be made only for the purpose
                   of disbursement of severance pay.


         B.       Employees of U.S. consolidated subsidiaries (U.S. companies)

         The subsidiaries sponsor a section 401(K) defined contribution plan or
         401(A) plan which permits its employees to invest up to certain
         amounts of their compensation (subject to limitation by Internal
         Revenue Service Regulations) on a pretax basis in certain
         self-directed investment programs. The subsidiaries may, at the
         discretion of the Board of Directors, make contributions to the plan.
         Company contributions with respect to this plan were $ 244 thousand, $
         499 thousand and $ 588 thousand in 2004, 2003 and 2002, respectively.


         C.       Employees in the rest of the world

         The provision for severance pay includes amounts related to employees
         in countries other than Israel and the U.S. and are calculated in
         accordance with the rules of the country in which they operate.


Note 11 - Commitments and Contingencies

         A.       Claims and potential claims

         1.       Following the reduction in workforce (see Note 19), in
                  accordance with the reorganization plan of the Company,
                  claims and demands for higher amounts of severance pay were
                  submitted by certain former employees. Management of the
                  Company believes, based on the opinion of its legal advisors,
                  that the effect, if any, of the results of such claims and
                  demands on the financial position of the Company and the
                  results of its operations, will be immaterial and the
                  provisions which are included in the financial statements in
                  respect thereof are appropriate and sufficient.

         2.       The Company conducts negotiations from time to time with
                  international technology companies ("technology companies")
                  regarding allegations that it is using certain patents owned
                  by the technology companies in its products. Although the
                  Company cannot assess each negotiation for its merit, it
                  estimates that any settlement, if needed, will not have a
                  material adverse effect on the Company's financial position
                  or results of operations.



                                    F-262
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 11 - Commitments and Contingencies (cont'd)

         A.       Claims and potential claims (cont'd)

         3.       In December 1999, an agreement was signed with SCI Systems
                  ("SCI") for the sale of a plant which manufactures electronic
                  components. SCI is one of the largest manufacturers of
                  electronic components in the world. As part of the agreement,
                  SCI will, for several years to come, be the subcontractor for
                  part of the manufacturing activities of the Company, on a
                  cost plus basis.

                  The Company is in dispute with SCI as to the interpretation
                  of certain aspects of the agreement, such as volume
                  commitments; discount terms for large orders; the minimum
                  size of orders; timing; untimely payments etc. The dispute
                  was referred to an arbitrator in December 2002. In April
                  2003, SCI submitted claims in an aggregate amount of $ 30
                  million.

                  The Company rejected the allegations made against it and
                  filed a claim against SCI in an amount of $ 50 million.

                  Since the arbitration began, the parties have appointed an
                  independent mediator in an additional attempt to settle this
                  dispute.

                  In the opinion of the Company's legal counsel, since the
                  defense arguments of SCI have not yet been thoroughly studied
                  and the inquiries regarding the facts relating to the
                  allegations have not yet been completed, it is not possible,
                  at this early stage of the proceedings, to evaluate the
                  chances of the Company's claim as well as the chances of
                  SCI's claim.

                  In the opinion of Management, the arbitrator's decision will
                  not have a material adverse effect on the Company's financial
                  position or results of its operation.

         4.       Several claims have been submitted against the Company and
                  against consolidated subsidiaries, resulting from ordinary
                  business operations inter alia, for using patents owned by
                  others. The Company's Management based mainly on opinions of
                  its legal advisors, believes that the effect, if any, of the
                  results of such claims on the financial position of the
                  Company and the results of its operations will be immaterial
                  and the provisions which are included in the financial
                  statements in respect thereof are appropriate and sufficient.



                                    F-263
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 11 - Commitments and Contingencies (cont'd)

         A.       Claims and potential claims (cont'd)

         5.       In October 1997, an investigation was commenced by the
                  Israeli Comptroller of Restrictive Trade Practices
                  ("comptroller") regarding alleged price fixing and
                  non-competitive practices among Tadiran Telecommunications
                  Ltd. ("TTL"), Tadiran Ltd (Tadiran was the parent company of
                  TTL) and Telrad Telecommunications and Electronics Industries
                  Ltd., a subsidiary of Koor Industries Ltd. (a significant
                  shareholder of the Company and Tadiran Ltd.).

                  In the 1999 merger agreement between the Company and TTL,
                  Tadiran Ltd. had agreed to indemnify the Company for damages
                  above $6 million.

                  In the third quarter of 2004, the Company was informed that
                  the comptroller has ceased the investigation without taking
                  any action against the Company. Accordingly, a provision in
                  the amount of $6 million that was recorded at the time of the
                  acquisition of TTL was reversed and recorded as other income.

         6.       In September 2004, following the completion of the
                  investigation by the comptroller mentioned above, a claim was
                  filed against Bezeq (Israel's national telecommunications
                  provider), Koor, TTL, Tadiran and Telrad in the District
                  Court of Tel Aviv-Jaffa. Attached to the claim was a request
                  for certification thereof as a class action, brought in the
                  name of all Bezeq customers against the aforesaid companies,
                  including the Company, in an amount of $ 396 million.

                  Management of the Company believes, in light of the advice of
                  its legal counsel, that the allegations against the Company
                  are without merit and therefore no provision was recorded in
                  respect thereto in the financial statements.


         B.       Lease commitments

         The Company and its consolidated subsidiaries have entered into
         several operating lease agreements in Israel and abroad. The
         agreements expire on various dates from 2004 to 2011 (some of which
         have renewal options) and are in local currencies or linked to the
         dollar or to the Israeli Consumer Price Index.

         Future minimum annual rent payments to which the Company and its
         subsidiaries are committed under the above leases, at rates in effect
         at December 31, 2004, are as follows:

         Year ending December 31                                $ in thousands
         -----------------------                                --------------

         2005                                                           6,770
         2006                                                           5,435
         2007                                                           4,750
         2008                                                           3,942
         2009 and thereafter                                            4,821

         As to rent expense under the Company's leases, see Note 17N.




                                    F-264
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 11 - Commitments and Contingencies (cont'd)

         C.       Royalty commitments

         1.       The Company is committed to pay royalties to the Government
                  of Israel on proceeds from sale of products in the Research
                  and Development of which the government participated by way
                  of grants. The royalties are computed mainly at the rates of
                  3.5% of the aggregated proceeds from sale of such products,
                  up to the amount not exceeding 100% of such grants. As at
                  December 31, 2004, the maximum possible future commitment of
                  the Company is approximately $ 137 million (excluding
                  interest).

         2.       The Company is committed to pay royalties to certain parties
                  whose products, patents or technology are incorporated in
                  certain products of the Company. Such royalties are based on
                  sales of systems or a family of products incorporating such
                  products, patents or technology and are paid based either on
                  a fixed rate, a price per unit sold or as a rate of the
                  system or the family of products sale price.


         D.       Financial instruments

         (1)      Derivative financial instruments

                  The Company has significant international sales transactions
                  in foreign currencies and has a policy of hedging forecasted
                  and actual foreign currency risk with forward foreign
                  exchange contracts and purchased and written options. The
                  Company's forward foreign exchange contracts and purchased
                  options are primarily denominated in Euro, Pounds Sterling
                  and NIS and are for periods consistent with the terms of the
                  underlying transactions, generally one year or less.
                  Derivative instruments are employed to eliminate or minimize
                  certain foreign currency exposures that can be identified and
                  quantified. The Company was exposed to but realized no losses
                  from non-performance by counter parties on these derivatives.

                  The Company uses foreign currency forward contracts
                  designated as fair value hedges to protect against the
                  foreign currency exchange rate risks related to the
                  remeasurement of firm sales commitments and recognized assets
                  such as accounts receivable. Changes in the fair value of
                  these derivatives are recognized in operations as offsets to
                  the changes in the fair value of the related assets or
                  liabilities.

                  The Company uses a combination of forwards and purchased and
                  written options designated as cash flow hedges to protect
                  against the foreign currency exchange rate risks inherent in
                  its forecasted revenue denominated in currencies other than
                  the U.S. dollar. The Company's cash flows hedges mature
                  generally within less than a year. For derivative instruments
                  that are designated and qualify as cash flow hedges, the
                  effective portions of the gain or loss on the derivative
                  instruments are initially recorded in accumulated other
                  comprehensive income (loss) as a separate component of
                  shareholders' equity and subsequently reclassified into
                  operations in the period during which the hedged transactions
                  is recognized operations. The ineffective portion of the gain
                  or loss is reported in financial income or expenses
                  immediately. The effective portion of cash flow and foreign
                  currency hedges is reported in the same financial statement
                  line item as the changes in value of the hedged item. For
                  foreign currency option and forward contracts designated as
                  hedges, hedge effectiveness is measured by comparing the
                  cumulative change in the hedge contract with the cumulative
                  change in the hedged item, both of which are based on forward
                  rates.



                                    F-265
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 11 - Commitments and Contingencies (cont'd)

         D.       Financial instruments (cont'd)

         (1)      Derivative financial instruments (cont'd)

                  The Company uses variable-rate debt to finance its
                  operations. The debt obligations expose the Company to
                  variability in interest payments due to changes in interest
                  rates. Management believes that it is prudent to limit the
                  variability of a portion of its interest payments. To meet
                  this objective, management enters into interest rate swap
                  agreements to manage fluctuations in cash flows resulting
                  from interest rate risk. These swaps change the variable-rate
                  cash flow exposure on the debt obligations to fixed cash
                  flows. Under the terms of the interest rate swaps, the
                  Company receives variable interest rate payments and makes
                  fixed interest rate payments thereby creating the equivalent
                  of fixed-rate debt.
                  Changes in the fair value of interest rate swaps designated
                  as hedging instruments that effectively offset the
                  variability of cash flows associated with variable-rate,
                  long-term debt obligations are reported in accumulated other
                  comprehensive income (loss). These amounts subsequently are
                  reclassified into interest expense as a yield adjustment of
                  the hedged interest payments in the same period in which the
                  related interest affects earnings.

                  Other derivatives not designated as hedging instruments under
                  SFAS No. 133 consist primarily of purchase and written
                  options used to hedge foreign currency cash flows. For
                  derivative instruments not designated as hedging instruments
                  under SFAS No. 133, changes in the fair values are recognized
                  in operations in the period of change.

                  Fair value hedging transactions
                  -------------------------------

                  As at December 31, 2004, the Company had entered into 42
                  currency forward contracts, as a hedge against sales
                  contracts receivable and firm commitments, as follows:

                  Obligation to sell Euro 22.6 million for a total amount of
                  US$ 27.2 million. Obligation to sell Pounds Sterling 2.6
                  million for a total amount of US$ 4.6 million. Obligation to
                  sell NIS 5.7 million for a total amount of US$ 1.3 million.

                  Since the effect of the fluctuations in foreign currency
                  exchange rates is set off against the effect on the hedged
                  sales agreements, the Company does not have any exposure to
                  exchange rate differentials in this connection.

                  As at December 31, 2004, the fair value of the fair value
                  hedging transaction is credit US$ 5.4 million.




                                    F-266
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 11 - Commitments and Contingencies (cont'd)

         D.       Financial instruments (cont'd)

                  Anticipated cash flow hedging transactions
                  ------------------------------------------

                  As at December 31, 2004, the Company had entered into forward
                  exchange contracts and also purchased and written options as
                  hedges for currency exchange rates for various periods of
                  time. These transactions constitute a future cash flow hedge
                  for sales agreements and for the anticipated backlog of
                  orders.

                  As at December 31, 2004, the Company had entered into 156
                  hedge transactions and strategies in respect of anticipated
                  sales amounting to 218.9 million Euro, 16.7 million Pounds
                  sterling and $ 1.3 million in other currencies.

                  The hedge transactions strategies are shown in the balance
                  sheet at fair value. The fair value of future transactions is
                  based on future exchange rates, as quoted at the balance
                  sheet date.

                  As at December 31, 2004, the fair value of the cash flow
                  hedging transaction is credit US$ 13.1 million.

                  Payroll expenses
                  ----------------

                  As at December 31, 2004, the Company had entered into 11
                  future cash flow hedge transactions and strategies in respect
                  of payroll expenses amounting to NIS 46.5 million.

                  As at December 31, 2004, the fair value of the cash flow
                  hedging transaction is debit US$ 0.1 million.

                  The Company had net realized foreign currency exchange losses
                  from all hedge transactions of $ 11.0 million, $ 6.9 million
                  and $ 1.5 million in 2004, 2003 and 2002, respectively.

                  Comprehensive income (loss) for the year ended December 31,
                  2004 includes an unrealized loss of $ 8.3 million relating to
                  the above hedge transactions. As of December 31, 2004 the net
                  unrealized loss on financial instruments is $ 15.0 million.
                  This amount is expected to appear in the statement of
                  operations for the year ended December 31, 2005.

                  Interest rate cash flow risk
                  ----------------------------

                  Interest expense for the years ended December 31, 2004, 2003
                  and 2002, includes net losses in the amount of $ 294
                  thousand, $ 502 thousand and $ 522 thousand, respectively,
                  arising from the difference between the fixed interest rate
                  in the interest rate swap agreements and the variable
                  interest rate on the hedged debt obligation.

                  Non-hedging transactions
                  ------------------------

                  The financing expenses include a loss of $ 0.2 million, $ 2.0
                  million and $ 1.5 million for the years ended December 31,
                  2004, 2003 and 2002, respectively. This amount reflects the
                  change in the exercise rate of the foreign currency between
                  the future exercise rate and the rate prevailing at the
                  balance sheet date deriving from the time value factor, which
                  is not considered as being for hedging purposes.



                                    F-267
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 11 - Commitments and Contingencies (cont'd)

         D.       Financial instruments (cont'd)

         (2)      Concentration of credit risks

                  Financial instruments which expose the Company to risks of
                  credit concentration, include cash, deposits, currency
                  hedging transactions, trade and other receivables. The cash
                  and deposits as well as the hedging transactions are
                  deposited and/or executed through a number of established
                  financial institutions. These financial institutions are
                  located in Israel, the USA and Europe. The policy of the
                  Company is to avoid the risk of making deposits with one
                  financial institution. The Company frequently evaluates the
                  amounts and volume of the transactions executed with each one
                  of the said financial institutions. The exposure in respect
                  of credit to customers is limited due to the large number of
                  customers and their geographical spread as well as the
                  provision for doubtful debts in the financial statements. As
                  to the long-term deposits and customer debts see Note 4.
                  Management of the Company believes that the credit risk is
                  limited since the customers are large suppliers of
                  communications services operating in countries in which this
                  sector is anticipated to grow.

         (3)      Fair value of the financial instruments

                  Management estimates that the fair value of the financial
                  instruments is not materially different from the amounts
                  included in the financial statements. In its determination of
                  fair value, management used certain estimates, as described
                  below, which do not necessarily indicate amounts which are
                  recoverable in current market trading.

                  -   Cash and cash equivalents, short-term investments, trade
                      receivables, other receivables, trade payables, other
                      payables and advances from customers:

                      The book value is the same as the fair value due to the
                      short realization period and/or repayment date of these
                      instruments.

                  -   Long-term receivables and liabilities:

                      The book value is not materially different from the fair
                      value since the Company's interest rates on its long-term
                      liabilities or receivables are not materially different
                      from those indicated in respect of the assets and
                      liabilities as at the balance sheet date.


         E.       Capital expenditure commitments

         The Company in Israel incurs capital expenditures pursuant to
         "Approved Enterprise" programs. At December 31, 2004, the Company is
         not committed to invest pursuant to existing programs. However, the
         Company submitted a request to the Investment Center to approve new
         investment plans at the value of $ 15.5 million. Approval and
         completion of such investment programs will provide tax benefits in
         the future (see Note 15A2).




                                    F-268
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 11 - Commitments and Contingencies (cont'd)

         F.       Purchase commitments

         At December 31, 2004, the Company has commitments, in the aggregate
         amount of $ 64.7 million, covering, primarily, the purchase of
         materials as well as, to a lesser extent, for the acquisition of
         equipment (December 31, 2003 - $ 68.9 million).


         G.       Guarantees

         1.       The Company maintains certain third-party guarantees
                  (primarily with banks) to support its performance obligations
                  under customer contracts and other contracts that can be
                  demanded in case of material breach of contracts. As at
                  December 31, 2004, these guarantees approximated $ 17,043
                  thousand.

         2.       The Company also maintains other third-party guarantees
                  (primarily with insurance companies). As at December 31,
                  2004, these guarantees approximated $ 9,671 thousand.


         H.       Commitments

         1.       In November 2001, the Company sold its information technology
                  unit ("IT") to EDS and signed a five-year outsourcing
                  contract with EDS. Under the agreement, EDS assumed all the
                  IT operations and is required to supply maintenance, support
                  and development services during the term of the agreement,
                  for a sum of between $ 15 and $ 18 million, per year. In 2003
                  a new five-year agreement replacing the previous agreement
                  was signed with effect through 2007. The Company undertook to
                  pay EDS $ 11.8 million in 2003 and amounts between $ 7.8
                  million and $ 8.8 million in 2004-2007 (in 2004 the Company
                  paid to EDS $ 8.8 million).
                  In addition, for the years ended December 31, 2004 and 2003,
                  the Company paid EDS $ 3 million and $ 2.2 million,
                  respectively, for additional services.

         2.       The Company has an obligation to indemnify the purchasers of
                  certain activities and/or the purchasers of subsidiaries at
                  rates which are stipulated in the sales agreement, should the
                  purchasers be forced to discharge former employees of TTL
                  during a period up to 2011 (see Note 10A(3)) and, therefore,
                  to pay increased severance benefits.

                  In the opinion of Company management, the provisions for
                  future indemnification, as stated, which are included in the
                  financial statements, are proper and adequate.



                                    F-269
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 11 - Commitments and Contingencies (cont'd)

         H.       Commitments (cont'd)

         3.       If the Company dismisses any of the remaining unionized
                  employees who joined from TTL by 2011, it is committed to pay
                  them increased severance benefits or early retirement
                  pensions, depending on age and seniority (see Note 10A(3)).
                  As at December 31, 2004, the maximum amount payable as a
                  result of this commitment is $ 15.8 million. Management does
                  not expect to dismiss the said employees and therefore no
                  provision in respect thereof has been included in the
                  financial statements.

         4.       Commitments to indemnify directors and officers

                  In August 2001, the Board of Directors of ECI resolved to
                  grant ECI's directors and officers at the level of vice
                  president and above, who may serve from time to time,
                  indemnification to the fullest extent permitted by law and
                  approved the form of indemnification letter provided to each
                  such director and officer. The Company has undertaken to
                  indemnify its directors and officers for financial
                  obligations and reasonable litigation costs imposed on them
                  in connection with their duties. The undertaking is limited
                  to categories of events set forth in the indemnification
                  letter and to an amount of $ 15 million per director and
                  officer, per case.

                  The prospective indemnification and form of indemnification
                  letter were approved by the shareholders of ECI.

                  In July 2002, the audit committee and the Board of Directors
                  of ECI resolved, subject to shareholders approval, to raise
                  the amount of the aforesaid undertaking to a limit of $ 30
                  million per director per case, but not more than a commitment
                  of $ 225 million in the aggregate for all persons to be
                  indemnified. The aforesaid changes were approved by ECI's
                  shareholders.


Note 12 - Shareholders' Equity

         A.       Authorized, issued and outstanding shares

                                                           Authorized
                                                ------------------------------
                                                December 31        December 31
                                                       2004               2003
                                                -----------        -----------
                                                      Number of shares
                                                ------------------------------

         NIS 0.12 par value per share          200,000,000       200,000,000
                                               ============      ============

         1.       The Company's shares (NIS 0.12 par value each) are traded in
                  the United States on the over the counter market and are
                  listed on the Nasdaq Stock Market.

         2.       For details of the issued share capital and treasury stock,
                  see Statement of Changes in Shareholders' Equity.




                                    F-270
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 12 - Shareholders' Equity (cont'd)

         A.       Authorized, issued and outstanding shares (cont'd)

         3.       On December 6, 2001, a private placement agreement was signed
                  with a group of investors in respect of 12.5% of the issued
                  share capital of the Company. The investors paid an amount of
                  $ 50 million to the Company for the shares received. Part of
                  the shares allotted to the investors were the balance of the
                  Company's shares held as Treasury stock.

         4.       Pursuant to a service agreement with one of the Company's
                  directors, the Company issued to him in 2004, 2003 and 2002,
                  1,653, 5,650 and 3,940 Ordinary shares, respectively.


         B.       Dividends

         According to the Israeli corporate laws, dividends may be paid by the
         Company only out of accumulated earnings, or out of net income, in two
         consecutive years. See Note 15A(2).


         C.       Share incentive and stock option plans

         1.       ECI Plan

         a.       The Company's current stock option plans are the ECI Telecom
                  Ltd. Key Employee Share Incentive Plan 1991 and the ECI
                  Telecom Ltd. Employee Share Incentive Plan 2002 (together the
                  "ECI Plans"), which were adopted by the shareholders at the
                  Annual General Meetings held respectively on August 29, 1991
                  and November 19, 2002. The ECI Plans will expire on December
                  31, 2012.

                  The ECI Plans provide that options may be granted to any
                  employee, director, consultant or contractor of the Company
                  pursuant to (a) one or more sub-plans designed to benefit
                  from the provisions of Section 102 of the Israeli Income Tax
                  Ordinance (New Version) 1961 and (b) any other share
                  incentive plan approved by the Board of Directors of the
                  Company.

                  Under the terms of the ECI Plans, as of December 31, 2004,
                  the Company is authorized to grant options for a total of
                  29,760,700 shares, subject to anti-dilution adjustment. The
                  option awards are personal and non-assignable and terminate
                  automatically upon termination of employment (except for
                  approved retirement or termination caused by death or
                  disability or as otherwise approved by the Board of Directors
                  or its Remuneration Committee).



                                    F-271
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 12 - Shareholders' Equity (cont'd)

         C.       Share incentive and stock option plans (cont'd)

         1.       ECI Plan (cont'd)

                  Grants during the reporting period

                  The Company granted options to its employees and managers, as
                  follows:

                  On March 4, 2004, the Company granted 70,896 share options at
                  an exercise price of $ 6.80 per share.

                  On April 21, 2004, the Company granted 2,439,500 share
                  options at an exercise price of $ 5.90 per share.

                  On May 10, 2004, the Company granted 400,000 share options at
                  an exercise price of $ 5.42 per share.

                  On July 1, 2004, the Company granted 400,000 share options at
                  an exercise price of $ 6.91 per share. The share options vest
                  as follows: 200,000 options vest over 4 years, 6.25% on the
                  last day of each quarter during 16 quarters. Additional
                  200,000 options vest over 5 years, 5% on the last day of 20
                  quarters.

                  On August 23, 2004, the Company granted 82,000 share options
                  at an exercise price of $ 6.56 per share.

                  In September 2004, the Company's shareholders approved the
                  grant by the Company of an aggregate of 79,452 share options
                  to two directors. One grant was of 52,452 share options at an
                  exercise price $2.89 per share of which one-third vested in
                  September 2004 and remaining two thirds vest in July 2005 and
                  July 2006, respectively. The other grant was of 27,000 share
                  options at an exercise price $6.56 per share, of which fifty
                  percent vest in March 2005 and March 2006, respectively.

                  On November 16, 2004, the Company granted 125,000 share
                  options at an exercise price of $ 7.95 per share.

                  On December 9, 2004, the Company granted 60,000, share
                  options at an exercise price of $ 8.13 per share.




                                    F-272
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 12 - Shareholders' Equity (cont'd)

         C.       Share incentive and stock option plans (cont'd)

         1.       ECI Plan (cont'd)

                  Unless otherwise stated, the majority of the share options
                  mentioned above vest as follows: 12.5% after six months and
                  6.25% on the last day of each following quarter over a period
                  of 14 quarters.

                  None of the above share options were granted at exercise
                  prices below the market price on the date of the grant.

                  Following approval by the board of directors and audit
                  committee, the Company's shareholders approved adjustments to
                  the terms of outstanding stock option awards, in order to
                  preserve the aggregate intrinsic value of such stock options
                  in light of the distribution to shareholders of 7.6 million
                  of the Company's shares in ECtel Ltd. (See Note 21B). On
                  April 30, 2004, immediately prior to the ex-dividend date for
                  the distribution of the ECtel shares, the closing market
                  price of the Company's shares on Nasdaq was $5.60 per share.
                  As a result of the proposed distribution, the opening market
                  price on the business day immediately following, May 3, 2004,
                  was adjusted to $5.36 per share, a reduction of $0.24 per
                  share, or 4.305%. The main provisions of the adjustments are
                  set forth below and applied to stock options granted prior to
                  May 3, 2004:

                  o   The exercise price of outstanding stock options granted
                      at an exercise price of less than $5.60 per share, was
                      reduced by 4.305% and rounded upwards to a whole cent.

                  o   The exercise price of outstanding stock options granted
                      at an exercise price of, or in excess of, $5.60 per
                      share, was reduced by $0.24 per share.

                  o   Additional 462,939 stock options were granted to
                      employees, directors or consultants of the Company who,
                      on May 3, 2004, held stock options with an exercise price
                      of less than $5.60 per share. The number of additional
                      stock options equated to approximately 4.5% of the said
                      stock options held by such grantees at May 3, 2004. The
                      additional stock options are exercisable at a price per
                      share equivalent to the new, reduced exercise price of
                      the original stock options, and in the same proportions
                      and will expire on the same dates as the original stock
                      options.

                  There was no accounting consequence for the above changes
                  made to the exercise price and the number of shares, since
                  the above adjustments meet the criteria set forth in FIN 44,
                  "Accounting for Certain Transactions involving Stock
                  Compensation (an interpretation of APB Opinion No. 25)" as
                  follows:

                  a.  The aggregate intrinsic value of the award immediately
                      after the change was not greater than the aggregate
                      intrinsic value of the award immediately before the
                      change.

                  b.  The ratio of the exercise price per share to the market
                      value per share was not reduced.


                  During the reporting period, 1,353,765 options were exercised.



                                    F-273
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 12 - Shareholders' Equity (cont'd)

         C.   Share incentive and stock option plans (cont'd)

         1.   ECI Plan (cont'd)

<TABLE>
         b.   Stock options under the ECI Plans are as follows:
<CAPTION>

                                                                                2004               2003               2002
                                                                    ----------------   ----------------   ----------------
                                                                    Number of shares   Number of shares   Number of shares
                                                                    ----------------   ----------------   ----------------
<S>                                                                      <C>                <C>                <C>
              Total number authorized at beginning of year               29,760,700         26,760,700         14,760,700
              Increase in number authorized during year                           -          3,000,000        12,000,000
              Options unexercised at beginning of year                  (19,067,545)       (12,349,747)      (12,087,850)
              Exercised till beginning of year                           (2,129,800)        (2,028,982)       (2,028,982)
              Granted during year (*)                                    (4,154,481)       (10,523,271)         (780,000)
              Cancelled during year                                       2,429,077          3,704,655           518,103
                                                                    ----------------   ----------------   ----------------

              Authorized for future grant at end of year                  6,837,951          8,563,355        12,381,971
                                                                    ================   ================   ================

              Exercised during the year **                                1,353,765            100,818                 -
                                                                    ================   ================   ================

              ** Average price of options exercised
                  during year (in US$)                                         1.83              2.62                 -
                                                                    ================   ================   ================


              Options unexercised at end of year                         19,439,184         19,067,545        12,349,747
                                                                    ================   ================   ================

              Options may be exercised as follows (1):
              First year or thereafter                                   16,840,697         16,540,199        11,997,247
              Second year or thereafter                                   1,328,180          1,911,858           147,500
              Third year or thereafter                                    1,270,307            615,488           205,000
                                                                    ----------------   ----------------   ----------------

                                                                         19,439,184         19,067,545        12,349,747
                                                                    ================   ================   ================


              (*) Including grants as a result of distribution of ECtel's shares (see C1 and Note 21B).
</TABLE>




                                    F-274
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 12 - Shareholders' Equity (cont'd)

         C.    Share incentive and stock option plans (cont'd)

         1.    ECI Plan (cont'd)

         b.    Stock options under the ECI Plans (cont'd)

<TABLE>
              (1)   To be paid in NIS based on the rate of exchange of the dollar on the date of payment as follows:
<CAPTION>

                                                                      2004               2003               2002
                                                          ----------------   ----------------   ----------------
                    Dollars per Share (*)(**)             Number of shares   Number of shares   Number of shares
                                                          ----------------   ----------------   ----------------

<S>                                                             <C>                <C>
                    Zero                                        2,518,982          2,942,728                 -
                    1.26 - 3.04                                 2,213,569          2,587,619           650,000
                    3.11                                        4,673,266          5,124,326                 -
                    3.12 - 8.13                                 4,102,460            598,334           798,600
                    13.76 - 20.76                                 748,991          1,134,842         1,443,016
                    23.76 - 26.14                                 176,500            183,500           269,000
                    26.42                                       3,075,356          3,985,054         5,630,531
                    27.27 - 29.29                               1,295,610          1,792,292         2,705,950
                    29.76 - 39.76                                 634,450            718,850           852,650
                                                          ----------------   ----------------   ----------------

                                                               19,439,184         19,067,545        12,349,747
                                                          ================   ================   ================
</TABLE>

              (*)  The dollars per share exercise range figures were
                   adjusted as a result of distribution of ECtel's shares
                   (see C1 and Note 21B).
              (**) As of December 31, 2004, the weighted average exercise
                   price was $ 10.34 and the weighted average remaining
                   contractual life of outstanding options was 7.1 years.

         2.       Fair value method

         a.       In October 1995 the Financial Accounting Standards Board
                  (FASB) issued SFAS 123 "Accounting for Stock-based
                  Compensation" which establishes financial accounting and
                  reporting standards for stock-based compensation plans. The
                  statement defines a fair value based method of accounting for
                  an employee stock option.

                  As required by SFAS 123, the Company has determined the
                  weighted average fair value per option of stock-based
                  arrangements grants during 2004, 2003 and 2002 to be $ 3.4, $
                  1.7 and $ 2.2, respectively. The fair values of stock based
                  compensation awards granted were estimated using the "Black -
                  Scholes" option pricing model with the following assumptions.

                                       Option        Expected          Risk free
                  Year of grant          Term      volatility      interest rate
                  -------------       -------      ----------      -------------

                  2004                     5              72              2.00%
                  2003                     5              70              1.00%
                  2002                     5             105              1.50%





                                    F-275
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 12 - Shareholders' Equity (cont'd)

         C.       Share incentive and stock option plans (cont'd)

         2.       Fair value method (cont'd)

         b.       Had the compensation expenses for stock options granted under
                  the Company's stock option plans been determined based on
                  fair value at the grant dates consistent with the method of
                  SFAS 123, the Company's net income (loss) and net income
                  (loss) per share would have been as follows:

<TABLE>
<CAPTION>

                                                                                        For the year ended December 31
                                                                                ---------------------------------------------
                                                                                    2004              2003               2002
                                                                                --------       -----------        -----------
                                                                                   $ in thousands, except per share amounts
                                                                                ---------------------------------------------

<S>                                                                              <C>              <C>               <C>
                  Net income (loss), as reported                                 10,153           (71,040)          (162,468)
                  Add:     Stock-based employee compensation
                            expenses included in reported net
                            income (loss), net of related tax
                            effects                                               1,650             3,568                286
                  Deduct:  Total stock-based employee
                            compensation expense determined
                            under the fair value based method
                            for all awards, net of related
                            tax effects                                         (10,072)          (23,450)           (59,930)
                                                                                --------       -----------        -----------

                  Pro Forma net income (loss)                                     1,731           (90,922)          (222,112)
                                                                                ========       ===========        ===========

                  Basic earnings (loss) per share ($):
                   - as reported                                                  0.09              (0.65)            (1.54)
                   - pro forma                                                    0.02              (0.84)            (2.10)

                  Diluted earnings (loss) per share ($):
                   - as reported                                                  0.09              (0.65)            (1.54)
                   - pro forma                                                    0.01              (0.84)            (2.10)
</TABLE>


         3.       Employee Stock Purchase Plans ("ESPP")

         In July 2000, the ECI Telecom Ltd. 2000 Employee Stock Purchase Plans
         were approved. Under the ESPP plan all employees were permitted to
         purchase shares at a price equal to 85% of the lower of the fair
         market value at the beginning or end of each offering period.

         Under the ESPP, the Company sold to its employees during 2003 and 2002
         418,983 and 775,123 ordinary shares of the Company (which, in 2001
         were previously treasury stock), respectively. The ESPP plan is no
         longer in effect.




                                    F-276
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>

Note 13 - Balances in Currencies Other Than the Dollar

                                               December 31, 2004                                December 31, 2003
                                     ---------------------------------------------- --------------------------------------------
                                      Israeli                         Foreign        Israeli                            Foreign
                                     currency                         currency      currency                           currency
                                     -------- ------------------------------------- --------  ---------------------------------
                                                           Pounds                                             Pounds
                                                  Euro   Sterling    Others                         Euro    Sterling     Others
                                              --------  ---------  --------                   ----------  ----------  ---------
                                                                     $ in thousands
-------------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>        <C>      <C>        <C>              <C>       <C>         <C>         <C>
Assets
Trade receivables                     18,838    35,161      5,285     1,346           11,613      48,343         997      1,390
Other current assets (include
 discontinued operations)             23,460    10,630      1,162     2,068           26,262       5,123       5,945      4,253
Long-term deposits and marketable
 securities                           14,870         -          -         -           18,282           -           -          -
Asses held for severance benefits     25,182         -          -         -           24,431           -           -          -
                                     -------  --------  ---------  --------         --------   ---------    --------   --------
                                      82,350    45,791      6,447     3,414           80,588      53,466       6,942      5,643
                                     =======  ========  =========  ========         ========   =========    ========   ========

Liabilities
Trade payables                        32,471     8,305        186     1,269           27,985       3,909         195      2,462
Other current liabilities (include
 discontinued operations)             23,297    17,111      3,775     1,403           36,621       6,571       3,057      4,553
Liabilities for employee severance
 benefits                             50,514         -          -       190           50,024           -           -         65
                                     -------  --------  ---------  --------         --------   ---------    --------   --------
                                     106,282    25,416      3,961     2,862          114,630      10,480       3,252      7,080
                                     =======  ========  =========  ========         ========   =========    ========   ========
</TABLE>





                                    F-277
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 14 - Charges (Assets Pledged)

         The existing and future liabilities of the Company towards Israeli
         banks are collateralized by certain pledges on assets (real estate in
         Israel), on certain rights (shares in companies held by the Company )
         and by an unlimited "negative pledge" on the Company's assets. As a
         condition to the continued granting of credit by the banks, the
         Company is to maintain certain financial ratios, inter alia, tangible
         equity to total liabilities, current ratio and certain ratios of
         operating income. See Note 22B.

         See Note 4A for pledges on deposits. See Note 17B for restricted
         deposits.


Note 15 - Taxes on Income

         A.       Tax programs under various Israeli tax laws:

         1.       Israel tax reform

                  During 2003, tax reform legislation was enacted, which
                  significantly changed the taxation basis of corporate and
                  individual taxpayers from a territorial basis to a worldwide
                  basis. From such date an Israel resident taxpayer will be
                  taxed on income produced and derived both in and out of
                  Israel.

                  The main provisions of the tax that are relevant to the
                  Company are as follows:

                  a) Transfer pricing of international transactions with
                     related parties.

                           The Income Tax Ordinance was amended to include
                           provisions concerning transfer pricing between
                           related parties, where one of the parties is
                           situated abroad. The Company considers that the
                           transfer pricing policy adopted with foreign
                           affiliates and subsidiaries is economically fair and
                           that it complies with the said regulations.

                  b) Employee stock incentive plans

                           The tax reform codified past practice and determined
                           three alternative tracks for taxing employee stock
                           option plans. Where a trustee arrangement is in
                           place, the employer can either claim an expense for
                           tax purposes while the employee will be fully taxed
                           up to the maximum marginal tax rate of 49% or the
                           Company can waive the tax expense and the employee
                           will pay a reduced tax rate of 25% after ending of a
                           "trustee period" (2-3 years from the date of grant).
                           Where there is no trustee arrangement, the employee
                           is fully taxable and no expense is allowed to the
                           Company. There are detailed provisions for
                           implementing these tracks. The Company chose to
                           waive the tax expense and the employees will pay a
                           reduced tax rate of 25%.

                  c) Controlled foreign company (CFC)

                           The amendment to the law introduced Controlled
                           Foreign Company (CFC) provisions, which, in certain
                           circumstances, will lead to the Israeli company
                           being charged to tax on passive income of foreign
                           affiliates as if it had received a dividend from
                           such companies.





                                    F-278
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

Note 15 - Taxes on Income (cont'd)

         A.       Tax programs under various Israeli tax laws: (cont'd)

                  d)       Capital gain tax is reduced to 25% from 36%, (except
                           with respect to capital gains from marketable
                           securities which consist to be 36%), with
                           transitional provisions for assets acquired prior to
                           January 1, 2003.

                  e)       The seven year limit for carrying forward of capital
                           losses has been removed with respect to capital
                           losses arising from 1996 and thereafter.

         2.       In June 2004, the Knesset (the Israeli Parliament) approved
                  the Income Tax Ordinance Amendment (No. 140 and Temporary
                  Order), 2004 ("the Amendment").

                  The Amendment prescribes a gradual reduction in the corporate
                  tax rate, from 36% (in 2001 to 2003) to 30%, in the following
                  manner: in the 2004 tax year, a tax rate of 35% will be
                  imposed, in 2005 a tax rate of 34% will be imposed, in 2006 a
                  tax rate of 32% will be imposed, and from the 2007 tax year
                  and thereafter, the tax rate will be 30%. The Israeli tax
                  rate change had zero current impact on the Company due to its
                  loss carryforwards and the associated valuation allowance.

                  The current taxes for 2004 (other than an "Approved
                  Enterprise" related income) and the deferred tax balances at
                  December 31, 2004 are calculated based on the new tax rates,
                  as prescribed in the Amendment.

                  In the event of distribution of cash dividends from income
                  taxed at zero rate, a reduced tax rate in respect of the
                  amount distributed would have to be paid. As of December 31,
                  2004, the Company has an accumulated loss and therefore it
                  cannot distribute a cash dividend - see Note 12B. Effectively
                  such dividend distribution would be reduced by the amount of
                  the tax. Benefits are attributed to an "Approved Enterprise"
                  based on the growth in turnover upon implementation of each
                  plan.

         3. Tax benefits under the Law for the Encouragement of Capital
            Investments, 1959.

                  Pursuant to the above Law, the Company and its Israeli
                  subsidiaries are entitled to tax benefits relating to
                  investments in "Approved Enterprises" in accordance with
                  letters of approval received.

                  A major part of the production facilities of the Company and
                  its Israeli subsidiaries has been granted the status of an
                  "Approved Enterprise" under the above Law. According to the
                  Law, a company is entitled to an investment grant (up to 24%
                  of investment cost) and also to a tax benefit, which grants
                  the company a reduced tax rate of 25% for a specific period
                  (Alternative A). The Company's "Approved Enterprise" is
                  subject to zero tax rates under the "Alternative Benefit
                  Method" and reduced tax rates (25% subject to examination of
                  the level of foreign ownership), for specified periods
                  (alternative B). All of the approved enterprises, which
                  currently entitle the Company to benefits, are under
                  alternative B.

                  The period of benefits in respect of most of the Company's
                  production facilities will terminate in the years 2005-2011.
                  Some of the Company's current investments are made under new
                  approvals, or under a request of a new approval.




                                    F-279
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

Note 15 - Taxes on Income (cont'd)

         A.       Tax programs under various Israeli tax laws: (cont'd)

         4.       Measurement of results for tax purposes under the Income Tax
                  Law (Inflationary Adjustments), 1985.

                  Under this law, operating results for tax purposes are
                  measured in real terms, in accordance with the changes in the
                  Israeli CPI, or in the exchange rate of the dollar - for a
                  "Foreign Investors' Company", as defined by the Law for the
                  Encouragement of Capital Investments, 1959. The Company and
                  its Israeli subsidiaries elected to measure their operating
                  results on the basis of the changes in the Israeli CPI. As a
                  result the Company and its subsidiaries are entitled to
                  deduct from their taxable income an "equity preservation
                  deduction" (which partially compensates for the decrease in
                  the value of shareholders' equity resulting from the annual
                  rise in the Israel CPI).

         5.       Tax benefits under the Law for the Encouragement of Industry
                  (Taxation), 1969.

                  The Company is an "Industrial Company" as defined by this
                  Law, and as such is entitled, among other benefits, to claim
                  accelerated depreciation of machinery and equipment as
                  prescribed by regulations issued under the inflationary
                  adjustments tax law.

         6.       The rate of company tax on income received in Israel from
                  sources other than an Approved Enterprise is mainly 35%.

         7.       In 2002 the Company came to an arrangement with the income
                  tax authorities concerning tax returns filed by TTL through
                  1998. Among other terms of the arrangement, the Company
                  undertook to pay a further $ 1.4 million in taxes if it does
                  not produce certain confirmations from government agencies in
                  future periods as defined in the arrangement. In the opinion
                  of Management, the provisions included in the balance sheet
                  are adequate and sufficient.


         B.       Non-Israeli subsidiaries

         Non Israeli subsidiaries are taxed based upon tax laws in their
         countries of residence.




                                    F-280
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 15 - Taxes on Income (cont'd)

         C.       Taxes on income from continuing operations

         Taxes on income included in the consolidated statements of operations
         are comprised as follows:
<TABLE>
<CAPTION>

                                                                                      Year ended December 31
                                                                          --------------------------------------------------
                                                                                    2004              2003              2002
                                                                          --------------    --------------    --------------
                                                                          $ in thousands    $ in thousands    $ in thousands
                                                                          --------------    --------------    --------------
<S>                                                                       <C>               <C>               <C>
         Current taxes relating to -
          The Company and its Israeli subsidiaries                               1,436              1,402             1,792
          Foreign subsidiaries*                                                    693             (6,704)              211
                                                                          --------------    --------------    --------------
                                                                                 2,129             (5,302)            2,003
                                                                          --------------    --------------    --------------
         Deferred taxes relating to -
          The Company and its Israeli subsidiaries                                   -                559             6,179
          Foreign subsidiaries                                                    (205)             6,884               274
                                                                          --------------    --------------    --------------
                                                                                  (205)             7,443             6,453
                                                                          --------------    --------------    --------------
                                                                                 1,924              2,141             8,456
                                                                          ==============    ==============    ==============

         (*)      In 2002 - Including tax benefits of $ 1,136 thousand with respect to previous years.
                  In 2004 - including tax benefits of $ 758 thousand - with respect to previous years.


         D.       Loss from continuing operations before taxes on income

                                                                                      Year ended December 31
                                                                          --------------------------------------------------
                                                                                   2004               2003              2002
                                                                          --------------    --------------    --------------
                                                                         $ in thousands     $ in thousands    $ in thousands
                                                                          --------------    --------------    --------------

         The Company and its Israeli subsidiaries                                22,677           (31,395)          (86,066)
         Foreign subsidiaries                                                    (3,005)           (6,929)            1,800
                                                                          --------------    --------------    --------------
                                                                                 19,672           (38,324)          (84,266)
                                                                          ==============    ==============    ==============
</TABLE>



                                    F-281
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 15 - Taxes on Income (cont'd)

         E. Reconciliation of the statutory tax expense (benefit) to actual tax
expense

         A reconciliation of the statutory tax expense, assuming all income is
         taxed at the statutory rate (see A2 above) applicable to the income of
         companies in Israel, and the actual tax expense is as follows:
<TABLE>
<CAPTION>

                                                                                      Year ended December 31
                                                                          --------------------------------------------------
                                                                                   2004               2003              2002
                                                                          --------------    --------------    --------------
                                                                         $ in thousands     $ in thousands    $ in thousands
                                                                          --------------    --------------    --------------
<S>                                                                      <C>                <C>               <C>
         Income from continuing operations as reported in
          the consolidated statements of operations                             19,672            (38,324)          (84,266)

         Tax rate                                                                   35%                36%               36%
                                                                          ==============    ==============    ==============

         Statutory income tax on the above amount                                6,885            (13,796)          (30,335)

         Foreign tax rate differential                                              (7)            (1,519)            2,403

         Current income/ (losses) for which no deferred
          tax expense (benefit) has been recorded                               (3,851)            10,160             5,661

         Tax benefits with respect to previous years                              (758)                 -            (1,136)

         Effect of lower tax rates arising from
          "Approved Enterprise Status"                                          (1,805)             2,652            15,357

         Increase (decrease) in taxes resulting from
          permanent differences and non deductible
          expenses                                                               2,693              7,154            15,963

         Other*                                                                 (1,233)            (2,510)              543
                                                                          --------------    --------------    --------------

         Taxes on income for the reported year                                   1,924              2,141             8,456
                                                                          ==============    ==============    ==============
</TABLE>


         (*)      Resulting from the difference between the changes in the
                  Israeli CPI, which forms the basis for computation of taxable
                  income of the Company and its Israeli subsidiaries - (see A4
                  above) and the exchange rate of Israeli currency relative to
                  the dollar.




                                    F-282
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

Note 15 - Taxes on Income (cont'd)

         F.       Components of deferred income tax

         (1)      As at December 31, 2004 and December 31, 2003, deferred
                  income tax consists of future tax assets (liabilities)
                  attributable to the following:
<TABLE>
<CAPTION>

                                                                                               December 31       December 31
                                                                                                      2004              2003
                                                                                            --------------    --------------
                                                                                            $ in thousands    $ in thousands
                                                                                            --------------    --------------
<S>                                                                                        <C>                <C>
                  Deferred tax assets:
                  Capital loss carryforward                                                        52,281            40,815
                  Operating loss carryforward (a)                                                 119,471            60,584
                  Vacation pay accruals, severance pay fund, net, and
                   other accruals                                                                  13,785             3,770
                  Property, plant and equipment                                                     3,138             4,526
                  Other                                                                             4,577             3,887
                                                                                            --------------    --------------
                  Gross total deferred tax assets                                                 193,252           113,582
                  Valuation allowance for deferred tax assets (a)                                (181,218)         (100,984)
                                                                                            --------------    --------------
                  Net deferred tax assets (a)                                                      12,034            12,598
                                                                                            --------------    --------------
                  Deferred tax liabilities:
                  Software development costs                                                       (2,887)           (1,629)
                  Property, plant and equipment                                                         -            (2,027)
                                                                                            --------------    --------------
                  Net deferred tax liabilities                                                     (2,887)           (3,656)
                                                                                            --------------    --------------
                  Deferred income taxes, net (b)                                                    9,147             8,942
                                                                                            ==============    ==============
</TABLE>


                  (a)      In assessing the realizability of deferred tax
                           assets, management considers whether it is more
                           likely than not that some portion or all of the
                           deferred tax assets will not be realized. The
                           ultimate realization of deferred tax assets is
                           dependent upon the generation of future taxable
                           income during the periods in which those temporary
                           differences become deductible and during which the
                           carryforwards are available. Management considers
                           the scheduled reversal of deferred tax liabilities,
                           projected future taxable income, and tax planning
                           strategies in making this assessment. Based upon
                           the level of historical taxable income and
                           projections for future taxable income over the
                           periods in which the deferred tax assets are
                           deductible, management believes it is more likely
                           than not that the Company will realize the benefits
                           of these deductible differences, net of the
                           existing valuation allowances at December 31, 2004.
                           The amount of the deferred tax asset considered
                           realizable, however, could be reduced in the near
                           term if estimates of future taxable income during
                           the carryforward period are reduced. Based on this
                           assessment, as of December 31, 2004, the Company
                           determined that it is more likely than not that $
                           9.1 million of such assets will be realized,
                           therefore resulting in a valuation allowance of $
                           181.2 million.




                                    F-283
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

Note 15 - Taxes on Income (cont'd)

         F.       Components of deferred income tax (cont'd)

         (1) (a) (cont'd)

                           The valuation allowance for deferred tax assets as
                           of January 1, 2004, 2003 and 2002 was $ 101 million,
                           $ 94 million and $ 70 million, respectively. The net
                           change in the total valuation allowance for the year
                           ended December 31, 2004, 2003 and 2002 was an
                           increase of $ 80 million, $ 7 million and $ 24
                           million, respectively.

                           If changes occur in the assumptions underlying the
                           Company's tax planning strategies or in the
                           schedulings of the reversal of the Company's
                           deferred tax liabilities, the valuation allowance
                           may need to be adjusted in the future.

                           The Company has not recognized a deferred tax
                           liability of approximately $ 901 thousand for the
                           undistributed earnings of its foreign operations
                           that arose in 2004 and prior years because the
                           Company currently does not expect those unremitted
                           earnings to reverse and become taxable to the
                           Company in the foreseeable future. A deferred tax
                           liability will be recognized when the Company is no
                           longer able to demonstrate that it plans to
                           permanently reinvest undistributed earnings. As of
                           December 31, 2004, the undistributed earnings of
                           these subsidiaries were approximately $ 7,301
                           thousand.

                  (b)      Long-term deferred taxes in the amount of $ 9,033
                           thousand are included in the other assets item of
                           the balance sheet, short-term deferred taxes in the
                           amount of $ 114 thousands are included in other
                           receivables.


         (2)      As at December 31, 2004, the Company and its subsidiaries
                  had, for tax purposes, operating loss carryforwards, capital
                  loss carryforwards and general business credit carryforward
                  of $ 504.9 million, $ 147.1 million and $ 1.0 million,
                  respectively.

                  The Company had no minimum tax credit carryover. A portion of
                  the federal net operating loss carryforwards will begin to
                  expire over the period of 2019 through 2023. The general
                  business credits will expire as follows: $ 302 thousand, $
                  495 thousand and $ 208 thousand in through 2005, 2007 and
                  2008, respectively. Substantially, all of the capital losses
                  have an unlimited carryforward period.


         G.       Tax assessment

         Final tax assessments have been received by some of the Israeli
         companies through the 1999 tax year.




                                    F-284
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

Note 16 - Related Party Transactions

         Related parties are comprised of principal shareholders (10% and up of
         the Company's share capital) and their subsidiaries and affiliates as
         well as affiliates of the Company. All related party transactions were
         at market rates.

         Transactions with related parties are mainly as follows:

         a. Sales of certain of the Company's products and expenses related to
            such sales;

         b. Financing expenses owing to the issue of capital notes convertible
            into shares and working capital balances;


         A. Balances due to or from related parties:
<TABLE>
<CAPTION>

                                                                                               December 31       December 31
                                                                                                      2004              2003
                                                                                            --------------    --------------
                                                                                            $ in thousands    $ in thousands
                                                                                            --------------    --------------
<S>                                                                      <C>                <C>               <C>
         Assets:
         Trade receivables                                                                         18,362             3,530
         Other receivables                                                                            236               317
         Long-term receivables, net                                                                81,112            85,538
         Investments                                                                                    -             5,600

         Liabilities:
         Trade payables                                                                             1,383             3,635
         Other payables                                                                                59            10,064


         B.       Income from, and expenses to, related parties:

                                                                                      Year ended December 31
                                                                          --------------------------------------------------
                                                                                    2004              2003              2002
                                                                          --------------    --------------    --------------
                                                                          $ in thousands    $ in thousands    $ in thousands
                                                                          --------------    --------------    --------------
         Sales                                                                   25,610            28,473             4,945
         Cost of revenues                                                         3,287             8,751             2,264
         Selling and marketing expenses                                           1,028             2,779             2,043
         General and administrative expenses                                        955             8,098            39,338
         Financial expenses                                                          68                15               108
         Financial income                                                            47                46             9,974
         Other expenses                                                               -             3,400            18,000
</TABLE>




                                    F-285
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

Note 17 - Supplementary Financial Statement Information

         Balance sheet:

         A.       Cash and cash equivalents

         Including deposits of $55,039 thousand at December 31, 2004 (December
         31,2003 - $ 109,319 thousand).


         B.       Short-term investments

         Including restricted balances of $1,035 thousand at December 31, 2004
         (December 31, 2003 - $ 1,035 thousand).


         C.       Trade receivables

         Net of provision for doubtful accounts of $ 25,387 thousand at
         December 31, 2004 (December 31, 2003 - $ 29,775 thousand).

         The activity in the allowance for doubtful accounts for impaired notes
         receivable for the years ended December 31, 2004 and 2003 follows:
<TABLE>
<CAPTION>

                                                                                               December 31       December 31
                                                                                                      2004              2003
                                                                                            --------------    --------------
                                                                                            $ in thousands    $ in thousands
                                                                                            --------------    --------------
<S>                                                                                                <C>               <C>
         Allowance for doubtful accounts at beginning of year                                      29,775            34,764
         Additions charged to bad debt expense                                                      3,798            10,378
         Write-down charged against the allowance                                                  (5,258)           (1,200)
         Recoveries of amounts previously charged off                                              (2,928)           (1,038)
         Reclassified to discontinued operations                                                        -           (13,129)
                                                                                            --------------    --------------
         Allowance for doubtful accounts at end of year                                            25,387            29,775
                                                                                            ==============    ==============
         As to sales of certain trade receivables, see Note 17P.
</TABLE>




                                    F-286
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

Note 17 - Supplementary Financial Statement Information (cont'd)

         D.       Other receivables
<TABLE>
<CAPTION>

                                                                                                 December 31       December 31
                                                                                                        2004              2003
                                                                                              --------------    --------------
                                                                                              $ in thousands    $ in thousands
                                                                                              --------------    --------------
<S>                                                                                                     <C>             <C>
         Employees                                                                                      918             1,147
         Chief Scientist                                                                              3,031             2,033
         Deferred income tax                                                                            114               101
         Accrued income and interest                                                                  2,341               976
         Advances to suppliers                                                                        4,228               708
         Related parties                                                                                 18               317
         Others                                                                                      12,791             8,893
                                                                                              --------------    --------------
                                                                                                     23,441            14,175
                                                                                              ==============    ==============

         E.       Short-term loans and current maturities of long-term debts

         Consist of the following:
                                                                                                 December 31       December 31
                                                                                                        2004              2003
                                                                                              --------------    --------------
                                                                                              $ in thousands    $ in thousands
                                                                                              --------------    --------------
         Short term loans                                                                                 -                 -
         Current maturities of long term debts                                                       30,000            30,000
                                                                                              --------------    --------------
                                                                                                     30,000            30,000
                                                                                              ==============    ==============
         F.       Other payables and accrued liabilities

         Consist of the following:
                                                                                                 December 31       December 31
                                                                                                        2004              2003
                                                                                              --------------    --------------
                                                                                              $ in thousands    $ in thousands
                                                                                              --------------    --------------
         Employees and social benefits                                                               28,023            25,640
         Chief Scientist                                                                              2,919                 -
         Tax authorities                                                                             11,913             4,741
         Commissions payable                                                                         12,234            13,670
         Advances from customers                                                                     37,202             7,761
         Warranty accrual (*)                                                                         6,007             6,328
         Accrued expenses                                                                            35,182            28,384
         Fair value of derivatives                                                                   13,174             5,944
         Other payables and accrued liabilities                                                       2,994             7,971
                                                                                              --------------    --------------
                                                                                                    149,648           100,439
                                                                                              ==============    ==============
         (*)  Balance at the beginning of the year                                                    6,328             9,546
              Warranty expenses                                                                      (3,123)           (5,104)
              Change in accrual                                                                       2,802             2,866
              Reclassified to discontinued operations                                                     -              (980)
                                                                                              --------------    --------------
              Balance at the end of the year                                                          6,007             6,328
                                                                                              ==============    ==============
</TABLE>




                                    F-287
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

Note 17 - Supplementary Financial Statement Information (cont'd)

         G.       Disclosures about segments and related information

         1.       Segment Activities Disclosure:

         Segment information is presented in accordance with SFAS 131,
         "Disclosures about Segments of an Enterprise and Related Information."
         This standard is based on a management approach, which requires
         segmentation based upon the Company's internal organization and
         internal financial reports to management. The Company's internal
         financial reporting systems present various data for management to run
         the business, including statement of operations (P&L).

         In 2003, following the sale of NGTS and the merger of Enavis and
         Lightscape, there was a change in the segments of the Company.
         Accordingly, in prior years the results of Enavis and NGTS were
         classified under Optical Networks and Others, respectively.

         Hereunder the Company's segments:

         Broadband Access Division (formerly - Inovia)
         ---------------------------------------------

         The broadband access systems division focuses on the development and
         production of access products for communications systems, including
         broadband solutions which make it possible to transfer multi-media
         content, as well as certain narrowband solutions. These products are
         designed to allow telecom operators to offer their retail customers
         broadband access for data applications over telephone (copper) lines,
         primarily using DSL technology.

         Optical Network Division (formerly - Lightscape and Enavis)
         -----------------------------------------------------------

         The division is a supplier of intelligent optical networking solutions
         for the metro and regional optical markets. It provides fully managed
         and scalable optical networks allowing "just on time" seamless
         coupling of network growth to the changing service needs of the
         operator, while delivering a variety of services including data, voice
         and video by means of optic DWDM, SDH/Sonet or Gigabit, Ethernet or
         other data transmission interfaces.

         The products are based on advanced synchronic digital hierarchy and
         optical technologies. Its lead product is the XDM, an optical dubbing
         system based on a new technique of band flattening which makes
         extensive use of state-of-the-art technology. The XDM enables the user
         to choose the initial platform for simple, low-speed, applications
         and, at a later stage, to expand them as required, simply, efficiently
         and at low cost

         In addition, the division develops, markets and supplies modular
         solutions for broadband management on digital cross connect platforms
         for long haul applications, enabling operators to provide services in
         a variety of protocols and technologies, thus profiting from the width
         of the band laid in the optical infrastructure.




                                    F-288
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

Note 17 - Supplementary Financial Statement Information (cont'd)

         G.       Disclosures about segments and related information  (cont'd)

         1.       Segment Activities Disclosure: (cont'd)

         Other
         -----

         The Other segment contains mainly the Company's manufacturing and
         service units; head office and management services; general and
         project management services to outside customers and others; and other
         activities which are not identified with any of the operational
         segments.

         The Company's manufacturing and service units serve as manufacturing
         and service sub-contractors and carry out activities primarily for the
         above divisions and for Veraz. The cost of manufacturing is included
         in the cost of sales of each of the divisions, as applicable.

         Included in the Other segment until December 2002, were the activities
         of the Company's NGTS (Next Generation Telephony System) division,
         whose principal operations were transferred to Veraz. (See Note 5A.)
         This division developed and manufactured solutions for the
         transmission of telephony over internet protocol (IP) networks at
         carrier grade levels of quality, reliability and density. It
         specialized in supplying media gateways connecting IP networks to
         traditional communication networks and offered combined solutions for
         the transmittal of telephony over IP networks.

         2.       Operational segments statement operation disclosure:

         The following financial information is the information that management
         uses for analyzing the results. The figures are presented in
         consolidated method as presented to management.
<TABLE>
<CAPTION>

                                                                          Year ended December 31, 2004
                                                        --------------------------------------------------------------------
                                                            Optical          Broadband             Other        Consolidated
                                                            Network             Access
                                                        -----------        -----------       -----------         -----------
                                                        $ thousands        $ thousands       $ thousands         $ thousands
                                                        -----------        -----------       -----------         -----------
<S>                                                         <C>              <C>                 <C>                <C>
         Revenues                                           254,058          212,939             29,715             496,712
                                                        ===========        ===========       ===========         ===========
         Operating expenses (*)                             250,964          188,336             40,455             479,755
         Restructuring expenses                                   -                -              2,585               2,585
                                                        -----------        -----------       -----------         -----------
         Operating income (loss)                              3,094           24,603            (13,325)             14,372
                                                        ===========        ===========       ===========         ===========
</TABLE>




                                    F-289
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

Note 17 - Supplementary Financial Statement Information (cont'd)

         G.       Disclosures about segments and related information  (cont'd)

         2.       Operational segments statement operation disclosure: (cont'd)
<TABLE>
<CAPTION>

                                                                          Year ended December 31, 2003
                                                        --------------------------------------------------------------------
                                                            Optical          Broadband             Other        Consolidated
                                                            Network             Access
                                                        -----------        -----------       -----------         -----------
                                                        $ thousands        $ thousands       $ thousands         $ thousands
                                                        -----------        -----------       -----------         -----------
<S>                                                         <C>              <C>                 <C>                <C>
         Revenues                                           177,706          182,290             32,571             392,567
                                                        ===========        ===========       ===========         ===========
         Operating expenses (*)                             207,659          165,862             42,190             415,711
         Impairment of assets                                     -                -                667                 667
         Restructuring expenses                               7,243              478                673               8,394
                                                        -----------        -----------       -----------         -----------
         Operating income (loss)                            (37,196)          15,950            (10,959)            (32,205)
                                                        ===========        ===========       ===========         ===========

                                                                          Year ended December 31, 2002
                                                          ------------------------------------------------------------------
                                                              Optical         Broadband              Other      Consolidated
                                                              Network            Access
                                                          -----------       -----------        -----------       -----------
                                                          $ thousands       $ thousands        $ thousands       $ thousands
                                                          -----------       -----------        -----------       -----------
         Revenues                                            233,218           241,807             75,409           550,434
                                                          ===========       ===========       ===========        ===========
         Operating expenses (*)                              262,754           237,154            118,908           618,816
         Impairment of assets                                      -                 -              3,725             3,725
         Loss from exchange of assets                              -                 -              6,783             6,783
                                                          -----------       -----------        -----------       -----------
         Operating income (loss)                             (29,536)            4,653            (54,007)          (78,890)
                                                          ===========       ===========       ===========        ===========
</TABLE>


         (*)      Includes cost of sales, research and development costs,
                  selling and marketing expenses, general and administrative
                  expenses and amortization of acquisition - related intangible
                  assets.

         3.       The following financial information identifies the assets to
                  segments:
<TABLE>
<CAPTION>

                                                                          Year ended December 31, 2004
                                                        --------------------------------------------------------------------
                                                            Optical          Broadband             Other        Consolidated
                                                            Network             Access
                                                        -----------        -----------       -----------         -----------
                                                        $ thousands        $ thousands       $ thousands         $ thousands
                                                        -----------        -----------       -----------         -----------
<S>                                                         <C>              <C>                <C>                 <C>
         Assets *                                           241,291          131,597            170,018             542,906
         Unallocated assets                                                                                         311,903
                                                                                                                 -----------
         Total consolidated assets                                                                                  854,809
                                                                                                                 ===========
         Depreciation and amortization**                     20,684           10,658              6,021              37,363
         Capital investments                                 15,271            6,392             13,720              35,383
</TABLE>




                                    F-290
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

Note 17 - Supplementary Financial Statement Information (cont'd)

         G.       Disclosures about segments and related information (cont'd)

         3. The following financial information identifies the assets to
            segments: (cont'd)
<TABLE>
<CAPTION>

                                                                          Year ended December 31, 2003
                                                        --------------------------------------------------------------------
                                                            Optical          Broadband             Other        Consolidated
                                                            Network             Access
                                                        -----------        -----------       -----------         -----------
                                                        $ thousands        $ thousands       $ thousands         $ thousands
                                                        -----------        -----------       -----------         -----------
<S>                                                         <C>              <C>                <C>                 <C>
         Assets*                                            189,235          108,288            199,280             496,803
         Unallocated assets                                                                                         405,193
                                                                                                                 -----------
         Total consolidated assets                                                                                  901,996
                                                                                                                 ===========
         Depreciation and amortization**                     18,332           11,208             14,458              43,998
         Capital investments                                 11,322            4,130              5,751              21,203

</TABLE>

         (*)         The assets include: trade receivables (short and
                     long-term), inventories, property, plant and equipment,
                     software development costs, goodwill and other
                     intangibles.
         (**)        Including impairment of assets.


         4.          Sales to significant customers

         The following table summarizes the percentage of sales to significant
         customers group (when they exceed 10 percent of total revenue for the
         year):
<TABLE>
<CAPTION>

                                                                                        Year ended December
                                                                          ----------------------------------------------------
                                                                                   2004               2003              2002
                                                                          --------------     --------------     --------------
<S>               <C>                                                               <C>                <C>               <C>
         Customer 1                                                                 13%                19%               23%
         Customer 2                                                                 14%                11%               11%


         5.       Information on sales by geographic distribution

                                                                                        Year ended December 31
                                                                          ----------------------------------------------------
                                                                                    2004               2003               2002
                                                                          --------------     --------------     --------------
                                                                          $ in thousands     $ in thousands     $ in thousands
                                                                          --------------     --------------     --------------
         North America                                                           21,894             21,627            40,665
         Europe                                                                 291,460            232,136           344,590
         Asia Pacific and Australia                                              99,436             64,731           111,327
         Israel                                                                  68,742             61,818            31,522
         Others                                                                  15,180             12,255            22,330
                                                                          --------------     --------------     --------------
                                                                                496,712            392,567           550,434
                                                                          ==============     ==============     ==============
</TABLE>




                                    F-291
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

Note 17 - Supplementary Financial Statement Information (cont'd)

         H.       Cost of revenues
<TABLE>
<CAPTION>

                                                                                        Year ended December 31
                                                                          ----------------------------------------------------
                                                                                    2004               2003               2002
                                                                          --------------     --------------     --------------
<S>                                                                       <C>                <C>                <C>
                                                                          $ in thousands     $ in thousands     $ in thousands
                                                                          --------------     --------------     --------------
         Finished products consumed                                             267,981            197,906           288,867
         Other manufacturing and other service costs                             25,972             43,024            51,486
                                                                          --------------     --------------     --------------
         Cost of revenues                                                       293,953            240,930           340,353

         Provision for inventory write off
          (see also Note 20)                                                          -                  -             7,446
         Royalties to the government (see Note 11(C)(1))                          7,018           *(1,632)             9,317
                                                                          --------------     --------------     --------------
                                                                                300,971            239,298           357,116
                                                                          ==============     ==============     ==============
</TABLE>

         (*)      In 2003, the Company reached an arrangement with the Chief
                  Scientist according to which it would be credited with the
                  amounts of the excess royalties that were paid in respect of
                  the sale of certain products in prior years. Such credits
                  amount to $ 6.3 million.


         I.       Research and Development costs, net
<TABLE>
<CAPTION>

                                                                                       Year ended December 31
                                                                          ----------------------------------------------------
                                                                                    2004              2003               2002
                                                                          --------------     --------------     --------------
                                                                          $ in thousands    $ in thousands     $ in thousands
                                                                          --------------     --------------     --------------
<S>                                                                             <C>                <C>              <C>
         Expenses incurred                                                      72,893             76,557           102,022
         Less - grant participations (see Note 11C)                              8,023             14,516            21,843
                                                                          --------------     --------------     --------------
                                                                                64,870             62,041            80,179
                                                                          ==============     ==============     ==============
</TABLE>




                                    F-292
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

Note 17 - Supplementary Financial Statement Information (cont'd)

         J.       Selling and marketing expenses
<TABLE>
<CAPTION>

                                                                                      Year ended December 31
                                                                                    2004              2003              2002
                                                                          --------------    --------------    --------------
                                                                          $ in thousands    $ in thousands    $ in thousands
                                                                          --------------    --------------    --------------
<S>                                                                              <C>               <C>               <C>
         Salaries and employee benefits                                          37,387            35,033            42,858
         Agents' commissions                                                     13,457            10,903            17,969
         Advertising and exhibitions                                              2,699             2,195             1,978
         Foreign travel                                                           5,047             4,469             5,986
         Other                                                                   19,833            21,043            28,518
                                                                          --------------    --------------    --------------
                                                                                 78,423            73,643            97,309
                                                                          ==============    ==============    ==============

         K.       General and administrative expenses
                                                                                      Year ended December 31
                                                                                    2004              2003              2002
                                                                          --------------    --------------    --------------
                                                                          $ in thousands    $ in thousands    $ in thousands
                                                                          --------------    --------------    --------------
         Salaries and employee benefits                                          19,225            16,949            21,628
         Rent and maintenance of premises                                         1,065             1,817             3,210
         Bad and doubtful debt expenses                                           1,200          (1)9,108         (1)44,623
         Other                                                                   14,001            11,082            12,991
                                                                          --------------    --------------    --------------
                                                                                 35,491            38,956            82,452
                                                                          ==============    ==============    ==============
         (1) See also Note 4C(2).


         L.       Financial income/expenses, net
                                                                                      Year ended December 31
                                                                          --------------------------------------------------
                                                                                    2004              2003              2002
                                                                          --------------    --------------    --------------
                                                                          $ in thousands    $ in thousands    $ in thousands
                                                                          --------------    --------------    --------------
         Financial expenses:
         Interest on loans from banks                                             1,518             2,449            10,036
         Bank charges                                                             2,117             1,529             2,837
         Exchange rate differences (see Note 1A(6))                               2,927             4,556             4,359
         Loss from marketable securities                                              -                 -               661
                                                                          --------------    --------------    --------------
                                                                                  6,562             8,534            17,893
                                                                          ==============    ==============    ==============
         Financial income:
         Interest mainly on bank deposits and receivables                         3,038             6,397            19,935
         Exchange rate differences (see Note 1A(6))                               2,772               624             3,656
         Gain from marketable securities                                          3,359               770                 -
                                                                          --------------    --------------    --------------
                                                                                  9,169             7,791            23,591
                                                                          ==============    ==============    ==============
</TABLE>




                                    F-293
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

Note 17 - Supplementary Financial Statement Information (cont'd)

         M.       Other income (expenses), net
<TABLE>
<CAPTION>

                                                                                      Year ended December 31
                                                                          --------------------------------------------------
                                                                                    2004              2003              2002
                                                                          --------------    --------------    --------------
                                                                          $ in thousands    $ in thousands    $ in thousands
                                                                          --------------    --------------    --------------
<S>                                                                       <C>               <C>               <C>
         Gain from sale of shares and issuance of new shares
          in a consolidated subsidiary (1)                                            -                 -            11,397
         Gain (loss) from sale of property and equipment, net                       735              (167)             (881)
         Loss from realization of investments and allowance
          for impairment of investments (2)                                      (2,469)           (1,587)           (3,139)
         Realization of gain on available for sales securities                    1,487                 -                 -
         Decline in value of convertible notes (see Note 5B)                          -            (3,400)          (18,000)
         Gain from cancellation of a provision to the Israeli
          Comptroller of Restrictive Trade Practices
          (see Note 11A(5))                                                       6,000                 -                 -
         Loss from impairment of amounts funded for
          severance pay                                                          (1,000)                -                 -
         Provision for the payment of indirect duty                              (1,600)                -                 -
         Other                                                                     (460)             (222)             (451)
                                                                          --------------    --------------    --------------
         Total other income (expenses), net                                       2,693            (5,376)          (11,074)
                                                                          ==============    ==============    ==============
</TABLE>

         (1)      During 2002, the Company sold 8.5% of the share capital of
                  ECtel. As a result, the Company recognized a pre-tax gain of
                  $ 11.4 million. Following the sale and conversion of options,
                  the Company's holding in ECtel decreased to 59%.
         (2)      Arising from a permanent impairment in the value of an
                  investment. The write down is based, among other factors, on
                  stock exchange prices, the operations of the investee and a
                  series of other relevant considerations.


         N.       Supplementary Statement of Operations information
<TABLE>
<CAPTION>

                                                                                      Year ended December 31
                                                                          --------------------------------------------------
                                                                                    2004              2003              2002
                                                                          --------------    --------------    --------------
                                                                          $ in thousands    $ in thousands    $ in thousands
                                                                          --------------    --------------    --------------
<S>                                                                      <C>                <C>               <C>
         Expenses:
         Maintenance and repairs                                                  9,034             9,963             7,459
         Depreciation of property, plant and equipment                           22,712            23,830            32,009
         Taxes (other than income taxes)                                          1,521             2,171             2,453
         Rent                                                                     7,820            11,507            21,200
         Advertising costs                                                        3,259             1,980             2,558
         Royalties                                                                7,018               162            11,412
         Amortization of capitalized software                                    13,005            15,157            19,939
</TABLE>




                                    F-294
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

Note 17 - Supplementary Financial Statement Information (cont'd)

         O.       Earnings (loss) per share ("EPS")

         Following are the details of the basic EPS:
<TABLE>
<CAPTION>

                                                                               2004
                                                          ----------------------------------------------
                                                              Net income       Number of    Earnings per
                                                                                  shares    share amount
                                                          --------------    ------------    ------------
                                                          $ in thousands    in thousands               $
                                                          --------------    ------------    ------------
<S>                                                       <C>               <C>             <C>
         Income (loss) from continuing operations                 14,056         108,575            0.13
                                                          ==============    ============    ============
         Cumulative effect of accounting
          change, net of taxes                                         -               -               -
                                                          ==============    ============    ============
         Discontinued operations                                  (3,903)        108,575          (0.04)
                                                          ==============    ============    ============
         Net income (loss) per share                              10,153         108,575            0.09
                                                          ==============    ============    ============
</TABLE>

(Table Continued)

<TABLE>
<CAPTION>

                                                                               2003
                                                         ---------------------------------------------
                                                               Net loss       Number of       Loss per
                                                                                 shares   share amount
                                                         --------------    ------------   ------------
                                                         $ in thousands    in thousands              $
                                                         --------------    ------------   ------------
<S>                                                      <C>               <C>            <C>
         Income (loss) from continuing operations              (44,723)         107,831         (0.41)
                                                         ==============    ============   ============
         Cumulative effect of accounting
          change, net of taxes                                        -               -             -
                                                         ==============    ============   ============
         Discontinued operations                               (26,317)         107,831         (0.24)
                                                         ==============    ============   ============
         Net income (loss) per share                           (71,040)         107,831         (0.65)
                                                         ==============    ============   ============
</TABLE>


(Table Continued)

<TABLE>
<CAPTION>

                                                                              2002
                                                          ---------------------------------------------
                                                                Net loss      Number of       Loss per
                                                                                 shares   share amount
                                                          --------------   ------------   -------------
                                                          $ in thousands   in thousands              $
                                                          --------------   ------------   -------------
<S>                                                       <C>              <C>            <C>
         Income (loss) from continuing operations               (95,202)        105,512         (0.90)
                                                          ==============   ============   =============
         Cumulative effect of accounting
          change, net of taxes                                     (550)        105,512         (0.01)
                                                          ==============   ============   =============
         Discontinued operations                                (66,716)        105,512         (0.63)
                                                          ==============   ============   =============
         Net income (loss) per share                           (162,468)        105,512         (1.54)
                                                          ==============   ============   =============
</TABLE>




                                    F-295
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------


Note 17 - Supplementary Financial Statement Information (cont'd)

         O.       Earnings (loss) per share ("EPS") (cont'd)

         Following are the details of diluted EPS:

<TABLE>
<CAPTION>

                                                                               2004
                                                          ----------------------------------------------
                                                              Net income       Number of    Earnings per
                                                                                  shares    share amount
                                                          --------------    ------------    ------------
                                                          $ in thousands    in thousands               $
                                                          --------------    ------------    ------------
<S>                                                       <C>               <C>             <C>
         Income (loss) from continuing operations                 14,056         117,133            0.12
                                                          ==============    ============    ============
         Cumulative effect of accounting
          change, net of taxes                                         -               -               -
                                                          ==============    ============    ============
         Discontinued operations                                  (3,903)        117,133          (0.03)
                                                          ==============    ============    ============
         Net income (loss) per share                              10,153         117,133            0.09
                                                          ==============    ============    ============
</TABLE>


(Table Continued)

<TABLE>
<CAPTION>

                                                                                2003
                                                          ---------------------------------------------
                                                                Net loss       Number of       Loss per
                                                                                  shares   share amount
                                                          --------------    ------------   ------------
                                                          $ in thousands    in thousands              $
                                                          --------------    ------------   ------------
<S>                                                       <C>               <C>            <C>

         Income (loss) from continuing operations               (44,723)         107,831         (0.41)
                                                          ==============    ============   ============
         Cumulative effect of accounting
          change, net of taxes                                        -                -             -
                                                          ==============    ============   ============
         Discontinued operations                                (26,317)         107,831         (0.24)
                                                          ==============    ============   ============
         Net income (loss) per share                            (71,040)         107,831         (0.65)
                                                          ==============    ============   ============
</TABLE>


(Table Continued)

<TABLE>
<CAPTION>

                                                                               2002
                                                           ---------------------------------------------
                                                                 Net loss      Number of       Loss per
                                                                                  shares   share amount
                                                           --------------   ------------   -------------
                                                           $ in thousands   in thousands              $
                                                           --------------   ------------   -------------
<S>                                                        <C>               <C>            <C>
         Income (loss) from continuing operations                 (95,202)       105,512         (0.90)
                                                           ===============  ============   ==============
         Cumulative effect of accounting
          change, net of taxes                                       (550)       105,512         (0.01)
                                                           ===============  ============   ==============
         Discontinued operations                                  (66,716)       105,512         (0.63)
                                                           ===============  ============   ==============
         Net income (loss) per share                             (162,468)       105,512         (1.54)
                                                           ===============  ============   ==============
</TABLE>





                                    F-296
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

Note 17 - Supplementary Financial Statement Information (cont'd)

         P.       Factoring of financial assets

         The Company entered into accounts receivable factoring agreements with
         a number of financial institutions ("banks"). Under the terms of the
         agreements, the Company has the option to factor receivables, with the
         banks on a non-recourse basis, provided that the banks approve the
         receivables in advance. In some cases, the Company continues to be
         obligated in the event of commercial disputes, (such as product
         defects) which are not covered under the credit insurance policy,
         unrelated to the credit worthiness of the customer. The Company
         accounts for the factoring of its financial assets in accordance with
         the provisions of SFAS No. 140.

         The agreements call for factoring fees on invoices or promissory notes
         factored with the banks, as follows: USD and EUR transactions - in
         most cases, LIBOR for the relevant period on the basis of the
         semi-annual discount to yield plus a margin of 3.4% per annum on
         average. In the past, there were no cases in which the Company had to
         reimburse the banks for accounts receivables following business
         disputes. The Company does not expect any reimbursements to take place
         in the foreseeable future.

         As at December 31, 2004, trade receivables amounting to $ 31,698
         thousand (December 31, 2003 - $ 16,671 thousand) were factored.



Note 18 - Relevant Recently Enacted Accounting Standards

         A.       In November 2003, the FASB ratified the consensus reached by
                  the Task Force on EITF Issue No. 03-1, "The Meaning of
                  Other-Than-Temporary Impairment and Its Application to
                  Certain Investments" ("EITF 03-1") regarding disclosures for
                  certain SFAS 115 investment securities and investments
                  accounted for under SFAS 124. In March 2004, the FASB
                  ratified other consensuses reached by the Task Force on EITF
                  03-1. The objective of EITF 03-1 is to provide guidance on
                  determining when an investment is considered impaired,
                  whether that impairment is other-than-temporary, and the
                  measurement of an impairment loss. The guidance also
                  includes accounting considerations subsequent to the
                  recognition of an other-than-temporary impairment and
                  requires certain disclosures about unrealized losses that
                  have not been recognized as other-than-temporary
                  impairments. In September 2004, the FASB issued FASB Staff
                  Position ("FSP") EITF Issue 03-1-1 which delays the
                  effective date for the measurement and recognition guidance
                  included in EITF 03-1. The FASB recently announced that it
                  intends to reconsider in its entirety EITF 03-1 and all
                  other guidance on disclosing, measuring, and recognizing
                  other-than-temporary impairments of debt and equity
                  securities. Until new guidance is issued, companies must
                  continue to comply with the disclosure requirements of EITF
                  03-1 and all relevant measurement and recognition
                  requirements in other accounting literature.




                                    F-297
<PAGE>


Note 18 - Relevant Recently Enacted Accounting Standards (cont'd)

         B.       In November 2004, the FASB issued FASB Statement No. 151,
                  Inventory Costs, an amendment to ARB 43, Chapter 4 (SFAS
                  151). The amendment made by SFAS 151 clarifies that abnormal
                  amounts of idle facility expense, freight, handling costs,
                  and wasted material (spoilage) should be recognized as
                  current-period charges, and also requires the allocation of
                  fixed production overhead to inventory based on the normal
                  capacity of the production facilities. The guidance is
                  effective for inventory costs incurred during fiscal years
                  beginning after June 15, 2005. Earlier application is
                  permitted for inventory costs incurred during fiscal years
                  beginning after November 23, 2004. The provisions of SFAS
                  151 should be applied prospectively. Adoption of this
                  statement is not expected to have a material impact on the
                  financial statements of the Company.


         C.       In December 2004, the FASB issued SFAS No. 123R,
                  "Share-Based Payment." This statement is a revision to SFAS
                  No. 123, "Accounting for Stock-Based Compensation" and APB
                  Opinion No. 25, "Accounting for Stock Issued to Employees."
                  This statement establishes standards for the accounting for
                  transactions in which an entity exchanges its equity
                  instruments for goods or services, primarily focusing on the
                  accounting for transactions in which an entity obtains
                  employee services in share-based payment transactions.
                  Entities will be required to measure the cost of employee
                  services received in exchange for an award of equity
                  instruments based on the grant-date fair value of the award
                  (with limited exceptions). That cost will be recognized over
                  the period during which an employee is required to provide
                  service, the requisite service period (usually the vesting
                  period), in exchange for the award. The grant-date fair
                  value of employee share options and similar instruments will
                  be estimated using option-pricing models. If an equity award
                  is modified after the grant date, incremental compensation
                  cost will be recognized in an amount equal to the excess of
                  the fair value of the modified award over the fair value of
                  the original award immediately before the modification. This
                  statement is effective as of the beginning of the first
                  interim or annual reporting period that begins after June
                  15, 2005. In accordance with the standard, the Company will
                  adopt SFAS No. 123R effective July 1, 2005.

                  Upon adoption, the Company has two application methods to
                  choose from: the modified-prospective transition approach or
                  the modified-retrospective transition approach. Under the
                  modified-prospective transition method the Company would be
                  required to recognize compensation cost for share-based
                  awards to employees based on their grant-date fair value from
                  the beginning of the fiscal period in which the recognition
                  provisions are first applied as well as compensation cost for
                  awards that were granted prior to, but not vested as of, the
                  date of adoption. Prior periods remain unchanged and pro
                  forma disclosures previously required by SFAS No. 123
                  continue to be required. Under the modified-retrospective
                  transition method, the Company would restate prior periods by
                  recognizing compensation cost in the amounts previously
                  reported in the pro forma disclosure under SFAS No. 123.
                  Under this method, the Company is permitted to apply this
                  presentation to all periods presented or to the start of the
                  fiscal year in which SFAS No. 123R is adopted. The Company
                  would follow the same guidelines as in the
                  modified-prospective transition method for awards granted
                  subsequent to adoption and those that were granted and not
                  yet vested. The Company has not yet determined which
                  methodology it will adopt and, at this stage, cannot evaluate
                  the potential impact of the adoption of SFAS No. 123R on its
                  financial position or results of operation because this
                  impact depends on the number of options that will be granted
                  in the future.




                                    F-298
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

Note 18 - Relevant Recently Enacted Accounting Standards (cont'd)

         D.       In December 2004, the FASB issued SFAS No. 153, "Exchanges of
                  Nonmonetary Assets - an amendment to APB No. 29." This
                  Statement amends Opinion No. 29 to eliminate the exception
                  for nonmonetary exchanges of similar productive assets and
                  replaces it with a general exception for exchanges of
                  nonmonetary assets that do not have commercial substance. A
                  nonmonetary exchange has commercial substance if the future
                  cash flows of the entity expected to change significantly as
                  a result of the exchange. Adoption of this statement is not
                  expected to have a material impact on the Company's financial
                  position or results of operations.


Note 19 - Restructuring

         A.       Consist of the following
<TABLE>
<CAPTION>

                                                                                                  Year ended        Year ended
                                                                                                 December 31       December 31
                                                                                                        2004              2003
                                                                                                 -----------       -----------
                                                                                                 $ thousands       $ thousands
                                                                                                 -----------       -----------

<S>                                                                                                                     <C>
         Severance expenses                                                                              -              6,120
         Rent contract expenses                                                                      2,585              2,274
                                                                                                 -----------       -----------
                                                                                                     2,585              8,394
                                                                                                 ===========       ===========
</TABLE>

         B.       Additional information

         1.       Following the Company's Board of Directors' decision to focus
                  on its two core activities, in the first quarter of 2004, the
                  Company recorded $ 2,585 thousand in restructuring expenses
                  associated with the completion of reorganization plan and the
                  integration of Lightscape Optical Networks and Enavis
                  Networks into the Optical Networks Division. The expenses
                  were due to abandonment of several leased buildings.

         2.       As part of the Company's Board of Directors' decision to
                  focus on its two core activities, in 2003, the Company
                  recorded $ 8,394 thousand in reorganization expenses
                  associated largely with the integration of Lightscape Optical
                  Networks and Enavis Networks into the Optical Networks
                  Division, mainly termination benefits and rent contract
                  expenses as follows:

         C.       A reconciliation of the beginning and ending restructuring
                  liability balances is as follows:
<TABLE>
<CAPTION>

                                                                                   Year ended December 31, 2004
                                                                            ------------------------------------------------
                                                                              Severance
                                                                                    pay      Rent contract             Total
                                                                            -----------      -------------       -----------
                                                                            $ thousands        $ thousands       $ thousands
                                                                            -----------      -------------       -----------
<S>                                                                                <C>              <C>               <C>
         At the beginning of the year                                              707              5,450             6,157
         Restructuring expenses                                                      -              2,585             2,585
         Paid                                                                     (707)            (3,461)           (4,168)
                                                                            -----------      -------------       -----------
         At the end of the year                                                      -              4,574             4,574
                                                                            ===========      =============       ============
</TABLE>




                                    F-299
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

Note 19 - Restructuring


         C.       A reconciliation of the beginning and ending restructuring
                  liability balances is as follows: (cont'd)
<TABLE>
<CAPTION>

                                                                                   Year ended December 31, 2003
                                                                            ------------------------------------------------
                                                                              Severance
                                                                                    pay      Rent contract             Total
                                                                            -----------      -------------       -----------
                                                                            $ thousands        $ thousands       $ thousands
                                                                            -----------      -------------       -----------

<S>                                                                         <C>                     <C>               <C>
         At the beginning of the year                                                -              3,944             3,944
         Restructuring expenses                                                  6,120              2,274             8,394
         Paid                                                                   (2,428)              (768)           (3,196)
         Classified to pension liability                                        (2,985)                 -            (2,985)
                                                                            -----------      -------------       -----------
         At the end of the year                                                    707              5,450             6,157
                                                                            ===========      =============       ===========
</TABLE>


Note 20 - Impairment of Assets and Loss from Exchange of Assets

         A.       For the year ended December 31, 2003

         During 2003, the Company recorded $0.7 million impairment charges
associated with NGTS.

         In addition, the Company recorded in the loss on discontinued
         operations, $6.0 million impairment charges associated with ECtel,
         arising from the write-down by ECtel of goodwill from the acquisition
         of Net-Eye in October 2001.

         In June 2003, due to significant reduction in ECtel's revenues, it
         was determined that goodwill has been impaired.

         This determination was based upon the guidance set forth in paragraphs
         19-22 of SFAS 142, which requires a two-step analysis. The first step
         used the Discounted Cash Flow approach to measure the fair value of
         the Telecommunication Systems reporting unit of ECtel Ltd., the result
         of which indicated that the carrying amount of such reporting unit,
         including goodwill, exceeded its fair value. The second step was then
         conducted in order to measure the amount of impairment loss, by means
         of a comparison between the implied fair value of the goodwill and the
         carrying amount of the goodwill. In the second step, the fair value of
         the Telecommunication Systems reporting unit of ECtel, as determined
         in the first step, was assigned to the reporting unit's individual
         assets and liabilities. The excess of the fair value of the reporting
         unit over the amounts assigned to its assets and liabilities
         represented the amount of the implied fair value of the goodwill. The
         excess of the carrying amount of goodwill over the implied fair value
         of goodwill was identified as the amount of the impairment loss.

         See also Note 21.




                                    F-300
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

Note 20 - Impairment of Assets and Loss from Exchange of Assets (cont'd)

         B.       For the year ended December 31, 2002

         1.       Impairment of assets

         During 2002, the Company made a provision of $ 3.7 million for a
         decline in value of assets relating to land and building including in
         property, plant and equipment and also, wrote off $ 7.4 million of
         inventory relating to discontinued production and marketing of certain
         products.


         2.       Loss from exchange of assets

         In December 2002, the Company closed a transaction pursuant to which
         it transferred the VoIP and other activities, including certain
         related net assets with book value of $ 19.6 million, of the business
         NGTS, plus $10 million in cash, to NexVerse Networks, in exchange for
         approximately 43% (fully diluted 36%) of the shares of NexVerse. The
         name of the company resulting from this transaction was changed to
         Veraz Networks.
         A third party valuation commissioned by Veraz, which evaluated among
         other things, the fair value of the shares transferred to ECI as at
         December 31, 2002, indicated that the fair market value as at December
         31, 2002 of the Veraz shares held by ECI to be $ 22.8 million. Due to
         the fact that the value of the shares received by ECI was less than
         the value of the assets transferred, ECI recorded a loss from exchange
         of assets of $ 6.8 million.



Note 21 - Discontinuance of Operations

         A.       During the third quarter of 2002, the Company's Board of
                  Directors decided on a plan to sell the operations of the
                  InnoWave segment, which specializes in development of
                  solutions for broadband wireless access to communications
                  networks.

                  In April 2003, the Company signed an agreement with Alvarion
                  to sell the InnoWave operation. The total value of the
                  transaction was approximately $ 20 million, consisting of a
                  cash consideration paid by Alvarion and the cash balances
                  withdrawn by ECI at closing. In addition, Alvarion granted
                  warrants to purchase 200,000 Alvarion shares over a period
                  of five years at an exercise price of $ 3 per share (of
                  which, warrants to purchase 50,000 transferred to certain
                  key InnoWave employees transferred to Alvarion). In the
                  first quarter of 2004, the Company sold all the shares it
                  had obtained from exercising the aforementioned warrants.
                  The gain from the sale of the shares amounted to $ 1.5
                  million and was recorded in other income.

         B.       During 2003, ECtel's Board of Directors decided on a plan to
                  sell the operations of the Government Surveillance business
                  of ECtel, which provided telecommunication monitoring needs
                  to government agencies. In February 2004, ECtel signed a
                  definitive agreement to sell the Government Surveillance
                  business to Verint Systems Inc. for $35 million in cash.
                  According to the terms of the transaction, ECtel transferred
                  to Verint various assets and liabilities relating to its
                  Government Surveillance business and undertook certain
                  commitments to Verint. ECtel recorded during the first
                  quarter of 2004 in respect of this transaction a gain of
                  $24.2 million.



                                    F-301
<PAGE>


                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

Note 21 - Discontinuance of Operations (cont'd)

         B.       (cont'd)

                  On March 9, 2004, the Board of Directors of ECI decided, in
                  principle, that ECI would distribute 7.6 million of its
                  shares in ECtel Ltd. to ECI's shareholders. On April 28,
                  2004, after the Company obtained court approval and the
                  consent of its banks, the Board of Directors declared a
                  distribution of 7.6 million shares of ECtel to the Company's
                  shareholders of record on May 5, 2004. The shares were
                  distributed on May 10, 2004. Before distribution, ECI held
                  approximately 10.5 million, or 58%, of ECtel's shares. After
                  distribution of the shares, ECI holds approximately 16% of
                  ECtel's outstanding shares.

                  Accordingly, the results of ECtel for all periods reported
                  were reclassified to one line in the statement of operations
                  following the loss from continuing operations. The assets and
                  liabilities of ECtel as at December 31, 2003 were
                  reclassified in the Company's balance sheets as assets from
                  discontinued operations and liabilities from discontinued
                  operations, respectively.


Note 21 - Discontinuance of Operations (cont'd)

         C.       Assets and liabilities of the discontinued segments
<TABLE>
<CAPTION>

                                                                                               December 31        December 31
                                                                                                      2004               2003
                                                                                            --------------     --------------
                                                                                            $ in thousands     $ in thousands
                                                                                            --------------     --------------
<S>                                                                                         <C>                <C>
         Assets relating to discontinued segments*
         Cash and cash equivalents                                                                      -             18,964
         Short-term investments                                                                         -             11,006
         Trade and other receivables                                                                    -             32,862
         Prepaid expenses                                                                               -                456
         Work in progress                                                                               -              7,175
         Inventory                                                                                      -              6,442
         Long-term deposits and marketable securities                                                   -              6,604
         Property, plant and equipment                                                                  -              5,589
         Other assets                                                                                   -                589
         Goodwill and other intangible assets, net                                                      -             11,056
                                                                                            --------------     --------------
                                                                                                        -            100,743
                                                                                            ==============     ==============
</TABLE>


<TABLE>
<CAPTION>

                                                                                               December 31        December 31
                                                                                                      2004               2003
                                                                                            --------------     --------------
                                                                                            $ in thousands     $ in thousands
                                                                                            --------------     --------------
<S>                                                                                        <C>                 <C>
         Liabilities relating to discontinued segments*
         Trade payables                                                                                 -              5,681
         Other payables and accrued liabilities                                                         -             18,128
         Liability for employee severance benefits, net                                                 -                567

         Minority interests                                                                             -             36,218
                                                                                            --------------     --------------
                                                                                                        -             60,594
                                                                                            ==============     ==============
</TABLE>

         (*) The assets and liabilities as of December 31, 2003 relate to the
discontinued ECtel segment.




                                    F-302
<PAGE>



                                                               ECI Telecom Ltd.

Notes to the Consolidated Financial Statements as at December 31, 2004
-------------------------------------------------------------------------------

Note 21 - Discontinuance of Operations (cont'd)

D.       Results of operations of the discontinued segments
<TABLE>
<CAPTION>

                                                                                      Year ended December 31
                                                                                    2004              2003              2002
                                                                          --------------    --------------    --------------
                                                                          $ in thousands    $ in thousands    $ in thousands
                                                                          --------------    --------------    --------------
<S>                                                                               <C>              <C>              <C>
         Revenues                                                                 3,948            44,697           142,414
         Expenses (1)                                                            (7,851)          (71,014)         (172,484)
         Cumulative effect of an accounting change, net
          (Note 1T)                                                                   -                 -            36,646
                                                                          --------------    --------------    --------------
         Net results                                                             (3,903)          (26,317)          (66,716)
                                                                          ==============    ==============    ==============
</TABLE>

         (1)      Including, loss from disposition for the year ended December
                  31, 2004 in the amount of $ 3,681 thousand, impairment of
                  goodwill for the year ended December 31, 2003 in the amount
                  of $ 6,017 thousand and impairment of long-lived assets for
                  the year ended December 31, 2002 in the amount of $ 22,678
                  thousand (*).

         (*)      As a result of the decline in the first quarter of 2002 in
                  the demand for products of InnoWave, Management updated its
                  forecast of anticipated sales. In accordance with the
                  provisions of SFAS 144 (see Note 1T), a loss was recorded
                  from the decline in value of intangible assets in InnoWave in
                  the amount of $ 15,835 thousand. Also as a result of the
                  expected disposal proceeds, the Company wrote down property,
                  plant and equipment in the amount of $ 6,843 thousand.



Note 22 - Subsequent Events

         A.       In January 2005, the Company was named as a defendant in a
                  purported class action complaint filed in the United States
                  against ECtel, certain officers and directors of ECtel, and
                  ECI. The complaint alleges violations of U.S. Federal
                  Securities laws by ECtel and breach of fiduciary duties by
                  the individual defendants, in connection with disclosure of
                  ECtel's financial results between April 2001 and April 2003.
                  It also alleges that ECI was the controlling shareholder of
                  ECtel during this period and, as such, influenced and
                  controlled the purported actions by its subsidiary. Damages
                  claimed by the plaintiff have not yet been quantified.

                  ECI believes that the allegations made in the complaint with
                  respect to it are without merit.


         B.       On February 9, 2005, the Company repaid to its Israeli banks
                  the balance of its long-term loans of $ 30 million. See
                  Notes 9A and 14.


         C.       In February 2005, the Company has entered into a preliminary
                  agreement to sell the long-term receivables from GVT to ABN
                  Amro Bank for the sum of $96 million in cash, plus
                  potentially a further amount of approximately $3.3 million
                  based on certain contingencies. The sale is subject to
                  certain conditions and corporate approvals, including that of
                  the Company's shareholders, and is anticipated to close in
                  April 2005. It is expected to result in a gain for the
                  Company of approximately $11 million, excluding the
                  contingent amount. See Note 4.


                                    F-303