<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   -----------
                                    FORM 10-K
       FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                                   -----------

(MARK ONE)

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934

For the fiscal year ended December 31, 2000

                                       OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

For the transition period from                to
                               --------------    --------------

                          Commission file number 0-538
                        AMPAL-AMERICAN ISRAEL CORPORATION
             (Exact Name of Registrant as Specified in Its Charter)

                   NEW YORK                                      13-0435685
        (State or Other Jurisdiction of                       (I.R.S. Employer
        Incorporation or Organization)                       Identification No.)
1177 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK                     10036
   (Address of Principal Executive Offices)                      (Zip Code)

       Registrant's telephone number, including area code: (212) 782-2100.
        Securities registered pursuant to Section 12(b) of the Act: None

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

                                  Class A Stock
                    4% Cumulative Convertible Preferred Stock
                  6 1/2% Cumulative Convertible Preferred Stock
                               (Titles of Classes)
                                   -----------

         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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K  X    .
                              ----
         The number of shares outstanding of the issuer's Class A Stock, its
only authorized common stock, is 19,353,768 (as of March 20, 2001).

         The aggregate market value of the voting stock held by non-affiliates
of the registrant is $47,366,522 (as of March 20, 2001).

<PAGE>   2

                           ANNUAL REPORT ON FORM 10-K
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
                      OF AMPAL-AMERICAN ISRAEL CORPORATION
                                     PART I

ITEM 1. BUSINESS

         As used in this report (the "Report"), the term "Ampal" only refers to
Ampal-American Israel Corporation, the parent company; the term "Company" refers
to Ampal and its consolidated subsidiaries. Ampal is a New York corporation
founded in 1942.

         For industry segment financial information and financial information
about foreign and domestic operations, see Note 14 to the Company's consolidated
financial statements included elsewhere herein.

         The Company primarily acquires interests in businesses located in the
State of Israel or that are Israel-related. The Company seeks to invest in
companies which have long-term growth potential. The Company is currently
invested in a broad cross-section of Israeli companies engaged in various fields
including high technology and communications, leisure-time, real estate, capital
markets, energy distribution and industry. The Company generally participates in
the management of its investee companies through representation on boards of
directors and otherwise. As part of its investment activity, Ampal provides its
investee companies with ongoing support through its involvement in the
investees' strategic decisions and introduction to the financial community,
investment bankers and other potential investors. Sometimes, the Company
participates in the investee companies' daily activities by providing managerial
support.

         In order to identify investment opportunities in the Israeli market,
the Company is active in those sectors where it believes that the Israeli market
has a competitive advantage in the global market. Currently, the Company has
identified the Israeli high-technology and telecommunications sector as having
attained world-class stature. In addition, the high-technology and
telecommunications sector is experiencing the greatest sector growth within the
Israeli economy. As a result, the Company has, for the past three years,
directed its strategic focus to investing in this sector. In 2000, the Company
invested a total of approximately $37 million in twenty-one high-technology
companies, most of which were at the seed-capital or start-up stage. The Company
expects to continue its activities in this sector and anticipates that
investments in high-technology and telecommunications will predominate, in both
number and investment value, among the Company's holdings. The Company is also
engaged in other investments that may have substantial potential, such as
facilities for senior citizens.

         Ampal's 42.5%-owned affiliate, Ophirtech Ltd., has also focused its new
investments in the technology sector, consistent with Ampal's current strategy.


                                       1
<PAGE>   3

         Listed below by industry segment are the Company's most significant
investees, the principal business of each and the percentage of equity owned,
directly or indirectly, by Ampal. The table below also indicates whether the
investee is listed on the New York Stock Exchange ("NYSE"), NASDAQ Stock Market
("NASDAQ"), American Stock Exchange ("AMEX"), Tel Aviv Stock Exchange ("TASE")
or the Canadian Venture Exchange ("CDNX"). For further information with respect
to the more significant investee companies, see below. For additional
information concerning the investee companies, previous 10-K forms of Ampal are
herein incorporated by reference.

<TABLE>
<CAPTION>
                                                                                                           PERCENTAGE AS OF
                       INDUSTRY SEGMENT                                 PRINCIPAL BUSINESS               DECEMBER 31, 2000(1)
                       ----------------                                 ------------------               -----------------
<S>                                                           <C>                                        <C>
HIGH-TECHNOLOGY AND COMMUNICATIONS
   Ampal Cavallo Intervest Fund .....................         Venture Capital Fund                              20.0
   Arel Communications and Software Ltd.
     (NASDAQ:"ARLC").................................         Interactive Distance Learning Systems              3.1
   Babylon Ltd.......................................         Translation Software for the Internet              2.1
   BreezeCom Ltd. (NASDAQ:"BRZE")....................         Wireless Local Area Network                        2.1
   BridgeWave Communications, Inc....................         Broadband Wireless Technology                      4.0
   Camelot Information Technologies Ltd..............         Systems-Safeguarding Software                     20.7(2)
   Clalcom Ltd.......................................         Communications                                     0.7
   Comfy Interactive Movies Ltd.(TASE)...............         Computer Technology for Children                   2.2
   Compugen Ltd. (NASDAQ:"CGEN").....................         Bioinformatics                                     1.5
   ContactNOW Inc....................................         Internet-Based Community Enablers                  4.6
   CUTe Ltd..........................................         Designs Intellectual Property Rights              20.0
   ElephantX dot com LLC.............................         Software for E-Trading                             0.5
   Enbaya Ltd........................................         3D Browser/Publisher                              12.9
   Floware Wireless Systems Ltd. (NASDAQ:"FLRE").....         Broadband Wireless Transmission                    1.6
   MIRS Communications Ltd...........................         Wireless Communications Service Provider          25.0
   Modem Art Ltd.....................................         Fabless Semiconductor Company                      7.6
   mPrest Technologies Ltd...........................         Web-Based Applications for Cellular Phones         9.5
   MuTek Solutions Ltd...............................         Defect-Detecting Software                          6.1
   Oblicore Ltd......................................         Service Performance Tracking Software             17.0
   Ophir Holdings Ltd. ("Ophir").....................         Holding Company                                   42.5
     Courses Investment in Technology Ltd............         Venture Capital Fund                               4.6(3)
     Dovrat Shrem-Skies Fund '92 Ltd.................         Venture Capital Fund                               1.2(3)
     Zoran Corporation (NASDAQ:"ZRAN")...............         Digital Solutions-on-a-Chip                        0.3(3)
   Ophirtech Ltd. ("Ophirtech")......................         Holding Company                                   42.5
     Carmel Bio-Sensors Ltd..........................         Glucose-measuring products                         5.8(2)
     Celvibe Ltd.....................................         Digital Video Technologies                         6.7(2)
     Cipheractive Ltd................................         Video Coding Technology                           13.7(2)
     Elpas Ltd.......................................         Products Using Infra-Red Based                     6.9(2)
                                                                Data Communication Technologies
     Expand Networks Ltd.............................         Internet Data Compression                          4.8(2)
     Indocs Online Ltd...............................         E-Commerce Software                                6.1(2)
     Interlink Computer Communications Ltd...........         Web-Based Application Integration Software         5.6(2)
     iRadius.com, Inc................................         Family-Friendly E-Commerce Platforms               4.5(2)
     Mainsoft Corporation ...........................         UNIX Tools                                         0.8(2)
     Omegaon Ltd.....................................         Computer Network Software                          6.6(2)
     Pelican Security Ltd............................         Internet Data Protection Software                  6.2(2)
     Praxell, Inc....................................         Prepaid Charge Card Software                       3.7(2)
     Romidot Ltd.....................................         Optical Checking Instruments                       4.5(2)
     StoreAge Networking Technologies Ltd............         Data Storage Software                              5.9(2)
     Techimage Ltd...................................         Computer Animation Software                        1.1(2)
   PowerDsine Ltd....................................         Telecommunications Components                     10.8
   Qronus Interactive Israel (1994) Ltd..............         Software Quality Products                          9.5
   RealM Technologies Ltd............................         IP Multi-Media Products                           19.2(2)
   SeraNova, Inc. (NASDAQ:"SERA")(4).................         Provider of E-Business Services                    0.5
   ShellCase Ltd. (CDNX:"SSD").......................         Packaging Process for Semiconductor Chips         17.6
   Shiron Satellite Communications (1996) Ltd........         Satellite Modems and Fast Internet Access          9.0
   Smartlight Ltd....................................         X-Ray Film Digital Viewer                          8.9
   Sonic Foundry, Inc. (NASDAQ:"SOFO")...............         Digital Media and Internet Software Tools          0.4
   Star Management of Investments No. II (2000) L.P..         Venture Capital Fund                              10.0
</TABLE>


                                       2
<PAGE>   4

<TABLE>
<CAPTION>
                                                                                                           PERCENTAGE AS OF
                       INDUSTRY SEGMENT                                 PRINCIPAL BUSINESS               DECEMBER 31, 2000(1)
                       ----------------                                 ------------------               -----------------
<S>                                                           <C>                                        <C>
HIGH-TECHNOLOGY AND COMMUNICATIONS - CONTINUED
   Trinet Venture Capital Ltd..----------------------         Venture Capital Fund                              50.0
    Netformx Ltd.------------------------------------         Network Design Tools                              20.2(2)(5)
    Peptor Ltd.--------------------------------------         Pharmaceutical Products                            0.6(5)
    Smart Link Ltd.----------------------------------         Software-Based Communications Products            14.9(5)
   VisionCare Ophthalmic Technologies Ltd.-----------         Advanced Optical Products                          9.4
   XACCT Technologies Ltd.---------------------------         TCP/IP Network Software                           16.2
   Xpert Integrated Systems Ltd.---------------------         Software and Systems Integrator                   16.6
                                                               Specializing in Systems Security
   Zactus, Inc.--------------------------------------         Web Site for Musicians                            11.9(3)
REAL ESTATE------------------------------------------
   Am-Hal Ltd.---------------------------------------         Chain of Senior Citizen Facilities               100.0
   Ampal (Israel) Ltd.-------------------------------         Holding Company and Real Estate                  100.0
   Ampal Realty Corporation--------------------------         Commercial Real Estate                           100.0
   Bay Heart Limited---------------------------------         Shopping Mall Owner/Lessor                        37.0
   Etz Vanir Ltd. and Yakhin Mataim Ltd.-------------         Citrus Groves                                     50.0(6)
   Frenkel Lefkovitz & Co.---------------------------         Real Estate                                       20.0
   Nir Ltd.------------------------------------------         Commercial Real Estate                            99.9
   Ophir Holdings Ltd. ("Ophir Holdings")------------         Holding Company                                   42.5
    Industrial Buildings Corporation Ltd. (TASE)-----         Industrial Real Estate                             5.2(3)
    Lysh The Coastal High-way Ltd.-------------------         Commercial Real Estate                            10.6(3)
    Meimadim Investments Ltd.------------------------         Commercial Real Estate                             6.3(3)
    New Horizons (1993) Ltd.-------------------------         Commercial Real Estate                            34.0(3)
    Shmey-Bar Group----------------------------------         Commercial Real Estate                             9.4(3)

ENERGY DISTRIBUTION AND INDUSTRY---------------------
   Carmel Container Systems Limited
    (AMEX:"KML")-------------------------------------         Packaging Materials and Carton Production         21.7
   Granite Hacarmel Investments Ltd. (TASE)----------         Distribution of Refined Petroleum Products        20.2
   M.D.F. Industries Ltd.----------------------------         Medium Density Fiber Products                     50.0

LEISURE-TIME-----------------------------------------
   Coral World International Limited-----------------         Underwater Observatories and Marine Parks         50.0
   Country Club Kfar Saba Limited--------------------         Country Club Facility                             51.0
   Hod Hasharon Sport Center (1992)
    Limited Partnership------------------------------         Country Club Facility                             50.0

CAPITAL MARKETS AND OTHER HOLDINGS-------------------
   Ampal Development (Israel) Ltd.-------------------         Holding Company                                  100.0
   Ampal Industries (Israel) Ltd.--------------------         Holding Company                                  100.0
   Bank Leumi le'Israel B.M.-------------------------         Israeli Commercial Bank                            0.3
   Blue Square-Israel Ltd. (NYSE:"BSI" and
    TASE)--------------------------------------------         Supermarket Chain                                  3.9
   Epsilon Investment House Ltd. and-----------------
    Renaissance Investment Company Ltd.--------------         Portfolio Management and                          20.0
                                                               Underwriting Services
   Renaissance Israel--------------------------------         Investment Fund                                   15.0
</TABLE>

-----------------------

(1)      Based upon current ownership percentage.  Does not give effect to any
         potential dilution.

(2)      As of December 31, 2000, Ophirtech Ltd. held the following percentage
         interests:

<TABLE>
<S>                                                                             <C>
              Camelot Information Technologies Ltd.--------------------         13.2
              Carmel Bio-Sensors Ltd.----------------------------------         13.7
              Celvibe Ltd.---------------------------------------------         15.7
              Cipheractive Ltd.----------------------------------------         32.3
              Elpas Ltd.-----------------------------------------------         16.3
              Expand Networks Ltd.-------------------------------------         11.2
              Indocs Online Ltd.---------------------------------------         14.4
</TABLE>


                                       3
<PAGE>   5

<TABLE>
<S>                                                                             <C>
              Interlink Computer Communications Ltd.-------------------         13.1
              iRadius.com, Inc.----------------------------------------         10.7
              Mainsoft Corporation Ltd.--------------------------------          1.8
              Netformx Ltd.--------------------------------------------          5.9
              Omegaon Ltd.---------------------------------------------         15.6
              Pelican Security Ltd.------------------------------------         14.6
              Praxell, Inc.--------------------------------------------          8.8
              RealM Technologies Ltd.----------------------------------         14.5
              Romidot Ltd.---------------------------------------------         10.6
              StoreAge Networking Technologies Ltd.--------------------         13.8
              Techimage Ltd.-------------------------------------------          2.6
</TABLE>

         The Company's percentage of the above companies reflects 42.5% of
         Ophirtech's ownership plus any direct holdings.

(3)      As of December 31, 2000, Ophir Holdings Ltd. held the following
         percentage interests:

<TABLE>
<S>                                                                              <C>
              Courses Investment in Technology Ltd.--------------------          5.0
              Dovrat Shrem-Skies Fund '92 Ltd.-------------------------          2.9
              Industrial Buildings Corporation Ltd.--------------------         12.2
              Lysh The Coastal High-way Ltd.---------------------------         25.0
              Meimadim Investments Ltd.--------------------------------         10.0
              New Horizons (1993) Ltd.---------------------------------         80.0
              Shmey-Bar (I.A.) 1993, Ltd., Shmey-Bar (T.H.)
               1993 Ltd. and Shmey-Bar Real Estate (1993) Ltd.---------         22.2
              Zactus, Inc.---------------------------------------------         14.9
              Zoran Corporation----------------------------------------          0.8
</TABLE>

         The Company's percentage of the above companies reflects 42.5% of Ophir
         Holdings' ownership plus any direct holdings.

(4)      SeraNova, Inc. was acquired by Silverline Technologies Ltd.
         (NYSE:"SLT") on March 6, 2001.

(5)      As of December 31, 2000, Trinet Venture Capital Ltd., held the
         following percentage interests:

<TABLE>
<S>                                                                             <C>
              Netformx Ltd.--------------------------------------------         16.8
              Peptor Ltd.----------------------------------------------          1.2
              Smart Link Ltd.------------------------------------------         28.6
</TABLE>

         The Company's percentage of the above companies reflects 50% of
         Trinet's ownership plus any direct holdings.

(6)      Please refer to "Legal Proceedings."


                                       4
<PAGE>   6

SIGNIFICANT RECENT DEVELOPMENTS SINCE THE END OF LAST FISCAL YEAR

          On January 22, 2001, the Company made an additional investment of $1.5
million in Enbaya Ltd., a developer of a 3D browser that enables fast serving,
compression and streaming of 3D models, and increased its equity interest in the
company from 12.9% to 20.5%.

         On February 5, 2001, the Company announced that its 25%-owned
affiliate, MIRS Communications Ltd. ("MIRS"), was granted a full general
operator license by the Ministry of Communications, similar to the three
existing cellular licenses previously granted to other Israeli operators.
Subsequently, on February 27, 2001, the Company was informed that Partner, the
Orange network operator in Israel, filed a petition with the High Court of
Justice in Jerusalem against the Ministry of Communications and MIRS. The
petition requests the cancellation of the general operator license granted to
MIRS on February 5, 2001, due to the circumstances leading to its granting.

         On February 23, 2001, the Company made an additional $5 million
investment in XACCT Technologies Ltd. ("XACCT"), a leading provider of business
infrastructure software for the next-generation public network. The Company now
holds an approximate 16.2% equity interest in XACCT.

         On March 27, 2001, the Company sold its interest in the building
located at 800 Second Avenue in New York City for $33 million and recorded a
pretax gain of approximately $7.7 million.

HIGH TECHNOLOGY AND COMMUNICATIONS

         AMPAL CAVALLO INTERVEST FUND ("AMPAL KOREA")

         In December 2000, the Company invested $1.1 million in Ampal Korea, a
new Korean venture capital fund which it will manage. Ampal Korea will have a
capitalization of 35 billion Korean won (approximately $30 million), and the
partners in this fund are the Company (20%); the Government of Korea (40%);
foreign investors including Cavallo Capital Corporation (29%) and Intervest
Company Ltd. (11%). The fund will be managed by Ampal International Ventures
(2000) Ltd., a wholly-owned subsidiary of Ampal, headed by Nitzan Yanovski,
together with Intervest Company Ltd. ("Intervest"), a venture capital fund
manager in Korea.

         The fund will invest in Korean high-technology companies and will
promote these companies by capitalizing upon the expertise of Ampal's Israeli
high-technology investee companies. The current business environment in Korea is
similar to the business environment in Israel in the early 1990s, when the
high-technology market offered high potential investment opportunities. As a
result of the recent economic upheavals which have affected the Far East, Korean
conglomerates have been forced to focus on salvaging profit margins and
restructuring, leaving the economy wide open to innovations by small and
mid-sized businesses. Furthermore, the involvement of the Korean Government in
this market significantly increased, providing assistance and incentives to
these high-technology companies.

         Ampal's investment strategy will focus on state-of-the-art technology
companies that can provide global growth potential, particularly in the
telecommunications, software and semiconductor sectors. Ampal's entry into the
Korean market provides Ampal's portfolio companies access to new business
opportunities and technological advantages to support their future growth.

         The structure of the deal provides Ampal with the option to purchase
the Korean Government's share in the fund at cost plus interest (and in certain
cases additional remuneration) upon the expiration of the initial three-year
term in 2004. This option may significantly enhance Ampal's return on its
investment.

         Ampal believes that Korea's technological expertise in the electronics
and semiconductor industries, together with the support of the Government of
Korea and Ampal's leadership, will provide the ingredients for the success of
this new fund.

         Intervest, established in 1999, is a Korean-owned enterprise
specializing in providing private and venture capital to existing companies,
many of them listed, and to start-up companies, particularly in the
high-technology and


                                       5
<PAGE>   7

information industries. Intervest also organized funds with Chase Asia Equity
Partners, an Asia-region private equity arm of the Chase Manhattan Bank group
and domestic investors.

         AREL COMMUNICATIONS AND SOFTWARE LTD. ("AREL")

         The Company purchased 396,000 shares of Arel (NASDAQ "ARLC") in
February 2000 for approximately $6 million. Arel's core business targets the
emerging Interactive Distance Learning (IDL) market, where it is positioned as
the innovative technology leader. Arel's subsidiary, ArelNet Ltd. ("ArelNet"),
is the leading provider of high quality Internet Protocol (IP) telephony
solutions, developing cutting-edge technology solutions for real-time voice and
fax over IP networks and enhanced services. Arel completed the spin-off of its
holdings in ArelNet in June 2000, and the Company received 119,674 shares of
ArelNet.

         In 2000, the Company recorded a net gain of $.3 million, after taxes,
on the sale of Arel shares, and also recorded a net unrealized loss of $3
million, after taxes. At December 31, 2000, the Company owned 398,100 and
119,674 shares of Arel and ArelNet, respectively, which had a combined market
valuation of $1.2 million. The Company's equity interest in Arel and ArelNet at
year-end was 3.1%.

         BABYLON LTD. ("BABYLON")

         In May 1999, the Company invested $.5 million to acquire a 2.1% equity
interest in Babylon Ltd., an Israeli corporation which develops and distributes
the Babylon single click translation software for Internet and e-mail users.


         Babylon's language applications already provide translation support for
85% of the emerging non-English speaking Internet market, including Spanish,
Japanese, German, French, Italian, Portuguese, Dutch, Hebrew and Chinese in both
simplified and traditional dialects. With a single click on any word, Babylon's
technology allows its users to find definitions, translations and links to more
information on a particular word. Its Single Click Translator allows users to
convert currencies, metrics and time zones, making e-business a more global
experience.

         Babylon recently announced a reorganization program that includes a 50%
cut in its work force.

         BREEZECOM LTD. ("BREEZE")

         Breeze (NASDAQ "BRZE") is an Israeli company which is a leading
provider of wireless access solutions used worldwide by public operators,
Internet service providers and private enterprises. Its products provide a
wireless alternative to wired access solutions, such as DSL and cable modems,
and facilitate indoor and outdoor, as well as fixed and mobile wireless LAN
connectivity. Breeze's products are based on a packet switching
point-to-multipoint wireless platform, optimized for high-speed Internet and
intranet access. Core technologies include spread spectrum radio, digital signal
processing, modems, networking protocols and VLSI. Breeze has three product
lines: BreezeACCESS(TM) for service providers in licensed and unlicensed
frequency bands, BreezeNET(R) for wireless campus networks in unlicensed bands
and BreezeLINK(R) for point-to-point T1/E1 connectivity.

         Breeze's revenues increased from $45 million in 1999 to $101 million in
2000, and net income in 2000 was $10 million, compared to a net loss of $3.6
million in 1999. In March 2000, Breeze completed an initial public offering of
5,750,000 shares on the NASDAQ and received net proceeds of $107 million.

         At December 31, 1999, the Company had invested $1 million in Breeze for
a 4.3% equity interest. In January 2000, the Company invested an additional $.1
million in Breeze. After the public offering, the Company held 814,870 shares of
Breeze and purchased additional shares during the year. In 2000, the Company
sold 318,200 shares of Breeze for a net gain of $7.2 million after taxes and
recorded a net unrealized gain of $.7 million, after taxes, in the statement of
income. A net unrealized gain of $3 million, after taxes, was recorded in
accumulated other comprehensive loss on the balance sheet.

         At December 31, 2000, the Company's holdings of 581,770 shares of
Breeze, representing a 2.1% equity interest, had a market value of $8.3 million.


                                       6
<PAGE>   8

         BRIDGEWAVE COMMUNICATIONS, INC. ("BRIDGEWAVE")

         During 2000, the Company made two investments, aggregating $2.8
million, for a 4% equity interest in BridgeWave, which develops and markets
wireless access systems that extend the reach of broadband networks, allowing
service providers to reach untapped subscribers with high-margin, high-bandwidth
services.

         The Company's most recent investment was made in September 2000 as part
of a $26.5 million private placement, based on a $126.5 million post-money
valuation. Other significant investors in the private placement were Merrill
Lynch and Scientific Atlanta Strategic Investment L.L.P.

         CAMELOT INFORMATION TECHNOLOGIES LTD. ("CAMELOT")

         In 1999 and 2000, the Company invested $1.25 million and $3.3 million,
respectively, for a 15.1% equity interest in Camelot, an Israeli corporation
which develops and markets security and management solutions for the networked
business environment. Its flagship product, HARK!, is the world's first
automated intelligent access control solution, which enables users access to
information resources strictly on a need-to-know basis. Utilizing sophisticated
discovery algorithms to analyze network events and deduce the functional
structure of an organization, HARK! automatically creates dynamic,
highly-granulated policies and facilitates effective management of network users
and resources. HARK! empowers information technology managers with time-saving
automation and reporting functionality, while allowing them to closely monitor
all activity on the network.

         Camelot's private placement in October 2000 raised $21 million from key
investors which included SOFTBANK, a prominent Japanese venture capital firm and
PCG Ventures, the venture capital arm of Pacific Capital Group.

         Ophirtech Ltd., the Company's 42.5%-owned affiliate, has invested $3.5
million in Camelot for a 13.2% equity interest. The Company's net equity
interest in Camelot at December 31, 2000, was 20.7%.

         COMPUGEN LTD. ("COMPUGEN")

         Compugen (NASDAQ "CGEN") is a pioneer in the field of computational
genomics and is developing new approaches to computational proteomics. Compugen
combines the disciplines of mathematics and computer science with molecular
biology to develop products and services that enable life scientists to
significantly enhance and accelerate their research efforts in the discovery of
drugs, therapeutics, diagnostics and agricultural products. In addition,
Compugen is commercializing the genes and proteins that are discovered through
its drug discovery division. Customers of Compugen products and services include
pharmaceutical, biotechnology and other life science organizations such as
Amgen, Human Genome Sciences, Inc., Merck, Monsanto, Pfizer and the U.S. Patent
and Trademark Office.

         In August 2000, Compugen completed an initial public offering of
5,750,000 shares on the NASDAQ and received net proceeds of $53.5 million.
Revenues increased from $3.2 million in 1999 to $6.9 million in 2000.

         The Company invested $1 million and $1.1 million in Compugen in 1998
and 2000, respectively. During 2000, the Company sold 26,300 shares of Compugen
for a net gain of $.1 million, after taxes. A net unrealized gain of $.4
million, after taxes, was recorded in accumulated other comprehensive loss on
the balance sheet.

         At December 31, 2000, the Company's holdings of 384,197 shares of
Compugen, representing a 1.5% equity interest, had a market value of $2.4
million.

         CONTACTNOW INC. ("CONTACTNOW")

         During 1999, the Company invested $.5 million to acquire 4.6% of
ContactNOW, which developed an Internet-activated anonymous telephony service.
By using the ContactNOW service, an Internet user can initiate a regular phone
call to any other Internet user simply by clicking on his/her e-mail address,
ICQ number, YahooID or any other identification alias. The actual telephone
numbers of both parties remain confidential.


                                       7
<PAGE>   9

         The investment in ContactNOW was written-off in 2000.

         CUTE LTD. ("CUTE")

         In June 2000, the Company entered into a Share Purchase Agreement
pursuant to which it undertook to invest $1.75 million, in four equal
consecutive quarterly installments, bearing interest from the date of the
closing until the repayment in full, for a 20% equity interest in CUTe, a
designer of intellectual property rights and software modules on key components
of the physical layer of wireless telecommunications systems.

         By December 31, 2000, the Company invested $.875 million of the total
amount of $1.75 million. The third installment was made at the beginning of
January 2001, and the last payment was made on March 26, 2001.

         ENBAYA LTD. ("ENBAYA")

         Enbaya (formerly Geometry-On-Line, Inc.) is the developer of the first
3D content delivery network service for the Internet. Based on 3D graphics and
animation, Enbaya's groundbreaking technology enables e-businesses to offer a
richer, more powerful interactive experience. With high quality, fast-loading 3D
objects that can be moved, turned, studied and "touched", Enbaya gives users
information in a format never before available on the Internet, strengthening
"stickiness" and enhancing sales. E-businesses can seamlessly integrate any 3D
content into their site by simply uploading it to the Enbaya Service
Network(TM).

         Enbaya's products are built around a core technology for progressive
compression and streaming, and a unique "one-link service" business model. The
combination of Enbaya's new technology with the easily deployed business model
breaks speed and integration barriers that have been traditionally associated
with delivering rich-media and 3D over the Internet, and is fast and compact
enough to be used with other platforms such as PDAs and mobile phones. Enbaya is
expected to launch beta services for bricks-and-mortar retailers who want to
provide customers with a realistic and interactive virtual experience of
products and services.

         In March 2000, the Company invested $.5 million in Enbaya for a 12.9%
equity interest, and extended a bridge loan of $.4 million in September 2000.
The Company made an additional investment of $1.5 million in Enbaya in January
2001, increasing its equity interest to 20.5%. The last investment was made as
part of a $5 million round of financing based on a $15 million post-money
valuation. Other significant investors included Poalim Capital Markets, DS
Polaris and Partner FutureComm.

         FLOWARE WIRELESS SYSTEMS LTD. ("FLOWARE")

         Floware (NASDAQ "FLRE") is a leading provider of broadband wireless
access solutions that enable new telecom operators (CLECs) to offer business
customers cost-effective "last mile" connectivity to backbone networks.
Floware's WALKair(TM) system, a broadband point-to-multipoint fixed wireless
access system, is designed to allow operators to produce competitive services in
the increasingly deregulated telecommunications marketplace. Installed in over
40 sites around the world (both commercial and field experiments), WALKair(TM)
offers high capacity bandwidth data/internet services as well as advanced voice
services.

         In September 1999, the Company invested $2.5 million, at a pre-money
valuation of approximately $80 million, for an approximately 2.45% equity
interest in Floware. During the first quarter of 2000, Siemens AG ("Siemens"), a
global powerhouse in telecommunications, electrical engineering and electronics
and a strategic investor in Floware, significantly increased its equity interest
in Floware from 10% to 28%, based on a pre-money valuation of $230 million. In
August 2000, Floware completed an initial public offering of 5,175,000 shares on
the NASDAQ and raised gross proceeds of $67 million.

         Floware's revenues increased from $3.3 million in 1999 to $38.5 million
in 2000.


                                       8
<PAGE>   10

         In 2000, the Company's statement of income reflected a net gain of $.4
million, after taxes, on the sale of shares to Siemens. A net unrealized gain of
$2.5 million, after taxes, was recorded in accumulated other comprehensive loss
in the balance sheet. At December 31, 2000, the Company's holdings of 518,800
shares of Floware, representing an equity interest of 1.5%, had a market value
of $6.1 million.

         MIRS COMMUNICATIONS LTD. ("MIRS")

         MIRS, which is the largest investment in Ampal's history, represents a
cornerstone in Ampal's strategic planning for the future. On January 22, 1998,
the Company completed its purchase of a one-third interest in the assets of a
new wireless communications service provider, MIRS Communication Company
Ltd.("MIRS") for $110 million. In March 1998, the Company transferred its
interest in MIRS to a limited partnership. A wholly-owned Israeli subsidiary of
Ampal is the general partner of the partnership and owns 75.1% of the
partnership. The limited partners of the partnership reimbursed the Company for
their pro-rata share of expenses incurred by the Company in connection with the
original purchase from Motorola Israel. MIRS, which is one-third owned by the
partnership and two-thirds owned by Motorola Israel, coordinates and operates
the digital and analog public-shared two-way radio and other services in Israel
previously furnished by Motorola Israel. The digital wireless communication
service is based on Motorola Israel's iDEN(TM) integrated wireless communication
technology, which is known as MIRS in Israel. The MIRS system employs a unique
radio technology, developed by Motorola Israel, and provides an integrated
service platform of digital wireless communications services. These services are
targeted primarily to commercial customers.

         During 2000, MIRS exceeded most of its business goals based on which
Ampal's investment was made. MIRS has over 168,000 subscribers (analog and
digital) in the commercial, governmental, municipal, security and military
sector, 15,000 of which are Packet-Data users. MIRS strongly positioned itself
in the commercial sector, announcing an aggressive pricing strategy for the
cellular services market, resulting in increased revenues in 2000 and an
increase in its customer base. In 2000, MIRS' Board of Directors authorized the
payment of a dividend based on 1999 results, of which $1.6 million was paid to
the Company. In addition, the Company recorded income of $3.8 million from
Motorola (Israel) Ltd, with respect to the guaranteed dividend income from MIRS.


         MIRS operated until recently under a license from the Israeli Ministry
of Communications permitting it to provide its communications services. The two
disadvantages of this license were that there were no Calling Party Pays (CPP)
agreements and no connectivity agreement with Bezek, the local telephone
provider.

         On February 5, 2001, MIRS Communications Ltd., was granted a full
general operator license by the Ministry of Communications, similar to the three
existing cellular licenses previously granted to other Israeli operators. The
major advantages of this new license are that MIRS will now be able to charge
for airtime usage for incoming calls and will have a connectivity agreement with
Bezek. As part of this agreement, MIRS agreed to pay royalties to the Government
of Israel and to be subject to certain quality of service measurements to comply
with industry standards. The Ministry of Communications will conduct an economic
valuation to determine the additional license fees to be paid by MIRS.

         The main goal of MIRS is to provide a new wireless advanced
communications service to the commercial, governmental and military sectors
according to quality standards set by Motorola, in order to give a full and
satisfying solution to all wireless communications needs.

         The communications infrastructures operated by MIRS are as follows:

         MIRS Network - the leading digital infrastructure of MIRS, which
offers a wide variety of communications services in national deployment, which
include instant radio communication, private and group communication, mobile
telephone services, short message services and data communication.

         Rav-Gal - provides the subscribers with analog trunking, enabling
regional group communication.


                                       9
<PAGE>   11

         Hyunit/Bakarit Networks - control systems allowing the subscriber to
receive beeper indications of the system's regular or irregular condition, as
well as indications of alarms and security in unmanned systems or
installations.

         At present, over 6 million subscribers are using the MIRS system
worldwide, primarily in the United States where service is provided by Nextel,
and in Argentina, Brazil, Canada, Japan, China, Korea, Mexico, Peru, Singapore
and Colombia. By the end of 2000, MIRS had more than 168,000 subscribers in
Israel, as compared to 140,000 subscribers in 1999.

THE MAIN COMMUNICATIONS SERVICES OF THE MIRS SYSTEMS ARE:

         -  Instant private communication

         -  Instant group communication

         -  High quality telephone calls with additional services, such as
            voice-mail, call waiting, last number dialing, etc.

         -  Two telephone numbers per subscriber - optional

         -  Smart voice-mail, including automatic indication on incoming
            messages

         -  Hebrew/English SMS, sent from the user's P.C.

         -  19.6 kbps net rate data transmission

         -  Video on MIRS - enables transmission of digital/video pictures via
            MIRS

         -  Business Networks - instant private calls between companies and
            organizations that belong to the same business network

         -  On-going information updates through the Internet regarding the
            current billing status of the customer's subscriber units

         -  96 kbps rate advanced Packet-Data communications, using TCP/IP
            protocols

         -  MIRS subscriber unit with integrated browser

         -  Easy access from the lap-top to the customer's office/home computer
            applications

         -  Fast access to information services and e-mail, directly from the
            MIRS subscriber unit

         -  Alphanumeric messages can be sent to the MIRS subscriber unit
            through a manned paging center or through the Internet

         MODEM ART LTD. ("MODEM")

         In 1999 and 2000, the Company invested $.2 million and $1.65 million,
respectively, for a 7.6% equity interest in Modem. An Israeli fabless
semiconductor company, Modem specializes in developing system-on-a-chip
solutions for wideband and broadband communication systems.

         mPREST TECHNOLOGIES LTD. ("mPREST")

         mPrest, (formerly WapDWap Ltd.), is engaged in the development of
web-based applications for cellular phones. In August 2000, Ampal invested $.75
million in mPrest for a 9.5% equity interest, as part of a $4 million private
placement, based on a $9.4 million post-money valuation.

         mPrest has developed a unique Personal Consolidation Platform for
mobile Internet information. Using this platform, Internet and Intranet users
can drag and drop specific information from any online page, choosing what is
important to them for viewing on their mobile handset. The updated selected
information is displayed on the mobile device, all on one phone page, with
one-click access. Furthermore, the mPrest platform intelligently links the
user's selected web information on the handset to relevant wireless services and
transactions, generating m-traffic and m-commerce (m- =mobile).


                                       10
<PAGE>   12

         MUTEK SOLUTIONS LTD. ("MUTEK")

         MuTek develops and markets software solutions that improve the
availability of business-critical software applications. Its Black Box Flight
Recorders for software applications provide online alerts prior to system
failures; record and play back software malfunctions and pinpoint the root cause
of crashes and other errors in server and desktop applications. MuTek's
customers include e-business and traditional blue chip companies in the computer
and software industry, financial services, telecom and cellular operators,
manufacturing and industrial companies.

         Revenues increased from $2.4 million in 1999 to $7.7 million in 2000.

         The Company has invested $3.7 million in MuTek, and its equity interest
at December 31, 2000 was 6.1%. Its most recent investment of $1.6 million was
made in October 2000 as part of a $15 million round of financing which was based
on a $115 million post-money valuation.

         In February 2001, the Intel 64 Fund invested in MuTek and MuTek signed
a joint development and marketing agreement with Sun Microsystems, Inc.

         NETFORMX, LTD. ("NETFORMX")

         The Company has a 20.2% equity interest in Netformx, directly and
indirectly through Trinet and Ophir. Netformx develops and markets the award
winning CANE(R) family of network design, analysis and simulation tools. CANE,
the emerging standard in Computer Aided Network Engineering, is the only
integrated, end-to-end, multi-layer, network design tool on the market.
Netformx's strategy is to help its customers design and maintain sophisticated
computer networks. Using CANE, network and system integrators and network
managers design, simulate and analyze efficient, reliable networks quickly and
easily. CANE is a highly sophisticated package built from the ground up to
resolve network chaos and manage the accelerating pace of network change while
reducing network equipment, consulting and staff costs.

         During 1999, Netformx signed a strategic agreement with Cisco making
its products the tools which Cisco utilizes to design computer networks.
Netformx is now positioning itself to become the preferred tool in the design
and maintenance of networks.

         Due to a slower than expected growth in its markets, Netformx has
reduced its work force and expenses during the first quarter of 2001 to
calibrate it to current market conditions. In 2000, the Company and its
50%-owned affiliate, Trinet Venture Capital Ltd., recorded net write-downs of
their investments in Netformx of $1.6 million and $2.7 million, respectively,
after taxes. The Company's consolidated net loss on the Netformx write-downs was
$2.5 million, after taxes.

         OBLICORE LTD. ("OBLICORE")

         Oblicore is developing a comprehensive infrastructure system that
enables Application Service Providers ("ASP") to reduce costs and regulate
service provision to meet the requirements of individual customers. With
Oblicore, ASPs can supply customers with timely, accurate reports comparing
actual service level delivery to service level commitments for each service
level agreement.

         The Company invested $2.2 million in 2000 for a 17% equity interest in
Oblicore. The most recent investment was made in November 2000 as part of an $11
million second round of financing based on a $27.5 million post-money valuation.

         OPHIR HOLDINGS LTD. ("OPHIR")

         Ophir, the Company's 42.5%-owned affiliate, held interests in real
estate and high technology. In March 2000, Ophir sold most of its
high-technology interests to a related entity, Ophirtech Ltd. ("Ophirtech") for
$17.6 million. The Company has a 42.5% interest in Ophirtech.


                                       11
<PAGE>   13

         In addition to its investment in two mutual funds which focus on the
high-technology sector, Ophir previously held a 5.6% equity interest in
Nogatech, Inc. ("Nogatech"), which developed video communication compression
technology. In May 2000, Nogatech completed an initial public offering of
3,500,000 shares on the NASDAQ and received gross proceeds of $42 million.
Nogatech was acquired by Zoran Corporation ("Zoran") in October 2000. Zoran is a
leading provider of digital solutions-on-a-chip for applications in the growing
multimedia and consumer electronics markets.

         At December 31, 2000, Ophir's 137,567 shares of Zoran, representing a
0.8% equity interest, had a market value of $2.1 million.

         In April 2000, Terayon Communications Systems, Inc. ("Terayon")
acquired Combox Ltd. ("Combox"). Ophir exchanged its 19.7% equity interest in
Combox for 301,998 shares of Terayon. During the year, Ophir sold 268,424 shares
of Terayon and recorded a net gain of $8.5 million, after taxes.

         OPHIRTECH LTD. ("OPHIRTECH")

         Ophirtech, the Company's 42.5%-owned affiliate, has invested in 18
companies in the high-technology sector. During 2000, Ophirtech invested $16.2
million in start-up companies.

         Included among Ophirtech's investments are the following companies:

                  CAMELOT INFORMATION TECHNOLOGIES LTD. ("CAMELOT")

                  Ophirtech has invested $3.5 million in Camelot for a 13.2%
         equity interest. The Company's net equity interest in Camelot at
         December 31, 2000, was 20.7% (see Camelot above).

                  CELVIBE LTD. ("CELVIBE")

                  Celvibe develops digital video technologies for the Internet,
         broadband networks and mobile users. Ophirtech invested $1.5 million
         for a 15.7% equity interest.

                  ELPAS LTD. ("ELPAS")

                  Elpas is a leader in local positioning-system solutions for
         hospitals and buildings. Through its patented wireless infra-red
         technology, Elpas is positioned to deliver solutions that change the
         way personnel, patients, visitors and equipment are managed indoors.
         Elpas recently formed a partnership with Siemens that will make patient
         positioning available to hospitals throughout the world. Ophirtech
         invested $1.6 million for a 16.3% equity interest in Elpas.

                  EXPAND NETWORKS LTD. ("EXPAND")

                  Expand developed caching technology designed to accelerate
         communications over diverse network infrastructures and improve
         broadband efficiency, thereby yielding significant savings in
         communications infrastructure costs. Expand extends the performance
         benefits of caching beyond Web traffic to all enterprise data. The
         result is a 100%-400% network performance increase that supports the
         deployment of bandwidth-intensive applications.

                  In October 2000, Expand completed a private placement, raising
         a total of $25 million from America Online, Inc., Comcast Interactive
         Capital, the Kaufman Fund, investment banks and other venture capital
         funds.

                  Expand's revenues increased from $.4 million in 1999 to $5.8
         million in 2000. At December 31, 2000, Ophirtech's investment of $2.9
         million represented an 11.2% equity interest in Expand.


                                       12
<PAGE>   14

                  INTERLINK COMPUTER COMMUNICATIONS LTD. ("INTERLINK")

                  Interlink is developing an application that enables
         communication between various computing platforms. Ophirtech invested
         $1.2 million for a 13.1% equity interest.

                  OMEGAON NETWORKS LTD. ("OMEGAON")

                  Omegaon, (formerly Attune Networks Ltd.), is developing a
         software system permitting quick and continuous identification of
         difficulties and interruptions in various communications networks.
         Ophirtech invested $2.0 million for a 15.6% equity interest.

                  PELICAN SECURITY LTD. ("PELICAN")

                  Pelican is a leading client-side Internet security vendor that
         provides solutions that proactively protect e-businesses from Internet
         threats. Pelican's flagship product line, Pelican SafeTnet(TM), defends
         organizations from threats such as destructive Internet viruses and
         hackers who attempt to exploit the security weaknesses of the Windows
         client to gain unauthorized access to vital corporate resources.
         SafeTnet(TM) was the only technology to proactively block the malicious
         actions of the "Love Bug" worm when it first hit in early May 2000.

                  Ophirtech has invested $2.6 million for a 14.6% equity
         interest in Pelican.

                  PRAXELL, INC. ("PRAXELL")

                  Praxell has developed a payment system (Praxicard), which
         provides safe, secured and anonymous online purchases. Praxicard also
         enables new segments like teenagers and travelers that lack credit
         cards, which have been largely excluded from online purchasing, to buy
         online. These segments are currently estimated as 40% of Internet
         users. The system, completely based on Oracle systems, provides
         Internet users comfortable, flexible and secured payment solutions, far
         more so than the existing payments that are based on credit cards.
         Praxell offers a variety of other services like gift certificates,
         loyalty points programs and account managing for e-commerce sites.

                  Ophirtech invested $.75 million in Praxell for an equity
         interest of 8.8%.

                  STOREAGE NETWORKING TECHNOLOGIES LTD. ("STOREAGE")

                  StoreAge provides cost effective storage solutions to the
         enterprise market with a focus on StoreAge Area Network (SAN)
         architecture. StoreAge makes a device that allows users to prioritize
         information contained on corporate storage networks and manage the data
         more efficiently, using virtualization technology to accomplish the
         gain in efficiency.

                  Ophirtech invested $3 million in StoreAge and had a 13.8%
         equity interest at December 31, 2000. In January 2001, Cisco Systems
         Inc. and several other investors participated in a $25 million round of
         financing and Ophirtech's equity interest decreased to 11%.


                                       13
<PAGE>   15

         POWERDSINE LTD. ("POWERDSINE")

         PowerDsine Ltd. is a leading designer and developer of
software-controlled power solutions, which enable the delivery of operating
power over telecom and converged voice-data communications networks. PowerDsine
is the market leader of Power over LAN(TM) technology, featuring Power over LAN
Hubs, which integrate data, voice and power on standard Ethernet cables.

         PowerDsine's products are based on its proprietary core technology for
advanced high performance Digital Signal Processor (DSP)-controlled switching
power supplies. Power over LAN is the first system on the market to supply
reliable, uninterrupted power to Internet Protocol (IP) telephones, wireless LAN
access points, and other devices using existing Local Area Network (LAN) cable
infrastructure.

         PowerDsine's client base includes major communications equipment
manufacturers, such as Nortel Networks, Siemens, Lucent Technologies, Ericsson,
Fujitsu, NEC, Proxim, 3Com, ADC Telecommunications, Gilat Satellite Networks,
Portugal Telecom, Sagem, Avaya and LG Information & Communications. PowerDsine's
solutions are included in the backbone of systems run by more than 100 telecom
equipment providers worldwide and have merited more than 200 industry design
wins.

         During 2000, PowerDsine's sales increased to $12.5 million, from $4.4
million in 1999.

         The Company's investment in PowerDsine at December 31, 1999, was $3
million, and its equity interest was 13.4%. As part of a $22 million private
placement during February 2000, the Company invested $1.8 million by exercising
its pre-emptive rights. As a result of the above, the Company currently has a
10.8% equity interest in PowerDsine. The last round of financing was at a
post-money valuation of $72 million.

         REALM TECHNOLOGIES LTD. ("REALM")

         RealM offers site owner's tools to integrate live interactive video
applications with their existing sites. Applications are then deployed over
RealM's VideoReach(TM) network of servers, maximizing performance and optimizing
bandwidth usage.

         In June 2000, the Company invested $1.25 million in RealM for a 13%
equity interest. Ophirtech, the Company's 42.5% affiliate, has invested $.75
million in RealM for a 14.5% equity interest. The Company's net equity interest
in RealM at December 31, 2000, was 19.2%.

         SHELLCASE LTD. ("SHELLCASE")

         ShellCase has developed a proprietary, patented chip size packaging
(CSP) technology for silicon devices using a wafer-level process. Hand-held
electronics, wireless communication products, ID technologies, digital imaging
and light detection applications in consumer goods, smart cards and medical
disposables are just part of the growing list of applications that benefit from
the unique properties of ShellCase's technology.

         ShellCase is publicly traded on the Canadian Venture Exchange. The
Company's investment of $2.4 million in ShellCase represented a 17.6% equity
interest at December 31, 2000.

         SHIRON SATELLITE COMMUNICATIONS (1996) LTD. ("SHIRON")

         Shiron is engaged in the development, manufacturing and marketing of
InterSKY(TM), the company's state-of-the-art satellite communications product.
Shiron is the leader in providing easily deployable two-way, "always-on"
broadband satellite communications to corporate businesses, Internet Service
Providers (ISP) and Small Office/Home Office (SOHO) in places where broadband
infrastructure is insufficient or does not currently exist. Unlike traditional
satellite solutions, which provide only a one-way connection, InterSKY(TM)
provides a broadband connection for both inbound and outbound signals. The
company's systems are intended to meet the communication needs of developing
countries, as well as the demands of technologically developed countries, for
advanced high-speed two-way transmission.


                                       14
<PAGE>   16

         In January 2001, Shiron was chosen to participate in European Union
research projects to construct a new generation of smart satellites and to
develop satellite communications applications for the distant management of
construction projects.

         Shiron's sales increased from $2.4 million in 1999 to $4.8 million in
2000.

         The Company invested an additional $.6 million in Shiron in April 2000
as part of a $6.5 million private placement. At December 31, 2000, the Company's
investment in Shiron was $1.8 million, representing an equity interest of 9%.

         SMARTLIGHT LTD. ("SMARTLIGHT")

         SmartLight is a manufacturer and marketer of computerized x-ray
viewers. SmartLight's viewers provide physicians and technicians with images,
which are up to 50% richer in detail.

         The Company invested $3 million in SmartLight. In December 2000,
SmartLight requested the Tel Aviv District Court to appoint a receiver for it in
order to realize the rights in its intellectual and physical property. The
Company wrote-off its investment in SmartLight in 2000 and recorded a net loss
of $2 million, after taxes.

         SMART LINK LTD. ("SMART LINK")

         Smart Link is a leading developer and supplier of software-based
communications products that provide Internet access and broadband voice/data
communications to the residential and small office/home office markets. Its
proprietary technology enables customers to replace traditional hardware-based
communications products with high-quality, user-friendly software-based
solutions that are smaller and less costly. Products include software and chips
that are easily integrated into personal computers and information appliances.
Its products take advantage of the excess computer power of advanced
microprocessors to perform required communications tasks.

         Smart Link's DSLsnapp(TM) is an enhanced solution for Voice-over-DSL
(VoDSL) communication that employs plug-and-play, hardware adapters and
downloadable, PC-based software to provide simultaneous Internet access and
voice calls on existing home/office telephone wiring. Smart Link has signed
partnerships with several leading providers of VoDSL equipment.

         Smart Link increased its sales from $11.6 million in 1999 to $18
million in 2000. It completed a $14 million private placement in 2000.

         Trinet, a 50%-owned affiliate, has invested $1.5 million in Smart Link
and had an equity interest of 28.6% at December 31, 2000. When combined with the
Company's direct investment of $150,000 (0.6% equity interest), the Company's
net equity interest in Smart Link at December 31, 2000, was 14.9%.

         STAR MANAGEMENT OF INVESTMENTS NO. II (2000) L.P. ("STAR")

         In September 2000, the Company invested $1.25 million in Star, a
venture capital fund which focuses on investments in communications, Internet,
software and medical devices, for a 10% equity interest.

         TRINET VENTURE CAPITAL LTD. ("TRINET")

         The Company and Poalim Investments established Trinet, a venture
capital fund for investments in high-technology ventures in Israel, including
start-up entities. Trinet invested in several high-technology companies,
including Netformx, Smart Link (as aforementioned), and Peptor Ltd.

         In 2000, Trinet recorded a net unrealized gain of $6.7 million, after
taxes, on its investment in Smart Link. A net unrealized loss of $2.7 million,
after taxes, was recorded on its investment in Netformx.


                                       15
<PAGE>   17

         VISIONCARE OPHTHALMIC TECHNOLOGIES LTD. ("VISIONCARE")

         VisionCare develops and markets unique, proprietary ophthalmic
implantable products that give patients better and more natural visual function
with improved quality of life. VisionCare's products meet the growing demand for
innovative devices to treat age-related eye disorders, affecting tens of
millions of people. VisionCare's first product is the patented Implantable
Miniaturized Telescope ("IMT"), a solution for macular degeneration, a disease
that affects 5 million Americans, destroying their central vision. IMT, which
restores central vision without the need for special glasses, is being
introduced to the market in the first quarter of 2000. VisionCare is also
developing new implantable devices for the treatment of tunnel vision and other
ophthalmic diseases. Initial clinical trials have been successful and
VisionCare's production facility has received ISO-9001 certification. In 1999,
VisionCare conducted a private placement based on a valuation of more than $25
million. The Company invested $.7 million in VisionCare and its equity interest
at December 31, 2000, was 9.4%.

         XACCT TECHNOLOGIES LTD. ("XACCT")

         XACCT is a leading provider of business infrastructure software for the
next-generation public network. Customers include telecommunications carriers,
Internet Service Providers, enterprise network operators and cable network
operators, referred to collectively as Network Service Providers (NSP). Using
XACCT's network-to-business (N2B(TM)) platform, NSPs can implement new business
models and offer high-margin, enhanced services. XACCT's N2B platform provides a
single point of interface between the operations and business support systems
and the physical network. NSPs use XACCT's platforms to run mission-critical
business applications that require comprehensive real-time data collection, data
aggregation and automated user account provisioning. As of December 31, 2000,
XACCT had licensed its business software to over 40 network service providers.
XACCT's customers include Bell Nexxia, Broadwing, Cable & Wireless, COLT
Telecom, Genuity, Global One, GTE Internetworking, Mannesman Ipulsys, MCI
Worldcom, Siemens, TV Cabo and Verio. In addition, XACCT has developed strategic
alliances or collaborative relationships with a group of over 100 system
integrators, value-added resellers, networking infrastructure vendors and
software applications vendors.

         XACCT is acknowledged as a world leader in this industry. XACCT has
earned the following honors:

         -   Twice named the "Most Innovative Billing Product", Billing System
             2000 and Billing System 1999 (April of 1999 and April of 2000).
         -   Named "Product of the Year" in the billing category by Internet
             Telephony(R) magazine's Annual Products of the Year Awards (1999).
         -   Three awards in the 1999-2000 DC Chapter of the Society for
             Technical Communication competition.
         -   "Hot Products of 1999" by Data Communications magazine (January 4,
             1999).
         -   "Top 25 Hot Startups of 1998" by Data Communications magazine
             (December 7, 1998).

         At December 31, 1999, the Company's investment in XACCT was $7.3
million. In March 2000, Sun Microsystems, Inc. and several other investors
invested a total of $15.5 million in XACCT. In April 2000, the Company exercised
approximately $.3 million in XACCT warrants. As of December 31, 2000, the
Company has invested $7.6 million in XACCT with an equity interest of 16.2%.

         In February 2001, the Company made an additional investment of $5
million in XACCT as part of a $26.6 million round of financing based on a $300
million post-money valuation.

         On March 28, 2000, XACCT filed its S-1 with the Securities and Exchange
Commission. On January 29, 2001, XACCT withdrew its S-1 filing due to adverse
market conditions for initial public offerings.

         XACCT's revenues increased from $1.2 million in 1999 to $10 million in
2000.


                                       16
<PAGE>   18

         XPERT INTEGRATED SYSTEMS LTD. ("XPERT")

         Xpert is a leader in architectural design and implementation for
IP-based service providers. Xpert completed a $15 million private placement in
December 2000, based on a $55 million post-money valuation.

         The Company invested $2.75 million in Xpert in 2000, and its equity
interest at December 31, 2000, was 16.6%

         ZACTUS, INC. ("ZACTUS")

         In 2000, the Company invested $.5 million in Zactus, a web site for
musicians, for a 5.6% equity interest. Ophir invested $1.3 million for a 14.9%
equity interest. At December 31, 2000, the Company's net equity interest in
Zactus was 11.9%.

         Zactus, Inc. is the creator of the Zactus Guidance Platform (ZGP), a
proprietary web-based application platform that allows users to self-manage
their way through any process or project over any period of time. Zactus.com is
the first site to incorporate the technology of the Zactus Guidance Platform,
and is a tool that allows independent musicians to manage and chart the progress
of their career on the web.

         In the fourth quarter of 2000, the Company and Ophir wrote-off their
investments in Zactus and recorded a net loss, of $.3 million and $.8 million,
respectively, after taxes. The Company's consolidated net loss on the Zactus
write-offs was $.6 million, after taxes.


REAL ESTATE

         In Israel, most land is owned by the Israeli government. In this
Report, reference to ownership of land means either direct ownership of land or
a long-term lease from the Israeli Government, which is in most respects
regarded in Israel as the functional equivalent of ownership. It is the Israeli
government's policy to renew its long-term leases (which usually have a term of
49 years) upon their expiration.

         AMPAL DEVELOPMENT (ISRAEL) LTD. ("AMPAL DEVELOPMENT"), NIR LTD. ("NIR")
         AND AMPAL FINANCIAL SERVICES LTD. ("AMPAL FINANCIAL") (TOGETHER, THE
         "HOLDING COMPANIES")

         Ampal Development, Nir and Ampal Financial, each of which is
wholly-owned by the Company, are engaged in the business of financing
acquisitions by the Company and, until July 1999, holding and leasing commercial
real estate in Israel. Prior to 1989, these companies had acted primarily as
lenders, and their financing activities were the principal activities of the
Company. In 1990, the Holding Companies sold substantially all their loan
portfolios to Bank Hapoalim B.M. ("Hapoalim"), and they relinquished their
banking licenses.

         It has been reported in the media that Israeli banks are the subject
of allegations that they engaged in improper business practices regarding
lending. The lending practices engaged in by the Holding Companies were
substantially similar to the lending practices of the other Israeli banks. A
claim in the amount of 3.6 million New Israeli Shekels ("NIS" or "shekels")
(approximately $865,000) has already been filed with the District Court in Tel
Aviv. However, to the best of the Company's knowledge, the Company's
subsidiaries, which operated as banking institutions, acted within the law and
in accordance with the procedures and customs in effect at the time. On
November 19, 1998, the District Court of Tel Aviv ruled that the statute of
limitations applies to the majority of the plaintiff's claim, and thereby
rejected same. The plaintiff filed an appeal with the High Court of Appeals,
and withdrew the remainder of its claim until the Appellate Court ruling. The
Company expects to continue to vigorously defend the claim. The Company
believes that its exposure to additional such claims is minimal due to the fact
that its banking activity is subject to the statute of limitations, and the
fact that the courts in Israel, as in the case of the claim against the Company
described above, do not support claims concerning events that happened more
than seven years ago.

         On July 6, 1999, the Company completed a transaction with Hapoalim and
two wholly-owned subsidiaries of Hapoalim. As a result of the above transaction,
the Company recorded a gain of $9.2 million ($6 million net of


                                       17
<PAGE>   19

taxes) on the sale of real estate properties in the December 31, 1999,
consolidated financial statements. A description of this transaction can be
found in the Company's Form 10K for 1999.

         At December 31, 2000, Ampal Development owned a 2,000 square foot
property in Tel Aviv and received rental income of approximately $.1 million in
2000. Nir owns four commercial properties located in Israel aggregating
approximately 18,000 square feet for which it received approximately $.6 million
in rent in 2000.

         Ampal Development issued debentures which are publicly traded on the
TASE. An aggregate of approximately $9.8 million of these debentures were
outstanding as of December 31, 2000. Ampal Development has deposited with
Hapoalim funds sufficient to pay all principal and interest on these debentures.

         AM-HAL LTD. ("AM-HAL")

         Am-Hal is a wholly-owned subsidiary of the Company. On December 31,
1999, the Company invested $6 million to purchase a 50% equity interest in
Am-Hal from the Israel Corporation and currently owns 100% of Am-Hal.

         Am-Hal develops and operates luxury retirement centers for senior
citizens.

         In March 1992, the first center was opened in Rishon LeZion, a city
located approximately 10 miles south of Tel-Aviv. This center, of about 120,000
square feet, includes 145 self-contained apartments (of which 123 were occupied
on December 31, 2000), an 80-bed nursing care ward, a 24-bed assisted-living
ward (which had 100% occupancy on December 31, 2000), a swimming pool, a health
care center and other recreational facilities. The nursing care ward is leased
to a non-affiliated health care provider until 2002. Rental payments are based
upon the profits of the nursing care ward, with a minimum rent of $350,000 per
year.

         The aggregate cost of the center in Rishon LeZion was approximately $21
million and was financed principally by loans made or guaranteed by the
shareholders and refundable tenants' deposits. All of the loans have been
repaid.

         Due to the success of this project and the increased demand for such
services, Am-Hal has entered into a joint venture agreement with, amongst
others, the owner of a property consisting of 2.5 acres of land in Hod Hasharon,
a city located approximately 7 miles north of Tel Aviv, for its second center.
This center, which is approximately 250,000 square feet, was opened in June
2000, and includes 244 self-contained apartments, a 34-bed nursing care ward and
a 24-bed assisted-living ward. As of December 31, 2000, 135 of the apartments
had been sold and the nursing care ward had a 30% occupancy. The total cost of
the project was approximately $42 million financed principally by bank loans and
refundable deposits from tenants.

         AMPAL (ISRAEL) LTD. ("AMPAL (ISRAEL)")

         Ampal (Israel), a wholly-owned subsidiary of Ampal, owns an
approximately 57,000 square foot commercial property located in Tel Aviv which
houses its principal offices. Total rental income was $.1 million. In November
2000, Ampal Israel entered into new lease agreements totaling $.3 million a
year. Ampal (Israel) also acts as a holding company for other investments
discussed elsewhere in this report.

         AMPAL REALTY CORPORATION ("AMPAL REALTY")

         Ampal Realty owns two condominium units totaling approximately 163,000
square feet in a 290,000 square foot office building located at 800 Second
Avenue, New York, New York. The building is 43.8%-occupied by the Consulate of
the Government of Israel in New York and many other Israeli government offices.

         At December 31, 2000, Ampal Realty had a $15 million note payable to
Hapoalim, with an interest rate of LIBOR plus .75%, which matures in March,
2001.

         During 2000, Ampal Realty recorded rental income of $5.1 million and
invested $.9 million for capital improvements. Currently, 99% of the space owned
by Ampal Realty in the building is occupied.


                                       18
<PAGE>   20
         On March 28, 2001, the Company sold its interest in the building for
$33 million and recorded a pretax gain of approximately $8 million.

         BAY HEART LIMITED ("BAY HEART")

         Bay Heart was established in 1987 to develop and lease a shopping mall
(the "Mall") in the Haifa Bay area. Haifa is the third largest city in Israel.
The Mall, which opened in May 1991, is a modern three-story facility with
approximately 280,000 square feet of rentable space. The Mall is located at the
intersection of two major roads and provides a large mix of retail and
entertainment facilities including seven movie theaters. Approximately 37,500
square feet of the Mall are occupied by Supersol Ltd., one of the two largest
Israeli supermarket chains, and the parent of a co-investor in Bay Heart. Shekem
Department Stores, a major Israeli department store, is the other anchor tenant
under a net lease for approximately 29,000 square feet of retail and
approximately 9,000 square feet of storage and other space expiring in 2011. As
of December 31, 2000, approximately 82% of the Mall was occupied. The total cost
of the Mall was approximately $53 million, which was financed principally with
debt. The Company owns 37% of Bay Heart.

         Three construction projects are in various stages of completion as
follows:

         1.       A train station is under construction on the west side of the
                  Mall and completion is expected in May 2001. The total cost of
                  this project will be approximately $1.5 million.

         2.       A transportation complex, in conjunction with a subsidiary of
                  Egged Bus Company, is under construction on the south side of
                  the Mall and completion is expected in July 2001 at a cost of
                  approximately $.6 million.

         3.       A new gas station was completed and became operational in
                  October 2000, providing annual rental income of $.1 million.

         All of these projects are expected to increase mall attendance.

         ETZ VANIR LTD. ("ETZ VANIR") AND YAKHIN MATAIM LTD. ("YAKHIN MATAIM")

         Both Etz Vanir and Yakhin Mataim cultivate orange, grapefruit,
clementine, lemon and avocado groves in Israel, both for export and domestic
use, pursuant to various long-term land leases which, including renewal options,
do not expire until the mid-21st century. These properties are located near the
city of Netanya between an existing and a proposed highway. Approximately 1,200
acres are presently under cultivation by these two companies.

         Ampal owns 50% of the equity of Etz Vanir and Yakhin Mataim. The
remaining 50% of the equity of these companies is owned by an unrelated company,
Yakhin Hakal Ltd. ("Yakhin Hakal") which manages their operations. Because of a
dispute between Ampal and Yakhin Hakal regarding the operating agreement for the
companies, Ampal had requested that an Israeli court declare the agreement null
and void, and, in its response, Yakhin Hakal had stated that the companies owed
it approximately $4 million for services it had rendered to the companies. The
court ruled that Ampal and Yakhin Hakal should jointly appoint an additional
director of these companies, who will cast the deciding vote in cases of
dispute. Yakhin Hakal filed an appeal and requested a stay concerning the
implementation of the court's ruling. The appeal was denied by the Israeli
Supreme Court. The parties subsequently agreed to the appointment of the
Honorable Dov Levine, a retired judge, as the additional director with the
deciding vote. In addition, both Ampal and Yakhin Hakal have appointed
independent accountants who will jointly prepare Etz Vanir's and Yakhin Mataim's
financial statements. Etz Vanir's and Yakhin Mataim's financial results have not
been included in the Company's financial statements.

         In February 1995, Yakhin Hakal and its affiliates commenced a legal
proceeding seeking to cause Etz Vanir and Yakhin Mataim to redeem perpetual
debentures owned by Ampal and to require Ampal to surrender all of its preferred
shares of Etz Vanir and Yakhin Mataim for their par value, which is nominal.


                                       19
<PAGE>   21

         On July 27, 1998, a Tel Aviv District Court judge ruled in favor of
Yakhin Hakal, the manager and co-owner of Ampal's 50%-owned affiliates Etz Vanir
and Yakhin Mataim. The judge's decision allows Etz Vanir and Yakhin Mataim to
redeem debentures owned by Ampal for approximately $.8 million and to require
Ampal to surrender all of its preferred shares of Etz Vanir and Yakhin Mataim
for their par value. After the redemption and surrender, Ampal will no longer
have any interest in Etz Vanir or Yakhin Mataim.

         At the request of Ampal's attorneys, the Tel Aviv District Court has
issued a stay of performance of the judgment until the High Court of Appeals
issues a final judgment. On October 15, 1998, Ampal filed an appeal with the
High Court of Appeals in Jerusalem. At this point, the Company can not estimate
when a final ruling will be issued. See "Legal Proceedings."

         INDUSTRIAL BUILDINGS CORPORATION LTD. ("INDUSTRIAL BUILDINGS")

         Industrial Buildings, Israel's largest owner/lessor of industrial
property, is engaged principally in the development and construction of
buildings in Israel for industrial and commercial use and in project management.
Industrial Buildings carries out infrastructure development projects for
industrial and residential purposes, principally for a number of government
agencies and authorities. Industrial Buildings hires and coordinates the work of
contractors, planners and suppliers of various engineering services.

         Industrial Buildings owns approximately 13.6 million square feet of
space in industrial buildings throughout Israel. It owns both multi-purpose
buildings and built-to-suit buildings which are constructed in accordance with
the specific requirements of tenants. In certain cases, there is an option in
the tenant's favor to purchase the leased property, and, in the case of most
built-to-suit properties, a commitment on the part of the tenant to purchase the
property.

         The buildings which are owned by Industrial Buildings are leased to
approximately 2,355 lessees under net leases having terms of up to ten years.
The occupancy rate in buildings owned or leased by Industrial Buildings was
approximately 86% at December 31, 2000.

         Industrial Buildings is engaged in the construction of "Tel Aviv
Towers", a project in the Tel Aviv area comprising approximately 448 apartments,
a commercial center of approximately 43,000 square feet, an office building of
approximately 156,000 square feet and underground parking facilities of
approximately 883,000 square feet. During 2000, the Company started to record
profits from the sale of apartments in one of the towers.

         Approximately 5% of Industrial Buildings' space is located in the
administered territories. Industrial Buildings cannot predict whether the
current dispute between the State of Israel and the Palestinians will have any
effect on these properties.

         Since 1993, Industrial Buildings' policy has been to distribute as a
dividend not less than 60% of each year's earnings. In December 2000, Industrial
Buildings distributed a dividend of approximately $12 million.

         Ophir's interest in Industrial Buildings is subject to foreclosure in
the event of a default by any of the investors under the bank credit agreements
entered into in connection with the original acquisition of Industrial Buildings
from the Government of Israel in 1993. Any amounts distributed as a dividend by
Industrial Buildings are required to be applied first to pay then-due
borrowings.

         Industrial Buildings had a staff of 57 permanent employees as of
December 31, 2000.

         Ophir's interest in Industrial Buildings, as of December 31, 2000, was
12.2%.

         OPHIR HOLDINGS LTD. ("OPHIR")

         Ophir is a holding company that owns interests in high-technology (as
described in the high-technology segment) and real estate companies. Ophir is
42.5%-owned by the Company. The Company and Poalim


                                       20
<PAGE>   22

Investments, which also owns 42.5% of Ophir, are parties to a shareholders'
agreement regarding joint voting, directorships and rights of first refusal with
respect to Ophir.

         Ophir owns six real estate properties located in Israel, aggregating
approximately 85,000 square feet.

         Ophir owns two acres of land in an industrial park in Netanya, Israel
together with an unrelated party. These parties entered into a joint venture
agreement regarding this site on which they developed a 326,000 square foot
building (including parking) for both industrial and commercial use. The cost of
development of this project was $21 million. Ophir's share of the property and
joint venture is 70%. Through December 31, 2000, Ophir invested $14.6 million in
the development of the building. A majority of the building (80% of main area)
is leased.

         Ophir owns a 22.2% interest in the Shmey-Bar group of companies
("Shmey-Bar"). Shmey-Bar acquired 2.3 million square feet of real estate
properties from Hamashbir Hamerkazi, Ltd. ("Hamashbir Hamerkazi") for $27.7
million. In the same transaction, Shmey-Bar received an option to acquire, for
$26.3 million, an additional 700,000 square feet of real estate properties from
Hamashbir Hamerkazi. These properties are situated in various locations in
Israel. Ophir's interest in Shmey-Bar was acquired with a nominal investment
accompanied by a $2.6 million shareholder's loan. In August 1999, Ophir acquired
an additional 5.5% interest in Shmey-Bar group, by exercising its right to buy
its proportional share per the Shmey-Bar group shareholder proposal, for a total
consideration of $2.6 million, which consists of an investment and a
shareholder's loan.

         In June 1999, Ophir entered into an agreement with Lysh The Coastal
High-way Ltd. ("Lysh"). Lysh has a 50% holding in Beit Herut-Lysh Development
Company Ltd. ("BHL"), which is building a 180,000 square foot commercial project
for rental near Moshav Beit Herut on land owned by the Israeli Land Authority.
The estimated construction costs for the commercial project are approximately
$20.6 million and the value of the land is estimated at approximately $9
million. Ophir's share in Lysh is approximately 25% (its share in the project
being approximately 12.5%). As of December 31, 2000, Ophir had invested
approximately $1.2 million in Lysh.

         Ophir has also undertaken to provide guarantees in an amount equivalent
to 25% of the construction costs. As of December 31, 2000, BHL had taken bank
loans for approximately $14.9 million, drawn on a credit line extended by the
bank in connection with the project.

         In September 1995, Ophir acquired a 10% interest in a joint venture
which has agreed to purchase 4.4 million square feet of land near Haifa for
approximately $15 million, on which the parties intend to develop a commercial
real estate project for rent. Ophir has obligated itself to invest up to $1.5
million in the first stage of this project and its share of development costs is
estimated to be as much as $30 million.

         In 2000, Ophir paid $7.4 million in dividends.

ENERGY DISTRIBUTION AND INDUSTRY

         CARMEL CONTAINER SYSTEMS LIMITED ("CARMEL")

         Carmel is one of the leading Israeli designers and manufacturers of
paper-based packaging and related products. Carmel manufactures a varied line of
products, including corrugated shipping containers, moisture-resistant
packaging, consumer packaging, triple-wall packaging and wooden pallets and
boxes.

         Carmel estimates that it manufactures approximately 12% of the folding
board, approximately 70% of the corrugated triple wall, and approximately 35% of
the corrugated board packaging in Israel. Carmel's products are marketed to a
wide variety of customers for diverse uses, but its principal market is
packaging for agricultural products and for the food and beverage industry.
During the last few years, sales of packaging products to exporters of
agricultural products have declined slightly, but have been partially offset by
an increase in domestic sales. The political situation also had a negative
effect on Carmel's business as well as increasing competition from low-cost
importers of packaging products.

         From 1996 through 1999, Carmel invested approximately $39 million for
machinery and infrastructure in its new plant, a leased property, in Caesarea, a
modern state-of-the-art manufacturing plant. By the end of 1997,


                                       21
<PAGE>   23

two of Carmel's plants were relocated to the new leased property in Caesarea. As
of December 31, 2000, Carmel employed 685 persons.

         As of December 31, 2000, the Company owned 21.7% of the shares of
Carmel. Shares of Carmel are listed for trading on the AMEX under the symbol
"KML." The Company, American Israel Paper Mills Ltd., the largest paper producer
in Israel, and Robert Kraft, a United States investor, are parties to a
shareholders' agreement with respect to their shareholdings (which aggregate
approximately 83.5% of the shares) in Carmel. The agreement includes provisions
governing board representation, required votes for specified corporate actions,
matters on which the shareholders agree to cooperate and rights of first refusal
with respect to the sale or transfer of the shares owned by the parties. Carmel
has granted to International Forest Products Corporation, an affiliate of Mr.
Kraft, a right to supply up to 80% of Carmel's requirements for imported paper
and forest products in the ordinary course of Carmel's business, on a
competitive basis.

         GRANITE HACARMEL INVESTMENTS LTD. ("GRANITE")

         Granite owns the Sonol group of companies, one of the three largest
Israeli distributors of refined petroleum products. Supergas, a wholly-owned
subsidiary of Granite, is the third largest marketer and distributor, in Israel,
of liquefied petroleum gas. Through its subsidiaries, Granite also manufactures
and markets lubricating oils and automotive batteries.

         During 2000, Sonol had a net increase of 7 public gas stations to its
network. As of December 31, 2000, Sonol supplied petroleum products to 191
public gas stations in Israel, of which 140 are owned by or leased to Sonol.
Sonol sold approximately 2.0 million metric tons of refined petroleum products
and lubricating oils in 2000.

         The Company received dividends from Granite of approximately $3.1
million on January 4, 2000.

         The Company's ownership of Granite, as of December 31, 2000, was 20.2%.
Two of the Company's representatives are members of the board of directors of
Granite and one representative is a member of the executive committee of the
board of Granite.

         On December 27, 1999, Granite announced a reorganization as follows:
Granite's subsidiary Sonol will be split into two companies, Sonol Israel, which
will function as the company's petroleum products distribution unit, and Sonol
Trading, which will focus on business and real estate development. Both Sonol
Israel and Sonol Trading are 100%-owned subsidiaries of Granite. As part of the
reorganization, Sonol Israel will transfer to Sonol Trading, assets and rights,
as well as a portion of Sonol Israel's liabilities, to reflect the book value of
the transferred assets. Additionally, Sonol Israel's share in Supergas (50%)
will be transferred to the parent company, and non-operating real estate assets
will be transferred to Granite HaCarmel Holdings (1993) Ltd., a 100%-owned
subsidiary, at book value. The aforementioned transactions are subject to the
approval of the Israeli regulatory authorities.

         In connection with this reorganization, Granite and Ampal are exploring
the feasibility of merging real estate assets and business into a separate joint
company. This process is in the preliminary stages and is subject to the
approval of the Boards of Directors of each of the companies and also to the
approval of the Israeli regulatory authorities.

         As part of the Ministry of National Infrastructure's policy to separate
the holding of Emergency Inventories of crude oil and product inventories from
the oil marketing companies' commercial inventories, the Fuel Authority had
ordered that Emergency Inventories of fuel products were to be stored in
separate tanks at specifically designated locations. The separation of
inventories has been postponed. Under consideration within the framework of the
Law for Arrangements in the Economy is a change proposed by the government
regarding the holding of inventories of fuel products, which would be held at
the account of the fuel companies. Until the law is passed and regulations and
rulings are formulated, it is difficult to determine its potential financial
impact on Granite.

         A claim filed by the oil marketing companies, Sonol, Paz and Delek
against the Government of Israel, the Minister of Finance, and the Department of
Customs and Value Added Tax, claimed the illegality of an excise tax order that
serves as the basis for excise tax charged the said companies' fuel sales.
Pursuant to mutual agreement between the parties, the claim for declarative
relief, which was filed with the District Court of Tel Aviv, was


                                       22
<PAGE>   24

withdrawn.

         Subsequent to the above withdrawal, a class action previously filed
against the oil marketing companies in the amount of NIS. 1 billion
(approximately $250 million), demanding the refund to consumers of illegally
charged excise taxes, was also withdrawn.

         In accordance with a government decision, the excise tax rate
applicable to gasoil used for transportation will be increased significantly.
This increase will cause a large price differential between the price of gasoil
used for transportation and that used for other purposes. As a result it has
been proposed, within the framework of a proposed law for Arrangements in the
Government Economy (1999), to amend the excise tax law pertaining to fuel
products in such a manner that will require the marking of gasoil not used for
transportation, and to provide the Director of Customs with enforcement powers
to inspect the purported uses of gasoil and to take punitive measures against
the illegal use of gasoil for purposes other than stipulated by law.
Concurrently with the government's above-mentioned decision, Knesset member, A.
Poraz, submitted a private bill intended to ensure that all fuel product excise
taxes will be imposed at equal rates for all types of the same products, thus
preventing the proposed tax differentials on gasoil. The proposed private bill
passed preliminary reading in the Knesset.

         If the proposed law is enacted as stated in the Law for Arrangements,
and Knesset member Poraz's private bill is not enacted, it can be assumed that
the enforcement means and punitive measures proposed will not suffice to prevent
potential users from violating the law by using gasoil, meant for industrial or
heating purposes, for transportation purposes, thus making the Company's
operations more difficult. Regardless, an increase in the rate of excise tax
will cause a significant increase in the level of customer credit.

         A claim was filed against Sonol, Paz Oil Company Ltd. and Delek Oil
Company Ltd. during February 2000, in the amount of NIS. 400,000 (approximately
$.1 million) relating to alleged collusion in the fixing of the price of gasoil
to consumers. This claim if recognized, as requested by the claimant as a class
action, is stated to amount to approximately NIS. 175 million (approximately $44
million) against all of the companies. Sonol denies the claim and, according to
its legal counsel, chances are good that the claim will not be recognized as a
class action.

         Three claims were lodged against Granite's formerly affiliated company
and its past and present shareholders, which included Sonol. The total amount of
the claims is approximately NIS. 60.2 million ($15 million). The plaintiff's
allegations concern the sale of fuel products pursuant to restrictive trade
practices among the fuel companies and their affiliates. In the opinion of the
legal counsels of Sonol and the formerly affiliated company, the companies have
a sound defense against the claims.

         Sonol has filed a claim against one of its agencies for approximately
NIS. 37 million (approximately $9 million) in the Tel Aviv District Court, on
account of an unpaid debt and damages caused to Sonol, alleging that the agency
violated the terms of the agency agreement by dealing with one of Sonol's
competitors. The agency, in turn, filed a counterclaim in the amount of
approximately NIS. 57 million (approximately $14 million), stating various
causes, including a claim that the contractual agreement between it and Sonol is
a restrictive agreement.

         In the opinion of Sonol's management, based on opinion of Sonol's legal
counsel, the prospects of Sonol's claim against the agency relating to amounts
owed to Sonol are good and, regarding the amount claimed for damages on account
of the violation of the agency agreement, such amount is subject to deliberation
by the court. Regarding the prospects of the agency's counterclaim, Sonol's
legal counsel are unable, at this time, to estimate its prospects, insofar as it
relates to the claim of a restrictive agreement. Should the claim of a
restrictive agreement be rejected by the court, the prospects of the
counterclaim will not be favorable. Currently, the dispute has been referred to
arbitration.

         At this time, it is too early to estimate the effects of the said
developments on the overall Israeli fuel market in general, and on Granite in
particular.


                                       23
<PAGE>   25

LEISURE-TIME

         CORAL WORLD INTERNATIONAL LIMITED ("CORAL WORLD")

         Coral World, which is 50%-owned by the Company, owns and controls three
marine parks: in Eilat (Israel), Perth (Australia) and Maui (Hawaii).

         Coral World's marine park, located in Eilat, is next to the coral reefs
and visitors at this park view marine life in its natural coral habitat through
a unique underwater observatory. Coral World's marine parks in Perth and Maui
allow visitors to walk through a transparent acrylic tube on the bottom of a
man-made aquarium surrounded by marine life. In addition to admission charges,
Coral World's food and beverage facilities and retail outlets are a significant
revenue source.

         Coral World's parks hosted approximately 1.1 million visitors during
2000. Coral World employed approximately 260 persons as of December 31, 2000.

         Coral World has invested in a new multimedia attraction for its
facility in Eilat. The attraction "Amazing World" was opened to the public in
the third quarter of 2000 and hosted 65,000 visitors. The attraction is a joint
venture of Clal Tourism, Red Sea Underwater Observatory and Yardeni Holdings.
Coral World is capitalizing on its expertise in operating marine parks and
multimedia attractions to evaluate several projects in Italy.

         Coral World is in litigation with respect to insurance coverage for a
U.S. $1.2 million claim relating to hurricane damages in St. Thomas in 1995. The
outcome of this dispute has not been determined.

         COUNTRY CLUB KFAR SABA LIMITED ("KFAR SABA")

         Kfar Saba operates a country club facility (the "Club") in Kfar Saba, a
town north of Tel Aviv. Kfar Saba holds a long-term lease to the real property
on which the Club is situated. The Club's facilities include swimming pools,
tennis courts and a clubhouse. The Club currently is seeking to obtain building
permits for an additional 30,000 square feet of commercial development on the
Club grounds.


         The Club, which has a capacity of 2,000 member families, had
approximately 1,890 member families for the 2000 season. The construction cost
of the Club was $5.2 million, which was financed principally with debt. Kfar
Saba's revenues are principally attributable to annual memberships. The Company
owns 51% of Kfar Saba.

         HOD HASHARON SPORT CENTER (1992) LIMITED PARTNERSHIP ("HOD HASHARON")

         On December 31, 1995, the Company purchased from Kfar Saba its 50%
interest in Hod Hasharon for $1.4 million. Hod Hasharon operates a similar
country club facility (the "H.H. Club") in Hod Hasharon, a town adjacent to Kfar
Saba. The H.H. Club, which has a capacity of 1,600 member families, has operated
at capacity for the past three years. The H.H. Club, which opened in July 1994,
was constructed at a cost of $4.8 million, of which $2.1 million was borrowed
from banks.

         In 2000, the H.H. Club distributed a cash dividend of $.1 million to
each of the partners and also repaid owner's loans of $1.5 million to each of
the partners. The H.H. Club is expected to continue repaying owner's loans in
2001.

CAPITAL MARKETS AND OTHER HOLDINGS

         AMPAL INDUSTRIES (ISRAEL) LTD. ("AMPAL INDUSTRIES")

         Ampal Industries, a wholly-owned subsidiary of Ampal, holds interests
in various investee companies described in the high-technology section in this
report. Ampal Industries also has a portfolio of marketable securities which was
valued at approximately $55.6 million at December 31, 2000, which includes
investments valued at approximately $19 million in Blue Square and $11 million
in Leumi.


                                       24
<PAGE>   26

         In addition, Ampal Industries owns 50% of a commercial building located
in Migdal Ha'emek. In 2000, it received approximately $.1 million in rental
income for this property.

         BANK LEUMI LE'ISRAEL B.M. ("LEUMI")

         In 2000, the Company sold 7,714,255 shares of Leumi for a net gain of
$.6 million, after taxes, and also recorded a net unrealized gain of $.5
million, after taxes. The Company owned 4,756,426 shares of Leumi at December
31, 2000 with a market valuation of $11 million.

         BLUE SQUARE ISRAEL LTD. ("BLUE SQUARE")

         In June 1999, the Company invested $24 million to purchase 1,500,000
shares of Blue Square, representing 3.9% of the Blue Square, at $16 per share.
Blue Square is the second largest supermarket chain in Israel, owning 168
supermarkets. Blue Square owns 80% of Blue Square Properties, a publicly traded
company on the Tel Aviv Stock Exchange, with which Blue Square expects to
merge. In March 2000, Blue Square sold its 38% interest in the Home Centers
chain of specialty retail stores.

         Over the last several years Blue Square has demonstrated a sound
financial structure and annual growth in sales.

         At December 31, 2000, the investment in Blue Square had a market value
of $19 million, and net unrealized loss of $3.3 million, after taxes, was
recorded in accumulated other comprehensive loss on the balance sheet.

         EPSILON INVESTMENT HOUSE LTD. ("EPSILON") AND RENAISSANCE INVESTMENT
         COMPANY LTD. ("RENAISSANCE")

         The Company has invested $1.5 million for 20% of Epsilon and its
affiliate, Renaissance. Epsilon is an investment bank which provides portfolio
management services and Renaissance provides underwriting services in Israel
through its subsidiaries. During 2000, the Company received a dividend of $.4
million from Epsilon.

         RENAISSANCE ISRAEL

         In July 1994, the Company agreed to invest $3 million for 15% of
Renaissance Israel, a fund that invests in Israel-related companies generally on
the same terms and conditions as the Renaissance Fund LDC (the "Renaissance
Fund"). The Renaissance Fund was formed in 1994 to invest primarily in emerging
markets, basic industry and government privatizations in Israel and elsewhere in
the Middle East. The Company had invested an aggregate of $2.9 million in
Renaissance Israel, as of December 31, 2000.

         The only active investment made by the Company through the Renaissance
fund which is still on the Company's books is a $.4 million investment in
Clalcom.


                                       25
<PAGE>   27

EMPLOYEES

         As of December 31, 2000, Ampal had 6 employees and Ampal Industries
(Israel) Ltd. had 16 employees. Relations between Ampal and its employees are
satisfactory.

                              CONDITIONS IN ISRAEL

         Most of the companies in which Ampal directly or indirectly invests
conduct their principal operations in Israel and are directly affected by the
economic, political, military, social and demographic conditions there. A state
of hostility has existed, varying as to degree and intensity, between Israel and
the Arab countries and the Palestine Liberation Organization (the "PLO"). Israel
signed a peace agreement with Egypt in 1979 and with Jordan in 1994. Since 1993,
several agreements have been signed between Israel and Palestinian
representatives regarding conditions in the West Bank and Gaza. While
negotiations have taken place between Israel, its Arab neighbors and the PLO to
end the state of hostility in the region, it is not possible to predict the
outcome of these negotiations and their eventual effect on Ampal and its
investee companies. During the last several months the state of hostility has
increased in intensity. It is possible that the situation may deteriorate
further and may impact the value of Ampal and it's investee companies.

         All male adult citizens and permanent residents of Israel under the age
of 48 are obligated, unless exempt, to perform military reserve duty annually.
Additionally, all these individuals are subject to being called to active duty
at any time under emergency circumstances. Many of the officers and employees of
Ampal's investee companies are currently obligated to perform annual reserve
duty. While these companies have operated effectively under these requirements
since they began operations, Ampal cannot assess the full impact of these
requirements on their workforce or business if conditions should change. In
addition, Ampal cannot predict the effect on our business of a state of
emergency in which large numbers of individuals are called up for active duty.


ECONOMIC AND FINANCIAL DEVELOPMENTS

         The first nine months of 2000 were a period of rapid economic growth
that was led by (a) a very large rise in exports but was halted in the fourth
quarter as a result of conditions in the market and the security situation in
Israel; (b) a high and static level of unemployment; (c) the completion of the
disinflation process to a level far below the targeted range of inflation; and
(d) a very small total budget deficit, which was considerably lower than its
targeted level.

         The rapid growth in exports of goods and services recorded during 2000
slowed considerably toward the end of the year, when the political/security
crisis led to a serious drop in tourism concurrent with the crisis on the NASDAQ
and the decline in "new economy" companies that led to a slowdown in industrial
exports. According to initial Israeli Central Bureau of Statistics estimates for
2000, exports of goods and services grew by 22.3% in real terms during 2000,
following an increase of 10% in 1999. Imports rose by 12.2% following a 1999
growth of 14.6%.

         The new trend in the American economy during 2000 that was reflected by
the heavy price slide on the NASDAQ and the problems encountered by many
high-tech companies in the United States are leading to fear of a drop in demand
for high-tech products, which will obviously affect Israel's exports. 35% of
Israel's exports, most of which are high-technology, go to the United States.
Investments in start-up companies are largely financed via the United States'
capital market. Under the Central Bureau of Statistics' method of measurement,
the sale of start-up companies abroad is recorded as the export of services.
Prior to a sale, the product of a company is recorded as a growth in inventory
(investment). The "other services" export item increased by 35% in 2000 due to
the sale of companies. The increase contributed two percentage points to the
5.9% growth rate.

         The unemployment rate averaged 8.8% in 2000. The rapid growth in
business sector Gross Domestic Product mainly derived from the high-technology
industries, especially start-up companies. Since these industries are not
labor-intensive, their contribution was clearly apparent from the growth in
labor productivity. It should be noted that the unemployment rate remained
stable despite an impressive 4.0% increase in the number of employed persons,
due to a similar increase in the civilian labor force. The labor force
participation rate (the proportion of the civilian labor force to the population
of the over-15 age group) rose from 53.8% to 54.9%. Most of the increase in the
number of employed persons was mainly recorded in the commerce and services
sector. The number of employed persons in manufacturing industry rose slightly
and the number of persons employed in construction fell.


                                       26
<PAGE>   28

         The consumer price index remained unchanged in 2000. The decline in the
level of inflation was already apparent at the beginning of 1998, as the result
of a policy of fiscal and monetary restraint. However, the downturn in inflation
was halted at the end of that year by the large depreciation of the shekel
following the crisis in Russia and the Long-Term Capital Market hedge fund.
Since then, the exchange rate has appreciated, a development that has
contributed to zero inflation. Price stability has derived from other factors as
well: structural changes in the economy that led to increased competition; the
opening up of the economy to imports, which, over the years, has affected prices
of clothing and shoes; the reduction in purchase taxes; and a relatively
moderate level of domestic demand which resulted from the high level of
unemployment. The housing item, which is measured on the basis of apartment
rental fees, fell by 2.4% in 2000. This item was notable for its increase during
the 1990's and its decrease reflects the fall off in demand resulting from the
high price level that had been achieved. The inflation target for 2001 has been
set as 2.5%-3.5%.

         The exchange rate of the shekel appreciated by 2.7% against the dollar
and by 5.5% against the currency basket during 2000. The appreciation largely
resulted from the convenient balance-of-payments situation: a low current
account deficit and growing capital movements to the economy that were mainly
intended for high-tech companies. The deterioration in the geopolitical
situation in the fourth quarter led to a small depreciation of the shekel. In
view of the seriousness of the developments at the time, this was most
definitely indicative of the strength of the shekel and the confidence in it.

         The following table sets forth, for the periods indicated, certain
information with respect to the rate of inflation in Israel, the NIS/$ exchange
rate and the rate of devaluation of the NIS against the dollar.

<TABLE>
<CAPTION>
                                       ISRAEL                                            U.S.
                                       ANNUAL        CLOSING                            ANNUAL
                                      INFLATION     EXCHANGE          ANNUAL           INFLATION
YEAR ENDED DEC. 31                     RATE(1)       RATE(2)       DEVALUATION(3)        RATE(4)
------------------                      ----          ----         -----------           ----
<S>                                   <C>           <C>            <C>                 <C>
1993............................        11.2          2.986            8.0                3.0
1994............................        14.5          3.018            1.1                2.6
1995............................         8.1          3.135            3.9                2.8
1996............................        10.6          3.251            3.7                3.3
1997............................         7.0          3.536            8.8                1.7
1998............................         8.6          4.160           17.6                1.6
1999............................         1.3          4.153           (0.2)               2.7
2000 ...........................         0            4.041           (2.7)               3.4
</TABLE>

-----------

(1)   "Israel Annual Inflation Rate" is the percentage increase in the Israeli
      CPI between December of the year indicated and December of the preceding
      year.

(2)   "Closing Exchange Rate" is the rate of exchange of one United States
      dollar for the NIS at December 31 of the year indicated as reported by the
      Bank of Israel.

(3)   "Annual Devaluation" is the percentage increase in the value of the United
      States dollar in relation to the NIS during the calendar year.

(4)   "U.S. Annual Inflation Rate" is obtained by calculating the percentage
      change in the United States Consumer Price Index for All Urban Consumers,
      as published by the Bureau of Labor Statistics of the United States
      Department of Labor.


                                       27
<PAGE>   29

ISRAELI INVESTMENT

         Since the establishment of the State of Israel in 1948, the Government
of Israel has promoted the development of industrial and agricultural projects
through a variety of methods including tax abatements and tax incentives.

         Industrial research and development projects in Israel may qualify for
government aid if they deal with the development of commercial products to be
made in Israel for sale abroad. Direct incentives usually are provided in the
forms of grants, regulated in accordance with the Law for Encouragement of
Industrial Research and Development 1984. Many of the Company's investee
companies have taken advantage of such incentives.


              CERTAIN UNITED STATES AND ISRAELI REGULATORY MATTERS

SEC EXEMPTIVE ORDER

         In 1947, the SEC granted Ampal an exemption from the Investment Company
Act of 1940, as amended (the "1940 Act"), pursuant to an Exemptive Order. The
Exemptive Order was granted based upon the nature of Ampal's operations, the
purposes for which it was organized, which have not changed, and the interest of
purchasers of Ampal's securities in the economic development of Israel. There
can be no assurance that the SEC will not reexamine the Exemptive Order and
revoke, suspend or modify it. A revocation, suspension or material modification
of the Exemptive Order could materially and adversely affect the Company unless
Ampal were able to obtain other appropriate exemptive relief. In the event that
Ampal becomes subject to the provisions of the 1940 Act, it could be required,
among other matters, to make changes, which might be material, to its
management, capital structure and methods of operation, including its dealings
with principal shareholders and their related companies.

                                 TAX INFORMATION

ISRAELI TAXATION OF AMPAL

         Ampal (to the extent that it has income derived in Israel) and Ampal's
Israeli subsidiaries are subject to taxes imposed under the Israeli Income Tax
Ordinance. For 2000, Israeli companies were taxed on their income at a rate of
36%.

         A tax treaty between Israel and the United States became effective on
December 30, 1994. This treaty has not had a substantial impact on the taxation
of the Company in the United States or in Israel.

         Ampal had income from interest, rent and dividends resulting from its
investments in Israel. Under Israeli law, Ampal has been required to file
reports with the Israeli tax authorities with respect to such income. In
addition, as noted below, Ampal is subject to a withholding tax on dividends
received from Israeli companies at a rate of either 25%, 15% or 12.5%, depending
on the percentage ownership of the investment and the type of income generated
by that company (as opposed to dividends payable to Israeli companies which are
exempt from tax, except for the dividends paid by an approved enterprise to
either residents or non-residents, the tax on which is withheld at a rate of
15%). Under an arrangement with the Israeli tax authorities, such income has
been taxed based on principles generally applied in Israel to income of
non-residents. Ampal has filed reports with the Israeli tax authorities through
1998 and has received "final assessments" with respect to such reports filed
through 1994 (which final assessments are, under Israeli law, subject to
reconsideration by the tax authorities only in certain limited circumstances,
including fraud). Based on the tax returns filed by Ampal through 1994, it has
not been required to make any additional tax payments in excess of the
withholding on its dividends. In addition, under Ampal's arrangement with the
Israeli tax authorities, the aggregate taxes paid by Ampal in Israel and the
United States on interest, rent and dividend income derived from Israeli sources
has not exceeded the taxation which would have been payable by Ampal in the
United States had such interest, rent and dividend income been derived by Ampal
from United States sources. There can be no assurance that this arrangement will
continue in the future. This arrangement does not apply to taxation of Ampal's
Israeli subsidiaries.


                                       28
<PAGE>   30

         Generally, under the provisions of the Income Tax Ordinance, taxable
income paid to non-residents of Israel by residents of Israel is generally
subject to withholding tax at the rate of 25%. However, withholding rates on
income paid to United States residents by residents of Israel are subject to the
United States-Israel tax treaty. No withholding has been made on interest and
rent payable to Ampal under an exemption which Ampal has received from the
income tax authorities on an annual basis. There can be no assurance that this
exemption will continue in the future. The continued tax treatment of Ampal by
the Israeli tax authorities in the manner described above is based on Ampal
continuing to be treated, for tax purposes, as a non-resident of Israel that is
not doing business in Israel.

         Under Israeli law, a tax is payable on capital gains of residents and
non-residents of Israel. With regard to non-residents, this tax applies to gains
on sales of assets either located in Israel or which represent a right to assets
located in Israel (including gains arising from the sale of shares of stock in
companies resident in Israel). Since January 1, 1994, the portion of the gain
attributable to inflation prior to that date is taxable at a rate of 10%, while
the portion since that date is exempt from tax, while the remainder of the
profit, if any, was taxable to corporations at 36% in 1996. Non-residents of
Israel are exempt from the 10% tax on the inflationary gain derived from the
sale of shares in companies that are considered Israeli residents if they choose
to compute the inflationary portion of the gain based on the change in the rate
of exchange between Israeli currency and the foreign currency in which the
shares were purchased from the date the shares were purchased until the date the
shares were sold.

The Income Tax Law (Adjustment for Inflation), 1985, which applies to companies
which have business income in Israel or which claim a deduction in Israel for
financing costs, has been in force since the 1985 tax year. The law provides for
the preservation of equity, whereby certain corporate assets are classified
broadly into Fixed (inflation resistant) and Non-Fixed (non-inflation resistant)
Assets. Where shareholders' equity, as defined therein, exceeds the depreciated
cost of Fixed Assets, a tax deduction which takes into account the effect of the
annual inflationary change on such excess is allowed, subject to certain
limitations. If the depreciated cost of Fixed Assets exceeds shareholders'
equity, then such excess, multiplied by the annual inflation change, is added to
taxable income.

         Individuals and companies in Israel pay VAT at a rate of 17% of the
price of assets sold and services rendered. They can deduct VAT paid on goods
and services acquired by them for the purpose of their business. Until November
1999, all of the Company's subsidiaries with the exception of Ampal Industries
Israel, were considered Financial Institutes and as such were not subject to the
VAT law. As of November 1999 their status has changed leaving Nir as the only
subsidiary not subject to the VAT law.

UNITED STATES TAXATION OF AMPAL

         Ampal and its United States subsidiaries (in the following tax
discussion, generally "Ampal") are subject to United States taxation on their
consolidated taxable income from foreign and domestic sources. The gross income
of Ampal for tax purposes includes or may include (i) income earned directly by
Ampal, (ii) Ampal's share of "subpart F income" earned by certain foreign
corporations controlled by Ampal and (iii) Ampal's share of income earned by
certain electing "passive foreign investment companies" of which Ampal is a
stockholder. Subpart F income includes dividends, interest and certain rents and
capital gains. Since 1993, the maximum rate applicable to domestic corporations
is 35%.

         Ampal is entitled to claim as a credit against its United States income
tax liability all or a portion of income taxes, or of taxes imposed in lieu of
income taxes, paid to foreign countries. If Ampal receives dividends from a
foreign corporation in which it owns 10% or more of the voting stock, in
determining total foreign income taxes paid by Ampal for purposes of the foreign
tax credit, Ampal is treated as having paid the same proportion of the foreign
corporation's post-1986 foreign income taxes as the amount of such dividends
bears to the foreign corporation's post-1986 undistributed earnings.

         In general, the total foreign tax credit that Ampal may claim is
limited to the proportion of Ampal's United States income taxes that its foreign
source taxable income bears to its taxable income from all sources, foreign and
domestic. The Internal Revenue Code of 1986, as amended (the "Code"), also
limits the ability of Ampal to offset its United States tax liability with
foreign tax credits by subjecting various types of income to separate
limitations. Source of income and deduction rules may further limit the use of
foreign taxes as an offset against United States tax


                                       29
<PAGE>   31

liability. As a result of the operation of these rules, Ampal may choose to take
a deduction for foreign taxes in lieu of the foreign tax credit.

         Ampal may be subject to the alternative minimum tax ("AMT") on
corporations. Generally, the tax base for the AMT on corporations is the
taxpayer's taxable income increased or decreased by certain adjustments and tax
preferences for the year. The resulting amount, called alternative minimum
taxable income, is then reduced by an exemption amount and subject to tax at a
20% rate. As with the regular tax computation, AMT can be offset by foreign tax
credits (separately calculated under AMT rules and generally limited to 90% of
AMT liability as specially computed for this purpose).

ITEM 2. PROPERTY

         Ampal subleases 4,960 rentable square feet of office space leased by
Hapoalim at 1177 Avenue of the Americas, New York City under a sublease which
expires on August 30, 2009. The base rent, which commenced in September 1994, is
$193,000, subject to escalation. In 2000, Ampal's total payment to Hapoalim in
connection with this lease was $199,000.

         Kfar Saba, which operates a country club in Kfar Saba, occupies a 7-1/4
acre lot which will be leased for five consecutive ten-year periods, at the end
of which the land returns to the lessor. The lease expires on July 14, 2038, and
lease payments in 2000 totaled $176,000.

         The Company leases space in various locations in Israel for office,
commercial and retail use to various parties and received $9,981,000 in rent for
such space in 2000.

         Other properties of the Company are discussed elsewhere in this Report.
See "Business."

ITEM 3. LEGAL PROCEEDINGS

         Yakhin Hakal

         In February 1995, Yakhin Hakal and its affiliates commenced a legal
proceeding in Tel Aviv District Court seeking to cause Etz Vanir and Yakhin
Mataim to redeem the perpetual debentures owned by Ampal for approximately
$700,000 and to require Ampal to surrender all of its preferred shares of Etz
Vanir and Yakhin Mataim for their par value (which is a nominal amount), on the
alleged grounds that the perpetual debentures are debt and not equity
investments. It is Ampal's view that its investments in these companies, which
were made in the 1950's, are equity investments and are not subject to
redemption by these companies, other than upon liquidation. Ampal is contesting
this legal proceeding.

         On July 27, 1998, a Tel Aviv District Court judge ruled in favor of
Yakhin Hakal, the manager and co-owner of Ampal's 50%-owned affiliates Etz Vanir
and Yakhin Mataim. The judge's decision allows Etz Vanir and Yakhin Mataim to
redeem debentures owned by Ampal for approximately $800,000 and to require Ampal
to surrender all of its preferred shares of Etz Vanir and Yakhin Mataim for
their par value. After the redemption and surrender, Ampal will no longer have
any interest in Etz Vanir or Yakhin Mataim.

         At the request of Ampal's attorneys, the Tel Aviv District Court has
issued a stay of performance of the judgment until the High Court of Appeals
issues a final judgment. On October 15, 1998, Ampal filed an appeal with the
High Court of Appeals in Jerusalem. At this point, the Company can not estimate
when a final ruling will be issued. See "Etz Vanir."

         Granite

         A claim was filed against Sonol, Paz Oil Company Ltd. and Delek Oil
Company Ltd. during February 2000, in the amount of NIS. 400,000 (approximately
$.1 million) relating to alleged collusion in the fixing of the price of gasoil
to consumers. This claim if recognized, as requested by the claimant as a class
action, is stated to amount to approximately NIS. 175 million (approximately $44
million) against all of the companies. Sonol denies the claim and, according to
its legal counsel, chances are good that the claim will not be recognized as a
class action.


                                       30
<PAGE>   32

         Three claims were lodged against Granite's formerly affiliated company
and its past and present shareholders, which included Sonol. The total amount of
the claims is approximately NIS. 60.2 million ($15 million). The plaintiff's
allegations concern the sale of fuel products pursuant to restrictive trade
practices among the fuel companies and their affiliates. In the opinion of the
legal counsels of Sonol and the formerly affiliated company, the companies have
a sound defense against the claims.

         Sonol has filed a claim against one of its agencies for approximately
NIS. 37 million (approximately $9 million) in the Tel Aviv District Court, on
account of an unpaid debt and damages caused to Sonol, alleging that the agency
violated the terms of the agency agreement by dealing with one of Sonol's
competitors. The agency, in turn, filed a counterclaim in the amount of
approximately NIS. 57 million (approximately $14 million), stating various
causes, including a claim that the contractual agreement between it and Sonol is
a restrictive agreement.

         In the opinion of Sonol's management, based on opinion of Sonol's legal
counsel, the prospects of Sonol's claim against the agency relating to amounts
owed to Sonol are good and, regarding the amount claimed for damages on account
of the violation of the agency agreement, such amount is subject to deliberation
by the court. Regarding the prospects of the agency's counterclaim, Sonol's
legal counsel are unable, at this time, to estimate its prospects, insofar as it
relates to the claim of a restrictive agreement. Should the claim of a
restrictive agreement be rejected by the court, the prospects of the
counterclaim will not be favorable. Currently, the dispute has been referred to
arbitration.

         Additional information regarding the above described legal proceedings
may be found in Note 25 to the Granite financial statements for the year ended
December 31, 2000, a copy of which has been filed with the Securities and
Exchange Commission in connection with this Annual Report on Form 10-K.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None.


                                       31
<PAGE>   33

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

                          PRICE RANGE OF CLASS A STOCK

         Ampal's Class A Stock is listed on the NASDAQ Stock Market under the
symbol "AMPL". The following table sets forth the high and low bid prices for
the Class A Stock for May and June of 2000, and the Third and Fourth Quarters of
2000, as reported by the NASDAQ Stock Market and representing inter-dealer
quotations which do not include retail markups, markdowns or commissions for
each period, and each calendar quarter during the periods indicated. Such prices
do not necessarily represent actual transactions.


<TABLE>
<CAPTION>
                                                                                         HIGH               LOW
                                                                                         ----               ---
<S>                                                                                  <C>                 <C>
2000:
Fourth Quarter......................................................                 $   13.375          $  5.5938
Third Quarter.......................................................                     19.5              13

May and June 2000...................................................                     17                 8.625
</TABLE>

         During 2000, Ampal changed the listing of its Class A Stock from the
American Stock Exchange under the symbol "AIS" to the NASDAQ Stock Market under
the symbol "AMPL". The following table sets forth the high and low sales prices
for the Class A Stock, as reported on the consolidated transaction reporting
system for April 2000 and for each calendar quarter indicated.

<TABLE>
<CAPTION>
                                                                                         HIGH             LOW
                                                                                         ----             ---
<S>                                                                                  <C>             <C>
2000:
April 2000..........................................................                 $   18          $   10
First Quarter.......................................................                     33 1/4           9 1/8

1999:
Fourth Quarter......................................................                 $    9 1/4      $    6 1/16
Third Quarter.......................................................                      6 5/8           5 3/8
Second Quarter......................................................                      5 5/8           4 1/16
First Quarter.......................................................                      4 7/16          3 7/8
</TABLE>

         As of March 20, 2001, there were approximately 946 record holders of
Class A Stock.

                                  VOTING RIGHTS

         Unless dividends on any outstanding preferred stock are in arrears for
three successive years, as discussed below, the holders of Class A Stock are
entitled to one vote per share on all matters voted upon. Notwithstanding the
above, if dividends on any outstanding series of preferred stock are in arrears
for three successive years, the holders of all outstanding series of preferred
stock as to which dividends are in arrears shall have the exclusive right to
vote for the election of directors until all cumulative dividend arrearages are
paid. The shares of Class A Stock do not have cumulative voting rights, which
means that any holder of at least 50% of the Class A Stock, can elect all of the
members of Ampal's Board of Directors.

                                 DIVIDEND POLICY

         In 1995, Ampal paid a dividend its Class A Stock. Ampal has not paid a
dividend on its Class A Stock other than in 1995. Past decisions not to pay cash
dividends on Class A Stock reflected the policy of Ampal to apply retained
earnings, including funds realized from the disposition of holdings, to finance
its business activities and to


                                       32
<PAGE>   34

redeem debentures. The payment of cash dividends in the future will depend upon
the Company's operating results, cash flow, working capital requirements and
other factors deemed pertinent by the Board.

         Dividends on all classes of Ampal's shares of Preferred Stock are
payable as a percentage of par value. The holders of Ampal's presently
authorized and issued 4% Preferred Stock and 6 1/2% Preferred Stock (each having
a $5.00 par value) are entitled to receive cumulative dividends at the rates of
4% and 6 1/2% per annum, respectively, payable out of surplus or net earnings of
Ampal before any dividends are paid on the Class A Stock. If Ampal fails to pay
such dividend on the preferred stock in any calendar year, such deficiency must
be paid in full, without interest, before any dividends may be paid on the Class
A Stock. If, after the payment of all cumulative dividends on the preferred
stock and a non-cumulative 4% dividend on the Class A Stock, there remains any
surplus, any dividends declared are to be participated in by the holders of 4%
Preferred Stock and Class A Stock, pro rata. On December 15, 2000, Ampal
announced that its Board of Directors had declared cash dividends on its
Preferred Stock ($0.325 per share on its 6 1/2% Preferred Stock and $0.20 per
share on its 4% Preferred Stock).

                     RECENT SALES OF UNREGISTERED SECURITIES

         Pursuant to a Letter Agreement, dated as of March 1, 1997, among Ampal,
Ampal Realty Corporation, a wholly-owned subsidiary of Ampal, and Emmes Asset
Management Corp. ("Emmes"), Ampal agreed to issue to Mr. Andrew Davidoff, 300
shares of Class A Stock each year for the duration of the effectiveness of the
Letter Agreement as consideration for Emmes and Mr. Davidoff's provision of
general asset management and property advisory services to Ampal with respect to
the building located at 800 Second Avenue in New York City. Emmes is a
wholly-owned subsidiary of Emmes & Company LLC. Mr. Michael Sonnenfeldt, a
former director of Ampal, was the founder and managing director of Emmes &
Company LLC. On July 8, 1998, Ampal issued 300 shares to Mr. Davidoff, as
custodian. On July 7, 2000, Ampal issued 600 shares to Mr. Davidoff, as
custodian. The issuance to Mr. Davidoff of such shares was exempted from
registration under the Securities Act of 1933, as amended, pursuant to Section
4(2) of such Act. On September 22, 2000 the Letter Agreement among Ampal, Ampal
Realty Corporation and Emmes was terminated.

         Pursuant to a Letter Agreement, dated as of January, 31, 2001, between
         Ampal (Israel) Ltd., a wholly-owned subsidiary of Ampal, and Zionism
         2000, a charitable organization, Ampal (Israel) Ltd. gifted to Zionism
         2000, 6,000 shares of Class A Stock on February 9, 2001.

         Pursuant to a Letter Agreement, dated as of January 31, 2001, between
Ampal (Israel) Ltd., a wholly-owned subsidiary of Ampal, and Coaching Ltd.,
Ampal (Israel) Ltd. transferred to Coaching Ltd., 1,500 shares of Class A Stock
on March 1, 2001, as compensation for services rendered.

         The issuance to each of Zionism 2000 and Coaching Ltd. of the
aforementioned shares was exempted from registration under the Securities Act of
1933, as amended, pursuant to Rule 902 of Regulation S of such Act.


                                       33

<PAGE>   35
ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,           2000            1999              1998               1997                1996
-----------------------           ----            ----              ----               ----                ----
                                                       (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<S>                            <C>             <C>                <C>                <C>                <C>
Revenues.....................  $  39,697       $  69,613          $  23,160          $  43,142          $  33,468
Net income (loss)............        813          28,031(1)           2,175(1)          14,183(1)         (10,252)(1)
Earnings (loss) per
 Class A share:
 Basic EPS...................  $     .03(2)    $    1.32(1)(2)    $     .08(1)(2)    $     .58(1)(2)    $    (.45)(1)(2)
 Diluted EPS.................  $     .03       $    1.15(1)       $     .07(1)(3)    $     .50(1)(3)    $    (.45)(1)(2)
Total assets.................    446,628         396,780            324,916            256,069            278,703
Notes and loans and
 debentures payable..........    201,576         174,519            129,025             64,068             99,755
Dividends declared per
 Class A share...............  $      --       $      --          $      --          $      --          $      --
</TABLE>

-----------------------------

(1)  Includes (loss) from discontinued operations, as follows:


<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                          2000         1999          1998      1997         1996
-----------------------                          ----         ----          ----      ----         ----
                                                       (Dollars in thousands, except per share data)

<S>                                              <C>        <C>           <C>        <C>         <C>
(Loss) from discontinued operations............  $ --       $(2,156)      $(1,715)   $(257)      $(4,166)
(Loss) per Class A  share from discontinued
operations:
   Basic EPS...................................  $ --       $  (.10)      $  (.07)   $(.01)      $  (.18)
   Diluted EPS.................................  $ --       $  (.09)      $  (.06)   $(.01)      $  (.18)
</TABLE>

(2) Computation is based on net income (loss) after deduction of preferred stock
    dividends of $234, $284, $335, $351 and $364, respectively.

(3) Computation is based on net income after deduction due to dilution in equity
    in earnings of affiliate of $334 and $258, respectively.

                                       34
<PAGE>   36
ITEMS 7 & 8.

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

         The "Company" (refers to Ampal-American Israel Corporation ("Ampal"),
and its consolidated subsidiaries) acquires interests in businesses located in
the State of Israel or that are Israel-related. Ampal's primary investment focus
is the growing high-technology and communications sector. The Company is
involved in a broad cross-section of Israeli companies engaged in various fields
including high-technology and communications, real estate, capital markets,
leisure-time, energy distribution and industry. The Company sometimes
participates in the management of its investee companies through representation
on boards of directors and otherwise.

         The Company's results of operations are directly affected by the
results of operations of its investees. The results of companies which are
greater than 50%-owned are included in the consolidated financial statements of
the Company. The Company accounts for its holdings in investees over which the
Company exercises significant influence, generally 20%- to 50%-owned companies
("affiliates"), under the equity method. Under the equity method, the Company
recognizes its proportionate share of such companies' income or loss based on
its percentage of direct and indirect equity interests in earnings or losses of
those companies. If the Company's interest in a subsidiary were to be reduced to
20%-50%, the investment would be recorded under the equity method. The Company's
results of operations are affected by capital transactions of the affiliates.
Thus, the issuance of shares by an affiliate at a price per share above the
Company's carrying value per share for such affiliate results in the Company
recognizing income for the period in which such issuance is made, while the
issuance of shares by such affiliate at a price per share that is below the
Company's carrying value per share for such affiliate results in the Company
recognizing a loss for the period in which such issuance is made. The Company
accounts for its holdings in investees, other than those described above, on the
cost method or in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities".

         A comparison of the Company's financial statements from year to year
must be considered in light of the Company's acquisitions and divestitures
during each period.

         For those subsidiaries and affiliates whose functional currency is
considered to be the New Israeli Shekel ("NIS"), assets and liabilities are
translated at the rate of exchange at the end of the reporting period and
revenues and expenses are translated at the average rates of exchange during the
reporting period. Translation differences of those foreign companies' financial
statements are included in the cumulative translation adjustment account
(reflected in accumulated other comprehensive loss) of shareholders' equity.
Should the NIS be devalued against the dollar, cumulative translation
adjustments are likely to result in a reduction in shareholders' equity. As of
December 31, 2000, the effect on shareholders' equity was a decrease of
approximately $17.2 million. Upon disposition of an investment, the related
cumulative translation adjustment balance will be recognized in determining
gains or losses.

INTRODUCTION OF THE EURO:

         On January 1, 1999, eleven of the fifteen member countries of the
European Union established fixed conversion rates between their existing
sovereign currencies and a new currency called the "Euro". These countries
agreed to adopt the Euro as their common legal currency on that date. The Euro
trades on currency exchanges and is available for non-cash transactions. Until
January 1, 2002, the existing sovereign currencies will remain legal tender in
these countries. On January 1, 2002, the Euro is scheduled to replace the
sovereign legal currencies of these countries.

                                       35
<PAGE>   37
         The Company does not conduct operations in Europe. However, there can
be no assurance that the implementation of the Euro will not have an adverse
material affect on the Company's financial condition or results of operations.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         In June 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133. The Statement defers
for one year the effective date of SFAS No. 133, Accounting Derivative
Instruments and Hedging Activities, which was issued in June 1998 and
established accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 will now apply to all fiscal
quarters of all fiscal years beginning after June 2000. Management believes that
the implementation of SFAS No. 133 and SFAS No. 138, which modifies certain
provisions of SFAS No. 133 will not have a material impact on the Company's
results of operations.

DISCONTINUED OPERATIONS

         On November 2, 1999, the Company completed the sale of its 85%-owned
mattress manufacturing subsidiary, Paradise Industries Ltd., ("Paradise") to
Beit Hafuton, AA Ltd. ("Beit Hafuton"). Accordingly, the results of Paradise,
whose financial statements were previously consolidated with the Company's
financial statements, have been presented as discontinued operations for all
periods presented. In connection with the sale, the Company agreed to the
following: a) to forgive a capital note in the amount of $.5 million from
Goodnight Center Ltd. ("Goodnight Center"), a subsidiary of Beit Hafuton, b) to
forgive a loan to Paradise in the amount of approximately $.5 million and c) to
pay an additional $1.8 million with respect to bank guarantees issued on behalf
of Paradise and Goodnight Center. As a result of the aforementioned sale, the
Company recorded a loss on disposition of approximately $3.6 million ($1.1
million net of taxes) in the consolidated financial statements for the year
ended December 31, 1999.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999:

         Consolidated income from continuing operations decreased to $.8 million
for the year ended December 31, 2000, from $30.2 million for the same period in
1999. The decrease in income is primarily attributable to lower realized and
unrealized gains on investments, the gain on sale of real estate rental property
in 1999, which was absent in 2000, greater loss from impairment of investments,
decreased equity in earnings of affiliates, and higher interest expense in 2000.
These decreases were partially offset by the increase in other income.

         The Company recorded $5.9 million of unrealized losses on investments
which are classified as trading securities in the year ended December 31, 2000,
as compared to $12.1 million of gains in the same period in 1999. The unrealized
losses in 2000 are primarily attributable to the Company's investment in shares
of Arel Communications and Software Ltd. ("Arel"), while in 1999, the unrealized
gains were primarily attributable to the investments in the shares of Bank Leumi
le'Israel B.M. ("Leumi") and Fundtech Ltd. ("Fundtech"). At December 31, 2000
and December 31, 1999, the aggregate fair value of trading securities amounted
to approximately $23.8 million and $40.4 million, respectively.

         In the year ended December 31, 2000, the Company recorded $13.7 million
of gains on the sale of marketable securities, $11.2 million of which are
attributable to the Company's investment in BreezeCOM Ltd. ("BreezeCOM"). In the
year ended December 31, 1999, the Company recorded $18.4


                                       36
<PAGE>   38
million of gains on the sale of investments, $13.5 million of which were
attributable to the sale of its 46% equity interest in Moriah Hotels Ltd.
("Moriah") to Koor Tourism Enterprises Ltd. and Sheraton International Ltd.

         On July 6, 1999, the Company sold real estate rental properties to a
subsidiary of Bank Hapoalim B.M., and recorded a gain on the sale of $9.2
million ($6 million net of taxes) in its December 31, 1999, consolidated
financial statements.

         Equity in earning of affiliates decreased to $11.9 million for the year
ended December 31, 2000, from $16 million for the same period in 1999. The
decrease is primarily attributable to the decreased earnings of Ophir Holdings
Ltd. ("Ophir"), the Company's 42.5%-owned affiliate, which is a holding company
with interests in real estate and high-technology companies. Ophir reported
significantly higher earnings in 1999 primarily due to the gain on the sale of
its holdings in Platinum Technology International Inc. This decrease was
partially offset by the increased earnings of the Company's 50%-owned affiliate,
Trinet Venture Capital Ltd. ("Trinet"), which recorded an unrealized gain on its
investment in Smart Link Ltd. Granite Hacarmel Investments Ltd. ("Granite"), the
Company's 20.2%-owned affiliate, which is one of the largest distributors of
refined petroleum products, also recorded higher earnings in 2000 primarily as a
result of a gain on sale of holdings in investees.

         The increase in real estate income of $3.1 million and expenses of $5.7
million in 2000 as compared to 1999 is attributable to the operations of Am-Hal
Ltd. ("Am-Hal"), the Company's wholly-owned subsidiary, which owns and operates
a chain of senior citizens facilities in Israel. The Company acquired an
additional 50% interest in Am-Hal on December 31, 1999. As a result, Am-Hal's
statement of income was consolidated with the Company's consolidated statement
of income in 2000, while in 1999, Am-Hal's results were recorded in equity in
earnings of affiliates.

         The Company recorded interest expense of $13.3 million in the year
ended December 31, 2000, as compared to $10 million in the same period in 1999.
Interest expense was higher in 2000 as a result of increased borrowings in
connection with new investments made, interest expense attributable to Am-Hal's
operations and the acquisition of the Company's shares from Bank Hapoalim B.M.
in July, 1999.

         The increase in other income of $4.2 million in the year ended December
31, 2000, as compared to the same period in 1999, is attributable to the
guaranteed income of $3.8 million from Motorola (Israel) Ltd. with respect to
the dividend from MIRS Communications Ltd. ("MIRS"), as well as a larger
dividend received from MIRS.

         In the year ended December 31, 2000, the Company recorded an $11.1
million loss from impairment of investments attributable to the $3.5 million
bank guarantees paid on behalf of M.D.F. Industries Ltd. ("M.D.F.") and to the
impairment in values of the Company's investments in Smartlight Ltd. ($3
million), Netformx Ltd. ($2.5 million), Qronus Interactive Israel (1994) Ltd.
($1.1. million), Zactus, Inc. ($.5 million) and ContactNOW, Inc. ($.5 million).
In 1999, the Company recorded $3 million of losses from impairment of
investments which were primarily attributable to its investments in M.D.F. ($1.5
million), Unic View Ltd. ($1 million) and MuTek Solutions Ltd. ("MuTek") ($.4
million).

         The change in the effective income tax rate in 2000 as compared to 1999
is mainly attributable to the additional tax benefits with respect to the loss
from impairment of investment in an affiliate which was recorded in previous
years.

         The Company recorded a net loss of $7.9 million in the three months
ended December 31, 2000, primarily as a result of losses from impairment of
investments which occurred during this period.


                                       37
<PAGE>   39
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998:

         Consolidated income from continuing operations increased to $30.2
million in 1999, from $3.9 million in 1998. The increase in income is primarily
attributable to the realized and unrealized gains on investments, gain on sale
of real estate rental property and the increase in equity in earnings of
affiliates.

         In the year ended December 31, 1999, the Company recorded $18.4 million
of gains on sale of investments, which is primarily attributable to the sale of
its investment in Moriah. On April 14, 1999, the Company sold its 46% equity
interest in Moriah to Koor Tourism Enterprises Ltd. and Sheraton International
Ltd. for $29.6 million. Prior to the sale, on April 12, 1999, the Company
received a dividend from Moriah in the amount of $7.9 million. As a result of
the aforementioned transaction, the Company recorded a gain on sale in the
amount of approximately $13.5 million ($8.8 million net of taxes). In addition,
the Company recorded gains of $1.7 million and $1.2 million, respectively, on
sale of its investments in shares of Fundtech and Leumi. In the year ended
December 31, 1998, the Company recorded $.8 million of gains on sale of
investments, which were attributable to its investments in Mercury Interactive
Corporation, Shikun U'Fituach le-Israel Ltd., Fundtech and M-Systems Flash Disk
Pioneers Ltd.

         The Company recorded $12.1 million of unrealized gains on investments
which are classified as trading securities in the year ended December 31, 1999,
as compared to $1.4 million of unrealized losses in the same period in 1998. The
unrealized gains recorded in 1999 are primarily attributable to the Company's
investments in the shares of Leumi (pre-tax gain of $7.9 million) and Fundtech
(pre-tax gain of $2 million). At December 31, 1999 and December 31, 1998, the
aggregate fair value of trading securities amounted to approximately $40.4
million and $26.3 million, respectively.

         On July 6, 1999, the Company completed a transaction with Bank Hapoalim
B.M. ("Hapoalim") and two wholly-owned subsidiaries of Hapoalim, which provided
for the following:

         (a)      The Company acquired from Hapoalim all of its holdings in
                  Ampal - 5,874,281 shares of Class A Stock, 3,350 shares of 4%
                  Preferred Stock and 122,536 shares of 6 1/2% Preferred Stock
                  for $31.5 million.

         (b)      The Company sold to Hapoalim's subsidiary seven real estate
                  properties totaling 53,000 sq. ft., which had previously been
                  leased to and occupied by Hapoalim, for $14.7 million.

         (c)      Ampal's subsidiary renewed the lease agreement with Hapoalim
                  with respect to a 4,400 sq. ft. branch in Bnei Brak, Israel
                  for ten years at an annual rental income of $346,000.

         As a result of the above transaction, the Company recorded a gain of
$9.2 million ($6 million net of taxes) on the sale of the aforementioned real
estate properties in the December 31, 1999 consolidated financial statements.

         Equity in earnings of affiliates increased to $16 million for the year
ended December 31, 1999, from $7.3 million for the same period in 1998. The
increase is primarily attributable to the increased earnings of Ophir, the
Company's 42.5%-owned affiliate, which is a holding company with interests in
real estate and high-technology companies. Ophir reported significantly higher
earnings in 1999 primarily due to the gain on the sale of its holdings in
Platinum Technology International Inc. in June 1999.

         The increase in other income in 1999, as compared to 1998 is primarily
attributable to the dividends received from MIRS ($1.2 million) and Leumi ($.7
million).

         In the year ended December 31, 1999, the Company recorded $3 million of
losses from impairment of investments which are primarily attributable to its
investments in M.D.F. Industries Ltd.


                                       38
<PAGE>   40
($1.5 million), which continues to experience operational problems, Unic View
Ltd. ($1 million) and MuTek ($.4 million). In the same period in 1998, the
Company recorded a $1.9 million loss on impairment of its investments in MuTek,
Ortek Ltd., Medco Electronics Systems Ltd. and Geotek Communications Ltd.

         The Company recorded net interest expense in the amount of $8 million
in 1999, as compared to $6.7 million in 1998. The increase in the net interest
expense in 1999 resulted from utilizing the Company's funds for making
investments in various companies and increasing its borrowings for the
acquisition of its shares from Hapoalim.

         The Company recorded a translation loss of $1.2 million in 1999, as
compared to a translation gain of $.6 million in 1998. The translation loss in
1999 is attributable to the foreign exchange forward contracts entered into by
the Company during the year.

         The change in the effective income tax rate in 1999, as compared to
1998, is mainly attributable to the higher deferred tax credits of certain
Israeli subsidiaries in 1998.

LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 2000, cash and cash equivalents were $5.8 million as
compared with $7.4 million at December 31, 1999. The decrease in cash is
primarily attributable to the new investments made during 2000. The decrease in
deposits, notes and loans receivable and debentures is primarily attributable to
scheduled repayments. The increase in accounts payable is primarily attributable
to the increase in Am-Hal's deposits from tenants. The increase in notes and
loans payable is attributable to the new investments made by the Company and the
increased borrowings with respect to the construction of the new senior citizens
facility by Am-Hal. The decrease in accumulated other comprehensive loss is
primarily attributable to the unrealized gains in the Company's investments in
BreezeCOM, Floware Wireless Systems Ltd. and Compugen Ltd. At March 22, 2001,
the aggregate fair market value of trading and available-for-sale securities was
approximately $43 million ($58.2 million at December 31, 2000).

         In 2000, the Company made the following investments, aggregating $37
million: (1) a $6.2 million investment to acquire a 4.9% interest in Arel, a
leading provider of interactive distance learning systems; (2) an additional
$3.3 million investment in Camelot Information Technologies Ltd. ("Camelot")
(total equity interest is 20.7%, including net indirect equity through Ophirtech
Ltd. ("Ophirtech")), a developer of innovative software solutions to secure
organizational communication networks; (3) a $2.8 million investment to acquire
a 4% interest in BridgeWave Communications Inc., a developer of wireless
solutions for cable companies; (4) an additional $2.75 million investment in
Netformx Ltd. ("Netformx") (net equity interest is 20.2%, including net indirect
equity through Trinet and Ophirtech), a developer of network design tools; (5)
a $2.75 million investment to acquire a 16.6% interest in Xpert Integrated
Systems Ltd., a software and systems integrator specializing in systems
security; (6) an additional $2.2 million investment in MuTek (total equity
interest is 6.1%), a developer and marketer of software solutions that improve
the availability of business critical software applications; (7) a $2.2 million
investment to acquire a 17% interest in Oblicore Ltd., a provider of a unique
solution that enables businesses to track service performance relative to
service targets and allocate service resources to maximize their success; (8) a
$2 million investment to acquire a 0.4% interest in Sonic Foundry Inc., a
developer of digital media and Internet software tools, services and systems;
(9) an additional $1.8 million investment in PowerDsine Ltd. ("PowerDsine")
(total equity interest -- 10.8%), a leading developer of power supply devices
for the telecommunications industry; (10) a $1.65 million investment to acquire
a 7.6% interest in Modem Art Ltd., a developer of system-on-a-chip solutions
for wideband and broadband communication systems; (11) a $1.25 million
investment to acquire a 13% interest in RealM Technologies Ltd. (total equity
interest -- 19.2%, including net indirect equity through Ophirtech), a
developer of a network of servers, which will allow the introduction of the
next generation of applicable services, while maximizing performance and
optimizing bandwidth usage; (12) a $1.25 million investment in Star Management
of Investments No.II (2000) L.P., a venture capital fund which


                                       39
<PAGE>   41
focuses on investments in communications, Internet, software and medical
devices; (13) an additional $1.1 million investment in Compugen Ltd. (total
equity interest -- 1.5%), a pioneer in the field of computational genomics and
proteomics; (14) a $1.1 million investment to acquire a 20% interest in Ampal
Cavallo Intervest Fund, a new Korean venture capital fund which will be managed
by Ampal; (15) a $1 million investment to acquire a 0.5% interest in SeraNova,
Inc., a provider of e-business services; (16) a $.9 million investment to
acquire a 20% interest in CUTe Ltd., a designer of intellectual property rights
and software modules on key components of the physical layer of wireless
telecommunications systems; (17) a $.75 million investment to acquire a 9.5%
equity interest in mPrest Technologies Ltd. (formerly WapDWap Ltd.), a developer
of web-based applications for cellular phones; (18) an additional $.6 million
investment to maintain its interest in Shiron Satellite Communications (1996)
Ltd. (equity interest -- 9%), a developer and marketer of two-way multimedia
satellite communication products; (19) a $.5 million investment to acquire a
12.9% interest in Enbaya Ltd., a developer and marketer of a 3D browser that
enables fast viewing, compression and streaming of 3D models; (20) a $.5 million
investment to acquire a 5.6% interest in Zactus, Inc., a developer of a web site
for musicians and (21) an additional $.4 million investment in ShellCase Ltd.,
(total equity interest -- 17.6%), a developer of the smallest packages for
semiconductor chips.

         In each of 2000 and 1999, Ampal paid dividends in the amount of $.20
and $.325 per share on its 4% and 6-1/2% Cumulative Convertible Preferred
Stocks, respectively. Total dividends paid in each year amounted to
approximately $.2 and $.3 million, respectively.

MARKET RISKS AND SENSITIVITY ANALYSIS

         The Company is exposed to various market risks, including changes in
interest rates, foreign currency rates and equity price changes. The following
analysis presents the hypothetical loss in earnings, cash flows and fair values
of the financial instruments which were held by the Company at December 31,
2000, and are sensitive to the above market risks.

INTEREST RATE RISKS

         At December 31, 2000, the Company had financial assets totalling $20.2
million and financial liabilities totalling $201.6 million. For fixed rate
financial instruments, interest rate changes affect the fair market value but do
not impact earnings or cash flows. Conversely, for variable rate financial
instruments, interest rate changes generally do not affect the fair market value
but do impact future earnings and cash flows, assuming other factors are held
constant.

         At December 31, 2000, the Company had fixed rate financial assets of
$14.8 million and variable rate financial assets of $5.4 million. Holding other
variables constant, a ten percent increase in interest rates would decrease the
unrealized fair value of the fixed financial assets by approximately $.2
million.

         At December 31, 2000, the Company had fixed rate debt of $50.5 million
and variable rate debt of $151.1 million. A ten percent decrease in interest
rates would increase the unrealized fair value of the fixed rate debt by
approximately $.4 million.

         The net decrease in earnings for the next year resulting from a ten
percent interest rate increase would be approximately $.9 million, holding other
variables constant.

EXCHANGE RATE SENSITIVITY ANALYSIS

         The Company's exchange rate exposure on its financial instruments
results from its investments and ongoing operations in Israel. During 2000, the
Company entered into various foreign exchange forward purchase contracts to
partially hedge this exposure. At December 31, 2000, the Company did not have
any open foreign exchange forward purchase contracts. Holding other variables
constant, if there were a ten percent devaluation of the foreign currency, the
Company's cumulative translation loss


                                       40
<PAGE>   42
(reflected in the Company's accumulated other comprehensive loss) would increase
by $.6 million. Conversely, if there were a ten percent revaluation of the
foreign currency, the net decrease in earnings would be $1.1 million.

EQUITY PRICE RISK

         The Company's investments at December 31, 2000, included marketable
securities (trading and available-for-sale) which are recorded at fair value of
$58.2 million, including a net unrealized loss of $.5 million. Those securities
have exposure to price risk. The estimated potential loss in fair value
resulting from a hypothetical ten percent decrease in prices quoted on stock
exchanges is approximately $5.8 million.

SUBSEQUENT EVENTS

         On January 22, 2001, the Company made an additional investment of $1.5
million in Enbaya Ltd., a developer of a 3D browser that enables fast viewing,
compression and streaming of 3D models, and increased its equity interest in the
company from 12.9% to 20.5%.

         On February 23, 2001, the Company made an additional investment of $5
million in XACCT, a leading provider of business infrastructure software for the
next-generation public network. The Company holds an approximate 16.2% equity
interest in XACCT.



                                       41
<PAGE>   43
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                                       42
<PAGE>   44
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
Ampal-American Israel Corporation:

We have audited the accompanying consolidated balance sheet of Ampal-American
Israel Corporation and Subsidiaries (the "Company") as of December 31,2000 and
1999, and the related consolidated statements of income, cash flows, changes in
shareholders' equity, and comprehensive income for each of the three years in
the period ended December 31,2000. 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 consolidated subsidiaries, which statements
reflect total assets and total revenues of 15% and 15%, respectively, in 2000,
27% and 25%, respectively, in 1999, and total revenues of 6% in 1998, of the
related consolidated totals. Also, we did not audit the financial statements of
certain affiliated companies, the investments in which are reflected in the
accompanying financial statements using the equity method of accounting. The
Company's equity in net earnings of these affiliated companies represents
$10,730,000, $15,727,000, and $7,995,000, of consolidated net income for the
years ended December 31, 2000, 1999 and 1998, respectively. The statements of
these subsidiaries and affiliated companies were audited by other auditors whose
reports have been furnished to us and our opinion, insofar as it relates to the
amounts included for those entities, is based solely on the reports of other
auditors.

We conducted our audits in accordance with auditing standards generally accepted
in the Untied 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 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 the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Ampal-American Israel Corporation and Subsidiaries as
of December 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.

New York, New York
March 26, 2000

                                       43
<PAGE>   45
               AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                                            -----------------------
                                                                  2000               1999                1998
                                                                  ----               ----                ----
                                                                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                            <C>               <C>                 <C>
REVENUES:
Equity in earnings of affiliates (Note 13).................    $ 11,876          $  16,003           $   7,328
Interest:
   Related parties.........................................          11                655               4,339
   Others..................................................       1,195              1,381                 987
Real estate income.........................................       9,981              6,900               7,302
Realized and unrealized gains (losses) on
   investments (Notes 4 and 6).............................       7,795             30,501                (568)
Gain on sale of real estate rental
   property (Note 3) ......................................          --              9,523                  --
Gain on issuance of shares by affiliate....................          --                 --               1,032
Other .....................................................       8,839              4,650               2,740
                                                               --------          ---------           ---------
         Total revenues....................................      39,697             69,613              23,160
                                                               --------          ---------           ---------

EXPENSES:
Interest:
   Related parties.........................................          300             2,225               5,022
   Others..................................................       13,017             7,778               6,981
Real estate expenses.......................................        9,191             3,528               3,550
Loss from impairment of investments (Note 4(b))                   11,095             3,025               1,890
Minority interests.........................................       (1,127)             (762)             (1,045)
Translation loss (gain)....................................        1,257             1,185                (623)
Other......................................................        7,344             6,885               7,016
                                                               ---------         ---------           ---------
         Total expenses....................................       41,077            23,864              22,791
                                                               ---------         ---------           ---------
(Loss) income from continuing operations before
 income taxes..............................................       (1,380)           45,749                 369
(Benefit) provision for income taxes (Note 12).............       (2,193)           15,562              (3,521)
                                                               ---------         ---------           ----------
Income from continuing operations..........................          813            30,187               3,890
                                                               ---------         ---------           ---------
Discontinued operations (Note 2):
   Loss from operations....................................           --            (1,083)             (1,715)
   Loss on disposition of $3,593, net of applicable tax
    benefit of $2,520......................................           --            (1,073)                 --
                                                               ---------         ---------           ---------
Loss from discontinued operations..........................           --            (2,156)             (1,715)
                                                               ---------         ---------           ---------
         NET INCOME........................................    $     813         $  28,031           $   2,175
                                                               =========         =========           =========

Basic EPS: (Note 11)
 Earnings from continuing operations.......................    $     .03         $    1.42           $     .15
 Loss from discontinued operations.........................           --              (.10)               (.07)
                                                               ---------         ---------           ---------
 Earnings per Class A share ...............................    $     .03         $    1.32           $     .08
                                                               =========         =========           =========

 Shares used in calculation (in thousands).................       18,916            20,966              23,911

Diluted EPS: (Note 11)
 Earnings from continuing operations.......................    $     .03         $    1.24           $     .13
 Loss from discontinued operations.........................           --              (.09)               (.06)
                                                               ---------         ---------           ---------
 Earnings per Class A share................................    $     .03         $    1.15           $     .07
                                                               =========         =========           =========

 Shares used in calculation (in thousands) ................       19,057            24,331              27,624
</TABLE>

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


                                       44
<PAGE>   46
               AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                    ASSETS AS AT
                                                                                    ------------
                                                                            DECEMBER 31,      DECEMBER 31,
                                                                              2000               1999
                                                                              ----               ----
                                                                             (DOLLARS IN THOUSANDS)

<S>                                                                       <C>                  <C>
Cash and cash equivalents..............................................   $  5,842             $  7,409


Deposits, notes and loans receivable (Note 5)..........................     14,804               22,336


Investments (Notes 6 and 13)...........................................    307,600              273,174


Real estate property, less accumulated depreciation of $9,310
   and $7,463..........................................................     87,480               72,809


Other assets...........................................................     30,902               21,052
                                                                          --------             --------


         TOTAL ASSETS..................................................   $446,628             $396,780
                                                                          ========             ========
</TABLE>


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

                                       45
<PAGE>   47
               AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                           LIABILITIES AND SHAREHOLDERS'
                                                                                                    EQUITY AS AT
                                                                                                    ------------
                                                                                            DECEMBER 31,    DECEMBER 31,
                                                                                                2000            1999
                                                                                                ----            ----
                                                                                               (DOLLARS IN THOUSANDS)
                                   LIABILITIES
<S>                                                                                         <C>             <C>
       Notes and loans payable: (Note 7)
          Related parties................................................................     $  11,605       $  14,564
          Others.........................................................................       165,938         131,296
       Debentures (Note 8)...............................................................        24,033          28,659
       Accounts and income taxes payable, accrued
        expenses and minority interests..................................................        80,650          65,427
                                                                                              ---------       ---------

                Total liabilities........................................................       282,226         239,946
                                                                                              ---------       ---------

                          SHAREHOLDERS' EQUITY (Note 9)

       4% Cumulative Convertible Preferred Stock, $5 par value; authorized 189,287
          shares; issued 156,401 and 165,823 shares; outstanding 153,051
          and 162,473 shares.............................................................           782             829


       6-1/2% Cumulative Convertible Preferred Stock, $5 par value; authorized
          988,055 shares; issued 745,814 and 891,763 shares; outstanding 623,278
          and 769,227 shares.............................................................         3,729           4,459

       Class A Stock, $1 par value; authorized 60,000,000 shares; issued
          25,303,002 and 24,817,445 shares; outstanding 19,134,838
          and 18,289,264 shares..........................................................        25,303          24,817

       Additional paid-in capital........................................................        58,194          57,896

       Retained earnings.................................................................       118,941         118,362

       Treasury stock, at cost (Note 3)..................................................       (33,275)        (35,552)

       Accumulated other comprehensive loss..............................................        (9,272)        (13,977)
                                                                                              ---------       ---------

                Total shareholders' equity...............................................       164,402         156,834
                                                                                              ---------       ---------

                TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...............................     $ 446,628       $ 396,780
                                                                                              =========       =========
</TABLE>


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


                                       46
<PAGE>   48
               AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31,
                                                             2000               1999             1998
                                                             ----               ----             ----
                                                                    (DOLLARS IN THOUSANDS)
<S>                                                      <C>               <C>               <C>
Cash flows from operating activities:
   Net income ...................................        $     813         $  28,031         $   2,175
   Adjustments to reconcile net income to
     net cash provided by (used in) operating activities:
   Equity in earnings of affiliates .............          (11,876)          (16,003)           (7,328)
   Loss from discontinued operations ............               --             2,156             1,715
   Realized and unrealized (gains) losses on
     investments ................................           (7,795)          (30,501)              568
   Gain on sale of real estate rental property ..               --            (9,523)               --
   Gain on issuance of shares by affiliate ......               --                --            (1,032)
   Depreciation expense .........................            2,208             1,003             1,129
   Amortization expense .........................              823             1,356             1,280
   Impairment of investments ....................            7,595             3,025             1,890
   Minority interests ...........................           (1,127)             (762)           (1,045)
   Consolidation of subsidiary previously
     accounted for by the equity method .........               --               386                --
   Translation loss (gain) ......................            1,257             1,185              (623)
   (Increase) decrease in other assets ..........           (4,331)            3,460            (1,063)
   Increase (decrease) in accounts and income
     taxes payable, accrued expenses and minority
     interests ..................................            9,619             3,925            (5,325)
Investments made in trading securities ..........          (23,341)          (28,004)          (30,838)
Proceeds from sale of trading securities ........           42,759            30,131            11,333
Dividends received from affiliates ..............            6,784            10,415            26,245
                                                         ---------         ---------         ---------
   Net cash provided by (used in) operating
     activities .................................           23,388               280              (919)
                                                         ---------         ---------         ---------

Cash flows from investing activities:
 Deposits, notes and loans receivable collected .            8,896             9,635            16,641
 Deposits, notes and loans receivable granted ...           (2,089)           (4,869)             (723)
 Investments made in:
  Available-for-sale securities .................           (2,127)          (24,147)               --
  Affiliates and others .........................          (42,136)          (12,935)         (119,844)
 Proceeds from sale of investments:
  Affiliate .....................................               --            29,622                --
  Available-for-sale security ...................               --                --               353
  Others ........................................            2,149             1,537             1,294
 Return of capital by partnership ...............              722                --                --
 Capital improvements ...........................          (16,762)           (1,944)           (2,952)
 Proceeds from sale of real estate property .....               --            15,076                --
                                                         ---------         ---------         ---------
  Net cash (used in) provided by investing
   activities ...................................          (51,347)           11,975          (105,231)
                                                         ---------         ---------         ---------
</TABLE>


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


                                       47
<PAGE>   49
               AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                            2000              1999            1998
                                                            ----              ----            ----
                                                                     (Dollars in thousands)

<S>                                                      <C>              <C>              <C>
Cash flows from financing activities:
 Notes and loans payable received:
  Related parties ...............................        $     25         $  8,139         $ 81,799
  Others ........................................          58,879           19,417           68,400
 Notes and loans payable repaid:
  Related parties ...............................          (3,143)          (1,281)         (43,493)
  Others ........................................         (23,983)          (5,029)         (32,626)
 Proceeds from exercise of stock options ........             759               --               --
 Debentures repaid ..............................          (6,402)          (5,785)          (8,283)
 Purchase of treasury stock .....................              --          (31,724)              --
 Contribution to partnership by minority
  interests .....................................              --               --            9,765
 Issuance of shares to related parties and others              10               --              352
 Dividends paid .................................            (234)            (284)            (335)
                                                         --------         --------         --------
  Net cash provided by (used in) financing
   activities ...................................          25,911          (16,547)          75,579
                                                         --------         --------         --------

Effect of exchange rate changes on cash and
 cash equivalents ...............................             481             (346)          (2,514)
                                                         --------         --------         --------

Net decrease in cash and cash equivalents .......          (1,567)          (4,638)         (33,085)
Cash and cash equivalents at beginning of year ..           7,409           12,047           45,132
                                                         --------         --------         --------

Cash and cash equivalents at end of year ........        $  5,842         $  7,409         $ 12,047
                                                         ========         ========         ========

Supplemental Disclosure of Cash Flow Information
Cash paid during the year:
 Interest:
  Related parties ...............................        $     25         $    613         $  1,824
  Others ........................................           6,502            2,205            2,524
                                                         --------         --------         --------
    Total interest paid .........................        $  6,527         $  2,818         $  4,348
                                                         ========         ========         ========

 Income taxes paid ..............................        $    382         $ 11,593         $  2,037
                                                         ========         ========         ========
</TABLE>


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


                                       48
<PAGE>   50
               AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                                 YEAR ENDED DECEMBER 31,
                                                                       2000               1999                1998
                                                                       ----               ----                ----
                                                                           (DOLLARS IN THOUSANDS, EXCEPT SHARE
                                                                               AMOUNTS AND PER SHARE DATA)
<S>                                                                 <C>                 <C>                 <C>
          4% PREFERRED STOCK
          Balance, beginning of year .....................          $     829           $     861           $     898
          Conversion of 9,422, 6,415 and 7,434 shares
           into Class A Stock ............................                (47)                (32)                (37)
                                                                    ---------           ---------           ---------
          Balance, end of year ...........................          $     782           $     829           $     861
                                                                    =========           =========           =========

          6-1/2% PREFERRED STOCK
          Balance, beginning of year .....................          $   4,459           $   4,626           $   4,842
          Conversion of 145,949, 33,516 and 43,009 shares
           into Class A Stock ............................               (730)               (167)               (216)
                                                                    ---------           ---------           ---------
          Balance, end of year ...........................          $   3,729           $   4,459           $   4,626
                                                                    =========           =========           =========

          CLASS A STOCK
          Balance, beginning of year .....................          $  24,817           $  24,685           $  24,418
          Issuance of shares upon conversion of
           Preferred Stock ...............................                485                 132                 167
          Issuance of additional shares ..................                  1                  --                  --
          Issuance of shares to related party (Note 10) ..                 --                  --                 100
                                                                    ---------           ---------           ---------
          Balance, end of year ...........................          $  25,303           $  24,817           $  24,685
                                                                    =========           =========           =========

          ADDITIONAL PAID-IN CAPITAL
          Balance, beginning of year .....................          $  57,896           $  57,829           $  57,491
          Conversion of Preferred Stock ..................                292                  67                  86
          Issuance of additional shares ..................                  9                  --                   2
          Exercise of stock options, including tax benefit                 (3)                 --                  --
          Issuance of shares to related party (Note 10) ..                 --                  --                 250
                                                                    ---------           ---------           ---------
          Balance, end of year ...........................          $  58,194           $  57,896           $  57,829
                                                                    =========           =========           =========

          RETAINED EARNINGS
          Balance, beginning of year .....................          $ 118,362           $  90,615           $  88,775
          Net income .....................................                813              28,031               2,175
          Dividends:
            4% Preferred Stock - $.20 per share ..........                (30)                (32)                (34)
            6-1/2% Preferred Stock - $.325 per share .....               (204)               (252)               (301)
                                                                    ---------           ---------           ---------
          Balance, end of year ...........................          $ 118,941           $ 118,362           $  90,615
                                                                    =========           =========           =========
</TABLE>

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


                                       49
<PAGE>   51
               AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31,
                                                                               -----------------------
                                                                      2000               1999              1998
                                                                      ----               ----              ----
                                                                      (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
        TREASURY STOCK (Note 3)

<S>                                                                 <C>                <C>                <C>
           4% PREFERRED STOCK
           Balance, beginning of year ....................          $    (84)          $     --           $     --
           Purchase of 3,350 shares, at cost .............                --                (84)                --
                                                                    --------           --------           --------
           Balance, end of year ..........................               (84)               (84)                --
                                                                    --------           --------           --------

           6-1/2% PREFERRED STOCK
           Balance, beginning of year ....................            (1,853)                --                 --
           Purchase of 122,536 shares, at cost ...........                --             (1,853)                --
                                                                    --------           --------           --------
           Balance, end of year ..........................            (1,853)            (1,853)                --
                                                                    --------           --------           --------

           CLASS A STOCK
           Balance, beginning of year - 6,528,181 and
            605,400 shares, at cost ......................           (33,615)            (3,829)            (3,829)
           Issuance of shares upon exercise of 360,017
            stock options ................................             2,277                 --                 --
           Purchase of 5,922,781 shares, at cost .........                --            (29,786)                --
                                                                    --------           --------           --------
           Balance, end of year - 6,168,164, 6,528,181 and
            605,400 shares, at cost ......................           (31,338)           (33,615)            (3,829)
                                                                    --------           --------           --------

        Balance, end of year .............................          $(33,275)          $(35,552)          $ (3,829)
                                                                    ========           ========           ========

        ACCUMULATED OTHER COMPREHENSIVE LOSS

           Cumulative translation adjustments:
           Balance, beginning of year ....................          $(17,676)          $(18,580)          $(10,085)
           Foreign currency translation adjustment .......               459                904             (8,495)
                                                                    --------           --------           --------
           Balance, end of year ..........................           (17,217)           (17,676)           (18,580)
                                                                    --------           --------           --------

           Unrealized gain on marketable securities:

           Balance, beginning of year ....................             3,699              4,958                 --
           Unrealized gain, net ..........................             4,246              3,699              4,958
           Sale of available-for-sale security ...........                --             (3,247)                --
           Transfer to trading securities ................                --             (1,711)                --
                                                                    --------           --------           --------
           Balance, end of year ..........................             7,945              3,699              4,958
                                                                    --------           --------           --------

        Balance, end of year .............................          $ (9,272)          $(13,977)          $(13,622)
                                                                    ========           ========           ========
</TABLE>


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


                                       50
<PAGE>   52
               AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                                        2000                1999               1998
                                                                        ----                ----               ----
                                                                                   (DOLLARS IN THOUSANDS)
<S>                                                                  <C>                <C>                 <C>
           Net income..........................................     $     813          $  28,031           $   2,175
                                                                      ---------          ---------           ---------

           Other comprehensive income (loss), net of tax:

            Foreign currency translation adjustments...........            459                904              (8,495)
            Unrealized gain on securities......................          4,246              3,699               4,958
                                                                     ---------          ---------           ---------
            Other comprehensive income (loss)..................          4,705              4,603              (3,537)
                                                                     ---------          ---------           ---------

            Comprehensive income (loss)........................      $   5,518          $  32,634           $  (1,362)
                                                                     =========          =========           =========

           Related tax (expense) benefit of other
            comprehensive income (loss):

            Foreign currency translation adjustments...........      $     (50)         $     223           $   1,248
            Unrealized gain on securities......................      $  (2,428)         $  (1,915)          $  (2,670)
</TABLE>


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


                                       51
<PAGE>   53
               AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)      THE COMPANY

         As used in these financial statements, the term the "Company" refers to
Ampal-American Israel Corporation ("Ampal") and its consolidated subsidiaries. A
substantial portion of the Company's operations involved transactions with Bank
Hapoalim B.M. ("Hapoalim"), the largest bank in Israel, and companies affiliated
or related thereto. Prior to July 6, 1999, Hapoalim and its wholly-owned
subsidiary, Atad Hevra Lehashkaot Limited owned 24.4% of Ampal's outstanding
Class A Stock. On July 6, 1999 the Company acquired all of Hapoalim's holdings
in Ampal (see Note 3). Commencing with the third quarter of 1999, transactions
with Hapoalim and its related parties, which were reflected as related parties
transactions in the Company's consolidated financial statements through June 30,
1999, are no longer reflected as transactions with a related party.

         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,
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. Actual results could differ from those estimates.

(b)      CONSOLIDATION

         The consolidated financial statements include the accounts of Ampal and
its subsidiaries. Certain prior year amounts have been reclassified to conform
with the current year's presentation.

(c)      TRANSLATION OF FOREIGN CURRENCIES

         For those subsidiaries and affiliates whose functional currency is
considered to be the New Israeli Shekel, assets and liabilities are translated
using year-end rates of exchange. Revenues and expenses are translated at the
average rates of exchange during the year. Translation differences of those
foreign companies' financial statements are reflected in the cumulative
translation adjustment accounts which is included in accumulated other
comprehensive loss.

         Assets and liabilities of foreign subsidiaries and companies accounted
for by the equity method whose functional currency is the U.S. dollar are
translated using year-end rates of exchange, except for property and equipment
and certain investment and equity accounts, which are translated at rates of
exchange prevailing on the dates of acquisition. Revenues and expenses are
translated at average rates of exchange during the year except for revenue and
expense items relating to assets translated at historical rates, which are
translated on the same basis as the related asset. Translation gains and losses
for these companies are reflected in the consolidated statements of income.

(d)      FOREIGN EXCHANGE FORWARD CONTRACTS

         The Company enters into various foreign exchange forward purchase
contracts to hedge foreign currency fluctuations in transactions denominated in
foreign currencies, thereby limiting the Company's risk that would otherwise
result from changes in exchange rates. Gains and losses associated with currency
rate changes are recorded in translation gain (loss) in the consolidated
statements of income. At December 31, 2000, the Company did not have any open
foreign exchange forward contracts.

                                       52
<PAGE>   54
Note 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED

(e)      INVESTMENTS

         (i)      Investments in Affiliates

                  Investments in which the Company exercises significant
         influence, generally 20%-to 50%-owned companies ("affiliates"), are
         accounted for by the equity method, whereby the Company recognizes its
         proportionate share of such companies' net income or loss. Goodwill,
         representing the excess of the purchase price over the fair value of
         the net assets of the acquired entities, is being amortized on a
         straight-line basis over the period of expected benefit of ten years.
         The Company reduces the carrying value of its investment in an
         affiliate if an impairment in value of that investment is deemed to
         be other than temporary.

         (ii)     Investments in Marketable Securities

                  Marketable equity securities, other than equity securities
         accounted for by the equity method, are reported at fair value. For
         those securities which are classified as trading securities, unrealized
         gains and losses are reported in the statements of income. Unrealized
         gains and losses from those securities which are classified as
         available-for-sale are reported as a separate component of
         shareholders' equity.

         (iii)    Cost Basis Investments

                  Equity investments of less than 20% in non-publicly traded
         companies are carried at cost. Changes in the value of these
         investments are not recognized unless an impairment in value is deemed
         to be other than temporary. At December 31, 2000 and December 31, 1999,
         the carrying value of the cost basis investments was $152.9 million and
         $138.7 million, respectively.

(f)      PROPERTY AND EQUIPMENT

         The Company's policy is to record long-lived assets at cost, amortizing
these costs over the expected useful life of the related assets. These assets
are reviewed on a quarterly and annual basis for impairment whenever events or
changes in circumstances indicate that the carrying amounts of the assets may
not be recoverable. Furthermore, the assets are evaluated for continuing value
and proper useful lives by comparison to expected future cash flows.

(g)      INCOME TAXES

         The Company applies the deferred method of accounting for income taxes
whereby deferred taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates to differences between
financial statements carrying amounts and the tax bases of existing assets and
liabilities.

         Deferred income taxes are not provided on undistributed earnings of
foreign subsidiaries adjusted for translation effect totaling approximately
$11.8 million, since such earnings are currently expected to be permanently
reinvested outside the United States. If the earnings were not considered
permanently invested, approximately $4.1 million of deferred income taxes would
have been provided. Deferred income taxes are provided on equity in earnings of
affiliates, gains on issuance of shares by affiliates and unrealized gains on
investments. Ampal's foreign subsidiaries file separate tax returns and provide
for taxes accordingly.

                                       53
<PAGE>   55
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED

(h)      CASH EQUIVALENTS

         Cash equivalents include time deposits and notes receivable with
maturities at acquisition of 90 days or less. At December 31, 2000, cash
equivalents included a short-term deposit of approximately $5 million which is
restricted for 60 days.

(i)      ACCUMULATED COMPREHENSIVE LOSS

         Accumulated other comprehensive loss consists of cumulative translation
adjustments and unrealized gains (losses) on available-for-sale marketable
securities presented net of income taxes.

NOTE 2 -- DISCONTINUED OPERATIONS

         On November 2, 1999, the Company completed the sale of its 85%-owned
mattress manufacturing subsidiary, Paradise Industries Ltd., ("Paradise") to
Beit Hafuton, AA Ltd. ("Beit Hafuton"). Accordingly, the results of Paradise,
whose financial statements were previously consolidated with the Company's
financial statements, have been presented as discontinued operations for all
periods presented. In connection with the sale, the Company agreed to the
following: a) to forgive a capital note in the amount of $.5 million from
Goodnight Center Ltd. ("Goodnight Center"), a subsidiary of Beit Hafuton, b) to
forgive a loan to Paradise in the amount of approximately $.5 million and c) to
pay an additional $1.8 million with respect to bank guarantees issued on behalf
of Paradise and Goodnight Center. As a result of the aforementioned sale, the
Company recorded a loss on disposition of approximately $3.6 million ($1.1
million net of taxes) in the consolidated financial statements for the year
ended December 31, 1999.

NOTE 3 -- TRANSACTION WITH HAPOALIM

         On July 6, 1999, the Company completed a transaction with Hapoalim and
two wholly-owned subsidiaries of Hapoalim, which provided for the following:

         (a)      The Company acquired from Hapoalim all of its holdings in
                  Ampal - 5,874,281 shares of Class A Stock, 3,350 shares of 4%
                  Preferred Stock and 122,536 shares of 6 1/2% Preferred Stock
                  for $31.5 million.

         (b)      The Company sold to Hapoalim's subsidiary seven real estate
                  properties totaling 53,000 sq. ft., which had previously been
                  leased to and occupied by Hapoalim, for $14.7 million.

         (c)      Ampal's subsidiary renewed the lease agreement with Hapoalim
                  with respect to a 4,400 sq. ft. branch in Bnei Brak, Israel
                  for ten years at an annual rental income of $346,000.

         As a result of the above transaction, the Company recorded a gain of
$9.2 million ($6 million net of taxes) on the sale of the aforementioned real
estate properties in the December 1999 consolidated financial statements.

NOTE 4 -- ACQUISITIONS AND DISPOSITIONS

         (a)      In 2000, the Company made the following investments,
                  aggregating $37 million: (1) a $6.2 million investment to
                  acquire a 4.9% interest in Arel Communications and Software
                  Ltd., a leading provider of interactive distance learning
                  systems; (2) an

                                       54
<PAGE>   56
NOTE 4 -- ACQUISITIONS AND DISPOSITIONS -- CONTINUED


                           additional $3.3 million investment in Camelot
                           Information Technologies Ltd. ("Camelot") (total
                           equity interest is 20.7%, including net indirect
                           equity through Ophirtech Ltd. ("Ophirtech")), a
                           developer of innovative software solutions to secure
                           organizational communication networks; (3) a $2.8
                           million investment to acquire a 4% interest in
                           BridgeWave Communications Inc., a developer of
                           wireless solutions for cable companies; (4) an
                           additional $2.75 million investment in Netformx Ltd.
                           ("Netformx") (net equity interest is 20.2%, including
                           net indirect equity through Trinet Venture Capital
                           Ltd. ("Trinet") and Ophirtech), a developer of
                           network design tools; (5) a $2.75 million investment
                           to acquire a 16.6% interest in Xpert Integrated
                           Systems Ltd., a software and systems integrator
                           specializing in systems security; (6) an additional
                           $2.2 million investment in MuTek Solutions Ltd.
                           ("MuTek") (total equity interest is 6.1%), a
                           developer and marketer of software solutions that
                           improve the availability of business critical
                           software applications; (7) a $2.2 million investment
                           to acquire a 17% interest in Oblicore Ltd., a
                           provider of a unique solution that enables businesses
                           to track service performance relative to service
                           targets and allocate service resources to maximize
                           their success; (8) a $2 million investment to acquire
                           a 0.4% interest in Sonic Foundry Inc., a developer of
                           digital media and Internet software tools, services
                           and systems; (9) an additional $1.8 million
                           investment in PowerDsine Ltd. ("PowerDsine") (total
                           equity interest -- 10.8%), a leading developer of
                           power supply devices for the telecommunications
                           industry; (10) a $1.65 million investment to acquire
                           a 7.6% interest in Modem Art Ltd., a developer of
                           system-on-a-chip solutions for wideband and broadband
                           communication systems; (11) a $1.25 million
                           investment to acquire a 13% interest in RealM
                           Technologies Ltd. (total equity interest -- 19.2%,
                           including net indirect equity through Ophirtech), a
                           developer of a network of servers, which will allow
                           the introduction of the next generation of applicable
                           services, while maximizing performance and optimizing
                           bandwidth usage; (12) a $1.25 million investment in
                           Star Management of Investments No. II (2000) L.P., a
                           venture capital fund which focuses on investments in
                           communications, Internet, software and medical
                           devices; (13) an additional $1.1 million investment
                           in Compugen Ltd. (total equity interest - 1.5%), a
                           pioneer in the field of computational genomics and
                           proteomics; (14) a $1.1 million investment to acquire
                           a 20% interest in Ampal Cavallo Intervest Fund, a new
                           Korean venture capital fund which will be managed by
                           Ampal; (15) a $1 million investment to acquire a 0.5%
                           interest in SeraNova, Inc., a provider of E-business
                           services; (16) a $.9 million investment to acquire a
                           20% interest in CUTe Ltd., a designer of intellectual
                           property rights and software modules on key
                           components of the physical layer of wireless
                           telecommunications systems; (17) a $.75 million
                           investment to acquire a 9.5% equity interest in
                           mPrest Technologies Ltd. (formerly WapDWap Ltd.), a
                           developer of web-based applications for cellular
                           phones; (18) an additional $.6 million investment to
                           maintain its interest in Shiron Satellite
                           Communications (1996) Ltd. (equity interest -- 9%), a
                           developer and marketer of two-way multimedia
                           satellite communication products; (19) a $.5 million
                           investment to acquire a 12.9% interest in Enbaya
                           Ltd., a developer and marketer of a 3D browser that
                           enables fast viewing, compression and streaming of 3D
                           models; (20) a $.5 million investment to acquire a
                           5.6% interest in Zactus, Inc., a developer of a web
                           site for musicians; and (21) an additional $.4
                           million investment in ShellCase Ltd., (total equity
                           interest - 17.6%), a developer of the smallest
                           packages for semiconductor chips.

                                       55
<PAGE>   57
NOTE 4 -- ACQUISITIONS AND DISPOSITIONS -- CONTINUED

                  (b)      In 2000, the Company recorded an $11.1 million loss
                           from impairment of investments attributable to the
                           $3.5 million bank guarantees paid on behalf of M.D.F.
                           Industries Ltd. ("M.D.F.") and to the impairment in
                           values of the Company's investments in SmartLight
                           Ltd. ($3 million), Netformx Ltd. ($2.5 million),
                           Qronus Interactive Israel (1994) Ltd. ($1.1 million),
                           Zactus Inc. ($.5 million) and ContactNOW Inc. ($.5
                           million). In 1999, the Company recorded $3 million of
                           losses from impairment of investments which were
                           primarily attributable to its investments in M.D.F.
                           ($1.5 million), Unic View Ltd. ($1 million) and MuTek
                           ($.4 million). In 1998, the Company recorded a $1.9
                           million loss from impairment of its investments in
                           MuTek, Ortek Ltd. Medco Electronics Systems Ltd. and
                           Geotek Communications Ltd.


                  (c)      On December 31, 1999 the Company invested $6 million
                           for a 50% equity interest in Am-Hal Ltd. ("Am-Hal").
                           The purchase price of this acquisition was allocated
                           to the net assets based upon their estimated fair
                           values at the time of the acquisition. Goodwill
                           resulting from this transaction is amortized over the
                           useful life of the related assets. As a result of
                           this transaction, the Company holds a 100% equity
                           interest in Am-Hal, the owner and manager of a chain
                           of luxury senior citizens facilities in Israel.
                           Accordingly, Am-Hal's balance sheet was consolidated
                           with the Company's consolidated balance sheet at
                           December 31, 1999.

                  (d)      On October 12, 1999, the Company, as part of a third
                           round financing, invested approximately $5 million in
                           XACCT Technologies (1997) Ltd. ("XACCT"), a developer
                           of billing, auditing and accounting software for
                           TCP/IP networks, and increased its equity interest in
                           XACCT by 0.8% to 16.2%.

                  (e)      On June 23, 1999, the Company acquired a 3.9%
                           interest in Blue Square-Israel Ltd. ("Blue Square")
                           for approximately $24 million. Blue Square owns 168
                           supermarkets in Israel.

                  (f)      The Company made the following additional investments
                           during the year ended December 31, 1999, aggregating
                           $11.7 million, notably; (1) a $4.3 million investment
                           to acquire an additional 0.2% interest (total equity
                           interest is 0.88%) in Bank Leumi le' Israel B.M.
                           ("Leumi"); (2) a $2.5 million investment to acquire a
                           2.45% interest in Floware Wireless Systems Ltd., a
                           developer of products that enable the transmission of
                           broadband wireless services; (3) a $1.8 million
                           investment to acquire an additional 1.2% interest
                           (total equity interest is 20.3%) in Granite Hacarmel
                           Investments Ltd.; (4) a $1.25 million investment to
                           acquire a 14% interest (subsequently diluted to
                           12.6%) in Camelot, a developer of intelligent
                           adaptive systems for the detection of illegal
                           activities on computer systems; (5) an approximately
                           $.6 million investment to maintain its equity
                           interest in Netformx (total equity interest - 20.7%);
                           (6) a $.5 million investment to acquire a 2.1%
                           interest in Babylon Ltd., a developer and marketer of
                           single click translation software for non-English
                           speaking Internet users; (7) a $.5 million investment
                           to acquire a 4.6% interest in ContactNOW Inc., a
                           developer of Internet-based community enablers; and
                           (8) a $.2 million investment to acquire a 5% interest
                           in Modem Art Ltd., a developer of programmable
                           modems.

                                       56
<PAGE>   58
NOTE 4 - ACQUISITIONS AND DISPOSITIONS -- CONTINUED

                  (g)      On April 14, 1999, the Company sold its 46% equity
                           interest in Moriah Hotels Ltd. ("Moriah") to Koor
                           Tourism Enterprises Ltd. and Sheraton International
                           Ltd. for $29.6 million. Prior to the sale, on April
                           12, 1999, the Company received a dividend from Moriah
                           in the amount of $7.9 million. As a result of the
                           aforementioned transaction, the Company recorded a
                           gain on sale in the amount of approximately $13.5
                           million ($8.8 million, net of income taxes) in the
                           December 31, 1999 consolidated financial statements.

                  (h)      On January 22, 1998, the Company completed its
                           purchase of a one-third interest in the assets of a
                           new wireless communications service provider, MIRS
                           Communication Company Ltd.("MIRS") for $110 million.
                           In March 1998, the Company transferred its interest
                           in MIRS to a limited partnership. A wholly-owned
                           Israeli subsidiary of Ampal is the general partner of
                           the partnership and owns 75.1% of the partnership.
                           The limited partners of the partnership reimbursed
                           the Company for their pro-rata share of expenses
                           incurred by the Company in connection with the
                           original purchase from Motorola Israel. MIRS, which
                           is one-third owned by the partnership and two-thirds
                           owned by Motorola Israel, coordinates and operates in
                           Israel the digital and analog public-shared two-way
                           radio and other services previously furnished by
                           Motorola Israel. The digital wireless communication
                           service is based on Motorola Israel's iDEN(TM)
                           integrated wireless communication technology, which
                           is known as MIRS in Israel.

                           The partnership owns all of the authorized preferred
                           shares of MIRS and Motorola Israel owns all of the
                           authorized ordinary shares. Each share issued by MIRS
                           is entitled to one vote. The Company accounts for its
                           investment in MIRS using the cost method of
                           accounting. Under the cost method, the Company
                           recognizes income from dividends as they are
                           declared. On March 21, 1999, MIRS declared a
                           dividend, the Company's share of which amounts to $.9
                           million (net of minority interest), which was paid in
                           September 1999.

                  (i)      In addition to the investment in MIRS, the Company
                           made the following investments in the high-technology
                           field in the year ended December 31, 1998,
                           aggregating $7.3 million: (1) a $2.5 million
                           investment to acquire an 8.9% interest in SmartLight
                           Ltd., a developer and marketer of innovative digital
                           film viewers for use in the diagnosis of medical
                           images; (2) a $2.1 million investment to acquire an
                           additional 8.6% of XACCT, a developer of billing,
                           auditing and accounting software for TCP/IP networks;
                           (3) a $1 million investment to acquire an additional
                           3.8% of PowerDsine Ltd., a developer, manufacturer
                           and marketer of innovative modules and components for
                           the telecommunications industry; (4) a $1 million
                           investment to acquire a 1.75% equity interest in
                           Compugen Ltd., a developer of algorithms and models
                           for the interpretation of biological processes; (5) a
                           $.4 million investment to acquire an additional 2% in
                           its existing investee Netformx, a developer of
                           CANER (C) family of network design, analysis and
                           simulation tools; and (6) a $.3 million investment to
                           maintain its equity interest in its existing
                           investee, Qronus, a developer and marketer of
                           software testing tools.

NOTE 5 -- DEPOSITS, NOTES AND LOANS RECEIVABLE

         Deposits, notes and loans receivable earn interest at varying rates
depending upon their linkage provisions. The deposits are guaranteed by
Hapoalim. Deposits have maturities of up to 5 years and

                                       57
<PAGE>   59
NOTE 5 -- DEPOSITS, NOTES AND LOANS RECEIVABLE -- CONTINUED

notes and loans receivable have maturities of up to 8 years. At December 31,
2000 and 1999, deposits, notes and loans receivable from related parties were
$3.2 million and $3.1 million, respectively, and such balances with others were
$11.6 million and $19.2 million, respectively (see Notes 1(a) and 3).

NOTE 6 -- INVESTMENTS IN MARKETABLE SECURITIES

         The Company classifies investments in marketable securities as trading
securities or available-for-sale securities and periodically re-evaluates such
classifications.

(a)      TRADING SECURITIES

         The cost and market values of trading securities at December 31, 2000
and 1999 are as follows:

<TABLE>
<CAPTION>
                                              UNREALIZED        MARKET
DECEMBER 31, 2000                 COST       GAINS/(LOSSES)     VALUE
-----------------                 ----       --------------     -----
                                        (DOLLARS IN THOUSANDS)
<S>                             <C>                 <C>        <C>
Bonds .......................   $    10        $    --         $    10
Equity Securities ...........    26,585         (2,817)         23,768
                                -------        -------         -------

Total Trading Securities ....   $26,595        $(2,817)        $23,778
                                =======        =======         =======
</TABLE>

<TABLE>
<CAPTION>
                                              UNREALIZED        MARKET
DECEMBER 31, 1999                 COST       GAINS/(LOSSES)     VALUE
-----------------                 ----       --------------     -----
                                        (DOLLARS IN THOUSANDS)
<S>                             <C>                 <C>        <C>
Bonds .......................   $    70        $    (4)        $    66
Equity Securities ...........    31,253          9,039          40,292
                                -------        -------         -------

Total Trading Securities ....   $31,323        $ 9,035         $40,358
                                =======        =======         =======
</TABLE>


            In the years ended December 31, 2000, 1999 and 1998, the Company
recorded $(5.9) million, $12.1 million, and $(1.4) million of unrealized
(losses) gains, respectively, on trading securities in the statement of income.

            During 2000, 1999 and 1998, the Company invested approximately $23.3
million, $28 million, and $30.8 million, respectively, in marketable securities,
which are classified as trading securities.

(b)         AVAILABLE-FOR-SALE SECURITIES

The cost and market values of available-for-sale securities at December 31, 2000
and 1999 are as follows:

<TABLE>
<CAPTION>
                                               UNREALIZED        MARKET
DECEMBER 31, 2000                  COST       GAINS/(LOSSES)     VALUE
-----------------                  ----       --------------     -----
                                         (DOLLARS IN THOUSANDS)
<S>                              <C>                 <C>        <C>
Equity Securities ...........    $32,114        $ 2,294        $34,408
                                 =======        =======        =======
</TABLE>

<TABLE>
<CAPTION>
                                               UNREALIZED        MARKET
DECEMBER 31, 1999                  COST       GAINS/(LOSSES)     VALUE
-----------------                  ----       --------------     -----
                                         (DOLLARS IN THOUSANDS)
<S>                             <C>                 <C>        <C>
Equity Securities ...........    $24,147        $(5,012)        $19,135
                                 =======        =======         =======
</TABLE>

                                       58
<PAGE>   60
NOTE 7 -- NOTES AND LOANS PAYABLE

            Notes and loans payable consist primarily of bank borrowings either
in U.S. Dollars, linked to the Consumer Price Index in Israel or in unlinked
shekels with interest rates varying depending upon their linkage provision and
mature through 2008.

            At December 31, 2000 and 1999, notes and loans payable include a $15
million note payable to Hapoalim, secured by the Company's ownership interest in
the building located at 800 Second Avenue, New York, New York. The loan is due
on March 30, 2001 and bears interest at the rate of LIBOR plus .75%, or 7.50%
and 6.85% at December 31, 2000 and December 31, 1999, respectively.

            The Company has two long-term loans from Hapoalim and Leumi in the
amount of $38.7 million and $36.4 million at December 31, 2000 and 1999,
respectively, (in connection with its investment in shares of MIRS (see Note
4(h)). Both loans are due on March 31, 2008 and bear interest at a rate of LIBOR
plus .8%. The principal payments are due as follows: 10% on March 31, 2004, 15%
on March 31, 2005 and 25% on each of the following dates - March 31, 2006, 2007
and 2008. Interest will be paid annually on March 31 of each year from March 31,
2001 until and including March 31, 2008.

            At December 31, 2000 and 1999, notes and loans payable include $23.9
million ($4.1 million to related parties) and $22.3 million ($4.6 million to
related parties) of loans, respectively, attributed to Am-Hal (see Note 4(c)).
The loans are dollar linked, mature through 2002 and have interest rates of zero
to LIBOR plus 1%.

            The weighted average interest rates on the balances of short-term
borrowings at year-end are as follows: 5.84% on $86.1 million and 5.24% on $46.7
million in 2000 and 1999, respectively.

NOTE 8 -- DEBENTURES

Debentures outstanding at December 31 consist of:

<TABLE>
<CAPTION>
                                                            2000            1999
                                                            ----            ----
                                                           (DOLLARS IN THOUSANDS)
<S>                                                        <C>            <C>
AMPAL:
Fifteen Year 11% Discount Debenture, maturing 2003 ......  $18,026        $18,044

AMPAL DEVELOPMENT (ISRAEL) LTD.:
Various series with interest rates ranging from
   6.2%-7.5%, linked to the Consumer Price Index in
   Israel, maturing 2001-2005, secured by assets of
   $10 million and $16 million, respectively ............    9,766         15,794
                                                           -------        -------
                                                            27,792         33,838

Less: Unamortized discounts .............................    3,759          5,179
                                                           -------        -------

Total ...................................................  $24,033        $28,659
                                                           =======        =======
</TABLE>

                                       59
<PAGE>   61
NOTE 8 -- DEBENTURES --CONTINUED

            Certain debentures are presentable for early redemption. If
presented for early redemption, maturities (including required obligations) for
the five years ending December 31 would be:

<TABLE>
<S>                    <C>
2001.................  $14,941*
2002.................    1,935
2003.................    1,935
2004.................    1,934
2005.................    2,027
</TABLE>

----------
* If no debentures are presented for early redemption, scheduled maturities will
amount to $1,935.

NOTE 9 -- SHAREHOLDERS' EQUITY

            Capital Stock

            The 4% and 6-1/2% preferred shares are convertible into 5 and 3
shares of Class A Stock, respectively. At December 31, 2000, a total of
5,796,089 shares of Class A Stock are reserved for issuance upon the conversion
of the Preferred Stock and the exercise of 3,161,000 options.

            The 4% and 6-1/2% Preferred Stock are preferred as to dividends on a
cumulative basis. Additional dividends out of available retained earnings, if
declared, are payable on an annual non-cumulative basis as a percentage of par
value as follows:

                     (i)        up to 4% on Class A Stock, then

                     (ii)       on 4% Preferred Stock and Class A Stock ratably.

            Preferred shares are non-voting unless dividends are in arrears for
three successive years. At December 31, 2000, there are no dividend arrearages.

            Retained Earnings

            At December 31, 2000, retained earnings include $49.6 million for
affiliates accounted for by the equity method, of which $5.3 million and an
additional $45.1 million from subsidiaries is not available for the payment of
dividends. In most cases this results from Israeli requirements that dividends
may only be paid on the basis of shekel-denominated and not dollar-denominated
retained earnings.

NOTE 10 -- STOCK OPTIONS

            In September 1994, the Company's shareholders approved a Stock
Option Plan (the "1994 Plan") permitting the granting of options to purchase up
to an aggregate of 200,000 shares of Class A Stock to employees, officers and
directors of the Company and certain subsidiaries of the Company. The options
granted under the 1994 Plan may be either incentive stock options, at an
exercise price of not less than (i) the fair market value of the underlying
shares on the date of grant, or (ii) 110% of the fair market value on the date
of grant if the grantee owns stock representing more than 10% of the voting
power of Ampal's capital stock or value of all classes of stock of Ampal, or
non-incentive stock options, at an exercise price that is fixed by the Board of
Directors (the "Board") or the Stock Option Committee (the "Committee") at the
time the options are granted. The options are exercisable at the discretion of
the Board or the Committee, with a non-exercisable period of at least two years
from the date of grant for all options granted except those granted to
non-employee directors, which may be exercised immediately upon grant.

                                       60
<PAGE>   62
NOTE 10 -- STOCK OPTIONS -- CONTINUED

The terms of options granted under the 1994 Plan may not exceed five years. As
of December 31, 1999, all options under the plan expired.

            In March 1998, the Company entered into a Stock Option and Stock
Purchase Agreement ("the Agreement") with Dr. Gleitman, the Company's then Chief
Executive Officer. Pursuant to the Agreement, the Chief Executive Officer was
granted options to purchase up to 1,000,000 shares of the Company's Class A
Stock. The Company also granted, based on certain terms and conditions, the
rights to purchase ("Share Purchase Rights"), at a discount, up to 200,000
shares of the Company's Class A Stock. On June 29, 1999, Dr. Gleitman announced
his resignation, effective July 1, 1999. The Agreement that the Company entered
into with Dr. Gleitman in 1998 was terminated on the date of his resignation.
Upon Dr. Gleitman's resignation, 437,500 stock options and 100,000 stock rights
have been forfeited.

            Also in March 1998, the Board approved a Long-Term Incentive Plan
(the "1998 Plan") permitting the granting of options to all employees, officers,
directors and consultants of the Company and its subsidiaries to purchase up to
an aggregate of 400,000 shares of Class A Stock. The 1998 Plan remains in effect
for a period of ten years.

            On February 15, 2000, the Stock Option Plan Committee approved a new
incentive plan, (the "2000 Plan") under which the Company has reserved 4 million
shares of Class A Stock for grants to present and future employees. The 2000
Plan was approved by the Board of Directors at a Meeting held on March 27, 2000
and was approved by a majority of the Company's shareholders at the June 29,
2000 annual meeting of shareholders.

            The options granted under the 1998 Plan and the 2000 Plan (together
with the 1998 Plan, the "Plans") may be either incentive stock options, at an
exercise price to be determined by the Committee but not less than 100% of the
fair market value of the underlying options on the date of grant, or
non-incentive stock options, at an exercise price to be determined by the
Committee. The Committee may also grant, at its discretion, "restricted stock,"
"dividend equivalent awards," which entitle the recipient to receive dividends
in the form of Class A Stock, cash or a combination of both and "stock
appreciation rights," which permit the recipient to receive an amount in the
form of Class A Stock, cash or a combination of both, equal to the number of
shares of Class A Stock with respect to which the rights are exercised
multiplied by the excess of the fair market value of the Class A Stock on the
exercise date over the exercise price. The options granted under the Plans were
granted either at market value or above.

            The Company accounts for all plans under APB Opinion No. 25, under
which compensation cost has been recognized for the year-ended December 31,
1998, for the 20% discount in connection with the Share Purchase Rights. No such
costs were incurred in the years ended December 31, 1999 and December 31, 2000.
Had compensation cost for the options under the above Plans been determined in
accordance with SFAS No. 123, the Company's net income and EPS would have been
reduced as follows:

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                         -----------------------
                                                     2000           1999        1998
                                                     ----           ----        ----
                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                <C>            <C>          <C>
Net income (loss):  As reported.............           $813       $28,031      $2,175
                    Pro forma...............        (10,640)       27,305       1,201

Basic EPS:          As reported.............           $.03         $1.32        $.08
                    Pro forma...............           (.57)         1.29         .04

Diluted EPS:        As reported.............           $.03         $1.15        $.07
                    Pro forma...............           (.57)         1.12         .03
</TABLE>

                                       61
<PAGE>   63
NOTE 10 -- STOCK OPTIONS -- CONTINUED

            Under SFAS No. 123, the fair value of each option is estimated on
the date of grant using the Black Scholes option-pricing model with the
following weighted average assumptions used for the options granted as of
December 31, 2000, December 31, 1999 and December 31, 1998, respectively: (1)
expected life of options of 5.92, 5 and 7.95 years; (2) dividend yield of 0%;
(3) expected volatility of 59%, 41% and 40%; and (4) risk-free interest rate of
6.68%, 6.35% and 5.72%.

            Because the SFAS No. 123 method of accounting has not been applied
to options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.

            Transactions under both Stock Option Plans and Agreement were as
follows:

<TABLE>
<CAPTION>

                                                          YEAR ENDED DECEMBER 31, 2000
                                                          ----------------------------
                                                                            WEIGHTED
                                                                            AVERAGE
                                                                           EXERCISE
                                                            OPTIONS         PRICE
                                                            -------         -----
                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                         <C>            <C>
Outstanding at beginning of year .....................          762         $ 8.55
Granted ..............................................        2,972         $25.48
Exercised ............................................         (511)        $ 8.59
Forfeited/Expired ....................................          (62)        $10.00
                                                             ------
Outstanding at end of year ...........................        3,161         $24.43
                                                             ======


Exercisable at end of year ...........................          884             --
                                                             ======
Weighted average fair value of options granted .......                      $ 6.94
                                                                            ======
</TABLE>

                                      62
<PAGE>   64
NOTE 10 -- STOCK OPTIONS -- CONTINUED


<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31, 1999
                                                     ----------------------------
                                                        WEIGHTED                   WEIGHTED
                                          SHARE         AVERAGE                    AVERAGE
                                         PURCHASE       EXERCISE                   EXERCISE
                                          RIGHTS         PRICE        OPTIONS       PRICE
                                          ------         -----        -------       -----
                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                      <C>            <C>           <C>         <C>
Outstanding at beginning of year ......    100               (1)       1,036         $8.82
Granted ...............................     --                           199         $8.00
Exercised .............................     --                            --            --
Forfeited/Expired .....................   (100)              (1)        (473)        $8.91
                                          ----                        ------
Outstanding at end of year ............      0                           762         $8.55
                                          ====                        ======

Exercisable at end of year ............     --             --            684            --
                                                                      ======
Weighted average fair value of
   options granted ....................                                              $3.67
                                                                                     =====
</TABLE>


<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31, 1998
                                                    ----------------------------
                                                       WEIGHTED                     WEIGHTED
                                         SHARE         AVERAGE                      AVERAGE
                                        PURCHASE       EXERCISE                     EXERCISE
                                         RIGHTS         PRICE         OPTIONS        PRICE
                                         ------         -----         -------        -----
                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                     <C>           <C>             <C>           <C>
Outstanding at beginning of year .....      --             --            109         $10.91
Granted ..............................     200               (1)       1,000         $ 8.75
Exercised ............................    (100)        $ 2.80             --             --
Terminated ...........................      --             --            (73)        $10.91
                                        ------                        ------
Outstanding at end of year ...........     100               (1)       1,036         $ 8.82
                                        ======                        ======

Exercisable at end of year ...........      --             --            473             --
                                                                      ======
Weighted average fair value of
   options granted ...................                                               $ 2.23
                                                                                     ======
</TABLE>

(1)      Pursuant to the Stock Option and Purchase Agreement, exercise price to
         be determined based on 80% of the market price of the shares purchased
         on the date of exercise.

            The 3,161,000 options outstanding as of December 31, 2000 have
exercise prices between $6.06 and $32 with a weighted average exercise price of
$24.43 and a weighted average remaining contractual life of 5.81 years. Of these
3,161,000 options, 884,000 are exercisable; their weighted average exercise
price is $20.09.

            The 762,000 options outstanding as of December 31, 1999 have
exercise prices between $6.75 and $10 with a weighted average exercise price of
$8.55 and a weighted average remaining contractual life of 2 years. Of these
762,000 options, 684,000 are exercisable; their weighted average exercise price
is $8.62.

                                       63
<PAGE>   65
NOTE 11 -- EARNINGS PER CLASS A SHARE

            In accordance with SFAS No. 128 "Earnings Per Share", net earnings
per Class A share ("basic EPS") were computed by dividing net earnings by the
weighted average number of Class A shares outstanding and excluded any potential
dilution. Net earnings per Class A share amounts, assuming dilution ("diluted
EPS") were computed by reflecting potential dilution from the conversion of the
4% and 6-1/2% Preferred Stocks into Class A Stock and the exercise of stock
options. SFAS No. 128 requires the presentation of both basic EPS and diluted
EPS on the face of the income statement.

            A reconciliation between the basic and diluted EPS computations for
net earnings is as follows:

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31, 2000
                                                                 ----------------------------
                                                                                              PER SHARE
                                                       INCOME              SHARES              AMOUNTS
                                                       ------              ------              -------
                                                           (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                    <C>                 <C>                <C>
Basic EPS:
Net income attributable to Class A
   Stock...................................             $579(1)            18,916                $.03
                                                        ====                                     ====

Effect of Dilutive Securities:
   Exercise of stock options...............                                   141
                                                                           ------

Diluted EPS(2):
   Net income attributable to Class A
      Stock................................             $579               19,057                $.03
                                                        ====               ======                ====
</TABLE>

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31, 1999
                                                                 ----------------------------
                                                                                                PER SHARE
                                                       INCOME               SHARES               AMOUNTS
                                                       ------               ------               -------
                                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                   <C>                   <C>                 <C>
Basic EPS:
   Income from continuing operations................. $29,903(1)                                  $1.42
   Loss from discontinued operations.................  (2,156)                                     (.10)
                                                       ------                                      ----
   Net income attributable to Class A Stock.......... $27,747               20,966                $1.32
                                                      =======                                     =====

Effect of Dilutive Securities:
   Conversion of 4% and 6-1/2% Preferred Stocks......                        3,365
                                                                             -----

Diluted EPS:
   Income from continuing operations................. $30,187                                     $1.24
   Loss from discontinued operations.................  (2,156)                                     (.09)
                                                       ------                                      ----
   Net income attributable to Class A Stock.......... $28,031               24,331                $1.15
                                                      =======               ======                =====
</TABLE>


                                    64
<PAGE>   66
NOTE 11 -- EARNINGS PER CLASS A SHARE -- CONTINUED

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31, 1998
                                                                             ----------------------------
                                                                                                           PER SHARE
                                                                  INCOME               SHARES               AMOUNTS
                                                                  ------               ------               -------
                                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                               <C>                  <C>                 <C>
Basic EPS:
   Income from continuing operations....................          $ 3,555(1)                                  $ .15
   Loss from discontinued operations....................           (1,715)                                     (.07)
                                                                  -------                                     -----
   Net income attributable to Class A Stock.............          $ 1,840               23,911                $ .08
                                                                  =======                                     =====

Effect of Dilutive Securities:
   Conversion of 4% and 6-1/2% Preferred Stocks.........                                 3,713
                                                                                        ------

Diluted EPS:
   Income from continuing operations....................          $ 3,556(3)                                  $ .13
   Loss from discontinued operations....................           (1,715)                                     (.06)
                                                                  -------                                     -----
   Net income attributable to Class A Stock.............          $ 1,841               27,624                $ .07
                                                                  =======               ======                =====
</TABLE>

(1)      After deduction of Preferred Stock dividends of $234, $284 and $335,
         respectively.

(2)      In 2000, the conversion of the 4% and 6-1/2% Preferred Stocks was
         excluded from the diluted EPS calculation due to the antidilutive
         effect.

(3)      Includes decrease in net income in 1998 of $334 due to dilution in
         equity in earnings of affiliate.

            Options to purchase 3,161,000, 762,000 and 1,036,000 shares of
common stock were outstanding as of December 31, 2000, 1999 and 1998,
respectively, of which 2,957,000, 762,000 and 1,036,000 options were not
included in the computation of diluted EPS because of their anti-dilutive
effect.

                                       65
<PAGE>   67
NOTE 12 -- INCOME TAXES

<TABLE>
<CAPTION>
                                                                                                YEAR ENDED DECEMBER 31,
                                                                                         2000            1999             1998
                                                                                         ----            ----             ----
                                                                                                  (DOLLARS IN THOUSANDS)
<S>                                                                                    <C>              <C>              <C>
The components of current and deferred income tax expense (benefit) are:
Current:
 State and local ................................................................      $     65         $      5         $     66
 Federal ........................................................................        (2,737)             542              280
 Foreign ........................................................................           164           13,291            1,136
Deferred:
 State and local ................................................................            14             (182)            (132)
 Federal ........................................................................         3,295           (1,582)          (3,137)
 Foreign ........................................................................        (2,994)           3,488           (1,734)
                                                                                       --------         --------         --------
      Total .....................................................................      $ (2,193)        $ 15,562         $ (3,521)
                                                                                       ========         ========         ========

The components of deferred income tax expense (benefit) are:

Unrealized gains (losses) .......................................................      $ (4,750)        $  4,375         $ (1,230)
Goodwill ........................................................................         1,593            1,186             --
Foreign tax credit utilization ..................................................          --             (1,740)            --
Equity in earnings of affiliates ................................................           894           (1,349)          (3,477)
Loss from impairment of investments .............................................            90             (875)            --
Net operating loss carryforwards ................................................           813              141             (985)
Deferred income .................................................................         1,840              255              368
Other ...........................................................................          (165)            (269)             321
                                                                                       --------         --------         --------
      Total .....................................................................      $    315         $  1,724         $ (5,003)
                                                                                       ========         ========         ========

The domestic and foreign components of (loss) income from continuing operations
before income taxes are:

Domestic ........................................................................      $ (2,496)        $ (2,540)        $ (5,806)
Foreign .........................................................................         1,116           48,289            6,175
                                                                                       --------         --------         --------
      Total .....................................................................      $ (1,380)        $ 45,749         $    369
                                                                                       ========         ========         ========


A reconciliation of income taxes between the statutory and effective tax is as
follows:

Federal income tax (benefit) at 35% .............................................      $   (483)        $ 16,012         $    129
Taxes on foreign income (below) U.S. rate,
   net of tax credits ...........................................................        (1,614)            (303)          (3,456)
Other ...........................................................................           (96)            (147)            (194)
                                                                                       --------         --------         --------
      Total effective tax: 159%, 34% and (954%) .................................      $ (2,193)        $ 15,562         $ (3,521)
                                                                                       ========         ========         ========
</TABLE>

            Other assets include approximately $6.3 million ($6.3 million in
1999) of deferred tax assets which primarily represent the tax benefit of the
temporary differences between the carrying values of the investments in the
financial statements and their income tax bases and a $4.1 million asset (in
2000) representing a tax benefit with respect to the net operating loss
carryforwards. Accounts and income taxes payable and accrued expenses include
approximately $24.1 million ($18 million in 1999) of deferred tax liability
which primarily consists of tax liability provided on undistributed earnings of
affiliates of approximately $22.9 million ($17 million in 1999).

                                       66
<PAGE>   68
NOTE 13 -- INVESTMENTS IN AFFILIATES

            The companies accounted for by the equity method and the Company's
share of equity in those investees are:

<TABLE>
<CAPTION>
                                                                  As of December 31,
                                                          2000          1999          1998
                                                          ----          ----          ----
<S>                                                       <C>           <C>           <C>
Am-Hal Ltd. (See Note 4(c))............................     --%           --%           50%
Bay Heart Limited (a)..................................     37            37            37
Carmel Containers Systems Limited......................   21.8          20.7          20.7
Coral World International Limited (b)..................     50            50            50
Epsilon Investment House Ltd...........................     20            20            20
Granite Hacarmel Investments Limited ("Granite").......   20.2          20.3          19.1
Hod Hasharon Sport Center (1992) Limited
 Partnership...........................................     50            50            50
Moriah Hotels Ltd. (see Note 4 (g))....................     --            --            46
Ophir Holdings Ltd.....................................   42.5          42.5          42.5
Ophirtech Ltd..........................................   42.5            --            --
Renaissance Investment Company Ltd.....................     20            20            20
Trinet Investment in High-Tech Ltd.....................   37.5          37.5          37.5
Trinet Venture Capital Ltd. (c)........................     50            50            50
</TABLE>


            Combined summarized financial information for the above companies is
as follows:


<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                             2000           1999            1998
                                                             ----           ----            ----
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                        <C>            <C>             <C>
Revenues.........................................          $843,152       $678,537        $672,803
Gross profit.....................................           183,680        216,285         184,487
Net income.......................................            36,799         51,443          31,720

Property and equipment...........................          $266,123       $272,548        $347,605
Other assets.....................................           668,750        597,505         508,459
                                                            -------        -------         -------
  Total assets...................................          $934,873       $870,053        $856,064
                                                           ========       ========        ========

Total liabilities, including bank borrowings.....          $635,873       $627,509        $601,909
                                                           ========       ========        ========
</TABLE>

(a)      At December 31, 2000 and 1999, the Company had a note receivable from
         Bay Heart Limited in the amount of $.4 million and recorded interest
         income in the amount of $22 and $20, respectively, for the above years.

(b)      At December 31, 1998, the Company had a note receivable from CWI in the
         amount of $.1 million and recorded interest income in the amount of $31
         for the above year. This note receivable matured on March 3, 1999.

(c)      At December 31, 2000 and 1999, the Company had a non-interest bearing
         note receivable from Trinet Venture Capital Ltd. in the amount of $2.5
         million and $2.4 million, respectively.

The carrying value of the Company's investments in shares of its publicly traded
affiliates at December 31, 2000, amounted to $31.6 million and had a market
value of $55.1 million, based upon quoted market prices of shares traded on the
New York Stock Exchange, American Stock Exchange, NASDAQ National Market and the
Tel Aviv Stock Exchange. There is no assurance that any of these investments
could be realized at the quoted market price.

                                       67
<PAGE>   69
NOTE 14 - SEGMENT INFORMATION

            SFAS 131 "Disclosure about Segments of an Enterprise and Related
Information," establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, geographic areas and major customers. Segment information presented
below results primarily from operations in Israel.


<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                            2000             1999               1998
                                            ----             ----               ----
                                                     (DOLLARS IN THOUSANDS)
<S>                                      <C>               <C>               <C>
REVENUES:
Finance................................  $  16,512         $  45,501         $   7,308
Real estate rental.....................      9,981             6,902             7,375
Leisure-time...........................      1,816             1,674             1,652
Intercompany adjustments...............       (488)             (467)             (503)
                                         ---------         ---------         ---------
     Total.............................  $  27,821         $  53,610         $  15,832
                                         =========         =========         =========

EQUITY IN EARNINGS OF AFFILIATES:
Finance(b).............................  $   2,745         $   5,595         $     186
Real estate rental(b)..................      2,915             5,277               510
Leisure-time(a)........................      1,418               782               775
                                         ---------         ---------         ---------
     Total.............................  $   7,078         $  11,654         $   1,471
                                         =========         =========         =========

INTEREST INCOME:
Finance................................  $   1,694         $   2,503         $   5,768
Real estate rental.....................         --                --                61
Intercompany adjustments...............       (488)             (467)             (503)
                                         ---------         ---------         ---------
     Total.............................  $   1,206         $   2,036         $   5,326
                                         =========         =========         =========

INTEREST EXPENSE:
Finance................................  $  10,998         $   8,947         $  10,500
Real estate rental.....................      2,732             1,374             1,483
Leisure-time...........................         75               149               523
Intercompany adjustments...............       (488)             (467)             (503)
                                         ---------         ---------         ---------
     Total.............................  $  13,317         $  10,003         $  12,003
                                         =========         =========         =========

PRETAX OPERATING (LOSS) INCOME:
Finance................................  $ (12,647)        $  26,873         $  (9,991)
Real estate rental.....................     (1,933)            2,000             2,341
Leisure-time...........................        197               111              (354)
                                         ---------         ---------         ---------
     Total.............................  $ (14,383)        $  28,984         $  (8,004)
                                         =========         =========         =========

INCOME TAX (BENEFIT) EXPENSE:
Finance................................  $  (2,246)        $  15,583         $  (2,904)
Real estate rental.....................         42                88              (319)
Leisure-time...........................         11              (109)             (298)
                                         ---------         ---------         ---------
     Total.............................  $  (2,193)        $  15,562         $  (3,521)
                                         =========         =========         =========

TOTAL ASSETS:
Finance................................  $ 324,593         $ 288,961         $ 243,329
Real estate rental.....................    125,017           104,337            45,145
Leisure-time...........................     13,708            13,882            37,169
Intercompany adjustments...............    (16,690)          (10,400)           (1,523)
                                         ---------         ---------         ---------
     Total.............................  $ 446,628         $ 396,780         $ 324,120
                                         =========         =========         =========
</TABLE>

                                       68
<PAGE>   70
NOTE 14 -- SEGMENT INFORMATION - CONTINUED

<TABLE>
<CAPTION>
                                            YEAR ENDED DECEMBER 31,
                                        2000           1999          1998
                                        ----           ----          ----
                                             (DOLLARS IN THOUSANDS)
<S>                                   <C>            <C>            <C>
INVESTMENTS IN AFFILIATES:
Finance(b).........................   $11,757        $ 9,109        $ 5,565
Real estate rental(b)..............    24,453         23,070         10,132
Leisure-time(a)....................    11,187         11,017         33,943
                                      -------        -------        -------
     Total.........................   $47,397        $43,196        $49,640
                                      =======        =======        =======

CAPITAL EXPENDITURES:
Finance............................   $   733        $   819        $    19
Real estate rental.................    15,893          1,014          2,895
Leisure-time.......................       136            111             38
                                      -------        -------        -------
     Total.........................   $16,762        $ 1,944        $ 2,952
                                      =======        =======        =======

DEPRECIATION AND AMORTIZATION:
Finance............................   $ 1,663        $ 1,434        $ 1,346
Real estate rental.................     1,253            818            848
Leisure-time.......................       115            107            215
                                      -------        -------        -------
     Total.........................   $ 3,031        $ 2,359        $ 2,409
                                      =======        =======        =======
</TABLE>

            Corporate office expense is principally applicable to the financing
operation and has been charged to that segment above. Revenues and pretax
operating income above exclude equity in earnings of affiliates and minority
interests. Equity in earnings of affiliates only includes the equity in
earnings of those affiliates whose operations are represented by the Company's
segments. Total assets exclude assets from discontinued operations.

            (a) Operations in Australia, Israel and the United States (see Note
                13).

            (b) Operations in Israel.

            The real estate rental segment consists of rental property owned in
Israel and the United States leased to related and unrelated parties. The
leisure-time segment consists primarily of Moriah Hotels Ltd. (hotel chain in
Israel-see Note 4 (g)), Coral World International Limited (marine parks located
around the world) and Country Club Kfar Saba (the Company's 51%-owned subsidiary
located in Israel).

NOTE 15 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

            The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:

(a)         CASH AND CASH EQUIVALENTS

            For short-term investments, the carrying amount is a reasonable
estimate of fair value (see Note 1(h)).

(b)         DEPOSITS, NOTES AND LOANS RECEIVABLE

            The fair value of these deposits, notes and loans is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities.

                                       69
<PAGE>   71
NOTE 15 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS -- CONTINUED

(c)         INVESTMENTS

            For financial instruments with maturities between 91 days and 1
year, and all marketable securities, the carrying amount is a reasonable
estimate of fair value.

(d)         COMMITMENTS

            Due to the relatively short term of commitments discussed in Note
16, their contract value is considered to be their fair value.

(e)         DEPOSITS, NOTES AND LOANS PAYABLE AND DEBENTURES

            The fair value of notes and loans payable, deposits payable and
debentures outstanding is estimated by discounting the future cash flows using
the current rates offered by lenders for similar borrowings with similar credit
ratings and for the same remaining maturities.


<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                           2000                            1999
                                           ----                            ----
                                 CARRYING           FAIR         CARRYING         FAIR
                                  AMOUNT           VALUE          AMOUNT          VALUE
                                  ------           -----          ------          -----
Financial assets:                                 (DOLLARS IN THOUSANDS)
<S>                              <C>             <C>             <C>             <C>
Cash and cash equivalents.....   $  5,842        $  5,842        $  7,409        $  7,409
Deposits, notes and loans
 receivable...................     14,804          14,602          22,336          20,682
Investments...................     58,186          58,186          59,493          59,493
                                 --------        --------        --------        --------
                                 $ 78,832        $ 78,630        $ 89,238        $ 87,584
                                 ========        ========        ========        ========

Financial liabilities:

Notes and loans payable.......   $177,543        $175,957        $145,860        $151,150
Debentures outstanding........     24,033          24,161          28,659          29,144
                                 --------        --------        --------        --------
                                 $201,576        $200,118        $174,519        $180,294
                                 ========        ========        ========        ========
</TABLE>

NOTE 16-- COMMITMENTS AND CONTINGENCIES

            (a) The combined minimum annual lease payments on Ampal's corporate
offices and Country Club Kfar Saba, without giving effect to future escalations,
are $.4 million in each of the years 2001-2005, and $6.5 million in the
aggregate, thereafter, totaling $8.5 million. The leases expire in 2009 and
2037, respectively.

            (b) For the years 2001 through 2005, the combined minimum lease
receipts to be received by the Company from rental properties are approximately
$5 million in 2001, $4.3 million in 2002 and 2003, $4.4 million in 2004 and $4
million in 2005; and $17.5 million in the aggregate, thereafter, totaling $39.5
million (all from non-related parties).

            (c) The Company has issued guarantees on bank loans to its investees
and subsidiaries totaling $6.2 million.

            The Company's commitments to its investees amounted to $12.4
million.

                                       70
<PAGE>   72
NOTE 16-- COMMITMENTS AND CONTINGENCIES -- CONTINUED

            (d) As part of the Ministry of National Infrastructure's policy to
separate the holding of Emergency Inventories of crude oil and product
inventories from the oil marketing companies' commercial inventories, the Fuel
Authority had ordered that Emergency Inventories of fuel products were to be
stored in separate tanks at specifically designated locations. The separation of
inventories has been postponed. Under consideration within the framework of the
Law for Arrangements in the Economy is a change proposed by the government
regarding the holding of inventories of fuel products, which would be held at
the account of the fuel companies. Until the law is passed and regulations and
rulings are formulated, it is difficult to determine its potential financial
impact on Granite.

            A claim filed by the oil marketing companies, Sonol (Granite's
wholly-owned subsidiary), Paz and Delek against the Government of Israel, the
Minister of Finance, and the Department of Customs and Value Added Tax, claimed
the illegality of an excise tax order that serves as the basis for excise tax
charged the said companies' fuel sales. Pursuant to mutual agreement between the
parties, the claim for declarative relief, which was filed with the District
Court of Tel Aviv, was withdrawn.

            Subsequent to the above withdrawal, a class action previously filed
against the oil marketing companies in the amount of NIS. 1 billion
(approximately $250 million), demanding the refund to consumers of illegally
charged excise taxes, was also withdrawn.

            In accordance with a government decision, the excise tax rate
applicable to gasoil used for transportation will be increased significantly.
This increase will cause a large price differential between the price of gasoil
used for transportation and that used for other purposes. As a result it has
been proposed, within the framework of a proposed law for Arrangements in the
Government Economy (1999), to amend the excise tax law pertaining to fuel
products in such a manner that will require the marking of gasoil not used for
transportation, and to provide the Director of Customs with enforcement powers
to inspect the purported uses of gasoil and to take punitive measures against
the illegal use of gasoil for purposes other than stipulated by law.
Concurrently with the government's above-mentioned decision, Knesset member, A.
Poraz, submitted a private bill intended to ensure that all fuel product excise
taxes will be imposed at equal rates for all types of the same products, thus
preventing the proposed tax differentials on gasoil. The proposed private bill
passed preliminary reading in the Knesset.

            If the proposed law is enacted as stated in the Law for
Arrangements, and Knesset member Poraz's private bill is not enacted, it can be
assumed that the enforcement means and punitive measures proposed will not
suffice to prevent potential users from violating the law by using gasoil, meant
for industrial or heating purposes, for transportation purposes, thus making the
Company's operations more difficult. Regardless, an increase in the rate of
excise tax will cause a significant increase in the level of customer credit.

            A claim was filed against Sonol, Paz Oil Company Ltd. and Delek Oil
Company Ltd. during February 2000, in the amount of NIS. 400,000 (approximately
$.1 million) relating to alleged collusion in the fixing of the price of gasoil
to consumers. This claim if recognized, as requested by the claimant as a class
action, is stated to amount to approximately NIS. 175 million (approximately $44
million) against all of the companies. Sonol denies the claim and, according to
its legal counsel, chances are good that the claim will not be recognized as a
class action.

            Three claims were lodged against Granite's formerly affiliated
company and its past and present shareholders, which included Sonol. The total
amount of the claims is approximately NIS. 60.2 million ($15 million). The
plaintiff's allegations concern the sale of fuel products pursuant to
restrictive trade

                                       71
<PAGE>   73
NOTE 16-- COMMITMENTS AND CONTINGENCIES -- CONTINUED

practices among the fuel companies and their affiliates. In the opinion of the
legal counsels of Sonol and the formerly affiliated company, the companies have
a sound defense against the claims.

            Sonol has filed a claim against one of its agencies for
approximately NIS. 37 million (approximately $9 million) in the Tel Aviv
District Court, on account of an unpaid debt and damages caused to Sonol,
alleging that the agency violated the terms of the agency agreement by dealing
with one of Sonol's competitors. The agency, in turn, filed a counterclaim in
the amount of approximately NIS. 57 million (approximately $14 million), stating
various causes, including a claim that the contractual agreement between it and
Sonol is a restrictive agreement.

            In the opinion of Sonol's management, based on opinion of Sonol's
legal counsel, the prospects of Sonol's claim against the agency relating to
amounts owed to Sonol are good and, regarding the amount claimed for damages on
account of the violation of the agency agreement, such amount is subject to
deliberation by the court. Regarding the prospects of the agency's counterclaim,
Sonol's legal counsel are unable, at this time, to estimate its prospects,
insofar as it relates to the claim of a restrictive agreement. Should the claim
of a restrictive agreement be rejected by the court, the prospects of the
counterclaim will not be favorable. Currently, the dispute has been referred to
arbitration.

            At this time, it is too early to estimate the effects of the said
developments on the overall Israeli fuel market in general, and on Granite in
particular.

            (e) On July 27, 1998, a Tel Aviv District Court judge ruled in favor
of Yakhin Hakal Ltd., the manager and co-owner of Ampal's 50%-owned affiliates,
Etz Vanir Ltd. ("Etz Vanir") and Yakhin Mataim Ltd. ("Yakhin Mataim"). The
judge's decision allows Etz Vanir and Yakhin Mataim to redeem debentures owned
by Ampal for approximately $.8 million and to require Ampal to surrender all of
its shares of Etz Vanir and Yakhin Mataim for their par value, which is nominal.
After the redemption and surrender, Ampal will no longer have any interest in
Etz Vanir or Yakhin Mataim.

            Etz Vanir and Yakhin Mataim cultivate in the aggregate approximately
1,200 acres of citrus groves.

            Etz Vanir and Yakhin Mataim have not reported their financial
results to Ampal since 1990 and, therefore, their financial results have not
been included in Ampal's financial statements. The carrying value of Ampal's
investment in Etz Vanir and Yakhin Mataim, as of December 31, 1998, is
approximately $.8 million.

            At the request of Ampal's attorneys, the Tel Aviv District Court has
issued a stay of performance of the judgment until the High Court of Appeals
issues a final judgment. On October 15, 1998, Ampal filed an appeal with the
High Court of Appeals in Jerusalem. At this point, the Company can not estimate
when a final ruling will be issued.

            (f) Legal claims arising in the normal course of business have been
filed against subsidiaries and affiliates of the Company. In the opinion of the
companies' managements, based on the opinions of legal counsel, the provisions
made are sufficient.


                                       72
<PAGE>   74
NOTE 17 -- SUBSEQUENT EVENTS

            On January 22, 2001, the Company made an additional investment of
$1.5 million in Enbaya Ltd., a developer of a 3D browser that enables fast
viewing, compression and streaming of 3D models, and increased its equity
interest in the company from 12.9% to 20.5%.

            On February 23, 2001, the Company made an additional investment of
$5 million in XACCT, a leading provider of business infrastructure software for
the next-generation public network. The Company holds an approximate 16.2%
equity interest in XACCT.



                                       73
<PAGE>   75
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)

<TABLE>
<CAPTION>
                                            FIRST             SECOND              THIRD             FOURTH
                                           QUARTER            QUARTER            QUARTER            QUARTER             TOTAL
                                           -------            -------            -------            -------             -----
                                                              (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                      <C>                <C>                <C>                <C>                <C>
Year Ended December 31, 2000
Revenues..............................   $   10,755         $   20,565         $    9,307         $     (930)        $   39,697
Net interest expense..................       (2,163)            (3,134)            (4,094)            (2,720)           (12,111)
Net income (loss).....................        1,162              7,235                359             (7,943)               813
Basic EPS:
  Earnings (loss) per Class A
   share(1)...........................          .06                .38                .02               (.42)               .03
Diluted EPS:
  Earnings (loss) per Class A
   share..............................          .05                .33                .02               (.42)               .03

Year Ended December 31, 1999
Revenues..............................   $   13,854         $   30,988         $   13,518         $   11,253         $   69,613
Net interest expense..................       (1,659)            (1,754)            (2,236)            (2,318)            (7,967)
Income from continuing operations.....   $    5,977         $   15,037         $    5,312         $    3,861         $   30,187
(Loss) income from discontinued
  operations..........................         (425)              (286)            (1,965)               520             (2,156)
                                         ----------         ----------         ----------         ----------         ----------
Net income............................   $    5,552         $   14,751         $    3,347         $    4,381         $   28,031
                                         ==========         ==========         ==========         ==========         ==========
Basic EPS:
  Earnings per Class A share:
  Earnings from continuing
   operations(1)......................   $      .25         $      .62         $      .29         $      .21         $     1.42
  (Loss) income from discontinued
   operations.........................         (.02)              (.01)              (.11)               .03               (.10)
                                         ----------         ----------         ----------         ----------         ----------
  Earnings per Class A share..........   $      .23         $      .61         $      .18         $      .24         $     1.32
                                         ==========         ==========         ==========         ==========         ==========
Diluted EPS:
  Earnings per Class A share:
  Earnings from continuing
   operations.........................   $      .22         $      .54         $      .25         $      .18         $     1.24
  (Loss) income from discontinued
   operations.........................         (.02)              (.01)              (.09)               .02               (.09)
                                         ----------         ----------         ----------         ----------         ----------
  Earnings per Class A share..........   $      .20         $      .53         $      .16         $      .20         $     1.15
                                         ==========         ==========         ==========         ==========         ==========
</TABLE>

      (1)  After deduction of preferred stock dividends of $234 and $284,
           respectively.


                                       74
<PAGE>   76
ITEM 9.  DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

            None


                                       75
<PAGE>   77
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

                                   MANAGEMENT

            The following table sets forth certain information regarding Ampal's
directors and executive officers:

<TABLE>
<CAPTION>
NAME                                 POSITION
<S>                                 <C>
Daniel Steinmetz(1)...........      Chairman of the Board of Directors and Director
Raz Steinmetz(1)..............      President and Chief Executive Officer and Director
Shlomo Meichor................      Vice President-Finance and Treasurer
Alla Kanter...................      Vice President-Accounting and Controller
Eli S. Goldberg...............      Vice President-Legal and Secretary
Michael Arnon(2)(3)(4)........      Director
Benzion Benbassat.............      Director
Yaacov Elinav.................      Director
Kenneth L. Henderson(3).......      Director
Hillel Peled(1)(2)(3)(4)......      Director
Avi A. Vigder.................      Director
Eliyahu Wagner(2)(4)..........      Director
</TABLE>

-----------

            The numbers listed below, which follow the names of some of the
foregoing directors, designate committee membership:

            (1)   Member of the Executive Committee of the Board which meets as
                  necessary between regularly scheduled Board meetings and,
                  consistent with certain statutory limitations, exercises all
                  the authority of the Board. Mr. D. Steinmetz is the Chairman
                  of the Executive Committee.

            (2)   Member of the Audit Committee of the Board which reviews
                  functions of the outside auditors, auditors' fees and related
                  matters. Mr. Arnon is the Chairman of the Audit Committee.

            (3)   Member of the Related Party Transactions Committee of the
                  Board which reviews and passes upon the fairness of business
                  transactions between Ampal and related parties. Mr. Peled is
                  the Chairman of the Related Party Transactions Committee.

            (4)   Member of the Stock Option Committee of the Board which
                  administers Ampal's 1998 Stock Option Plan and other grants of
                  options. For a description of Ampal's 1998 Stock Option Plan,
                  see "Executive Compensation - Stock Option Plan." Mr. Wagner
                  is the Chairman of the Stock Option Committee.

            In 2000, the Board of Directors met four times and did not act by
written consent; the Executive Committee met six times and acted by written
consent one time; the Audit Committee met two times and did not act by written
consent; the Related Party Transactions Committee did not meet and acted by
written consent one time; and the Stock Option Committee met one time and did
not act by written consent. Ampal does not have a nominating committee or
compensation committee. All directors attended more than 75% of the aggregate of
(1) the total number of Board of Directors meetings held during the period in
2000 for which such individual was a director and (2) the total number of
meetings held by all committees of the Board on which such individual served in
2000 (during the period of such service).

            The following sets forth the ages of all of the above-mentioned
directors and officers, all positions and offices with Ampal or its subsidiaries
held by each director and officer and principal occupations during the last five
years.

                                       76
<PAGE>   78
            DANIEL STEINMETZ, 62, has managed family diamond trading businesses
in Israel for more than the past five years. Mr. Steinmetz is the father of Raz
Steinmetz.

            RAZ STEINMETZ, 37, has managed various investments for his family,
including real estate, financial investments and others, since September 1994.
From September 1993 through September 1994, he worked as a trainee at Republic
National Bank of New York. From September 1991 through July 1993, he attended
the University of Pennsylvania, Wharton Business School, where he received a
Masters Degree in Business Administration. He served as a director of Ampal and
has been the Chairman of the Executive Committee since December 1996. On June
29, 1999, Mr. Steinmetz was elected Chief Executive Officer and President. Mr.
Steinmetz is the son of Daniel Steinmetz.

            SHLOMO MEICHOR, 43, assumed the duties of Vice President-Finance and
Treasurer of Ampal on April 1, 1998. For more than five years prior to April 1,
1998, Mr. Meichor was the Finance and Operations Manager of Digital
Semi-Conductors Israel, a semi-conductor subsidiary of Digital Equipment
Corporation.

            ALLA KANTER, 43, has been Vice President-Accounting of Ampal since
September 1995 and Controller of Ampal since August 1990.

            ELI S. GOLDBERG, 46, has been Vice President-Legal and Secretary of
Ampal since November 1998. From September 1996 until November 1998, he was an
associate at Lowenstein, Sandler P.C. From November 1990 until July 1996, he was
employed as Special Assistant to the General Counsel of the Market Transition
Facility of New Jersey.

            MICHAEL ARNON, 76, was Chairman of the Board of Directors of Ampal
from November 1990 to July 1994. From July 1986 until November 1990, he was
President and Chief Executive Officer of Ampal. He became a director of Ampal in
1986.

            BENZION BENBASSAT, 63, has been the President and Chief Executive
Officer of D.R.B. Investments Ltd., an investment company, controlled by Daniel
Steinmetz and Raz Steinmetz, directors of Ampal and the controlling persons of
Ampal's shareholder, for more than the past five years.

            YAACOV ELINAV, 56, has been a Senior Deputy Managing Director of
Hapoalim since August 1992. From October 1991 to August 1992, he was a Deputy
Managing Director of Hapoalim. From October 1988 to October 1991, he was head of
the Corporate Division of Hapoalim. He became a director of Ampal in 1992.

            KENNETH L. HENDERSON, 45, is an attorney and has been a partner at
Robinson Silverman Pearce Aronsohn & Berman LLP ("Robinson") since 1987.
Robinson provided legal services to Ampal during 2000.

            HILLEL PELED, 53, has been President of Inveco International, Inc.,
a private investment company, since January 1990. From January 1982 to June
1986, he served as Vice President-Finance and Treasurer of Ampal. He became a
director of Ampal in June 1996.

            AVI A. VIGDER, 40, has been a Senior Vice President and Chief
Financial Officer of R. Steinmetz (U.S.) Ltd. since November 1998. From June
1997 until October 1998, he was head of Investment Banking at Israel Discount
Bank. From January 1994 until December 1996, he was Managing Director of Foreign
Trusts Ltd. He became a director of Ampal in 1999.

            ELIYAHU WAGNER, 60, has been a private real estate developer for
more than the past five years. He became a director of Ampal in 1999.

             SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

            Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires Ampal's officers and directors, and persons who own more than 10% of a
registered class of Ampal's equity securities, to file reports of ownership

                                       77
<PAGE>   79
and changes in ownership with the SEC and the NASDAQ. These persons are required
by regulation of the SEC to furnish Ampal with copies of all Section 16(a) forms
they file.

            Based solely on its review of the copies of forms received by it and
written representations received by it, Ampal believes that during 2000 Ampal's
officers, directors and greater than 10% beneficial owners complied with all
applicable Section 16(a) filing requirements.

ITEM 11. EXECUTIVE COMPENSATION

                           SUMMARY COMPENSATION TABLE

            The table below presents information regarding remuneration paid or
accrued for services to Ampal and its subsidiaries by the executive officers
named below during the three fiscal years ended December 31, 2000, 1999 and
1998.

<TABLE>
<CAPTION>
                                                                 ANNUAL COMPENSATION
                                                                 -------------------

                                                                                      LONG-TERM
                                                                                     COMPENSATION
                                                                                        AWARDS
                                                                                      NUMBER OF
                                                                       OTHER          SECURITIES         ALL
   NAME AND PRINCIPAL                                                  ANNUAL         UNDERLYING        OTHER
         POSITION              YEAR      SALARY        BONUS        COMPENSATION     OPTIONS (14)    COMPENSATION
         --------              ----      ------        -----        ------------     -------------   ------------
<S>                            <C>     <C>            <C>          <C>              <C>              <C>
Raz Steinmetz(1)                2000    $175,369       $49,822        $20,555(2)       655,000       $51,644(3)
 (Chief Executive Officer       1999     176,123                       10,097(2)        30,000        41,085(4)
  and President)                1998     144,002                        7,417(2)                      33,559(5)



Shlomo Meichor(6)               2000     156,150        44,056         14,849(2)       374,000        46,281(7)
  (Vice President-Finance       1999     180,317                        7,701(2)        24,000        37,609(8)
   and Treasurer)               1998     122,795                        9,735(2)                      31,869(9)




Alla Kanter(10)                 2000     126,036        10,476                          15,000        17,007(11)
 (Vice President-               1999     116,300         9,700                          15,000        15,598(12)
 Accounting and                 1998     107,310         9,000                                        14,362(13)
 Controller)
</TABLE>

-----------

(1)   Mr. Steinmetz has been employed by Ampal since January 1, 1997, and was
      appointed C.E.O. and President effective July 1, 1999. Pursuant to an
      employment agreement dated January 1, 1997, Mr. Steinmetz is entitled to
      receive a base salary of $175,000 (payable in Shekels) per annum (plus
      benefits), the total for 2000 was $297,390. His agreement can be
      terminated by either party upon thirty days notice.

(2)   Consists of amounts reimbursed for the payment of taxes.

(3)   Comprised of Ampal (Israel)'s contribution pursuant to: (i) Ampal
      (Israel)'s Pension Plan of $27,967, (ii) Ampal (Israel)'s education fund
      of $13,250 and (iii) use of a car of $10,427.

(4)   Comprised of Ampal (Israel)'s contribution pursuant to: (i) Ampal
      (Israel)'s Pension Plan of $27,877 and (ii) Ampal (Israel)'s education
      fund of $13,208.

                                       78
<PAGE>   80
(5)   Comprised of Ampal (Israel)'s contribution to: (i) Ampal (Israel)'s
      Pension Plan of $22,778 and (ii) Ampal (Israel)'s education fund of
      $10,781.

(6)   Mr. Shlomo Meichor has been employed by Ampal since March 1, 1998, and was
      appointed Vice President-Finance and Treasurer of Ampal, effective April
      1, 1998. Pursuant to an employment agreement, dated March 5, 1998, Mr.
      Meichor receives a base salary of $144,000 per annum, adjusted annually in
      accordance with the United States consumer price index (payable in
      Shekels) plus benefits and use of a car. His agreement can be terminated
      upon two months' notice and after the two months' notice period expires
      Mr. Meichor is entitled to receive his salary for an additional four
      months.

(7)   Comprised of Ampal (Israel)'s contribution pursuant to: (i) Ampal
      (Israel)'s Pension Plan of $28,309; (ii) Ampal (Israel)'s education fund
      of $11,809 and (iii) use of a car of $6,163.

(8)   Comprised of Ampal (Israel)'s contribution pursuant to: (i) Ampal
      (Israel)'s Pension Plan of $22,833; (ii) Ampal (Israel)'s education
      fund of $10,818; and (iii) use of a car of $3,958.

(9)   Comprised of Ampal (Israel)'s contribution pursuant to: (i) Ampal
      (Israel)'s Pension Plan of $19,323; (ii) Ampal (Israel)'s education fund
      of $9,155; and (iii) use of a car of $3,391.

(10)  Ms. Kanter has been Vice President-Accounting of Ampal since September
      1995 and Controller of Ampal since August 1990.

(11)  Comprised of Ampal's contribution pursuant to: (i) Ampal's Pension Plan of
      $12,927 and (ii) Ampal's Savings Plan of $4,080.

(12)  Comprised of Ampal's contribution pursuant to: (i) Ampal's Pension Plan of
      $11,827 and (ii) Ampal's Savings Plan of $3,771.

(13)  Comprised of Ampal's contribution pursuant to: (i) Ampal's Pension Plan of
      $10,873 and (ii) Ampal's Savings Plan of $3,489.

(14)  Represents the number of shares of Class A Stock underlying options
      granted to the named executive officers.

      FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>

                           SHARES                                      NUMBER OF SECURITIES
                         ACQUIRED ON           VALUE                  UNDERLYING UNEXERCISED
                          EXERCISE            REALIZED             OPTIONS AT FISCAL YEAR-END(1)
                         ----------           --------             -----------------------------
NAME                        (#)                 ($)             EXERCISABLE           UNEXERCISABLE
----                        ---                 ---             -----------           -------------
<S>                      <C>                  <C>               <C>                   <C>
Raz Steinmetz..........                                            45,000                 640,000
Shlomo Meichor.........    2,000              $44,800              34,000                 362,000
Alla Kanter............                                            22,500                   7,500
</TABLE>

-----------

(1)   This table represents the total number of shares of Class A Stock subject
      to stock options held by each of the named executive officers at December
      31, 2000. None of the outstanding options are in-the-money.

                          OPTION GRANTS IN FISCAL YEAR

            The following table sets forth certain information regarding stock
options granted to purchase our Class A Stock to our named executive officers
during fiscal year 2000:


                                       79
<PAGE>   81
<TABLE>
<CAPTION>
                                                        ANNUAL COMPENSATION
                                                        -------------------
                                Number of        % of Total
                                Securities     Options Granted                     Market Price
                    Option      Underlying     to Employees in    Exercise Price    on Date of      Expiration
  Name               Plan     Option Granted     Fiscal Year         Per Share        Grant            Date
  ----              ------    --------------     -----------         ---------        -----            ----
<S>                 <C>       <C>              <C>                <C>              <C>              <C>
  Raz Steinmetz      1998          30,000           12.68%           $6.0625         $6.0625         12-31-05
                     2000          43,750           22.85%                15              15          Various
                     2000          87,500           22.85%                20              15          Various
                     2000         181,250           22.85%                25              15          Various
                     2000         312,500           22.85%                32              15          Various

  Shlomo Meichor     1998          24,000           10.14%           $6.0625         $6.0625         12-31-05
                     2000          24,500           12.80%                15              15          Various
                     2000          49,000           12.80%                20              15          Various
                     2000         101,500           12.80%                25              15          Various
                     2000         175,000           12.80%                32              15          Various
  Alla Kanter        1998          15,000            6.34%           $6.0625         $6.0625         12-31-05
</TABLE>


<TABLE>
<CAPTION>

                           Potential Realizable Value at Assumed
                               Annual Rates of Stock Price
                               Appreciation For Option Term
                           -------------------------------------
  Name                     0%          5%              10%
  ----                     --          --              ---
<S>                       <C>     <C>               <C>
  Raz Steinmetz           0     $  50,248.71      $ 111,036.51
                                  181,309.78        400,647.19
                                  483,492.73      1,068,392.50
                                1,251,900.83      2,766,373.44
                                2,762,815.63      6,105,100.00

  Shlomo Meichor          0     $  40,198.97      $  88,829.21
                                  101,533.47        224,362.43
                                  270,755.93        598,299.80
                                  701,064.46      1,549,169.13
                                1,547,176.75      3,418,856.00
  Alla Kanter             0     $  25,124.35      $  55,518.25
</TABLE>

OTHER BENEFITS

            Ampal maintains a money purchase pension plan ("Pension Plan") for
its eligible employees. Eligible employees are all full-time employees of Ampal
except non-resident aliens, night-shift employees and employees represented by a
collective bargaining unit. Ampal's contribution is equal to 7% of each
employee's compensation plus 5.7% of the compensation in excess of the Social
Security taxable wage base for that year.

            Employees become vested in amounts contributed by Ampal depending on
the number of years of service, as provided in the following table:

<TABLE>
<CAPTION>
                                    VESTED
YEARS OF SERVICE                  PERCENTAGE
----------------                  ----------

<S>                               <C>
less than 2 years..............        0%
2 but less than 3 years........       20%
3 but less than 4 years........       40%
4 but less than 5 years........       60%
5 but less than 6 years........       80%
6 or more years................      100%
</TABLE>

            Benefits under the Pension Plan are paid in a lump sum, in an
annuity form or in installments.

            Ampal maintains a savings plan (the "Savings Plan") for its eligible
employees pursuant to Section 401(k) of the Internal Revenue Code of 1986, as
amended (the "Code"). Eligible employees are all employees of Ampal except
non-resident aliens, night-shift employees and employees represented by a
collective bargaining unit. Participation by employees in the Savings Plan is
voluntary. Participating employees may direct that a specific percentage of
their annual compensation (up to 15%) be contributed to a self-directed 401(k)
savings account. The amount which any employee could contribute to his or her
401(k)savings account in 2000 was limited under the Code to $10,500. Effective
January 1, 1996, the Savings Plan was amended so that Ampal matches 50% of each
employee's contribution up to a maximum of 3% of the employee's compensation.
Employees who were eligible to participate in the Savings Plan as of December
31, 1995, are 100% vested at all times in the account balances maintained in
their 401(k) savings account. Employees who became eligible to participate in
the Savings Plan on or after January 1, 1996, become vested in amounts
contributed by Ampal depending on the number of years of service, as provided in
the following table:

                                       80
<PAGE>   82
<TABLE>
<CAPTION>

                                                 VESTED
YEARS OF SERVICE                               PERCENTAGE
----------------                               ----------
<S>                                            <C>
less than 2 years..........................         0%
2 but less than 3 years....................        20%
3 but less than 4 years....................        40%
4 but less than 5 years....................        60%
5 but less than 6 years....................        80%
6 or more years............................       100%
</TABLE>

            Benefits under the Savings Plan are required to be paid in a single,
lump-sum distribution. Payment is usually made after termination of employment.

            In 1994, Ampal established a Supplementary Executive Retirement Plan
("SERP") for its eligible employees. Ampal's obligation under the SERP is to pay
to affected employees the amount that would have been paid to them by the
Pension Plan but for the operation of Section 401(a)(17) of the Code.

COMPENSATION OF DIRECTORS

            Directors of Ampal (other than Mr. R. Steinmetz) receive $500 per
Board meeting attended. The Chairman of the Board receives $2,000. Such persons
also receive the same amount for attendance at meetings of committees of the
Board, provided that such committee meetings are on separate days and on a day
other than the day of a regularly scheduled Board meeting. In December 1999 and
in December 2000, directors were each granted options to purchase 5,000 shares
of the Company's Class A Stock. On each of those dates, Mr. Daniel Steinmetz,
Chairman of the Board, received options to purchase 10,000 shares of the
Company's Class A Stock.

STOCK OPTION PLAN

            In March 1998, the Board approved a Long-term Incentive Plan (the
"1998 Plan") permitting the granting of options to all employees, officers,
directors and consultants of the Company and its subsidiaries to purchase up to
an aggregate of 400,000 shares of Class A Stock. The 1998 Plan remains in effect
for a period of ten years.

            On February 15, 2000, the Stock Option Plan Committee approved a new
incentive plan, the 2000 Incentive Plan (the "2000 Plan") under which the
Company has reserved 4 million shares of Class A Stock for grants to present and
future employees. The 2000 Plan was approved by the Board of Directors at a
Meeting held on March 27, 2000, and was approved by a majority of the Company's
shareholders at the June 29, 2000, annual meeting of shareholders.

            The options granted under the 1998 Plan and the 2000 Plan (together
with the 1998 Plan, the "Plans") may be either incentive stock options, at
exercise prices to be determined by the Committee, but not less than 100% of the
fair market value of the underlying shares on the date of grant, or
non-incentive stock options, at exercise prices to be determined by the
Committee. Under each of the Plans, the Committee may also grant, at its
discretion, "restricted stock", "dividend equivalent awards", which entitle the
recipients to receive dividends in the form of Class A Stock, cash or a
combination of both, and "stock appreciation rights," which permit the
recipients to receive an amount in the form of Class A Stock, cash or a
combination of both, equal to the number of shares of Class A Stock with respect
to which the rights are exercised multiplied by the excess of the fair market
value of the Class A Stock on the exercise date over the exercise price.


                                       81
<PAGE>   83
           COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

            During 2000, members of the Executive Committee of the Board of
Directors which functions as the compensation committee of Ampal included: Mr.
Daniel Steinmetz (Chairman) and Chairman of the Board of Directors of the
Company; Mr. Hillel Peled, President of Inveco International Inc.; and Mr. Raz
Steinmetz, Chief Executive Officer and President of the Company.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSHIP AND MANAGEMENT

                         PRINCIPAL SHAREHOLDERS OF AMPAL

            The following table sets forth information as of March 20, 2001, as
to the holders known to Ampal who beneficially own more than 5% of the Class A
Stock, the only outstanding series of voting securities of Ampal. For purposes
of computation of the percentage ownership of Class A Stock set forth in the
table, conversion of any 4% Cumulative Convertible Preferred Stock (the "4%
Preferred Stock") and 6 1/2% Cumulative Convertible Preferred Stock (the "6 1/2%
Preferred Stock") owned by such beneficial owner has been assumed, without
increasing the number of shares of Class A Stock outstanding by amounts arising
from possible conversions of convertible securities held by shareholders other
than such beneficial owner. As at March 20, 2001, there were outstanding
19,353,768 (not including treasury shares) shares of Class A Stock of Ampal. In
addition, there were outstanding 620,812 non-voting shares of 6 1/2% Preferred
Stock (each convertible into 3 shares of Class A Stock) and 149,865 non-voting
shares of 4% Preferred Stock (each convertible into 5 shares of Class A Stock).

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

<TABLE>
<CAPTION>

                                                              NUMBER OF SHARES                      PERCENT
NAME AND ADDRESS                                                 AND NATURE               OF OUTSTANDING SHARES OF
OF BENEFICIAL OWNER                   TITLE OF CLASS       OF BENEFICIAL OWNERSHIP               CLASS A STOCK
-------------------                   --------------       -----------------------               -------------
<S>                                   <C>                  <C>                             <C>
Daniel Steinmetz..................    Class A Stock                  11,115,112 shs. (1)                    57.4%
Rebar Financial Corp.
c/o Icaza, Gonzalez-Ruiz
& Aleman (BVI) Ltd.
Wickhams Cay, Road Town,
Tortola, British Virgin Islands

Raz Steinmetz.....................    Class A Stock                  11,115,112 shs. (1)                    57.4%
Rebar Financial Corp.
c/o Icaza, Gonzalez-Ruiz
& Aleman (BVI) Ltd.
Wickhams Cay, Road Town,
Tortola, British Virgin Islands

Rebar Financial Corp..............    Class A Stock                  11,115,112 shs. (1)                    57.4%
c/o Icaza, Gonzalez-Ruiz
& Aleman (BVI) Ltd.
Wickhams Cay, Road Town,
Tortola, British Virgin Islands
</TABLE>

-----------

(1)   Consists of 11,115,112 shares of Class A Stock held directly by Rebar, as
      reported by Mr. Daniel Steinmetz, Mr. Raz Steinmetz and Rebar on Amendment
      11 to Form 13D, dated September 12, 1999, filed with the SEC. Mr. Raz
      Steinmetz is the President of Rebar

                                       82
<PAGE>   84
      and Mr. Daniel Steinmetz is the Vice President. They are the sole
      directors of Rebar and beneficially own, directly and indirectly, 96% and
      4% of the outstanding equity of Rebar, respectively. Certain of the shares
      of Class A Stock held by Rebar have been pledged to The First
      International Bank of Israel Ltd.

SECURITY OWNERSHIP OF MANAGEMENT

            The following table sets forth information as of March 20, 2001, as
            to each class of equity securities of Ampal or any of its
            subsidiaries beneficially owned by each director and named executive
            officer of Ampal listed in the Summary Compensation Table and by all
            directors and named executive officers of Ampal as a group. All
            ownerships are direct unless otherwise noted. The table does not
            include directors or named executive officers who do not own any
            such shares:


<TABLE>
<CAPTION>
                                              NUMBER OF SHARES AND NATURE OF        PERCENT OF OUTSTANDING
                                                   BENEFICIAL OWNERSHIP                   SHARES OF
NAME                                                 OF CLASS A STOCK                    CLASS A STOCK
----                                                 ----------------                    -------------
<S>                                           <C>                                   <C>
Daniel Steinmetz.......................               11,135,112(1)                           57.5%
Raz Steinmetz..........................               11,285,112(1)                           57.8%
Shlomo Meichor.........................                  104,000(2)                            *
Alla Kanter............................                   22,500(2)                            *
Eli Goldberg...........................                   10,500(2)                            *
Benzion Benbassat......................                   11,000(3)                            *
Michael Arnon..........................                   10,000(2)                            *
Yaacov Elinav..........................                   10,000(2)                            *
Kenneth Henderson......................                   10,000(2)                            *
Hillel Peled...........................                   10,000(2)                            *
Avi Vigder.............................                   10,000(2)                            *
Eliyahu Wagner.........................                   10,000(2)                            *
All Directors and Executive Officers
  as a Group...........................               11,513,112                              58.3%
</TABLE>

-----------

      *    Represents less than 1% of the class of securities.

      (1)  In each case attributable to 11,115,112 shares of Class A Stock held
           directly by Rebar. See "Security Ownership of Certain Beneficial
           Owners." In addition, this represents 20,000 shares underlying
           options for Daniel Steinmetz and 170,000 shares underlying options
           for Raz Steinmetz, which in each case, are presently exercisable.

      (2)  Represents shares underlying options which are presently exercisable.

      (3)  Includes 10,000 shares underlying options which are presently
           exercisable.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

            The Board of Directors of Ampal maintains a Related Party
Transactions Committee comprised of independent directors which reviews and
passes upon the fairness of any business dealings and arrangements (other than
borrowings on then prevailing market terms or deposits made in the ordinary
course of business) between Ampal and any affiliated party. With certain
exceptions, Ampal may not enter into transactions with any officer, director or
principal shareholder of Ampal, without first obtaining the approval of the
Related Party Transactions Committee or a majority of the disinterested members
of the Board of Directors or the shareholders.

            The management of Ampal believes that all of the following
transactions were done on terms which were no less advantageous to Ampal than
could have been obtained from unaffiliated third parties.

            In March 1998, the Company transferred its interest in MIRS to a
limited partnership (the "Partnership"). A wholly-owned Israeli subsidiary of
Ampal (the "General Partner") is the general partner of the Partnership and owns
75.1% of the Partnership. The limited partners of the Partnership purchased
their interests in the Partnership from the Partnership and include (i) an
entity owned by Daniel Steinmetz and Raz Steinmetz (directors of Ampal and the
controlling persons of Ampal's principal shareholder) and (ii) an unrelated
third party. The related parties purchased their limited

                                       83
<PAGE>   85
partnership interests on the same terms as the unrelated third party. These
terms were negotiated on an arm's length basis between the Company and the
unrelated third party.



                                       84
<PAGE>   86
                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

   (a)  The following documents are filed as a part of this report:

                                                                         PAGE
                                                                       REFERENCE
                                                                       ---------
      (1)  Financial Statements and Supplementary Data

           Ampal-American Israel Corporation and Subsidiaries
               Report of Independent Public Accountants...........
               Consolidated Statements of Income for the years
                 ended December 31, 2000, 1999 and 1998...........
               Consolidated Balance Sheets as at December 31,
                 2000 and 1999....................................
               Consolidated Statements of Cash Flows for the
                 years ended December 31, 2000, 1999 and 1998.....
               Consolidated Statements of Changes in
                 Shareholders' Equity for the years ended
                 December 31, 2000, 1999 and 1998.................
               Consolidated Statements of Comprehensive Income
                 for the years ended December 31, 2000, 1999 and
                 1998
               Notes to Consolidated Financial Statements.........
           Supplementary Data:
               Selected quarterly financial data for the years
                 ended December 31, 2000 and 1999.................

      (2)  Financial Statement Schedules

                 (i) Schedule of Representative Rates of
                     Exchange between the U.S. dollar and New
                     Israeli Shekel for three years ended
                     December 31, 2000
                (ii) Consolidated financial statements filed
                     pursuant to Rule 3-09 of Regulation S-X

           Granite Hacarmel Investments Limited and Subsidiaries
               Report of Certified Public Accountants ............
               Consolidated Balance Sheets as at December 31,
                 2000 and 1999....................................
               Consolidated Statements of Income for the years
                 ended December 31, 2000, 1999 and 1998...........
               Consolidated Statements of Shareholders' Equity
                 for the years ended December 31, 2000, 1999 and
                 1998.............................................
               Consolidated Statements of Cash Flows for the years
                 ended December 31, 2000, 1999 and 1998...........
               Notes to Consolidated Financial Statements.........

           Ophir Holdings Ltd.
               Report of Certified Public Accountants.............           *
               Consolidated Balance Sheets as at December 31,
                2000 and 1999.....................................
               Consolidated Statements of Income for the years
                 ended December 31, 2000, 1999 and 1998...........
               Consolidated Statements of Changes in
                 Shareholders' Equity for the years ended
                 December 31, 2000, 1999 and 1998.................


                                       85
<PAGE>   87
                                                                         PAGE
                                                                      REFERENCE
                                                                      ---------

               Consolidated Statements of Cash Flows for the
                 years ended December 31, 2000, 1999 and 1998.....
               Notes to Consolidated Financial Statements.........

               (iii) Reports of Other Certified Public Accountants
                     filed pursuant to Rule 2-05 of Regulation S-X:
                       AM-HAL Ltd.................................
                       Ampal Industries (Israel) Ltd..............
                       Bay Heart Ltd. ............................
                       Carmel Container Systems Ltd. .............
                       Coral World International Limited.........
                       Country Club Kfar Saba Limited.............
                       Epsilon Investment House Ltd...............
                       Hod Hasharon Sport Center Ltd..............
                       Hod Hasharon Sport Center (1992) Limited
                       Partnership................................
                       Mivnat Holdings Ltd........................
                       Moriah Hotels Ltd..........................
                       Ophirtech Ltd..............................
                       Renaissance Investment Co. Ltd.............
                       Shmey-Bar Real Estate 1993 Ltd.............
                       Shmey-Bar (T.H.) 1993 Ltd..................
                       Trinet Investment in High-Tech Ltd.........
                       Trinet Venture Capital Ltd. ...............

      (3) List of Exhibits


EXHIBIT 2 - PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION

 2a.   Purchase and Sale Agreement, dated January 5, 1998,
       between Ampal Communications, Inc. and Motorola
       Communications Israel Ltd.  (Includes as Exhibit A the
       form of Partnership Agreement between Ampal
       Communications, Inc. and Motorola Communications Israel
       Ltd. and as Exhibit B the form of Shareholders' Agreement
       between Ampal Communications, Inc. and Motorola
       Communications Israel Ltd.)  (Filed as Exhibit 2 to a
       Current Report on Form 8-K, dated February 5, 1998, and
       incorporated herein by reference. File No. 0-538.)
2b.    Amendment, dated January 22, 1998, to (i) Purchase and
       Sale Agreement, dated January 5, 1998, between Ampal
       Communications, Inc. and Motorola Communications Israel
       Ltd., (ii) Partnership Agreement between Ampal
       Communications, Inc. and Motorola Communications Israel
       Ltd. and (iii) form of Shareholders' Agreement between
       Ampal Communications, Inc. and Motorola Communications
       Israel Ltd.  (Filed as Exhibit 2a to a Current Report on
       Form 8-K, dated February 5, 1998, and incorporated herein
       by reference. File No. 0-538.)


                                       86
<PAGE>   88
EXHIBIT 3 - ARTICLES OF INCORPORATION AND BY-LAWS                        PAGE
                                                                       REFERENCE
                                                                       ---------
3a.    Amended and Restated Certificate of Incorporation of
       Ampal-American Israel Corporation, dated May 28, 1997.
       (Filed as Exhibit 3a. to Form 10-Q, for the quarter
       ended June 30, 1997, and incorporated herein by
       reference.  File No. 0-5380).
3b.    By-Laws of Ampal-American Israel Corporation as amended,
       dated June, 1997.  (Filed as Exhibit 3b to Form 10-Q,
       for the quarter ended September 30, 1998, and
       incorporated herein by reference.  File No. 0-538).

EXHIBIT 4 - INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES

4a.    Form of Indenture dated as of November 1, 1984.  (Filed
       as Exhibit 4a to Registration Statement No. 2-88582 and
       incorporated herein by reference).
4b.    Form of Indenture dated as of May 1, 1986.  (Filed as
       Exhibit 4a to Pre-Effective Amendment No. 1 to
       Registration Statement No. 33-5578 and incorporated
       herein by reference).

EXHIBIT 10 - MATERIAL CONTRACTS

10a.   Agreement, dated March 22, 1993, between the Investment
       Company of Bank Leumi, Ltd., and Ophir Holdings Ltd.,
       Mercazim Investments Ltd., Diur B.P. Ltd. and Mivnat
       Holdings Ltd. (Filed as Exhibit 10.4 to Pre-Effective
       Amendment No. 1 to Registration Statement No. 33-51023
       and incorporated herein by reference).


                                       87
<PAGE>   89
EXHIBIT 10 - MATERIAL CONTRACTS - CONTINUED                              PAGE
                                                                       REFERENCE
                                                                       ---------
10b.   Agreement, dated March 30, 1994, between Poalim
       Investments Ltd., Ampal (Israel) Ltd. and Ampal
       Industries (Israel) Ltd. (Translation). (Filed as Exhibit
       10l, to Form 10-K for the fiscal year ended December 31,
       1994, and incorporated herein by reference. File No.
       0-538).
10c.   Declaration Establishing a Plan for Condominium Ownership
       of Premises 800 Second Avenue, New York, New York, dated
       December 12, 1996. (Filed as Exhibit A to Exhibit 10m to
       Form 10-K for the fiscal year ended December 31, 1997, and
       incorporated herein by reference File No. 0-538)
10d.   Agreement dated September 9, 1997, between Ampal
       Industries (Israel) Limited and Raz Steinmetz. (Filed as
       Exhibit 10 to Report on Form 10-Q for the quarter ended
       September 30, 1997. File No. 0-538).
10e.   Agreement, dated as of March 1, 1997, among Emmes Asset
       Management Corp., Ampal-American Israel Corporation and
       Ampal Realty Corporation (Filed as Exhibit 10s to Form
       10-K for the fiscal year ended December 31, 1997, and
       incorporated herein by reference File No. 0-538).
10f.   Loan Agreement, dated April 27, 1998, between Bank
       Hapoalim Ltd. and Ampal Communications Limited
       Partnership (Filed as Exhibit 10.1 to Report on Form 10-Q
       for the quarter ended June 30, 1998. File No. 0-538).
10g.   Form of Loan Agreement between Ampal Communications
       Limited Partnership and Bank Leumi Le-Israel B. M. (Filed
       as Exhibit 10.2 to Report on Form 10-Q for the quarter
       ended June 30, 1998. File No. 0-538).
10h.   Amendment No. 1, dated June 16, 1998, to a letter
       agreement, dated September 9, 1997, between Ampal
       Industries (Israel) Limited and Raz Steinmetz (Filed as
       Exhibit 10.3 to Report on Form 10-Q for the quarter ended
       June 30, 1998. File No. 0-538).
10i.   Sale & Purchase Agreement, dated November 8, 2000, between
       Ampal Realty Corporation and Second 800 LLC.

EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE................... E-11

EXHIBIT 12 - STATEMENT RE COMPUTATION OF RATIOS.................. E-12


                                       88
<PAGE>   90
                                                                         PAGE
                                                                       REFERENCE
                                                                       ---------
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT...................... E-21

EXHIBIT 23 - CONSENTS OF AUDITORS:

    AM-HAL Ltd................................................... E-23.1
    Ampal-American Israel Corporation............................ E-23.2
    Ampal Industries (Israel) Ltd................................ E-23.3
    Bay Heart, Ltd............................................... E-23.4
    Carmel Container Systems Ltd................................. E-23.5
    Coral World International Ltd................................ E-23.6
    Country Club Kfar Saba Limited............................... E-23.7
    Epsilon Investment House Ltd................................. E-23.8
    Granite Hacarmel Investments Ltd............................. E-23.9
    Hod Hasharon Sport Center Ltd................................ E-23.10
    Hod Hasharon Sport Center (1992) Ltd. Partnership............ E-23.11
    Mivnat Holdings Ltd.......................................... E-23.12
    Moriah Hotels Ltd............................................ E-23.13
    Ophir Holdings Ltd........................................... E-23.14
    Ophirtech Ltd................................................ E-23.15
    Renaissance Investment Co. Ltd............................... E-23.16
    Shmey-Bar Real Estate 1993 Ltd............................... E-23.17
    Shmey-Bar (T.H.) 1993 Ltd.................................... E-23.18
    Trinet Investment in High-Tech Ltd........................... E-23.19
    Trinet Venture Capital Ltd................................... E-23.20

EXHIBIT 24 - POWERS OF ATTORNEY.................................. E-24

    (b)   No reports on Form 8-K were filed during 2000.


    Page reference proceeded by the letter "E" refer to the separately bound
volumes of exhibits.

    * Pursuant to the rules and regulations of the SEC, Ampal filed as part of
this Annual Report on Form 10-K, reports of certified public accountants as well
as the financial statements of Granite Hacarmel Investments Ltd. and of Ophir
Holdings Ltd. These reports and financial statements are not included in this
copy of the Annual Report on Form 10-K. Such reports and financial statements
will be provided without charge upon request. The Auditors' Reports that were
included as part of the financial statements have been included with the
Auditors' Reports that follow.


                                       89
<PAGE>   91
                        REPRESENTATIVE RATES OF EXCHANGE
               BETWEEN THE U.S. DOLLAR AND THE NEW ISRAELI SHEKEL
                   FOR THE THREE YEARS ENDED DECEMBER 31, 2000

      The following table shows the amount of New Israeli Shekels equivalent to
one U.S. Dollar on the dates indicated:

<TABLE>
<CAPTION>
                                 2000       1999      1998
                                 ----       ----      ----
<S>                             <C>        <C>        <C>
March 31.....................   4.026      4.034      3.597
June 30......................   4.084      4.076      3.667
September 30.................   4.024      4.276      3.845
December 31..................   4.041      4.153      4.160
</TABLE>
                                       90
<PAGE>   92

                              [Letterhead of KPMG]


                          INDEPENDENT AUDITORS' REPORT

                             TO THE SHAREHOLDERS OF
                      GRANITE HACARMEL INVESTMENTS LIMITED

We have audited the accompanying consolidated balance sheets of Granite Hacarmel
Investments Limited and its subsidiaries (the Company) as of December 31, 2000
and 1999, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2000. 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 1.8% and 5.2% of the total consolidated assets as of December 31,
2000 and 1999 respectively, and whose revenues constitute 3.3%, 5.3% and 5.1% of
the total consolidated revenues for the years ended December 31, 2000, 1999 and
1998, respectively. The financial statements of those subsidiaries were audited
by other auditors whose report thereon was furnished to us. Our opinion, insofar
as it relates to amounts emanating from the financial statements of such
subsidiaries, is based solely on the said report of the other auditors.
Furthermore, the data included in the financial statements relating to the net
asset value of the Company's investments in affiliates and to its equity in
their operating results is based on the financial statements of such affiliates,
some of which were audited by other auditors.

We conducted our audits in accordance with generally accepted auditing
standards, including standards prescribed by the Auditors Regulation (Manner of
Auditor's Performance) 1973 and auditing standards generally accepted in the
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 by 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.




                                      146
<PAGE>   93
In our opinion, based upon our audits and the reports of the above mentioned
other auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 2000 and 1999, and the consolidated results of their
operations, changes in the shareholders' equity and their cash flows for each of
the three years, the last of which ended December 31, 2000 in conformity with
generally accepted accounting principles. Furthermore, these statements have, in
our opinion, been prepared in accordance with the Securities Regulation
(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.
Application of accounting principles generally accepted in the United States
affected results of operations and shareholders' equity for each of the years in
the three-year period ended December 31, 2000 as included in U.S. Dollars, in
Note 29 to the consolidated financial statements.

As explained in Note 2, the above mentioned financial statements are stated in
values adjusted for the changes in the general purchasing power of the Israeli
currency, in accordance with opinions of the Institute of Certified Public
Accountants in Israel.

Without qualifying our opinion, we would like to bring attention to Note 25 in
the financial statements regarding two claims against consolidated companies
which the court has been asked to recognize as class actions and to Note 26 in
the financial statements regarding the fuel market. At this time, it is not
possible to estimate the effect of the above on the fuel market in general and
on the Company in particular.


/s/ Somekh Chaikin
______________________________________
Somekh Chaikin

Certified Public Accountants (Israel)

HAIFA March 8, 2001



                                      147
<PAGE>   94
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------

ADJUSTED TO THE INDEX OF DECEMBER 2000


<TABLE>
<CAPTION>
                                                         NOTE               DECEMBER 31,
                                                         ----         --------------------------
                                                                        2000              1999
                                                                      ---------        ---------
                                                                           NIS. (THOUSANDS)
                                                                      --------------------------
<S>                                                      <C>          <C>              <C>
CURRENT ASSETS

Cash and cash equivalents                                 4              20,764           52,866
Marketable securities                                                    13,130           10,573
Trade receivables                                         5             781,205          770,420
Accounts receivable                                       5              53,702           55,635
Inventories                                               6             420,289          393,701
                                                                      ---------        ---------
                                                                      1,289,090        1,283,195
                                                                      ---------        ---------

INVESTMENTS, LONG-TERM LOANS AND
 RECEIVABLES

Affiliated companies and others                           7             151,370          153,198
Long-term loans and receivables                           8             127,628           73,565
                                                                      ---------        ---------
                                                                        278,998          226,763
                                                                      ---------        ---------

FIXED ASSETS                                              9

Cost                                                                  1,734,156        1,749,374
Less: Accumulated depreciation                                          978,996          971,625
                                                                      ---------        ---------
                                                                        755,160          777,749
                                                                      ---------        ---------

INTANGIBLE ASSETS AND DEFERRED
 CHARGES, NET                                             10             86,823           64,686
                                                                      ---------        ---------
                                                                      2,410,071        2,352,393
                                                                      =========        =========
</TABLE>


The accompanying notes are an integral part of the financial statements.
<PAGE>   95
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------

ADJUSTED TO THE INDEX OF DECEMBER 2000

<TABLE>
<CAPTION>
                                                            NOTE                  DECEMBER 31,
                                                           ------        -------------------------------
                                                                            2000                1999
                                                                         ---------             ---------
                                                                                NIS. (THOUSANDS)
                                                                         -------------------------------
<S>                                                        <C>           <C>                   <C>
CURRENT LIABILITIES

Credit from banks and others                                  11         1,084,675             1,166,923
Current portion of convertible debentures                     14            12,664                14,194
Trade payables                                                12           128,623               105,443
Accounts payable                                              13           234,015               217,148
                                                                         ---------             ---------
                                                                         1,459,977             1,503,708
                                                                         ---------             ---------

LONG-TERM LIABILITIES
Long-term loans                                               14           209,627               160,703
Debentures convertible into shares of the
 Company                                                      14            12,664                28,388
Customers' deposits                                           15            58,508                63,712
Liabilities for employee rights
 upon retirement, net                                         16            18,056                15,281
Capital notes issued by a consolidated
  company                                                                      215                   215
                                                                         ---------             ---------
                                                                           299,070               268,299
                                                                         ---------             ---------
MINORITY INTEREST                                                            6,390                 7,190
                                                                         ---------             ---------

COLLATERAL, COMMITMENTS AND
  CONTINGENT LIABILITIES                                   25,26

SHAREHOLDERS' EQUITY                                                       644,634               573,196
                                                                         ---------             ---------
                                                                         2,410,071             2,352,393
                                                                         =========             =========
</TABLE>


---------------------------------------
Prof. I. Borovich - Chairman of the Board


---------------------------------------
R. Steinmetz - Director


---------------------------------------
M. Erez - President and Chief Executive Officer


Date: March 8, 2001



The accompanying notes are an integral part of the financial statements.
<PAGE>   96
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------


ADJUSTED TO THE INDEX OF DECEMBER 2000

<TABLE>
<CAPTION>
                                                         NOTE                YEARS ENDED DECEMBER 31,
                                                         ----        --------------------------------------------
                                                                       2000               1999            1998
                                                                     ---------         ---------        ---------
                                                                                 NIS. (THOUSANDS)
                                                                     --------------------------------------------
<S>                                                      <C>         <C>               <C>              <C>
Sales                                                                4,038,491         3,427,232        3,201,370
Less: Government imposts                                             1,291,274         1,343,439        1,366,564
                                                                     ---------         ---------        ---------
Net sales                                                            2,747,217         2,083,793        1,834,806
Cost of sales                                             19         2,220,547         1,526,612        1,327,399
                                                                     ---------         ---------        ---------

Gross profit                                                           526,670           557,181          507,407
                                                                     ---------         ---------        ---------

Selling and marketing expenses                            20           332,248           330,958          317,288
General and administrative expenses                       21            78,077            71,584           69,637
                                                                     ---------         ---------        ---------
                                                                       410,325           402,542          386,925
                                                                     ---------         ---------        ---------

Income from operations                                                 116,345           154,639          120,482
                                                                     ---------         ---------        ---------
Financing expenses, net                                   22           (70,190)          (75,278)         (22,336)
Other income, net                                         23            59,640            12,199           19,317
                                                                     ---------         ---------        ---------
                                                                       (10,550)          (63,079)          (3,019)
                                                                     ---------         ---------        ---------

Income before taxes on income                                          105,795            91,560          117,463
Taxes on income                                           24            42,966            33,670           47,399
                                                                     ---------         ---------        ---------

Income after taxes on income                                            62,829            57,890           70,064
Company's share in income (loss)
 of affiliates, net                                                     10,362             5,001           (9,486)
 Minority interest in consolidated
  subsidiaries,  net                                                    (2,430)           (2,713)          (1,066)
                                                                     ---------         ---------        ---------

Net income for the year                                                 70,761            60,178           59,512
                                                                     =========         =========        =========
Earnings  per ordinary share
(in NIS.):                                                18

Primary                                                                   0.51              0.43             0.50
                                                                     =========         =========        =========

Fully diluted                                                             0.50              0.42             0.50
                                                                     =========         =========        =========
</TABLE>


The accompanying notes are an integral part of the financial statements.
<PAGE>   97
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------

ADJUSTED TO THE INDEX OF DECEMBER 2000


<TABLE>
<CAPTION>
                                                                                   COMPANY'S
                                                                                   SHARES HELD BY
                                                                                   A CONSOLIDATED     RETAINED
                                                     CAPITAL         PREMIUM       COMPANY            EARNINGS          TOTAL
                                                     -------         -------       -------            --------          -----
                                                                                 NIS. (THOUSANDS)
                                                     ----------------------------------------------------------------------------
<S>                                                  <C>             <C>         <C>                 <C>              <C>
Balance as at January 1, 1998                        237,256         134,837              --           514,205           886,298

CHANGES IN 1998:
Conversion of debentures to shares                    16,495         120,913*             --                --           137,408
Net income for the year                                   --              --              --            59,512            59,512
Dividend paid                                             --              --              --          (506,700)         (506,700)
Gain from the sale of the Company's
 shares held by a consolidated
 company, net                                             --              92              --                --                92
                                                     -------         -------          ------          --------          --------

Balance as at December 31, 1998                      253,751         255,842              --            67,017           576,610

CHANGES IN 1999:

Net income for the year                                   --              --              --            60,178            60,178
Dividend paid                                             --              --              53           (63,000)          (62,947)
Acquisition of the Company's shares
 by a consolidated company                                --              --            (645)               --              (645)
                                                     -------         -------          ------          --------          --------

Balance as at December 31, 1999                      253,751         255,842            (592)           64,195           573,196

CHANGES IN 2000:

Net income for the year                                   --              --              --            70,761            70,761
Conversion of debentures to shares                       397           3,089              --                --             3,486
Acquisition of the company's
Shares by a consolidated company                          --              --          (2,809)               --            (2,809)
                                                     -------         -------          ------          --------          --------

Balance as at December 31, 2000                      254,148         258,931          (3,401)          134,956           644,634
                                                     =======         =======          ======          ========          ========
</TABLE>


*  Net of issuance expenses in the amount of NIS. 1,978 thousand.

The accompanying notes are an integral part of the financial statements.
<PAGE>   98
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------

ADJUSTED TO THE INDEX OF DECEMBER 2000

<TABLE>
<CAPTION>
                                                                                      YEARS ENDED DECEMBER 31,
                                                                           ------------------------------------------------
                                                                             2000                1999                1998
                                                                           --------            --------            --------
                                                                                            NIS. (THOUSANDS)
                                                                           ------------------------------------------------
<S>                                                                        <C>                 <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES

Net income                                                                   70,761              60,178              59,512
Adjustments to reconcile net income to operating
 cash flows (A):                                                            (19,903)            (46,469)            102,452*
                                                                           --------            --------            --------

Net cash provided by  operating activities                                   50,858              13,709             161,964
                                                                           --------            --------            --------

CASH FLOWS FROM INVESTING ACTIVITIES

Acquisition of fixed assets                                                (102,839)           (120,064)           (107,469)
Proceeds from sale of fixed assets                                           14,669              16,162              31,115
Proceeds from the sale of investments in affiliated companies                57,803                  --                  --
Dividend received from affiliates from
 prior year's income                                                            412                 981                  --
Investment in long-term loans (1)                                           (11,234)            (19,053)            (20,052)
Collection of long-term loans                                                16,085              25,549              12,419
Investment in intangible and deferred charges                               (21,496)            (12,190)            (11,444)
Acquisition of shares of an affiliated company                               (1,965)                (21)             (1,743)
(Investments in)  Proceeds from marketable
 securities, net                                                              2,371                (222)             (6,639)
Investment in companies carried on the cost basis                            (1,585)             (2,978)             (1,540)
Acquisition of shares in a consolidated company                              (1,052)            (10,262)                 --
Realization of  investment in capital notes                                   7,992                 978                  --
Acquisition of initially consolidated
 companies (B)(2)                                                               (14)             (4,226)                 --
Proceeds from the sale of a previously consolidated company (C)               5,802                  --                  --
                                                                           --------            --------            --------

Net cash used for investing activities                                      (35,051)           (125,346)           (105,353)
                                                                           --------            --------            --------

                                         C/F                                 15,807            (111,637)             56,611
                                                                           --------            --------            --------
</TABLE>


*  Reclassified
<PAGE>   99
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
--------------------------------------------------------------------------------

 ADJUSTED TO THE INDEX OF DECEMBER 2000

<TABLE>
<CAPTION>
                                                                     YEARS ENDED DECEMBER 31,
                                                            -----------------------------------------
                                                             2000             1999             1998
                                                            -------         --------         --------
                                                                        NIS. (THOUSANDS)
                                                            -----------------------------------------
<S>                                                         <C>            <C>               <C>
                                         B/F                 15,807         (111,637)          56,611
                                                            -------         --------         --------

CASH FLOWS FROM FINANCING ACTIVITIES
Dividend paid                                                    --          (62,947)        (506,700)
Dividend paid to minority shareholders in
 Consolidated subsidiaries                                    (1510)          (1,347)            (287)
Short-term credit from banks and others,  net               (79,710)         180,414          560,957
Long-term loans received                                     49,953          152,334              818
Long-term loans repaid                                       (1,094)         (99,931)         (71,770)
Customers' deposits received                                  2,335            1,996            2,331
Customers' deposits repaid                                   (2,209)            (787)            (902)
Redemption of debentures (3)                                (12,865)         (14,475)         (39,906)
Proceeds from sale of shares of the Company held
 By a consolidated company, net                                  --               --               92

Acquisition of Company's shares by a
 Consolidated company                                        (2,809)            (645)              --
                                                            -------         --------         --------

Net cash provided (used for) by financing activities        (47,909)         154,612          (55,367)
                                                            -------         --------         --------

Increase (decrease) in cash and cash equivalents            (32,102)          42,975            1,244
Cash and cash equivalents at beginning of year               52,866            9,891            8,647
                                                            -------         --------         --------

Cash and cash equivalents at end of year                     20,764           52,866            9,891
                                                            =======         ========         ========
</TABLE>


The accompanying notes are an integral part of the financial statements.
<PAGE>   100
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
--------------------------------------------------------------------------------

ADJUSTED TO THE INDEX OF DECEMBER 2000

<TABLE>
<CAPTION>
                                                                    YEARS ENDED DECEMBER 31,
                                                             ------------------------------------------
                                                              2000             1999              1998
                                                             -------         --------          --------
                                                                        NIS. (THOUSANDS)
                                                             ------------------------------------------
<S>                                                          <C>              <C>               <C>
(A) ADJUSTMENTS TO RECONCILE NET INCOME TO
       OPERATING CASH FLOWS:

INCOME AND EXPENSES NOT REQUIRING CASH FLOWS:

Depreciation and amortization, net                            86,155           93,689            88,100
Deferred taxes, net                                           (1,256)          (3,632)              321
Increase in liabilities for employee rights upon
  retirement, net                                              5,157              858             2,525
Minority interest in income of consolidated
  companies                                                    2,430            2,713             1,066
Company's share in (profit)/losses (less undistributed
  income) of affiliates, net                                  (2,192)           1,747            16,320
Capital gains                                                 (2,033)            (332)          (10,092)
Erosion of investments in capital notes, net                    (486)            (380)             (238)
Erosion of long-term loans, debentures and
  capital notes issued                                          (934)             (54)           18,454
Erosion of loans granted                                        (906)             843             3,404
(Increase) Decrease  in value of compulsory
 government loan and securities, net                          (4,847)          (1,502)            2,514
Erosion of customers' deposits                                (5,428)          (1,597)           (5,545)
Decrease (Increase) of other investments                         696               --            (1,167)
Write-off of loan to an affiliated company                     1,484               --             1,400
Profit on change in percent ownership of an
 affiliated company                                          (49,555)              --                --
Loss (Profit) from the decrease in percent
 ownership of an affiliated company                               --              522               (50)
Loss from sale of investment consolidated  company             1,619               --                --
CHANGES IN ASSETS AND LIABILITIES:
Increase in trade and accounts
 receivable (1)                                              (62,596)         (46,027)         (169,010)*
(Increase) Decrease in inventories                           (35,417)        (191,916)           93,873
Increase(Decrease) in trade and accounts payable (4)          48,206           98,599            60,577
                                                             -------         --------          --------
                                                             (19,903)         (46,469)          102,452*
                                                             =======         ========          ========
</TABLE>


* Reclassified


The accompanying notes are an integral part of the financial statements.
<PAGE>   101
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
--------------------------------------------------------------------------------

ADJUSTED TO THE INDEX OF DECEMBER 2000


<TABLE>
<CAPTION>
                                                                         YEARS ENDED DECEMBER 31,
                                                                 --------------------------------------
                                                                   2000            1999           1998
                                                                 -------         -------         ------
                                                                            NIS. (THOUSANDS)
                                                                 --------------------------------------
<S>                                                              <C>             <C>             <C>
(B)ACQUISITION OF INITIALLY CONSOLIDATED COMPANIES

Working capital (not including cash and cash
  equivalents)                                                    (3,319)         (1,920)        (1,756)
Fixed assets, net                                                    591          29,595          2,515
Long-term debt, net                                                   91         (10,667)          (741)
Investment in loans to affiliated companies                           --         (14,995)            68
Goodwill created at acquisition                                    2,404           2,213            694
Minority interests as of the acquisition date                        247              --           (780)
                                                                 -------         -------         ------
                                                                      14           4,226             --
                                                                 =======         =======         ======
</TABLE>

(C) PROCEEDS FROM THE REALIZATION OF AN INVESTMENT
         IN A PREVIOUSLY CONSOLIDATED COMPANY:

<TABLE>
<CAPTION>
                                                                   2000            1999           1998
                                                                 -------         -------         ------
                                                                             NIS. (THOUSANDS)
                                                                 --------------------------------------
<S>                                                              <C>             <C>             <C>
Working capital (not including cash and cash equivalents)         16,711              --             --
Fixed and intangible assets                                       36,108              --             --
Long-term receivables, net                                        (3,233)             --             --
Investment in an affiliated company                              (10,156)             --             --
Goodwill                                                           1,091              --             --
Minority interests on date of sale                                  (719)             --             --
Capital loss from the realization of investment in a
  consolidated company                                            (1,619)             --             --
                                                                 -------         -------         ------
Proceeds from sale of consolidated company                        38,183              --             --
Less proceeds not yet received                                    32,381              --             --
                                                                 -------         -------         ------
                                                                   5,802              --             --
                                                                 =======         =======         ======
</TABLE>

(D) ACTIVITIES NOT REQUIRING CASH FLOW:

(1)   In 2000, current receivables from customers were converted into long-term
      loans in the amount of NIS. 23,163 thousand (1999 - NIS. 3,952 thousand,
      1998 - NIS. 10,734 thousand).

(2)   In 1998, acquisition of a company initially consolidated in consideration
      of its debt in the amount of NIS. 1,501 thousand.
<PAGE>   102
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
--------------------------------------------------------------------------------


(3)   In 2000, NIS. 3,486 thousand, net, of debentures were converted to shares.
      (1998 - NIS. 137,408 thousand).

(4)   On December 31, 1999 and 2000 an amount of NIS 4,270 thousand was
      reflected in accounts payable, representing the balance due to a
      municipality relating to 50% of the plot of land sold. (1998 - NIS 5,720
      thousand) (see note 25.C.2e.).







    The accompanying notes are an integral part of the financial statements.
<PAGE>   103
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------

NOTE 1 - GENERAL

      Granite Hacarmel Investments Ltd. ("the Company" and/or "Granite" (P.C.
      520037177) has initiated a restructuring of companies within the group,
      with the intention of creating a suitable commercial framework for its
      consolidated companies which will distinguish between current and future
      areas of operations. The restructuring will allow for the possibility of
      the subsidiary companies raising capital from the public or enlisting a
      strategic investor for the separate operations of the specific assets of a
      given company.

      In 1999, within the framework of the restructuring of the Granite group
      and after appropriate discussions in the authorized forums within the
      Company and its subsidiary, Sonol Israel Ltd. ("Sonol"), it was decided
      to split the subsidiary, Sonol, into two corporations:

      1.    Sonol Israel Ltd. ("Sonol") - which will continue its commercial
            activities and marketing operations of products to its customers.

      2.    Sonol Trading Ltd. ("Sonol Trading") - which will engage in other
            activities, which do not include the marketing of fuel products,
            including developing new business in filling stations, new business
            ventures, providing infrastructure services and land development.

      Both of the above mentioned companies are wholly owned and controlled by
      the Company.

      As part of the division, Sonol will transfer to Sonol Trading assets and
      rights as determined by the division, including land and shareholdings.
      Concurrently, Sonol Trading will assume a portion of Sonol's liabilities
      to be split from Sonol in proportion to the book value of the assets to be
      transferred to Sonol Trading under the division.

      Within the framework of the restructuring arrangement and after
      deliberations by the authorized forums of the Company and its
      subsidiaries, Sonol, Supergas Israel Gas Distribution Company Ltd.
      ("Supergas") and Granite Hacarmel Holdings (1993) Ltd. ("Granite
      Holdings"), it was decided that Sonol will transfer, without
      consideration, its shares in Supergas (50%) to the Company and, in
      addition, certain real assets will be transferred without payment from
      Sonol and Supergas to Granite Holdings.

      As of the date of the signing of the financial statements, the
      restructuring has not yet taken place. However, in connection with and
      further to the restructuring, Granite, together with Ampal Industries
      (Israel) Ltd. and companies controlled by Ampal American Israel
      Corporation (together: "Ampal Group"), are considering the possibility of
      a merger of their holdings, primarily in real estate owned by both groups,
      into a single, jointly owned entity.
<PAGE>   104
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------

NOTE 2 - SIGNIFICANT REPORTING AND ACCOUNTING POLICIES

A.    PRINCIPLES OF ADJUSTMENT AND CONSOLIDATION IN THE FINANCIAL STATEMENTS

      1.    FINANCIAL STATEMENTS IN ADJUSTED VALUES

            a.    The Company and the other companies of the group have prepared
                  their financial statements on the basis of historical cost
                  which was adjusted to the changes in the general purchasing
                  power of the shekel.

            b.    The adjusted values presented do not necessarily reflect
                  realizable value or current economic value, but rather the
                  cost, adjusted for the changes in the general purchasing power
                  of the shekel.

            c.    The term "cost" used in the adjusted statements means cost in
                  adjusted shekels unless otherwise stated.

            d.    The comparative figures (including the monetary items) are
                  stated in shekels adjusted to the December 2000 Index.

            e.    The adjusted amounts are expressed in New Israel Shekels, the
                  purchasing power of which reflects the average price level of
                  the month of December 2000, based on the consumer price index
                  published by the Central Bureau of Statistics ("Index"), on
                  January 15, 2001 (see Note 2.G.).

      2.    BALANCE SHEET

            a.    The non-monetary items were adjusted for the changes in the
                  Index since their acquisition or creation and until the
                  balance sheet date. The following items were the main items
                  which were treated as non-monetary items: fixed assets and
                  related accumulated depreciation, investments carried at cost,
                  inventories, except for inventories of crude oil and refined
                  products, (see Note 2.c.2) deferred charges and the related
                  accumulated amortization, and shareholders' equity.

            b.    The value of the investments in affiliated companies carried
                  on the equity basis was computed on the basis of the adjusted
                  statements of the affiliated companies.

            c.    Deferred taxes, net were computed on the basis of the adjusted
                  data.

            d.    Monetary items are stated in the adjusted statements at their
                  nominal value.

      3.    STATEMENT OF INCOME

            The items of the statement of income were adjusted in accordance
            with the changes in the Index as follows:
<PAGE>   105
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------


NOTE 2 - SIGNIFICANT REPORTING AND ACCOUNTING POLICIES (CONTINUED)

A.    PRINCIPLES OF ADJUSTMENTS AND CONSOLIDATION IN THE FINANCIAL STATEMENTS
      (CONTINUED)

      3.    STATEMENT OF INCOME (CONTINUED)

            a.    Amounts relating to non-monetary items in the balance sheet
                  (e.g. depreciation and amortization), or provisions included
                  in the balance sheet (e.g. severance indemnities, vacation
                  pay) were adjusted in accordance with the changes in the
                  corresponding balance sheet items.

            b.    Other amounts in the statement of income (e.g. sales,
                  purchases, other current expenses), except for the components
                  financing expenses net, are stated at their adjusted amounts
                  based on the index for the month of the related transactions.

            c.    The net financing item reflects financing income and expenses
                  in real terms, erosion of monetary items during the year,
                  profit and loss arising from realization and valuation of
                  marketable securities and profit and loss from financial
                  instruments.

            d.    The Company's equity in the operating results of the
                  affiliated companies and the minority interest in the results
                  of consolidated subsidiaries were determined on the basis of
                  the adjusted statements of the invested companies.

            e.    Current taxes are comprised of payments on account during the
                  year, in addition to amounts payable as of the balance sheet
                  date (or net of refunds claimed). The payments on account were
                  adjusted based on the prevailing Index on the date of each
                  payment, while the amounts payable (or claimed as refund) are
                  included without adjustment. Accordingly, the current taxes
                  include the expenses arising from the erosion of the payments
                  on account taxes from the date of such payments to the balance
                  sheet date. Deferred taxes - see Note 2.J.

      4.    STATEMENT OF SHAREHOLDERS' EQUITY

            Dividend declared and paid on during the year has been adjusted on
            the basis of the index at the day of payment. Dividend declared but
            not yet paid at the balance sheet date is included without
            adjustment.

      5.    PRINCIPLES OF CONSOLIDATION

            a.    The consolidated financial statements of the Company include
                  the consolidated financial statements of the Company and its
                  subsidiaries. The list of subsidiaries which are included in
                  the consolidated financial statements and the percent
                  ownership and control therein are included in a separate
                  schedule to the financial statements.
<PAGE>   106
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------

NOTE 2 - SIGNIFICANT REPORTING AND ACCOUNTING POLICIES (CONTINUED)

      5.    PRINCIPLES OF CONSOLIDATION (CONTINUED)

            b.    Intercompany balances and transactions of consolidated
                  companies have been eliminated.

            c.    Shares of the Company, acquired by a consolidated company,
                  have been recorded using the "treasury stock" method.

B.    INVESTMENTS IN SUBSIDIARY AND AFFILIATED COMPANIES

      1.    The investments in subsidiaries and affiliated companies are
            reflected in the financial statements in accordance with their
            equity adjusted to the balance sheet date together with the balance
            of the excess cost or net of the balance of deferred credits. Other
            investments are stated at cost or under which does not exceed equity
            as of the balance sheet date. Subsidiary companies own several other
            inactive and/or insignificant subsidiaries and which, therefore, are
            not consolidated and are carried at cost, which does not exceed
            equity as of the balance sheet date.

      2.    The excess of cost of investments in consolidated subsidiaries,
            which is not related to specific assets, over the net value of net
            assets acquired ("Goodwill"), is included in "Intangible assets and
            deferred charges, net" and is amortized by the straight-line method
            over a period of ten years.

            The excess net value of net assets acquired over cost of investments
            in affiliated companies, which is not related to specific assets, is
            set off against excess of cost included in "Intangible assets and
            deferred charges, net" and is amortized on the straight-line method
            over a period of ten years.

      3.    The investments of the Company in capital notes of affiliated
            companies are presented in the financial statements of the Company
            in accordance with the requirements of the Securities Authority
            regarding transactions between the Company and its interested
            parties.

      4.    A list of affiliated companies is included in a schedule attached to
            the financial statements.

C.    VALUATION OF INVENTORIES

      1.    Inventory of crude oil and refined products

            The major part of the crude oil and refined product inventories
            consists of Emergency Inventories. The Emergency Inventories are
            valued based on current value, which does not exceed market value in
            accordance with the lower of the changes in the exchange rate
            determined by the Fuel Authority ("Fuel Authority rate") or the
            dollar exchange rate. In all instances, the recovery of the value of
            the Emergency Inventories at the Fuel Authority rate is guaranteed
            by the Government in accordance with the Commodities and Services
            Control Order (Arrangements in the Oil Economy) - 1988.
<PAGE>   107
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------

NOTE 2 - SIGNIFICANT REPORTING AND ACCOUNTING POLICIES (CONTINUED)

C.    VALUATION OF INVENTORIES (CONTINUED)

            The commercial inventories (crude oil and refined products) are
            stated at the lower of cost or market.

            The cost is determined by the first-in, first-out method.

      2.    Other inventories

             The inventories of luboils, spare parts and others are stated at
             the lower of cost or market. The cost is determined by the moving
             average method.

D.    FIXED ASSETS

      Fixed assets are carried at cost, net of investment grants, or at cost
      together with the addition of excess of cost over net asset value related
      to specific assets. Improvements are charged to assets while maintenance
      and repair expenses are charged as incurred to the statement of income.

E.    DEPRECIATION AND AMORTIZATION

      Depreciation is computed by the straight-line method at annual rates
      considered to be sufficient for depreciating the assets over their
      estimated useful lives.

      The annual rates of depreciation are as follows:

<TABLE>
<CAPTION>
                                                                  %
                                                                 ---
<S>                                                          <C>
      Buildings (including temporary and rental buildings)    2 - 6.5
      Machinery and equipment                                 5 - 15
      Vehicles                                                15 - 20
      Computers                                               20 - 33
      Furniture, office equipment and computers               6 - 10
</TABLE>

      The excess of cost over net asset value related to specific assets is
      depreciated over the remaining useful life as determined at the time the
      excess of cost was related to those assets. Leasehold rights are amortized
      over the term of their leases. Buildings on leased land are depreciated
      over the period of their leases.

F.    DEBENTURES CONVERTIBLE INTO SHARES

      1.    Convertible debentures are presented in accordance with the Opinion
            No.53 of the Institute of Certified Public Accountants in Israel on
            the basis of the probability of their conversion into shares.
            Debentures are reflected in the financial statements at their
            liability value.

      2.    Costs relating to the issuance of convertible debentures are
            amortized over the term of the debentures.
<PAGE>   108
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------

NOTE 2 - SIGNIFICANT REPORTING AND ACCOUNTING POLICIES (CONTINUED)

G.    FOREIGN CURRENCY AND LINKAGE BASIS

      Assets (other than securities) and liabilities in foreign currencies or
      linked thereto are stated at the exchange rates in effect on the balance
      sheet date. Assets (other than securities) and liabilities linked to the
      Index, are stated according to the linkage conditions applying to each
      balance. The Index, the exchange rates and the rate of changes therein
      were as follows:

<TABLE>
<CAPTION>
                                                  DECEMBER 31                                   CHANGES IN %
                                     ------------------------------------            ---------------------------------
                                     2000            1999            1998             2000         1999           1998
                                     ----            ----            ----             ----         ----           ----
<S>                                 <C>             <C>             <C>              <C>          <C>            <C>
      Index                          168.5           168.5           166.3               0          1.3            8.6
      Exchange rate of the
        U.S. dollar                  4.041           4.153           4.160            (2.7)        (0.2)          17.6
</TABLE>

H.    MARKETABLE SECURITIES

      Marketable securities are carried at their market value on the date of the
      balance sheet. The changes in the value of the securities are reflected in
      the statement of income.

I.    PROVISION FOR DOUBTFUL RECEIVABLES

      The Company provides specifically for receivables the collection of which
      is doubtful in the opinion of the management.

J.    DEFERRED TAXES

      The companies in the group apportion taxes as a result of timing
      differences between the values of assets and liabilities for book and tax
      purposes. The said apportionment is made on account of differences
      relating to assets whose usage or expense are recognized for tax purposes.
      The balance of deferred taxes are calculated according to the liability
      method at tax rates which will be in effect when the deferred taxes will
      be utilized, using tax rates that are known at the time of publication of
      the financial statements (36%).


      The main factors in respect of which deferred taxes have not been
      computed:

      a.    Amounts of adjustment for the change in the purchasing power of the
            New Israel Shekel relating primarily to buildings and automobiles,
            in accordance with rules determined by the Institute of Certified
            Public Accounts in Israel ("the Institute").

      b.    Investments in subsidiaries and affiliates, where it is the
            Company's intention to hold these investments rather than to sell
            them.

      c.    Tax benefit receivable on account of timing differences where
            realization of the benefit is uncertain.
<PAGE>   109
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000

NOTE 2 - SIGNIFICANT REPORTING AND ACCOUNTING POLICIES (CONTINUED)

K.    RECOGNITION OF INCOME

      1.    Product sales - Income from the sale of products is recorded upon
            receipt of the products by the customer.

      2.    Rental income - Rental income is recorded upon receipt of payment,
            proportionately to the relevant period.

      3.    Construction project income (recorded in 1998) was recognized, in
            accordance with the opinions of the Institute.

L.    PROVISION FOR LINKAGE INCREMENTS ON CUSTOMERS' DEPOSITS

      Supergas Israel Gas Distribution Company Ltd. is obligated under a
      Government decree to pay customers terminating their gas purchasing
      agreement an amount equal to the latest approved deposit authorized by the
      Ministry of Trade and Industry, linked to the change in the exchange rate
      of the dollar from the date of the last approval to the date of payment.
      For periods subsequent to the last approval, Supergas provides for
      adjusting the amounts of the deposits on the basis of the next expected
      updating that it plans to request, based on the change in the exchange
      rate of the dollar from the last update until the end of the year.
      Supergas provides for this liability on a discounted present value basis.

M.    EARNINGS PER SHARE

      The earnings per share are computed in accordance with Opinion No. 55 of
      the Institute.

      In computing primary earnings per share, consideration is given to whether
      there is a reasonable chance of conversion or realization of convertible
      securities in accordance with the tests prescribed by the Opinion.

      The computation of diluted earnings per share takes into account
      convertible securities issued by the Company and its consolidated
      companies that were not included in the calculation of primary earnings
      per share, provided that their conversion or realization does not result
      in an increase in earnings per share (anti-dilutive effect).

N.    USE OF ESTIMATES

      The preparation of financial statements in accordance with generally
      accepted accounting principles requires management to use estimates and
      valuations which influence the reported amounts of assets and liabilities,
      the disclosure regarding contingent assets and liabilities, and also, the
      amounts of income and expenses recorded in the reporting period. Actual
      results may differ from these estimates.
<PAGE>   110
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------

NOTE 2 - SIGNIFICANT REPORTING AND ACCOUNTING POLICIES (CONTINUED)

O.    PRESENTATION OF TRANSACTIONS BETWEEN THE COMPANY AND A CONTROLLING PARTY

      Transactions between the Company and a controlling party are presented in
      the accordance with the Securities Regulation (Presentation of
      transactions between the Company and a controlling party in the Financial
      Statements) - 1996.

P.    FAIR VALUE OF FINANCIAL INSTRUMENTS

      With the exception of convertible debentures (see Note 14.B.) there are no
      material differences between the fair value of the financial instruments
      of the Company and their value in the financial statements.


NOTE 3 - ACCOUNTING WITH THE FUEL AUTHORITY AND THE REFORM IN THE ENERGY SECTOR
         - SONOL

      1.    Amounts due to or from the Fuel Authority, to the extent still
            provisional, are included each year in the accounts according to
            estimates prepared by the Company based on past experience.
            Differences which subsequently arise are reflected in the results of
            the year in which such differences are determined.

      2.    All costs and expenses related to the holding of Emergency
            Inventories are fully recoverable from the government while the
            holding of Commercial Inventories is at the risk of the fuel
            marketing companies.

      3.    The prices of 95 and 96 octane gasoline continue to be subject to
            government price controls.

      4.    See Note 26.


NOTE 4 - CASH AND CASH EQUIVALENTS

Consist of:

<TABLE>
<CAPTION>
                                                 DECEMBER 31,
                                            -----------------------
                                             2000             1999
                                            ------           ------
                                                 NIS. THOUSANDS
                                            -----------------------
<S>                                         <C>             <C>
In local currency                            5,983           47,984
In foreign currency                         14,781            4,882
                                            ------           ------
                                            20,764           52,866
                                            ======           ======
</TABLE>

Cash equivalents - bank deposits whose maturities, at the time of the deposit,
did not exceed three months.
<PAGE>   111
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------

NOTE 5 - TRADE RECEIVABLES AND ACCOUNTS RECEIVABLE

      A.    TRADE RECEIVABLES

<TABLE>
<CAPTION>
                                                                               DECEMBER 31,
                                                                       -------------------------
                                                                         2000              1999
                                                                       -------           -------
                                                                            NIS. (THOUSANDS)
                                                                       -------------------------
<S>                                                                    <C>               <C>
                Customers - open accounts                              605,358           608,810
                Checks and notes receivable                             84,644            80,569
                Credit cards companies                                  98,330            80,940
                Short-term loans and current portion
                of long-term loans granted                              16,129            18,393
                Less - provision for doubtful
                receivables*                                           (23,256)          (18,292)
                                                                       -------           -------
                                                                       781,205           770,420
                                                                       =======           =======
</TABLE>

      B.    ACCOUNTS RECEIVABLE

<TABLE>
<CAPTION>
                                                                               DECEMBER 31,
                                                                        ------------------------
                                                                         2000              1999
                                                                        ------            ------
                                                                            NIS. (THOUSANDS)
                                                                        ------------------------
<S>                                                                    <C>               <C>
                Government institutions                                    614                 8
                Income receivable                                       11,232            11,479
                Income tax receivable                                    4,280                --
                Employees                                                  695             1,143
                Prepaid expenses                                        10,970            12,164
                Future tax benefits, net**                               8,019             7,814
                Others                                                  17,892            23,027
                                                                        ------            ------
                                                                        53,702            55,635
                                                                        ======            ======
</TABLE>

      C.    REGARDING CREDIT RISKS SEE NOTE 25.E.

            *  See note 2.I.
            ** See note 24

NOTE 6 - INVENTORIES

<TABLE>
<CAPTION>
                                                                               DECEMBER 31,
                                                                       -------------------------
                                                                         2000              1999
                                                                       -------           -------
                                                                            NIS. (THOUSANDS)
                                                                       -------------------------
<S>                                                                    <C>               <C>
                Consist of:
                Crude oil and raw materials                             38,126            69,065
                Finished products                                      371,832           313,687
                Materials and supplies                                  10,331            10,949
                                                                       -------           -------
                                                                       420,289           393,701
                                                                       =======           =======
</TABLE>
<PAGE>   112
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------

NOTE 7 - AFFILIATED COMPANIES AND OTHERS

<TABLE>
<CAPTION>
                                                                                        DECEMBER 31,
                                                                                 -------------------------
                                                                                  2000              1999
                                                                                 -------           -------
                                                                                      NIS. (THOUSANDS)
                                                                                 -------------------------
<S>                                                                              <C>               <C>
              Affiliated companies:
              Share at equity (F)                                                 20,627            27,160
              Goodwill and excess cost attributed, net (D):
              Original amount                                                     89,036            87,495
              Less accumulated amortization                                       (3,522)           (2,797)
                                                                                 -------           -------
              Book value (A)                                                     106,141           111,858
              Long-term loans, net of cumulative losses (C)(G)                     6,627             7,674
              Capital note and capital reserve, net
               of accumulated losses (B)                                              --             6,109
                                                                                 -------           -------
                                                                                 112,768           125,641
              Others-- cost less amortization (E)*                                38,602            27,557
                                                                                 -------           -------
                                                                                 151,370           153,198
                                                                                 =======           =======
              *  Including securities registered for
                   trading on the Tel Aviv stock exchange                          9,460                --
                                                                                 -------           -------
                 Market value                                                     17,253                --
                                                                                 =======           =======
              A. Costs of shares including accumulated
                     profits as of December 31, 1991                                  --             7,444

                     Changes, beginning January 1, 1992:
                     Cost of shares acquired                                     108,260           106,295

                     Accumulated losses, net *                                    (1,597)           (1,359)
                     Other changes                                                  (522)             (522)
                                                                                 -------           -------
                     Book value (**)                                             106,141           111,858
                                                                                 =======           =======

              (*)    Dividend received in the current year                         8,582             7,729
                                                                                 =======           =======
              (**)   Including securities quoted on the Tel Aviv Exchange:

                     Book value                                                   92,301            89,952
                                                                                 =======           =======
                     Market value                                                 44,749            70,230
                                                                                 =======           =======
</TABLE>
<PAGE>   113
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------

NOTE 7 - AFFILIATED COMPANIES AND OTHERS (CONTINUED)

            B.    The capital note is unsecured and non-negotiable, linked to
                  the Index and bears no interest. During 1999, NIS. 978
                  thousand as repaid and the balance was repaid in the
                  year 2000.

            C.    The loans were granted by the Company and consolidated
                  companies to affiliated companies or partnerships. Included
                  are index linked loans in the amount of NIS. 6,507 thousand
                  (1999 - NIS. 5,988 thousand) bearing interest at the rate of
                  10% p.a. The loans are repayable at a time to be determined by
                  the parties.

            D.    Includes goodwill not yet amortized in the amount of NIS.
                  5,413 thousand. (1999 - NIS. 6,143 thousand).

            E.    (1)   On July 1, 1999 the Company acquired 14.5% of the share
                        capital of Vulcan Batteries Ltd. ("Vulcan") in a
                        transaction that took place outside the stock exchange.
                        After this purchase, the Company's holdings in Vulcan
                        amounted to approximately 98.5%. On May 24, 2000 an
                        agreement between the Company and Focus Capital Net Ltd.
                        ("Focus Capital") and a group of private investors was
                        finalized. Under the terms of the agreement, the Company
                        sold 11,903,166 shares representing approximately 78.51%
                        of the issued and outstanding shares of Vulcan. After
                        the sale, the Company continues to hold 20% of Vulcan's
                        shares. The investment is stated at cost in the
                        company's accounts.

                  (2)   The Company, through one of its subsidiaries, invested
                        in two venture capital funds, Jerusalem Venture Partners
                        (Israel) LP and Eucalyptus Ventures LP, both of whom
                        invested in shares of Chromatis Networks Ltd.
                        ("Chromatis"). Lucent Technologies Inc. ("Lucent"), an
                        American company, acquired the remaining unowned balance
                        of Chromatis' shares, in exchange for Lucent shares. The
                        closing took place on June 29, 2000. The expected gain
                        on the sale will be recorded upon receipt of the shares.

            F.    On May 2, 2000 a consolidated company sold its holdings in
                  three affiliated companies for an amount of approximately NIS.
                  58 million.

            G.    The affiliated Company, Supergas Etzion Holdings (1997) Ltd.
                  collateralized, by a fixed charge to a bank, all its holding
                  in the shares of Etzion Gas Products, including dividends,
                  bonus shares and cash. The shares in the company's name were
                  transferred in trust and are being held by the bank on behalf
                  of the shareholders.
<PAGE>   114
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------


NOTE 7 - AFFILIATED COMPANIES AND OTHERS (CONTINUED)

            H.    Changes in investments in affiliated companies and others:

<TABLE>
<CAPTION>
                                                                                NIS.(THOUSANDS)
                                                                                ---------------
<S>                                                                             <C>
              Balance as at January 1, 2000                                        153,198
               Changes during the year:
              Investments in shares, partnerships and loans                          3,551
              Sale of shares in affiliated company                                  (8,173)
              Repayment of capital notes                                            (7,992)
              Equity income, net                                                    10,362
              Dividend received                                                     (8,582)
              Previously consolidated company                                       10,156
              Other changes                                                         (1,150)
                                                                                   -------
              Balance as at December 31, 2000                                      151,370
                                                                                   =======
</TABLE>

NOTE 8  - LONG-TERM LOANS AND RECEIVABLES

<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                                        ------------------------
                                                                         2000              1999
                                                                        ------            ------
                                                                             NIS. (THOUSANDS)
                                                                        ------------------------
<S>                                                                    <C>                <C>
              a.  CONSIST OF:
                 Loans to customers                                    110,120            91,305
                 Loans to employees                                        129               119
                                                                        ------            ------
                                                                       110,249            91,424
                 Less: current portion                                  16,129            17,859
                                                                        ------            ------
                                                                        94,120            73,565
                 Other receivables(1)                                   33,508                --
                                                                        ------            ------
                                                                       127,628            73,565
                                                                       =======            ======

                 The years of maturity of the loans:
                 First year - current portion                           16,129            17,859
                 Second year                                            18,503            37,616
                 Third year                                              9,108             5,674
                 Fourth year                                             9,075             6,071
                 Fifth year                                             13,407            13,407
                 Sixth year and thereafter and without
                 maturity date                                          44,027            10,797
                                                                        ------            ------
                                                                       110,249            91,424
                                                                       =======            ======
</TABLE>

            (1) Long term receivables from the sale of a previously
                consolidated company.

                See also Note 7.E.(1). In accordance with the sale agreement,
                the balance due is index linked, will be paid no later than
                April 22, 2003, and is secured by bank guarantees. The loan
                balance has been discounted at the rate of 6%.
<PAGE>   115
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------

NOTE 8  - LONG-TERM LOANS AND RECEIVABLES (CONTINUED)

b.    BREAKDOWN OF LOANS BY LEVEL OF BORROWERS' BALANCES:

<TABLE>
<CAPTION>
                                               DECEMBER 31, 2000                   DECEMBER 31, 1999
                                               ------------------------------      --------------------------------
              BORROWERS' BALANCES              NUMBER OF        TOTAL              NUMBER OF        TOTAL
              NIS. THOUSANDS                   LOANS            NIS.(THOUSANDS)    LOANS            NIS.(THOUSANDS)
              --------------------             ---------        ---------------    ---------        ---------------
<S>                                            <C>              <C>                <C>              <C>
               Less than 100                    87                   3,297            93                 4,010
               100 - 500                        37                  11,438            34                11,207
               500 - 1,000                       9                   6,778            11                 7,615
               Above 1,000                      30                  88,736            29                68,592
                                               ---------        --------------     ---------        ---------------
                                               163                 110,249           167                91,424
                                               =========        ==============     =========        ===============
</TABLE>


c.    LINKAGE TERMS AND INTEREST RATES:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31, 2000
                                 ----------------------------------------------------------------------------------------
                                                                                      LINKED TO FOREIGN
      INTEREST RATES:                 UNLINKED              LINKED TO INDEX                CURRENCY                TOTAL
                                 -----------------        -------------------        --------------------         -------
                                                                       OVER 4-
                                  0%        10-20%         0-4%          10%           0-2%          5-9%
                                 ---        ------        ------       ------         -----         -----         -------
                                                                   NIS. (THOUSANDS)
                                 ----------------------------------------------------------------------------------------
<S>                              <C>        <C>           <C>          <C>            <C>           <C>           <C>
      Loans to:
      Customers                  326        17,435        46,062       33,899         6,460         5,938         110,120
      Employees                   --            --           129           --            --            --             129
                                 ---        ------        ------       ------         -----         -----         -------
                                 326        17,435        46,191       33,899         6,460         5,938         110,249
                                 ===        ======        ======       ======         =====         =====
      Less: current portion                                                                                        16,129
                                                                                                                   ------
                                                                                                                   94,120
                                                                                                                  =======
</TABLE>

<TABLE>
<CAPTION>
                                                                   DECEMBER 31, 1999
                                 ----------------------------------------------------------------------------------------
                                                                                      LINKED TO FOREIGN
      INTEREST RATES:                 UNLINKED              LINKED TO INDEX                CURRENCY                TOTAL
                                 -----------------        -------------------        --------------------         -------
                                                                       OVER 4-
                                  0%        10-20%         0-4%          10%           0-2%          5-9%
                                 ---        ------        ------       ------         -----         -----         -------
                                                                   NIS. (THOUSANDS)
                                 ----------------------------------------------------------------------------------------
<S>                             <C>         <C>           <C>          <C>            <C>           <C>           <C>
      Loans to:
      Customers                 5,564       2,252         37,441       33,203         5,844         7,001         91,305
      Employees                    --          --            119           --            --            --            119
                                -----       -----         ------       ------         -----         -----         ------
                                5,564       2,252         37,560       33,203         5,844         7,001         91,424
                                =====       =====         ======       ======         =====         =====
      Less: current portion                                                                                       17,859
                                                                                                                  ------
                                                                                                                  73,565
                                                                                                                  ======
</TABLE>


d.    REGARDING CREDIT RISKS SEE NOTE 25.E.
<PAGE>   116
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------


NOTE 9 - FIXED ASSETS

A.    Consist of:

<TABLE>
<CAPTION>
                                                                                   FURNITURE,
                                                                   MACHINERY       OFFICE EQUIP-
                                                  LAND AND         AND             MENT AND
                                                  BUILDINGS        EQUIPMENT       COMPUTERS       VEHICLES            TOTAL
                                                  ---------        ---------       -------------   --------         ----------
                                                                               NIS. (THOUSANDS)
                                                  ----------------------------------------------------------------------------
      Cost:
<S>                                                <C>              <C>             <C>             <C>              <C>
      Balance at beginning of year*                703,392          904,470          79,871          61,641          1,749,374
      Additions                                     33,289           50,068          13,336           7,713            104,406
      Disposals                                    (32,733)         (59,178)        (16,012)        (11,701)          (119,624)
                                                  --------         --------         -------         -------         ----------
      Balance at end of year                       703,948          895,360          77,195          57,653          1,734,156
                                                  --------         --------         -------         -------         ----------

      Accumulated depreciation:
      Balance at beginning of year*                235,550          647,490          51,951          36,634            971,625
      Depreciation charged                          21,867           40,548           9,537           7,036             78,988
      Depreciation in respect of disposals          (8,900)         (41,332)        (14,731)         (6,654)           (71,617)
                                                  --------         --------         -------         -------         ----------
      Balance at end of year                       248,517          646,706          46,757          37,016            978,996
                                                  --------         --------         -------         -------         ----------

      Depreciated balance as of
      December 31, 2000                            455,431          248,654          30,438          20,637            755,160
                                                  ========         ========         =======         =======         ==========

      Depreciated balance as of
      December 31, 1999*                           467,842          256,980          27,920          25,007            777,749
                                                  ========         ========         =======         =======         ==========
</TABLE>

* Reclassified.


B.    Land and buildings include buildings on lease-hold lands, the cost of
      which is NIS. 233,905 thousand, leased for various original periods of
      49-98 years, ending in the years 2001-2072. Land and buildings at a cost
      of NIS. 232,287 thousand have not yet been registered in the name of the
      Company or the consolidated subsidiaries in the Land Registry Office. The
      main reason for the lack of registration is that the land settlement and
      sub-division process has not yet been completed.

      Land and buildings include building and lease-hold improvements on leased
      land in the original cost of NIS. 5,191 thousand, and depreciated cost of
      NIS. 2,949 thousand, leased for various original periods from 4 to 25
      years.

C.    Commitments and contingent liabilities - see Note 25.
<PAGE>   117
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------


NOTE 10 - INTANGIBLE ASSETS AND DEFERRED CHARGES, NET


              Consist of:
<TABLE>

                                                                        BALANCE TO BE AMORTIZED
                                                                       ------------------------
                                                                           AS OF DECEMBER 31,
                                                                       ------------------------
                                                                        2000              1999
                                                                       ------            ------
                                                                          NIS. (THOUSANDS)
                                                                       ------------------------
<CAPTION>
<S>                                                                    <C>               <C>
              Intangible assets:
              Deferred rent                                            35,456            28,374
              Goodwill in consolidated companies (1)                    8,238             8,014
              Others                                                   34,373            21,953
                                                                       ------            ------
                                                                       78,067            58,341
              Deferred charges:
              Expenses incurred in the issuance of
              debentures by the Company (2)                               308               615
                                                                       ------            ------
                                                                       78,375            58,956


              Long-term deferred taxes, net
              (see Note  24)                                            8,448             5,730
                                                                       ------            ------
                                                                       86,823            64,686
                                                                       ======            ======
</TABLE>


            (1)   For amortization see Note 2.B.2

            (2)   For amortization see Note 2.F.2
<PAGE>   118
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------

NOTE 11 - CREDIT FROM BANKS AND OTHERS

         Linkage terms and interest rates:
<TABLE>
<CAPTION>
                                                                           DECEMBER 31, 2000
                                                         ---------------------------------------------------------
                                                                                         Linked to
                                                                         Linked to       Foreign
                                                         Unlinked        index           Currency
         Interest rates:                                 8.2-12.4%       5.2%-7.5%       6.8%-7.5%        Total
                                                          -------          -----          ------        ---------
                                                                           NIS. (THOUSANDS)
                                                         ---------------------------------------------------------
<S>                                                       <C>              <C>            <C>           <C>
         Overdrafts                                         3,801             --              --            3,801
         Short-term loans                                 985,965             --          92,943        1,078,908
         Current portion of long-term loans                    --            949              --              949
                                                          -------          -----          ------        ---------

         Total credit from banks                          989,766            949          92,943        1,083,658

         Credit from others                                    --          1,017              --            1,017
                                                          -------          -----          ------        ---------
                                                          989,766          1,966          92,943        1,084,675
                                                          =======          =====          ======        =========
</TABLE>


<TABLE>
<CAPTION>
                                                                            DECEMBER 31, 1999
                                                         ---------------------------------------------------------
                                                                                         Linked to
                                                                           Linked to     Foreign
                                                         Unlinked          Index         Currency
         Interest rates:                                 10.9-15.2%        2-7.1%        5.6-6.7%         Total
                                                         ---------------------------------------------------------
<S>                                                       <C>              <C>            <C>           <C>
         Overdrafts                                         5,511             --              --            5,511
         Short-term loans                                 959,796             --         195,191        1,154,987
         Current portion of long-term loans                    23            829              --              852
                                                          -------          -----         -------        ---------

         Total credit from banks                          965,330            829         195,191        1,161,350

         Credit from others                                    --          5,573              --            5,573
                                                          -------          -----         -------        ---------
                                                          965,330          6,402         195,191        1,166,923
                                                          =======          =====         =======        =========
</TABLE>


NOTE 12 - TRADE PAYABLES

      The liabilities represent open accounts and include NIS. 39,908 thousand
      (1999 - NIS. 25,515 thousand) balances of related and interested parties.

      Linkage terms - See Note 17


<PAGE>   119
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000

NOTE 13 -  ACCOUNTS PAYABLE


              Consist of:
<TABLE>
<CAPTION>
                                                                            DECEMBER 31,
                                                                       ------------------------
                                                                        2000              1999
                                                                       ------------------------
                                                                          NIS. (THOUSANDS)
                                                                       ------------------------

<S>                                                                    <C>               <C>
              Fuel Authority                                           125,629           70,352
              Liabilities to employees and other
                Salary related liabilities                              25,484           37,776
              Institutions                                              50,240           44,763
              Accrued expenses                                          13,463           23,068
              Income tax payable                                            --           12,469
              Interested party                                              --           12,780
              Others                                                    19,199           15,940
                                                                       -------          -------
                                                                       234,015          217,148
                                                                       =======          =======
</TABLE>



NOTE 14 - LONG-TERM LIABILITIES

              A. (1)  LONG-TERM LOANS


              Consist of:
<TABLE>
<CAPTION>
                                                                  RATE OF         DECEMBER 31,       DECEMBER 31
                                                                 ---------        ------------      ------------
                                                                 INTEREST            2000                1999
                                                                 ---------        -------------     ------------
                                                                     %                   NIS. (THOUSANDS)
                                                                 ---------        ------------------------------
<S>                                                              <C>                <C>                  <C>
              Index linked loans from banks                      5.2 - 7.1          157,399              158,088
              Unlinked loans from banks                          9.2                 50,000                   23
              Customers' deposit - linked to the
              Index                                              --                   3,018                3,160
              Customers' deposit - linked to
              foreign currency                                   --                      69                   18
              U.S. dollar loans from banks                       7.6                     90                   --
              Other loans - linked to the Index                  --                      --                  266
                                                                                    -------              -------
                                                                                    210,576              161,555
              Less: current portion                                                     949                  852
                                                                                    -------              -------
                                                                                    209,627              160,703
                                                                                    =======              =======
</TABLE>
<PAGE>   120
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000

NOTE 14 - LONG-TERM LIABILITIES (CONTINUED)

              A. (1)  LONG-TERM LOANS (CONTINUED)

              Yearly Installments:
<TABLE>
<CAPTION>
                                                                               DECEMBER 31,
                                                                    ----------------------------------
                                                                          2000              1999
                                                                          ----              ----
                                                                             NIS. (THOUSANDS)
                                                                    ----------------------------------
<S>                                                                     <C>               <C>
              First year - current portion                                  949               852
                                                                        -------           -------
              Second year                                                81,387               872
              Third year                                                 31,426            31,377
              Fourth year                                                31,249            31,416
              Fifth year                                                 31,100            31,179
              Sixth year and thereafter                                  31,099            62,415
              Without maturity date                                       3,366             3,444
                                                                        -------           -------
                                                                        209,627           160,703
                                                                        -------           -------
                                                                        210,576           161,555
                                                                        =======           =======
</TABLE>

             Accrued interest is included in "Accounts payable" in Current
             liabilities.

             A (2)     In accordance with understanding reached by the
                       Company with banking institutions regarding long-term
                       loans to Sonol which are guaranteed by the Company, the
                       Company agreed to fulfill certain conditions as follows:

                       (1) Consolidated shareholders' equity, together with
                           customer deposits, will exceed NIS 450 million.

                       (2) The ratio of consolidated shareholders' equity,
                           together with customer deposits divided by total
                           assets, net of Emergency Inventories, will exceed
                           20%.

                       (3) The level of consolidated liabilities to banks and
                           other financial institutions (net of liabilities on
                           account of the Emergency Inventories) will not exceed
                           10 times EBITDA (earnings before interest, taxes,
                           depreciation and amortization), at any time.

                       (4) Not to create a specific charge on any fixed assets
                           which were held by the Company on December 31, 1998
                           (with the exception of a specific existing collateral
                           and with the exception of collaterals to finance
                           development of those assets).

                           The Company is permitted to collaterize assets
                           acquired after December 31, 1998.
<PAGE>   121
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000

NOTE 14 - LONG-TERM LIABILITIES (CONTINUED)

             B.   DEBENTURES CONVERTIBLE INTO SHARES OF THE COMPANY

<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                                   ----------------------------------
                                                                          2000              1999
                                                                          ----              ----
                                                                            NIS. (THOUSANDS)
                                                                   ----------------------------------

<S>                                                                      <C>               <C>
              Debentures (series 1) (*)                                  21,048            34,227
              Debentures (series 2) (**)                                  4,280             8,355
                                                                         ------            ------
                                                                         25,328            42,582
              Less - current portion                                     12,664            14,194
                                                                         ------            ------
                                                                         12,664            28,388
                                                                         ======            ======
</TABLE>

                     Yearly installments:
<TABLE>
<CAPTION>
                                                                     DECEMBER 31, 2000              DECEMBER 31,1999
                                                                     -----------------              ----------------
                                                                  SERIES 1      SERIES 2         SERIES 1       SERIES 2
                                                                  --------      --------         --------       --------
                                                                                     NIS. (THOUSANDS)
                                                                  ------------------------------------------------------
<S>                                                               <C>           <C>              <C>            <C>
              First year - current portion                         10,524        2,140            11,409          2,785
                                                                   ------        -----            ------          -----
              Second year                                          10,524        2,140            11,409          2,785
              Third year                                               --          --             11,409          2,785
                                                                   ------        -----            ------          -----
                                                                   10,524        2,140            22,818          5,570
                                                                   ------        -----            ------          -----
                                                                   21,048        4,280            34,227          8,355
                                                                   ======        =====            ======          =====
</TABLE>

                 *  Registered debentures (Series 1) NIS. 1.- par value each.
                    Every NIS. 55.- par value of debentures are convertible into
                    10 ordinary shares NIS. 1- par value each. The debentures
                    bear interest at an annual rate of 0.1%. The principal,
                    interest and the price for conversion into ordinary shares
                    are linked to the representative rate of exchange of the
                    U.S. dollar and are payable in 2 equal annual installments
                    on November 30 in each of the years commencing in 2001 and
                    ending in 2002. In 2000 994,675 debentures (series 1) were
                    converted into shares. As of the balance sheet date, there
                    were 11,968,822 outstanding debentures. The market value of
                    the debentures, as their price was quoted on the Stock
                    Exchange, was NIS. 19,629 thousand at the balance sheet
                    date.

                 ** Registered debentures (Series 2) NIS. 1.- par value each.
                    Every NIS. 5.- par value of debentures are convertible into
                    an ordinary shares NIS. 1.- par value each. The debentures
                    bear interest at an annual rate of 2.5%. The principal,
                    interest and the price for conversion into ordinary shares
                    are linked to the representative rate of exchange of the
                    U.S. dollar and are payable in 2 equal annual installments
                    on November 30 in each of the years commencing in 2001 and
                    ending in 2002. In the year 2000, 1,060,085 debentures
                    (series 2) were converted into shares. As of the balance
                    sheet date, there were 2,651,711 outstanding debentures. The
                    market value of the debentures, as their price was quoted on
                    the Stock Exchange, was NIS. 4,163 thousand at the balance
                    sheet date.
<PAGE>   122
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000

NOTE 14 - LONG-TERM LIABILITIES (CONTINUED)

             B.   DEBENTURES CONVERTIBLE INTO SHARES OF THE COMPANY (CONTINUED)

                  Accrued interest is included in "Accounts payable" in Current
                  liabilities. See Note 18.a.

                  Regarding collaterals see Note 25.

                  The above debentures are traded on the Tel-Aviv Stock
                  Exchange.


NOTE 15 - CUSTOMERS' DEPOSITS

             a.   Customers deposits of Supergas as of December 31, 2000 were
                  calculated on the basis of the most recent price updating
                  approved by the Ministry of Industry and Commerce, and the
                  change in the exchange rate of the dollar from the last update
                  until the end of the year. The most recent update for 2000 was
                  2.7% (1999 - 4.57%). The deposits are calculated on the basis
                  of their present value at the annual discount rate of 3.75%
                  (1999 - 3.25%).

             b.   Customers' deposits include NIS 34,077 thousand (1999 - NIS.
                  40,483 thousand) of linkage increments accrued on those
                  deposits (Note 2.L.).


NOTE 16 - LIABILITIES FOR EMPLOYEE RIGHTS UPON RETIREMENT, NET

<TABLE>
<CAPTION>
Consist of:                                                             DECEMBER 31,
                                                                   ------------------------
                                                                    2000              1999
                                                                   ------            ------
                                                                       NIS. (THOUSANDS)
                                                                   ------------------------
<S>                                                                <C>               <C>
Provision for severance pay (a)                                     9,734             9,917
Less: deposits in approved funds (*)                                2,265             1,798
                                                                   ------            ------
                                                                    7,469             8,119
Provision for early retirement pension(**) (b)                      8,743             5,084
Provision for redemption of unutilized sick leave (c)               1,844             2,078
                                                                   ------            ------
                                                                   18,056            15,281
                                                                   ======            ======
</TABLE>

             (*)  The deposits can be withdrawn subject to law. Accrued income
                  on the deposits is included in the statements of income.

             (**) Excluding NIS. 2,627 thousand (1999 - NIS. 2,111 thousand)
                  current early retirement pension which is included in "Other
                  accounts payable".

             (a)  The liabilities of the Company and its subsidiaries in respect
                  of pension and severance indemnities are fully covered by
                  provisions for severance indemnities, by deposits in approved
                  funds and in managers' insurance policies. The deposits in
                  approved funds and in managers' insurance plans are not
                  included in the financial statements as they are not under the
                  control of the Company.
<PAGE>   123
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000

NOTE 16 - LIABILITIES FOR EMPLOYEE RIGHTS UPON RETIREMENT, NET (CONTINUED)

             (b)  The provision for pension benefits in case of early retirement
                  of employees is computed at the discounted present value of
                  the future liabilities of the Company for such retired
                  employees. The Company's liability for early retirement is
                  generally up to the time when the employee reaches retirement
                  age and is measured as a fixed percentage of the maximum
                  amount due to the employee from the pension fund. The rate of
                  capitalization for computing the provision is 7% per annum,
                  (previous year 6%).

             (c)  In accordance with the labor agreements between subsidiaries
                  and their employees, some retiring employees (men at age 65
                  and women at age 60-65) are entitled to receive a partial
                  redemption of unutilized sick leave, subject to a ceiling of
                  50 working days. A provision based on an actuarial calculation
                  has been made in the financial statements for covering the
                  aforesaid liability. The actuarial calculation is based, inter
                  alia, on a capitalization rate of 3%.

NOTE 17 - LINKAGE OF MONETARY BALANCES

<TABLE>
<CAPTION>

                                           DECEMBER 31, 2000                           DECEMBER 31, 1999
                              ----------------------------------------      ----------------------------------------
                                            LINKED TO                                      LINKED TO
                               LINKED        FOREIGN          UNLINKED       LINKED TO     FOREIGN          UNLINKED
                              TO INDEX       CURRENCY            *            INDEX        CURRENCY            *
                               -------       ---------       ---------       -------       ---------       ---------
                                            NIS. (THOUSANDS)                             NIS. (THOUSANDS)
                              ----------------------------------------      ----------------------------------------
<S>                           <C>           <C>              <C>             <C>           <C>             <C>
ASSETS:
  Cash and cash
    equivalents                   --            14,781           5,983          --             4,882          47,984
  Marketable  securities          --              --            13,130          --              --            10,573
  Trade receivables              8,541          81,335         691,329        11,163          73,069         686,188
  Accounts receivable            5,852            --            28,861           679           3,503          31,218
  Investment in capital
  Notes and loans                6,791            --              --          20,385            --              --
  Long-term loans               89,746           8,935          28,947        59,566          10,416           3,583
                               -------       ---------       ---------       -------       ---------       ---------
                               110,930         105,051         768,250        91,793          91,870         779,546
                               =======       =========       =========       =======       =========       =========
LIABILITIES:
  Credit from banks and
    others                       1,017          92,943         989,766         5,573         195,191         965,307
  Trade payables                  --            91,710          36,913         2,803          35,699          66,941
  Accounts payable              30,562         129,345          74,108        29,288          78,806         109,054
  Long-term liabilities
    And debentures
    (including current
    Portion)                   159,962          25,487          50,454       161,514          42,600              23
  Customers' deposits             --            58,508            --            --            63,712            --
  Capital notes                   --              --               215          --              --               215
                               -------       ---------       ---------       -------       ---------       ---------
                               191,541         397,993       1,151,456       199,178         416,008       1,141,540
                               =======       =========       =========       =======       =========       =========
</TABLE>

*  Partly bearing interest
<PAGE>   124
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000

NOTE 17 - LINKAGE OF MONETARY BALANCES (CONTINUED)

Against the excess of foreign currency linked liabilities over assets in the
amount of NIS. 292,942 thousand, Sonol holds fuel and refined products
inventories amounting to NIS. 361,928 thousand, which are mainly Emergency
Inventories valued according to the changes in the rate of exchange of the
U.S. dollar as explained in Note 2.C.1.


NOTE 18 - CAPITAL

        a.   NOMINAL VALUES
              CONSIST OF:
<TABLE>
<CAPTION>
                                                           AUTHORIZED              ISSUED AND PAID *
                                                          DECEMBER 31,                DECEMBER 31,
                                                     ----------------------       --------------------
                                                      2000           1999          2000         1999
                                                     -------        -------       -------      -------
                                                          NIS (THOUSANDS)           NIS (THOUSANDS)
                                                     ----------------------       --------------------
<S>                                                  <C>            <C>           <C>          <C>
225,000 Ordinary shares of NIS. 1.- each             225,000        225,000       139,336      138,943
                                                     =======        =======       =======      =======
</TABLE>

          *  139,335,657 ordinary shares (1999 - 138,942,790 ordinary shares).

             In the year 2000, the share capital increased as a result of the
             conversion of debentures into shares. See Note 14.B.

             As of December 31, 2000 a consolidated company holds 583,771
             ordinary shares of the Company - see Note 2.A.5.

        b.   EARNINGS PER ORDINARY SHARE

       1.    The net income used in computing earnings per NIS. 1.- par value of
             shares:

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                                  ----------------------------------
                                                   2000           1999         1998
                                                  -------        ------       ------
                                                           NIS. (THOUSANDS)
                                                  ----------------------------------
<S>                                               <C>           <C>          <C>
Net income per Statement of Income                 70,761        60,178       59,512
(Less profit) add  loss resulting from
 Conversion of debentures  (series 1 and 2)           (41)         --          9,938
                                                  -------        ------       ------
The net income used in computing primary
 Earnings per share                                70,720        60,178       69,450
Add (Deduct) theoretical income deriving
  From:
  Conversion of debentures (series 1)                (213)           99         --
  Conversion of debentures (series 2)                  21           178         --
                                                  -------        ------       ------
The net income used in computing the
 diluted earnings per share                        70,528        60,455       69,450
                                                  =======        ======       ======
</TABLE>
<PAGE>   125
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000

NOTE 18 - CAPITAL (CONTINUED)

      2.  The par value of shares used in computing earnings per NIS. 1.- par
          value share:

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                            -----------------------------------
                                                              2000          1999          1998
                                                            -------       -------       -------
                                                                      NIS. (THOUSANDS)
                                                            -----------------------------------
<S>                                                         <C>           <C>           <C>
Share capital used in computing primary
 earnings per share                                         139,017       138,943       138,943

Add - theoretical share capital that may derive from:
Conversion of debentures (series 1)                           2,176         3,445          --
Conversion of debentures (series 2)                             530         1,008          --
                                                            -------       -------       -------
The share capital used in computing the
 diluted earnings per share                                 141,723       143,396       138,943
                                                            =======       =======       =======
</TABLE>

      3. For examining the probability of conversion or exercise of convertible
         securities, the present value was computed using a discount rate of 6%
         (1999 - 6 %, 1998 - 5%) for securities linked to the exchange rate of
         the U.S. dollar.


NOTE 19 - COST OF SALES

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                               ------------------------------------------
Consists of:                                     2000            1999            1998
                                               ---------       ---------       ----------
                                                           NIS. (THOUSANDS)
                                               ------------------------------------------
<S>                                            <C>             <C>              <C>
 Petroleum products and other  materials
   used*                                       2,114,479       1,392,736        1,188,414

Labor and sub-contract work                        6,259          15,626           13,994
Production costs                                  96,031         102,930          104,097
Depreciation                                         916           3,016            3,565
Batteries                                          2,862          12,304           17,329
                                               ---------       ---------       ----------

Total cost of sales                            2,220,547       1,526,612        1,327,399
                                               =========       =========       ==========

Increase (decrease) in inventories                35,417         191,916          (93,873)
                                               =========       =========       ==========
</TABLE>



           *  Financing income deriving from the erosion of dollar linked credit
              used as a source of financing purchases of oil inventories is
              included in Cost of Sales. See also Note 2.C.

<PAGE>   126
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------

NOTE 20 -  SELLING AND MARKETING EXPENSES

      Consist of:

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                                   -------------------------------------------
                                                                     2000              1999              1998
                                                                   -------           -------           -------
                                                                                 NIS. (THOUSANDS)
                                                                   -------------------------------------------
<S>                                                                <C>               <C>               <C>
      Salaries                                                      96,695            96,697            87,577
      Advertising and promotion                                     15,298            13,641            12,778
      Depreciation and amortization                                 72,469            78,973            75,438
      Maintenance of buildings, plants and
      filling stations                                              26,711            25,305            27,287
      Rent                                                          59,783            50,588            47,823
      Other expenses                                                61,292            65,754            66,385
                                                                   -------           -------           -------
                                                                   332,248           330,958           317,288
                                                                   =======           =======           =======
</TABLE>


NOTE 21 - GENERAL AND ADMINISTRATIVE EXPENSES

      (1) Consist of:

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                                   -------------------------------------------
                                                                     2000              1999              1998
                                                                    ------            ------            ------
                                                                                 NIS. (THOUSANDS)
                                                                   -------------------------------------------
<S>                                                                <C>               <C>               <C>
     Salaries                                                      40,896            39,951            40,251
     Depreciation and amortization                                  8,936             7,064             3,952
     Consulting, legal and audit                                    7,684             4,896             7,622
     Provision for doubtful accounts and
     bad debts                                                      8,136             3,985             4,475
     Other expenses                                                12,425            15,688            13,337
                                                                   ------            ------            ------
                                                                   78,077            71,584            69,637
                                                                   ======            ======            ======
</TABLE>
<PAGE>   127
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------

NOTE 22 - FINANCING EXPENSES, NET

      Income (Expenses) are derived from:


<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                                   -------------------------------------------
                                                                     2000              1999              1998
                                                                    ------            ------            ------
                                                                                 NIS. (THOUSANDS)
                                                                   -------------------------------------------
<S>                                                                <C>               <C>               <C>
      Dollar linked convertible debentures                             439              (184)          (23,972)
      Long-term debt                                                (6,549)           (4,909)            3,355
      Negotiable securities, net                                     5,300             7,111            (2,514)
      Other receivables and payables                                15,792            14,425            14,909
      Short term loans received                                    (92,825)          (92,485)          (17,037)
      Others, including erosion of other monetary
       assets and  liabilities, net                                  7,653               764             2,923
                                                                   -------           -------           -------
                                                                   (70,190)          (75,278)          (22,336)
                                                                   =======           =======           =======
</TABLE>


NOTE 23 - OTHER INCOME, NET

      Consists of:


<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                                   -------------------------------------------
                                                                     2000              1999              1998
                                                                    ------            ------            ------
                                                                                 NIS. (THOUSANDS)
                                                                   -------------------------------------------
<S>                                                                <C>               <C>               <C>
      Gain on sale of investment in affiliated
       companies                                                    49,555                 -                 -
      Rent                                                           8,635              7,284            5,738
      Dividends received                                             2,028                564            1,103
      Management fees                                                1,794              6,102            6,926
      Income from a construction project:
         Financial income (1)                                            -                 -               132
         Income from the project (2)                                     -                 -             1,459
      Investment in and loan to affiliated
       companies written off (3)                                    (2,180)                -            (1,274)
      Proceeds from sales of part of land
       (see note 25.c.2.b)                                                                 -             9,690
      Expenses resulting from strike in a
       consolidated company                                              -                 -            (2,153)
      Others                                                          (192)            (1,751)          (2,304)
                                                                    ------             ------           ------
                                                                    59,640             12,199           19,317
                                                                    ======             ======           ======
</TABLE>



      (1)   The income results from consideration for a guarantee given by a
            consolidated company in favor of a bank that granted a loan to a
            third party for financing a residential housing and building
            project.
<PAGE>   128
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------

NOTE 23 - OTHER INCOME, NET (CONTINUED)

      (2)   In the year 1997 an agreement was signed between a consolidated
            company together with its partners in the project known as
            "Rubinstein Towers" and Revadim (Properties) Ltd. (hereafter -
            Revadim), a subsidiary of Bank Hapoalim Ltd., according to which
            Revadim acquired a material part of the project which was in its
            final stages of completion. The building was transferred to Revadim
            as at the end of 1997 (the registration in the Land Registry Office
            has been completed). The consolidated company included in its
            financial statements the above income after taking into account
            provisions needed, in the opinion of the management of the Company,
            for completion of the project.

      (3)   Consists of:

            a.    Provision for the decrease in the value of loans and
                  investments in affiliated companies (50%) in an amount of NIS.
                  1,484 thousand (1998- NIS.2,441 thousand).

            b.    Decrease in the value of an investment in a company carried at
                  cost in the amount of NIS. 696 thousand (1998 - decrease in
                  the write-off of an investment carried at cost in the amount
                  of NIS. 1,167 thousand).


NOTE 24  - TAXES ON INCOME

            a.    The Company and most of its subsidiaries are taxed under the
                  Income Tax Law (Inflationary Adjustments) - 1985, effective as
                  of the tax year 1985, which introduced the measurement of
                  results for income tax purposes in real terms. The various
                  adjustments required by the above mentioned law are made in
                  order to align taxation to a real income basis. Nevertheless,
                  the adjustments of the nominal income according to the Income
                  Tax Law are not always identical to the inflationary
                  adjustments made in the financial statements in accordance
                  with the opinion of the Institute of Certified Public
                  Accountants in Israel. As a result, differences arise between
                  the adjusted income in the statement of income and the
                  adjusted income for income tax purposes. Regarding deferred
                  taxes for these differences, see Note. 2.J.
<PAGE>   129
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------

NOTE 24  - TAXES ON INCOME (CONTINUED)

            b.    Deferred taxes

                  The deferred taxes are regarding:

<TABLE>
<CAPTION>
                                                             DEDUCTIONS
                                                             AND LOSSES      LIABILITIES FOR
                                                             CARRIED FOR-    EMPLOYEE
                                           DEPRECIABLE       WARD FOR TAX    RIGHTS UPON
                                           FIXED ASSETS      PURPOSES        RETIREMENT         OTHERS            TOTAL
                                             -------           ----           -------           -------           -------
                                                                         NIS. (THOUSANDS)
<S>                                        <C>               <C>             <C>               <C>               <C>
      Balance as of January 1, 1999          (12,085)           496            10,265            11,802            10,478

      CHANGES IN 1999:
      Current                                  2,641           (213)              889               315             3,632

      Addition on account of
       investment in a consolidated
       company                                  (566)            --                --                --              (566)
                                             -------           ----           -------           -------           -------
      Balance as of
       December 31, 1999                     (10,010)           283            11,154            12,117            13,544

      CHANGES IN 2000:
      Current                                    969            252             1,099              (562)            1,758
      Reduction on account of
       a company no longer
       consolidated                            2,989             --              (857)             (680)            1,452

      Addition for investment in
        a consolidated company                    --             --               215                --               215
      On account of prior years                 (502)            --                --                --              (502)
                                             -------           ----           -------           -------           -------

      Balance as of
       December 31, 2000                      (6,554)           535            11,611            10,875            16,467
                                             =======           ====           =======           =======           =======
</TABLE>
<PAGE>   130
\GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------

NOTE 24  - TAXES ON INCOME (CONTINUED)

      The deferred taxes are presented in the balance sheet as follows:

<TABLE>
<CAPTION>
                                                                                 YEAR ENDED DECEMBER 31,
                                                                                -------------------------
                                                                                 2000               1999
                                                                                ------             ------
                                                                                     NIS. (THOUSANDS)
                                                                                -------------------------
<S>                                                                             <C>                <C>
      In current assets                                                          8,019              7,814
      In intangible assets and deferred charges, net                             8,448              5,730
                                                                                ------             ------
                                                                                16,467             13,544
                                                                                ======             ======
</TABLE>

      c.    The provision for taxes on income in the statements of income
            consists of:

<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                                    ------------------------------------------
                                                                      2000               1999            1998
                                                                    ------              ------          ------
                                                                                 NIS. (THOUSANDS)
                                                                    ------------------------------------------
<S>                                                                 <C>                 <C>             <C>
      Current taxes including inflationary
       erosion of advance tax payments                              44,943              37,325          46,963
      Deferred taxes, net                                           (1,758)             (3,632)            321
                                                                    ------              ------          ------
                                                                    43,185              33,693          47,284
      (Overprovisions) Provisions
       on account of prior years                                      (219)                (23)            115
                                                                    ------              ------          ------
                                                                    42,966              33,670          47,399
                                                                    ======              ======          ======
</TABLE>


      d.    Final tax assessments:

            Sonol received final tax assessments through the tax year 1990.
            Supergas received final tax assessments through the tax year 1994
            and assessments based upon the tax assessor's judgement for the
            years 1995 and 1996. Supergas has appealed these assessments which
            do not have an effect on Supergas' results. Sprint Motors received
            final tax assessments through the tax year 1996. The Company, Aloc
            and Sonapco received final tax assessments through the tax year
            1991.

      e.    Reconciliation between the theoretical tax on the reported income
            and the tax on income included in the statements of income:

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                                    ------------------------------------------
                                                                     2000                1999            1998
                                                                    ------              ------          ------
                                                                                 NIS. (THOUSANDS)
                                                                    ------------------------------------------
<S>                                                                 <C>                 <C>             <C>
      Statutory rate of tax                                             36%                 36%             36%
                                                                    ======              ======          ======

      The theoretical tax at the applicable tax rate                38,086              32,962          42,286
      Erosion of advanced tax payments                                 20                  263           1,283
      Differences in the definition of capital and
       assets for tax purposes and others, net                       5,079                 468           3,715
      Provision in respect of prior years                             (219)                (23)            115
                                                                    ------              ------          ------
                                                                    42,966              33,670          47,399
                                                                    ======              ======          ======
</TABLE>
<PAGE>   131
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------

NOTE 25 - COLLATERALS, COMMITMENTS AND CONTINGENT LIABILITIES

      A.    FLOATING AND FIXED CHARGES

<TABLE>
<CAPTION>
                                        December 31, 2000      Collateralized by
                                          NIS(thousands)
                                         --------------
<S>                                     <C>                    <C>
      Bank overdrafts                            3,801         Floating charges on current assets of the main
                                                               subsidiaries.
      Short-term loans from                  1,078,908         Floating charges on the assets of the
       Banks                                                   Company and its main subsidiaries

      Accounts  payable and                      4,926         Floating charges on the assets of the
       credit balances, including                              Company and of the main subsidiaries
       accrued interest on
       short-term bank loans

      Long-term bank loans                     210,576         Floating charges on the assets of the main
                                                               subsidiaries and fixed charges on portions of
                                                               the fixed assets of some of the Company's main
                                                               subsidiaries.
                                                               (see note 14.A.2)



      Convertible debentures                    25,340         Floating charges subordinated to other
      (including interest)                                     floating charges on all the assets of the
                                                               Company
</TABLE>


      B.    LIABILITIES AND CONTINGENCIES

            1.    INDEMNIFICATION AND INSURANCE OF DIRECTORS AND SENIOR OFFICERS

                  The Articles of Association of the Company enable the
                  indemnification and insurance of directors and senior officers
                  according to the law. The Company insures, subject to
                  provisions of the law, the directors' and senior officers'
                  liability.

            2.    PENDING LITIGATION

                  a.    Claims (mainly legal claims) arising in the normal
                        course of business have been lodged against consolidated
                        and affiliated companies, for which appropriate
                        provisions have been made in the financial statements.
                        In the opinion of the companies' managements, based on
                        the opinions of the legal counsel, the provisions made
                        are sufficient.
<PAGE>   132
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------

NOTE 25 - COLLATERAL, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

      B.    LIABILITIES AND CONTINGENCIES (CONTINUED)

            2.    PENDING LITIGATION (CONTINUED)

                  b.    In the course of a claim and counterclaim heard in the
                        district court, the court considered a claim that was
                        submitted against Sonol by a customer owning land leased
                        to Sonol on which a filling station was built, the
                        substance of which is the cancellation of all agreements
                        between Sonol and the plaintiff, a monetary claim
                        against Sonol in the amount of approximately NIS. 6
                        million and a counterclaim by Sonol against the customer
                        asking that such customer vacate the station as a result
                        of the breach of the agreements.

                        The court denied the customer's claim regarding the
                        cancellation of agreements and accepted Sonol's claim
                        against the customer regarding breach of agreements. The
                        court, however, did not order the customer to vacate the
                        station, but, rather, ruled that damages in the amount
                        of NIS. 0.4 million be paid to Sonol. In addition, the
                        court accepted the customer's claims regarding the
                        manner in which leasing charges due him from Sonol were
                        calculated and instructed that a recalculation of
                        Sonol's charges be made. Sonol has appealed this ruling
                        and, in the opinion of its legal counsel, has a good
                        chance of receiving a favorable ruling. In light of this
                        opinion, it was decided not to change the provision
                        previously recorded by the Company. As a result of
                        arbitration proceedings, the parties have reached a
                        tentative compromise agreement which is the final stages
                        of preparation.

                  c.    As a result of arbitration proceedings between the Fuel
                        Authority and the Agents' organization and station
                        owners, in which Sonol was not a party, the arbitrator
                        ruled that the Fuel Authority is to reimburse the
                        station owners for the depreciation on their investments
                        in stations. The arbitrator's ruling was confirmed by
                        the district court. The Fuel Authority, in turn,
                        demanded that the oil marketing companies reimburse the
                        station owners for the depreciation (to the extent
                        payable) since it claims that the depreciation component
                        was previously recognized by the Fuel Authority within
                        the framework of the Price Structure. In the opinion of
                        Sonol's legal counsel, there is no basis for the Fuel
                        Authority's demand. In accordance with the arbitration
                        ruling, twenty five third party proceedings have been
                        filed by the Government against Sonol regarding claims
                        filed against the Government by station owners for the
                        reimbursement of the investment in the construction of
                        stations. The total of these proceedings amounts to NIS.
                        39.5 million and, in the opinion of the company's legal
                        counsel, there is no basis for these claims as far as
                        they relate to Sonol.

                  d.    Three claims were lodged against a formerly affiliated
                        company and against its shareholders, which included
                        Sonol. The total amount of the claims is approximately
                        NIS. 60.2 million relating to the sale of fuel products
                        pursuant to restrictive trade practices (as the
                        plaintiff alleges) among the fuel companies. In the
                        opinion of Sonol's and the formerly affiliated
                        company's, legal counsels, the companies have a sound
                        defense against the claims.
<PAGE>   133
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------


NOTE 25 - COLLATERAL, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

      B.    LIABILITIES AND CONTINGENCIES (CONTINUED)

            2.    PENDING LITIGATION (CONTINUED)

                  e.    A filling station operator, who received operating
                        rights within the framework of an agreement between war
                        invalids and the rehabilitation department of the
                        Ministry of Defense, the Israel Land Authority and the
                        fuel marketing companies, filed an action in the
                        district court for a ruling declaring the cancellation
                        of agreements between him and Sonol, claiming them to be
                        illegal restrictive trade agreements in accordance with
                        the Law for Restrictive Trade Practices. The operator's
                        claim was rejected by the Court. The rejection of the
                        claim has ramifications on the other claims filed
                        against Sonol claiming illegal restrictive trade
                        agreements, and thus, improves Sonol's defense prospects
                        against such claims. Subsequently, the operator filed an
                        appeal in the Supreme Court contesting the facts of the
                        case and the court's conclusions. The appeal has been
                        referred to arbitration.

                        Another war invalid operating a different filling
                        station has also submitted a claim to the court for a
                        declarative judgement claiming that agreements between
                        him and Sonol are restrictive trade agreements and,
                        therefore, void. In addition, the claimant is asking for
                        a declaration that the agreement to appoint an operator
                        includes discriminatory provisions in a uniform
                        contract, and that Sonol be required to pay him
                        approximately NIS. 2 million due him as a result of
                        inflated prices which he claims Sonol charged him over
                        the years. The case has been referred to a pre-trial
                        hearing. As a result of the above mentioned ruling,
                        Sonol's legal counsel is of the opinion that the defense
                        prospects in this case regarding the claims of
                        restrictive agreements are favorable. If the claims,
                        that the agreements be cancelled as a result of their
                        being restrictive agreements, will be rejected by the
                        court, Sonol's defenses against the station operators'
                        financial claims have a reasonable to good chance of
                        succeeding.

                  f.    The operators of one of Sonol's filling stations,
                        against whom Sonol filed a claim in the district court
                        in Tel-Aviv, instituted legal proceedings against Sonol.
                        In one proceeding, they requested a declarative
                        judgement stating that inasmuch as a filling station
                        operated by them was to be "freed" under the terms of an
                        arrangement reached between the fuel companies and the
                        Controller of Restrictive Trade Practices, the
                        contractual relationships between them and Sonol should
                        be related to as an arrangement which has also
                        terminated and, that all agreements between the
                        plaintiffs and Sonol be considered restrictive
                        agreements and, thereby, cancelled. In the opinion of
                        Sonol's legal counsel, defense prospects are good. In
                        another proceeding, the above operators are claiming an
                        amount of approximately NIS 14.9 million, alleging
                        having paid exorbitant prices on account of the fuel
                        products they purchased from Sonol, and maintaining that
                        inasmuch as the contractual arrangements between them
                        and Sonol have been terminated as claimed in the other
                        proceeding, Sonol had no right to charge such prices. At
                        this time, legal counsel are unable to determine the
                        defense prospects regarding the claim of a restrictive
                        agreement, although the prospects have improved as a
                        result of the court ruling mentioned in sub- paragraph e
                        above. It should be noted that if this claim is accepted
                        there is a risk that the financial claim against Sonol
                        will also be accepted (even though, in such a case, the
                        amount of the claim is exaggerated). Should the above
                        claim regarding a restrictive agreement not be accepted,
                        the prospects of the financial claim against Sonol will
                        be weak.
<PAGE>   134
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------


NOTE 25 - COLLATERAL, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

      B.    LIABILITIES AND CONTINGENCIES (CONTINUED)

            2.    PENDING LITIGATION (CONTINUED)


                  g.    Former operators of a filling station have filed a
                        monetary claim against Sonol in the amount of
                        approximately NIS 4.1 million on account of alleged
                        exorbitant prices paid on account of fuel products
                        purchased from Sonol, maintaining that the contractual
                        arrangements between them and Sonol have been cancelled
                        and/or terminated, being restrictive arrangements. At
                        this time, Sonol's legal counsel are of the opinion that
                        Sonol's defense claims, although difficult to assess,
                        are not insignificant.

                  h.    Sonol has filed a claim against one of its agencies for
                        approximately NIS 37 million in the Tel Aviv District
                        Court, on account of an unpaid debt and damages caused
                        to the Company, alleging that the agency violated the
                        terms of the agency agreement by dealing with one of
                        Sonol's competitors. The agency, in turn, filed a
                        counterclaim in the amount of approximately NIS 57
                        million, stating various causes, including a claim that
                        the contractual agreement between it and Sonol is a
                        restrictive agreement.

                        In the opinion of Sonol's management, based on opinion
                        of the company's legal counsel, the prospects of Sonol's
                        claim against the agency relating to amounts owed to
                        Sonol are good and, regarding the amount claimed for
                        damages on account of the violation of the agency
                        agreement, such amount is subject to deliberation by the
                        court. Regarding the prospects of the agency's
                        counterclaim, Sonol's legal counsel are unable, at this
                        time, to estimate its prospects, insofar as it relates
                        to the claim of a restrictive agreement. Should the
                        claim of a restrictive agreement be rejected by the
                        court, the prospects of the counterclaim will not be
                        favorable. At this time, the dispute has been referred
                        to arbitration.
<PAGE>   135
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------


NOTE 25 - COLLATERAL, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

      B.    LIABILITIES AND CONTINGENCIES (CONTINUED)

            2.    PENDING LITIGATION (CONTINUED)

                  i.    A claim filed against Sonol on December 10,1998 by one
                        of Sonol's agencies in the amount of NIS 30.4 million
                        and counterclaims filed by Sonol in the amount of NIS
                        38.1 million against the owners of that agency for the
                        non-payment of amounts due on account of fuel products
                        supplied to them and for the unpaid balance of a loan,
                        together with a claim for the enforcement of a
                        memorandum of agreement signal by the parties on March
                        23, 1998, will all be resolved within the framework of a
                        new agreement between the parties. As part of this
                        agreement, both parties agreed to cancel their mutual
                        claims and are basing their relationship on a new set of
                        agreements.

                  j.    An agency of Sonol, which also operates four stations on
                        behalf of Sonol, has filed a claim against Sonol asking
                        for declarative and monetary relief. The agency claims
                        that the agreement in effect with Sonol, in regard to
                        one of the stations is a restrictive trade arrangement,
                        and is also a uniform contract with discriminatory
                        provisions and is thus void. The agency is also asking
                        that the station be "freed" under the terms of the
                        arrangement with the Controller of Restrictive Trade
                        Practices, and is, therefore, asking for declaratory
                        relief from the court regarding the cancellation of
                        rights granted Sonol to the land on which the station is
                        located, including leasehold and other rights.

                        The agency is also asking that Sonol be required to pay
                        approximately NIS 15.7 million on account of the
                        inflated prices which Sonol is alleged to have charged
                        over the years. It should be noted that Sonol filed a
                        monetary counterclaim against the same agency in the
                        amount of approximately NIS 18.5 million on account of
                        amounts due from the agency from the purchase of fuel
                        products from Sonol.

                        At this time, although prospects have improved as a
                        results of the district court's ruling mentioned in
                        sub-paragraph e. above, legal counsel is unable to
                        assess the defense prospects in regard to the alleged
                        restrictive agreement. Should the district court rule in
                        favor of this claim, there is also a risk that the court
                        will accept the monetary claim against Sonol (which,
                        even in such case, the amount of claim is by all
                        accounts exaggerated). If the agency's claim of a
                        restrictive agreement is not accepted by the court, the
                        prospects of the monetary claim against Sonol, are weak.

                  k.    A group of greenhouse owners, claiming damage caused to
                        them in the amount of approximately NIS 7.7 million as a
                        result of the use of defective light fuel oil produced
                        by the Oil Refineries Ltd. and sold to them by the oil
                        marketing companies, has filed a claim against, Sonol,
                        Oil Refineries Ltd., Paz Oil Company Ltd., "Delek" the
                        Israel Fuel Corporation Ltd. and Alon Israel Fuel
<PAGE>   136
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------


NOTE 25 - COLLATERAL, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

      B.    LIABILITIES AND CONTINGENCIES (CONTINUED)

            2.    PENDING LITIGATION (CONTINUED)

                        Company Ltd. Sonol's share of this claim amounts to
                        approximately NIS 2.3 million. In the opinion of Sonol's
                        management, Sonol has a sound defense against this claim
                        and, in addition, has insurance coverage included in a
                        product liability policy.

                  l.    Two filling station owners have filed claims in court
                        against Sonol, in the amount of approximately NIS. 10
                        million, claiming that the Company owes them commission
                        differentials on account of prior years. One of the
                        claims was settled as part of a compromise agreement in
                        2001, and was provided for in the financial statements,
                        while the second, in the amount of NIS 6 million, is
                        still pending. In the opinion of the company's legal
                        counsel, if the claim regarding a restrictive agreement
                        is not accepted, Sonol`s prospects for a favorable
                        decision are reasonable.

                        Two additional claims were submitted by two filling
                        station operators in the amount of approximately NIS 4
                        million, for commission differentials they claim, are
                        due them. These two claims were submitted subsequent to
                        Sonol's demand that the station operators relinquish the
                        operation of Sonol's stations. In the opinion of Sonol's
                        legal counsel, the claims' prospects against Sonol are
                        weak.

                  m.    During February 2000 a claim was filed against Sonol,
                        together with Paz Oil Company Ltd. and "Delek" the
                        Israel Fuel Corporation Ltd. to allow a class action
                        relating to the alleged collusion in the fixing of the
                        price of gasoil to consumers. This claim, if recognized
                        as a class action, will amount to approximately NIS. 175
                        million against all the companies. Sonol denies the
                        claim and, according to its legal counsel, chances are
                        good that the claim will not be recognized as a class
                        action.

                  n.    In April 1999, a claim in the amount of approximately
                        NIS 8 thousand was filed in the Tel-Aviv district court
                        against Supergas and four other gas companies by several
                        consumers claiming non performance of periodic
                        inspection of gas systems used by the consumers, the
                        sale of a product by deception, causing damages, loss of
                        comfort and damage to their safety, thus endangering the
                        lives of consumers. The claim was subsequently amended
                        to NIS 4.7 thousand. The plaintiffs have asked that the
                        court order the gas companies to make the periodic
                        inspections, to pay damages in the amount mentioned
                        above of approximately NIS 0.8 thousand per plaintiff,
                        and/or issue a declarative order stating that the
                        plaintiffs are entitled to a refund of the amount paid
                        to the defendants from the time agreements were entered
                        into and, also, other orders. Concurrently, the
                        plaintiffs asked that the court consider the claim as a
                        class action.
<PAGE>   137
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000
--------------------------------------------------------------------------------


NOTE 25 - COLLATERALS, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

      B.    LIABILITIES AND CONTINGENCIES (CONTINUED)

            2.    PENDING LITIGATION (CONTINUED)

                        The court has ruled only partially in favor of the class
                        action, allowing the claim to be submitted as a class
                        action for declaratory relief only, in accordance with
                        the Consumer Protection Law, regarding the gas
                        companies' obligation to refund to their customers
                        amounts actually paid for periodic inspections which did
                        not take place, retroactive to the date of agreements
                        entered into with each customer. The court rejected the
                        claim for financial and other remedies against the gas
                        companies. Supergas has requested permission of the
                        Supreme Court to appeal the above ruling and, in the
                        opinion of its legal counsel, has valid causes for
                        appeal, both factually and legally. In the opinion of
                        the Company's management, Supergas has made an adequate
                        provision in its books for any potential exposure.

      C.    THE CONSOLIDATED COMPANIES ARE COMMITTED AS OF BALANCE SHEET DATE AS
            FOLLOWS:

            (1)   COMMITMENTS:

<TABLE>
<CAPTION>
                                                                                                          NIS.
                                                                                                      (THOUSANDS)
                                                                                                      -----------
<S>                                                                                                   <C>
            Acquisition of fixed assets                                                                 217,854

            Suppliers of fuel, luboils and equipment                                                    137,877
            (delivery January 2001)

            Rental leases and obligations in accordance with signed agreements with                     909,060
            agencies for the use of their outlets for marketing the Company's products
            over various periods(*)

            Lease obligation for a computer and other equipment for various periods for                     543
            a period of up to five years

            (*)   The rental liability for each of the years following December 31, 2000 is
                  as follows:
                  2001                                                                                   65,187
                  2002                                                                                   64,125
                  2003                                                                                   62,627
                  2004                                                                                   60,138
                  2005                                                                                   49,470
                  2006 and thereafter                                                                   607,513
                                                                                                        -------
                                                                                                        909,060
                                                                                                        =======
</TABLE>

            (2)   COMMITMENTS FOR INVESTMENTS:

                  a.    In 1996, a consolidated company signed an agreement for
                        its participation in a limited partnership to establish
                        a tourist attraction. The investment by the consolidated
                        subsidiary (including loans and guarantees) is expected
                        to reach an amount of up to NIS. 19,000 thousand linked
                        to the representative rate of the U.S. dollar, for which
                        it will obtain a 35% share in the limited partnership.
<PAGE>   138
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------

NOTE 25 - COLLATERALS, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

      C.    (2)   a.    COMMITMENTS FOR INVESTMENTS: (CONTINUED)

                        As of the balance sheet date, the company invested
                        approximately NIS. 6,700 thousand.

                  b.    In 1998, a consolidated company entered into an
                        agreement to sell 50% of its rights in a plot of land
                        situated in Tel Aviv for an amount of NIS. 30,600
                        thousand, linked to the Index. The balance not yet
                        received as of the balance sheet date amounts to
                        approximately NIS. 1,600 thousand. The consolidated
                        company also signed an agreement with the buyer to
                        construct a joint building project on the land. The
                        project will include, inter alia, a 20 story office
                        building covering an area of approximately 25,000 sq. m.
                        and underground parking facilities. In addition, the
                        company signed a conditional agreement whereby it agreed
                        to pay the city of Tel Aviv an amount of NIS. 11.3
                        million, linked to the Index for betterment taxes. As of
                        the balance sheet date, the balance of the liability
                        payable amounted to NIS. 8.4 million. The consolidated
                        company, together with the buyer, also entered into an
                        agreement with a bank whereby the bank will provide
                        construction financing throughout the construction
                        period. In return, the consolidated company
                        collateralized its rights to the land and future
                        payments from the project to the bank.

                  c.    Should the restructuring of the companies in the group
                        be realized (see Note 1), it is expected that the
                        Company will incur costs, primarily professional fees,
                        taxes on the transfer of assets between companies and
                        other fees. At this time, the extent of these costs is
                        not known.

                  d.    The Controller of Oil Interests in the Ministry of
                        National Infrastructures issued a license to Granite -
                        Sonol Oil Drilling and Gas Limited Partnership for oil
                        exploration on a tract of land of over 400,000 dunam
                        located between Or Yehuda in the north, Kiryat Malachi
                        in the south and Mishmar Ayalon in the east and known as
                        License No. 302/"Modiin".

                        Under the terms of the above license, the Partnership,
                        owner of the license, is obligated to carry out certain
                        preliminary activities by October 1, 2001. If no
                        drilling prospect is found, the license will be revoked
                        by November 1, 2001. If a drilling prospect is found, a
                        contract with a drilling contractor for a test site is
                        to be signed no later than December 1, 2001 and drilling
                        is to commence no later than April 1, 2002.

                  e.    In November 2000, a Memorandum of Agreement was signed
                        between the Company and BG International Ltd. ("BG"
                        and/or "British Gas") whereby the company will acquire
                        rights in BG's preliminary permits to carry out drilling
                        opposite the coast of the State of Israel as follows:
<PAGE>   139
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------


NOTE 25 - COLLATERALS, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

      C.    (2)e. COMMITMENTS FOR INVESTMENTS: (CONTINUED)

                  1.    30% in preliminary permits known as Gal "A" and Gal "B"
                        situated in the ocean depths opposite the northern coast
                        of the country. Two concessions have been granted on
                        parts of the permit areas for the exploration of oil and
                        natural gas.

                  2.    15% of the preliminary permit known as Gal "C" situated
                        in the ocean depths opposite Ashdod. Four concessions
                        have been granted on parts of the permit areas for the
                        exploration of oil and natural gas.

                  3.    Completion of the agreement is subject, int alia, to
                        receiving various permits, completion of due diligence
                        and the signing of a detailed agreement.

                  4.    As a result of the desire of one of the participants in
                        the joint project, who owns the rights in the above
                        concessions, L.Y.A. Exploration Ltd., to exercise its
                        first right of refusal and increase its share, it was
                        agreed that the above mentioned acquisition would be
                        divided equally between the Company and L.Y.A.
                        Exploration Ltd., such that Granite will own 15% of Gal
                        "A" and "B" and 7.5% of Gal "C". According to the
                        Company, the above division was made in concurrence with
                        the other members of the joint project.

                  5.    Following the request of other members of the joint
                        project, regarding the above rights, to exercise their
                        first right of refusal, Granite filed a claim in court
                        to carry out the agreement. In January 2001, the
                        Tel-Aviv district court, after hearing only one of the
                        partners, agreed to the Company's claim and ruled that a
                        temporary lien be instituted on 15% of the exploration
                        rights held by British Gas in the Gal "A" and Gal "B"
                        sites and on 7.5% of British Gas' rights in the Gal "C"
                        site. Granite claims that it legally acquired the above
                        rights from British Gas and that the agreement signed
                        with British Gas is in effect. Several of the
                        participants in the British Gas project in the above
                        licenses, Clal Industries and Energy Ltd., Israel
                        Petrochemical Industries Ltd. and Dor Chemicals Ltd.,
                        claim that they have the first right of refusal in
                        acquiring the above rights. No hearing has yet taken
                        place among the parties. Upon completion of the
                        agreement, the Company will pay BG an amount of $ 0.4
                        million and, in addition, will pay during the course of
                        2001, up to $ 0.95 million pursuant to developments
                        regarding the work plan and, will participate in its
                        share of the joint project's current expenses.
<PAGE>   140
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000
--------------------------------------------------------------------------------

NOTE 25 - COLLATERALS, COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

      D.    THE CONSOLIDATED COMPANIES HAVE CONTINGENT LIABILITIES AS OF THE
            BALANCE SHEET DATE AS FOLLOWS:


<TABLE>
<CAPTION>
                                                                                           NIS.
                                                                                       (THOUSANDS)
                                                                                       -----------
<S>                                                                              <C>
            1. Bank guarantees in respect of customers                                    4,340

            2. Performance guarantees to customers and others                             6,401

            3.  Guarantees to municipalities and tax authorities                         12,323

            4.  Other guarantees                                                          5,041

            5.  Guarantees to a bank for the financing of a tourism                    Unlimited
                 project currently under construction                                    Amount

            6.  Guarantees given to Customs and Excise Department for .
                 payment of customs duty, purchase and other taxes by                 Unlimited
                 the company and consolidated companies                                  Amount
</TABLE>


      E.    CREDIT RISKS

            1.    The maximum credit risks of the Company regarding its
                  financial assets do not exceed the book value of the financial
                  assets less the existing collaterals held by the Company.

            2.    Concentration of credit risks are created by the fact, that
                  the consolidated company's customers and long-term receivables
                  (long-term loans granted) are of similar character
                  (independent fuel agencies). The highest balance is that of an
                  agent whose current balance (included in trade receivables)
                  and whose long-term balance (included in long-term loans)
                  total approximately NIS 31.6 million. Against a portion of
                  amounts due from customers, the Company has collateral as is
                  acceptable in the industry. The financial statements include
                  specific provisions for receivables, whose the collection in
                  the opinion of the management, is questionable.
<PAGE>   141
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------

NOTE 26 - EVENTS AND PROPOSAL LAWS FOR THE FUEL SECTOR

            a.    Within the framework of the Ministry of National Instracture's
                  intention to separate the storage of Emergency Inventories of
                  crude oil and fuel products from the commercial inventories of
                  the oil marketing companies, the Fuel Authority has ordered
                  that the Emergency Inventories of fuel products be held in
                  separate storage tanks at predetermined locations. The
                  separation has been postponed. Under the proposed Law for
                  Arrangements in the Economy, the Government has proposed that
                  the level of commercial inventories to be held by and on
                  account of each company, will be determined by the Fuel
                  Authority and not independently by each company. Until the Law
                  is passed, and regulations and rules formulated, it is
                  difficult to determine its financial effects on the Company
                  and its effective date.

            b.    In accordance with a government decision, the excise tax rate
                  applicable to gasoil used for transportation will be increased
                  significantly. This increase will cause a large price
                  differential between the price of gasoil used for
                  transportation and that used for other purposes. As a result,
                  it has been proposed, within the framework of a proposed Law
                  for Arrangements in the Government Economy (1999) to amend the
                  excise tax law pertaining to fuel products in such a manner
                  that will require the marking of gasoil not used for
                  transportation, will provide the Director of Customs with
                  enforcement powers to inspect the purported uses of gasoil and
                  to take punitive measures against the illegal use of gasoil
                  for purposes other than transportation. Concurrent with the
                  government's above mentioned decision, a private bill has been
                  submitted which is intended to ensure that all fuel product
                  excise taxes will be imposed at equal rates for all types of
                  the same products, thus preventing any price differentials
                  from arising on gasoil. The Economics Committee of the Knesset
                  recently approved the above proposed law for a first reading.
                  If the proposed law is enacted as stated in the Law for
                  Arrangements, and the private bill is not enacted, it can be
                  assumed that the enforcement means and punitive measures
                  proposed will not suffice to prevent potential users from
                  violating the law by using gasoil meant for industrial or
                  heating purposes, for transportation purposes, thus making the
                  Company's operations more difficult. Regardless, an increase
                  in the rate of excise tax will cause a significant increase in
                  the level of customer credit.

            c.    An amendment to the Excise Tax Law was passed in the Knesset
                  authorizing the director of Customs to extend the credit terms
                  for the payment of excise tax on the sale of fuel products to
                  ten days instead of the five days of credit currently in
                  effect. The Director of Customs subsequently ruled that for
                  the period of November 12, 2000 through December 31, 2000,
                  credit terms for payment of the excise tax will be extended to
                  eight days and, beginning January 1, 2001 credit will be
                  extended to ten days.
<PAGE>   142
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTE 27 - TRANSACTIONS AND BALANCES WITH INTERESTED AND RELATED PARTIES
--------------------------------------------------------------------------------

      a.    INCOME AND EXPENSES FROM INTERESTED AND RELATED PARTIES.

            1.    Consist of:

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                    ----------------------------------------------------------------------------------------------
                                               2000                                1999                             1998
                                    -------------------------           --------------------------         -----------------------
                                                                            NIS. (THOUSANDS)
                                    ----------------------------------------------------------------------------------------------
                                    Interested        Related           Interested         Related         Interested     Related
                                    parties           parties           parties            parties         parties        parties
                                    -------           -------           -------            -------         -------        -------
<S>                                 <C>               <C>               <C>                <C>             <C>            <C>
      Financing expenses                 --               --                 --               143            133              112
      Financing income                   --            1,044                 27               714             --              353
      Income from
       management services               --            1,544                 --             6,197             --            6,927
      Purchases                     420,396               --            207,351            10,062             --               --
      Services purchased                786               --                 --                --             --               --
</TABLE>

            2.    The decision as to the price at which purchases are made from
                  an interested party is determined by comparison to the price
                  at the gate of the Oil Refineries and the prices charged by
                  other competing suppliers a that time. The price paid by Sonol
                  at any given time was lower than any other alternative
                  available at that time. Credit terms were not less than those
                  available from the Oil Refineries in Haifa or from any other
                  supplier.

            3.    Other transactions with interested and related parties are
                  conducted in the normal course of business and according to
                  normal credit terms and do not exceed 10% of the Company's
                  transactions. The Company has been granted an exemption in
                  accordance with paragraph 64(3) D of the Securities
                  Regulations (Preparation of Annual Financial Statements
                  (correction) - 1995) from the requirement to disclose
                  transactions with interested parties and affiliated companies
                  made during the normal course of business of the Company.

            4.    Sonol purchases most of its fuel products from Oil Refineries
                  Ltd. which is obligated to supply its products to the oil
                  marketing companies at the refinery gate price which is under
                  government control.


      b.    BENEFITS TO INTERESTED PARTIES


<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                                                ---------------------------------------
                                              NUMBER            2000            1999             1998
                                                OF              -----           -----            -----
                                              PERSONS                       NIS. (THOUSANDS)
                                              -------           ---------------------------------------
<S>                                           <C>               <C>             <C>              <C>
       1.  Interested party employed
             by the Company                   1                  3,140           4,596            6,523

       2.  Directors                          13                   952           1,128              715
</TABLE>
<PAGE>   143
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000
--------------------------------------------------------------------------------


NOTE 27 - TRANSACTIONS AND BALANCES WITH INTERESTED AND RELATED PARTIES
(CONTINUED)

      c.    BALANCES WITH INTERESTED AND RELATED PARTIES

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                  -------------------------------------------------
                                                          2000                        1999
                                                  ---------------------       ---------------------
                                                                 NIS. (THOUSANDS)
                                                  -------------------------------------------------
                                                  Interested    Related       Interested    Related
                                                  Parties       Parties       Parties       parties
                                                  -------       -------       -------       -------
<S>                                              <C>            <C>          <C>           <C>
       CURRENT ASSETS:
      Trade receivables                            1,938        27,928            --         1,507
      Accounts receivable                             --           203            --            73
                                                  ------        ------        ------        ------
                                                   1,938        28,131            --         1,580
                                                  ======        ======        ======        ======
      Loans and capital notes
       to subsidiary companies                                   9,618                      20,385
                                                                ======                      ======

      The highest balance with
        interested parties during the year         4,642                          --
                                                   =====                      ======

      CURRENT LIABILITIES:
      Credit from banks and others                    --            --            --         5,573
      Trade payables                              35,453         4,455        20,545         4,970
      Accounts payable                                --           113        12,780            --
                                                  ------        ------        ------        ------
                                                  35,453         4,568        33,325        10,543
                                                  ======        ======        ======        ======
      The highest balance with
        interested parties during the year        53,293                      33,325
                                                  ------                      ------
      Commitment to purchase fuel
       products  from an interested party         30,049                      34,409
                                                  ------                      ------
</TABLE>

NOTE 28 - SUBSEQUENT EVENTS

      On February 1, 2001, the Company, through its subsidiary Granite Hacarmel
      Communications (2001) Ltd. signed a founders agreement together with other
      parties including Screen Communication Holdings (2001) Ltd., Ashtrom
      Industry Holdings Ltd., Egged Touring and Leisure Ltd., Epsilon Investment
      House Underwriters (1993) Ltd., Zahi Kirel Holdings (2001) Ltd., (in
      formation) and T.V. Three Ltd. - hereinafter "the Group". In accordance
      with the above founders agreement, the members of the Group agreed to work
      together through T.V. Three Ltd. for the purpose of submitting a proposal
      regarding a tender for obtaining the franchise for television broadcasting
      rights under the auspices of the new commercial channel - "the third
      channel". The tender was published by the Second Authority for Television
      and Radio, in accordance with the Law for the Second Authority for
      Television and Radio - (1990). The members of the group have committed
      themselves to invest the financial resources necessary to submit the
      tender proposal according to a budget to be approved by the Group and,
      should the Group be awarded the tender, to invest the amounts required by
      the above Second Authority in order to acquire and operate the franchise.
      Granite Hacarmel Communication (2001) Ltd.'s share in the Group amounts to
      27.02%.

<PAGE>   144
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES





NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000

NOTE 29 - FINANCIAL STATEMENTS TRANSLATED INTO U.S. DOLLARS

         The financial records of the Company and its consolidated companies are
         maintained on a current basis in historical nominal New Israel Shekels.

         The translated consolidated financial statements, stated in U.S.
         dollars, have been prepared in accordance with generally accepted
         accounting principles for use in connection with the preparation of the
         financial statements of a U.S. shareholder.

         The functional currency of the Company is the U.S. dollar. Despite the
         significant reduction in Israel's rate of inflation, the Company has
         continued to prepare its consolidated financial statements in U.S.
         dollars in accordance with translation principles identical to those
         prescribed by Statement of Financial Accounting Standards No. 52
         ("F.A.S.B. 52"), based on the historical nominal amounts.


<TABLE>
<CAPTION>
                                                        TRANSLATED TO U.S. DOLLARS
                                                               DECEMBER 31,
                                                         2000              1999
                                                      ----------------------------

<S>                                                    <C>               <C>
CURRENT ASSETS
  Cash and cash equivalents                              5,139            12,731
   Marketable securities                                 3,250             2,546
   Trade receivables                                   193,298           185,506
   Accounts receivable                                  12,831            13,444
   Inventories                                         104,024            94,922
                                                       -------           -------
                                                       318,542           309,149
                                                       -------           -------

INVESTMENTS, LONG-TERM LOANS AND
  RECEIVABLES
 Subsidiaries, affiliated companies
  and others                                            35,310            35,870
 Long-term loans                                        31,584            17,713
 Deferred taxes, net                                     1,741               379
                                                       -------           -------
                                                        68,635            53,962
                                                       -------           -------
FIXED ASSETS
  Cost                                                 309,832           305,859
  Less: Accumulated depreciation                       153,067           144,272
                                                       -------           -------
                                                       156,765           161,587
                                                       -------           -------
INTANGIBLE ASSETS AND DEFERRED
 CHARGES,  NET                                          19,042            14,153
                                                       -------           -------
                                                       562,984           538,851
                                                       =======           =======
</TABLE>
<PAGE>   145
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000

NOTE 29 - FINANCIAL STATEMENTS TRANSLATED INTO U.S. DOLLARS (CONTINUED)


                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                      TRANSLATED TO U.S. DOLLARS
                                                             DECEMBER 31,
                                                         2000              1999
                                                      ----------------------------
<S>                                                     <C>             <C>
CURRENT LIABILITIES
Credit from banks and others
Current portion of convertible                          268,418          280,979
 Debentures                                               2,981            3,091
Trade payable                                            31,836           25,383
Accounts payable                                         57,924           52,311
                                                        -------          -------
                                                        361,159          361,764
                                                        -------          -------

LONG-TERM LIABILITIES
 Long-term loans                                         51,876           38,695
Debentures convertible into shares
 of the Company                                           3,053            6,676
Customers' deposits                                      14,478           15,341
Liabilities for employee rights upon
 retirement, net                                          4,468            3,681
Capital notes issued by a consolidated
  company                                                    53               50
                                                         -------          -------
                                                         73,928           64,443
                                                         -------          -------
MINORITY INTEREST                                         1,531            1,709
                                                         -------          -------
SHAREHOLDERS' EQUITY                                    126,366          110,935
                                                        -------          -------
                                                        562,984          538,851
                                                        -------          -------
</TABLE>
<PAGE>   146
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000

NOTE 29 - FINANCIAL STATEMENTS TRANSLATED INTO U.S. DOLLARS (CONTINUED)

                        CONSOLIDATED STATEMENT OF INCOME
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                               TRANSLATED TO U.S. DOLLARS
                                                 YEAR ENDED DECEMBER 31,
                                            2000             1999             1998
                                            ----             ----             ----
<S>                                       <C>              <C>              <C>
Revenues
 Sales                                     978,886          807,889          793,106
 Less: Government imposts                 (313,010)         316,707          339,228
                                           -------          -------          -------
 Net sales                                 665,876          491,182          453,878
 Other income, net                          15,135            3,243            6,833
                                           -------          -------          -------
                                           681,011          494,425          460,711
                                           -------          -------          -------
Costs and expenses:
 Cost of sales                             537,815          359,414          327,708
  Selling, general and
  Administrative  expenses                  79,998           74,681           76,162
 Depreciation and amortization              19,566           18,072           15,634
 Financing expenses, net                    20,602           21,144            5,903
                                           -------          -------          -------
                                           657,981          473,311          425,407
                                           -------          -------          -------

Operating income before taxes on
  Income                                    23,030           21,114           35,304
Taxes on income                              9,791            8,147           11,695
                                           -------          -------          -------
Operating income after taxes on
 Income                                     13,239           12,967           23,609
Company's share in income
 of affiliates, net                          2,375              367            1,052
Minority interest in  consolidated
 Subsidiaries                                 (605)            (701)            (215)
                                             -------          -------          -------

Net income for the year                     15,009           12,633           24,446
                                            -------          -------          -------

Earnings per ordinary share
(in U.S. dollars):

Primary and fully diluted                     0.11             0.09             0.18
                                            -------          -------          -------
</TABLE>
<PAGE>   147
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000

NOTE 29 - FINANCIAL STATEMENTS TRANSLATED INTO U.S. DOLLARS (CONTINUED)

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                       TRANSLATED TO U.S. DOLLARS

                                                               Company's
                                                              shares held               Other
                                                                 by a                 accumulated
                                     Common      Capital      consolidated  Retained  comprehensive
                                     stock       Reserves      company      earnings    income *      Total

<S>                                  <C>         <C>            <C>        <C>        <C>            <C>
 Balance as at
 January 1, 1998                      55,735       36,006        --          84,414          379      176,534
 Changes in 1998:
 Issuance of shares                    3,864       28,300**      --            --            --        32,164
 Net income for the year                --           --          --          24,446          --        24,446
 Unrealized losses on securities        --           --          --            --           (249)        (249)
 Reclassification
   adjustment for gains
   included in net income               --           --          --            --           (146)        (146)
 Gain from the sale of the
  Company's Shares by a
  consolidated Company, net             --             22        --            --            --            22
 Dividend paid                          --           --          --        (120,106)         --      (120,106)
                                      ------       ------       ----        -------          ---      -------
 Balance as December 31, 1998         59,599       64,328        --         (11,246)         (16)     112,665
                                      ------       ------       ----        -------          ---      -------

 Changes in 1999:                                                --
 Net income for the year                                                     12,633          --        12,633
 Dividend paid                          --           --           13        (14,823)         --       (14,810)
 Acquisition of the Company's
 Shares held by a consolidated
 Company                                --           --         (154)          --            --          (154)
 Unrealized gains on securities         --           --          --            --            630          630
 Reclassification adjustment for
  gains included in net income                                                               (29)         (29)
                                      ------       ------       ----        -------          ---      -------
Balance as December 31, 1999          59,599       64,328       (141)       (13,436)         585      110,935
                                      ------       ------       ----        -------          ---      -------
 Changes in 2000:
  Net income for the year               --           --          --          15,009          --        15,009
 Acquisition of the Company's
 Shares held by a consolidated
 Company                                                        (669)                                    (669)
 Conversion of debentures to
 shares                                   97          714        --                                       811
Unrealized gains on securities
 Reclassification adjustment for
  gains included in net income                                   --                          280          280
                                      ------       ------       ----        -------          ---      -------

Balance as December 31, 2000          59,696       65,042       (810)         1,573          865      126,366
                                      ======       ======       ====        =======          ===      =======
</TABLE>

* Deriving from unrealized gains (losses) on marketable securities. Tax effect
  is immaterial.

** Net of issuance stock expenses in the amount of $420 thousand.
<PAGE>   148
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000

NOTE 29 - FINANCIAL STATEMENTS TRANSLATED INTO U.S. DOLLARS (CONTINUED)

(I)      The proceeds of the public offerings have been allocated to the
         securities issued on the basis of their fair market prices at the
         beginning of trading on the stock exchange. As a result, the debentures
         are carried at their discounted values as follows:


<TABLE>
<CAPTION>
                                                         U.S. DOLLARS (THOUSANDS)
                                                              DECEMBER 31,
                                                            2000           1999

<S>                                                      <C>              <C>
Debentures (series 1 and 2) - face value                   6,268          10,253
Discount (series 1) (*)                                      234             486
                                                           -----           -----

                                                           6,034           9,767
Less current portion                                       2,981           3,091
                                                           -----           -----
                                                           3,053           6,676
                                                           -----           -----
</TABLE>

(*) The discount is being amortized over the remaining period until maturity.

        See Note 14.B.


(II)    The Company's policy is to record long-lived assets at cost, amortizing
        these costs over the expected useful life of the related assets. In
        accordance with Statement of Financial Accounting Standards No. 121
        ("SFAS 121") "Accounting for the impairment of Long-lived Assets and for
        Long-lived Assets to be disposed of", these assets are reviewed on a
        quarterly and annual basis for impairment whenever events or changes in
        circumstances indicate that the carrying amounts of the assets may not
        be reasonable. Furthermore, the assets are evaluated for continuing
        value and proper useful lives by comparison to expected future cash
        flows. For the year ended December 31, 2001, the adoption of SFAS 121
        did not have a material effect on the Company.

(III)    During 1999, the FASB published a new pronouncement, FAS 133, dealing
         with the reporting of derivative financial instruments which requires
         that all derivative financial instruments be recorded in the financial
         statements at their fair value. FAS 133 is to be applied beginning with
         the financial statements for the year 2001. The effect of the
         implementation of FAS 133 on the financial statements is expected to be
         immaterial.
<PAGE>   149
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000

<TABLE>
<CAPTION>
LIST OF THE MAIN SUBSIDIARIES AND AFFILIATES                             HOLDINGS AND
--------------------------------------------                             CONTROL AS OF
                                                                         DECEMBER 31, 2000
                                                                               %
                                                                         -----------------
<S>                                                                      <C>
    Consolidated Subsidiaries:
    Sonol Israel Ltd.                                                        100
    Sprint Motors Ltd.                                                       100
    Sprint Motors Agencies (1995) Ltd.                                       100
    Sprint Motors Transport (1999) Ltd.                                      100
    Milchen Sonol Agency Ltd.                                                 67
    Sonol J-M Ltd.                                                            70
    Sonol Dan (1992) Ltd.                                                    100
    Sonol Agencies Shuvas (1996) Ltd.                                        100
    Sonol Cnaan Ltd                                                           51
    Sonol Shani Agencies Ltd.                                                 51
    Sonokal (1999) Limited Partnership                                        51
    Allied Oils and Chemicals Ltd.                                           100
    Sonapco Bank Street Corporation                                          100
    Supergas Israel Gas Distribution Company Ltd.                            100
    Supergas Hanegev Ltd.                                                     65
    Supergas Rehovot  89 Ltd.                                                 90
    M. Solomon & Co. Gas Agencies
      Ashkelon Ltd.                                                           51
    Supergas Hagalil Ltd.                                                    100
    Supergas Etzion Holdings (1997) Ltd.                                     100
    Rav Gas Ltd.                                                              55
    Granite Hacarmel Holdings (1993) Ltd.                                    100
    Granite Hacarmel Properties (1993) Ltd.                                  100
    Granite Hacarmel O.Y. Holdings Ltd.                                      100
    Granite Hacarmel Development
      Holdings Ltd.                                                          100
    Granite Hacarmel Development Ltd.                                        100
    Granite Hacarmel Industries Holdings Ltd                                 100
    Granite Hacarmel Industries Ltd.                                         100
    Granite Hacarmel Y.A. Holdings Ltd.                                      100
    Granite Hacarmel NZV Holdings Ltd.                                       100
    Granite Hacarmel Motorika Holdings Ltd.                                  100
    Granite Hacarmel Energy Holdings Ltd.                                    100
    Granite Hacarmel Energy (1997) Ltd.                                      100
    Granite Hacarmel Tourism Ltd.                                            100
    Sonor Ltd.                                                               100
    Otzem Promotion and Investments (1991) Ltd.                              100
    N.M.R.1998 Ltd.-Mechanization and Automotive
      Equipment Ltd.                                                          51
    Sonol Darom Ltd.                                                         100
</TABLE>
<PAGE>   150
GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2000

<TABLE>
<CAPTION>
                                                                         HOLDINGS AND
                                                                         CONTROL AS OF
                                                                        DECEMBER 31, 2000
                                                                                %
                                                                        -----------------
                    Affiliated Companies:
                    ---------------------
<S>                                                                     <C>
Texma Chemical Ltd.                                                           50
Yarok Az Ltd.                                                                 22.9
Etzion Gas Products (1998) Ltd.                                               50
Lev Magor Management and Services Ltd.                                        50
Park Cible Management and Holdings Ltd.                                       50
Nitzba Holdings (1995) Ltd.                                                   10.65
Orpak Industries (1983) Ltd                                                   10.1
Mini Israel Ltd.                                                              35
After Holdings Ltd.                                                           50
Kleesson Holdings (1999)  Ltd.                                                50
Park Mini Israel - Limited Partnership                                        35
</TABLE>





The above list does not include inactive and/or immaterial affiliated companies
and others.
<PAGE>   151
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                               2000 ANNUAL REPORT
<PAGE>   152
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                               2000 ANNUAL REPORT






                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                           PAGE
<S>                                                                        <C>
REPORT OF INDEPENDENT AUDITORS                                             2-3
FINANCIAL STATEMENTS - OF THE COMPANY AND
     CONSOLIDATED - IN ADJUSTED NEW ISRAELI SHEKELS (NIS):
     Balance sheets                                                        4-5
     Statements of income                                                   6
     Statements of changes in shareholders' equity                          7
     Statements of cash flows                                               8-9
     Notes to financial statements                                         10-56
</TABLE>
<PAGE>   153
                         REPORT OF INDEPENDENT AUDITORS


To the shareholders of
OPHIR HOLDINGS LTD.


 We have audited the financial statements of Ophir Holdings Ltd. (the "Company")
 and the consolidated financial statements of the Company and its subsidiaries:
 balance sheets as of December 31, 2000 and 1999 and the related statements of
 income, changes in shareholders' equity and cash flows for each of the three
 years in the period ended December 31, 2000. These financial statements are the
 responsibility of the Company's Board of Directors and management. Our
 responsibility is to express an opinion on these financial statements based on
 our audits.

 We did not audit the financial statements of certain subsidiaries, whose assets
 included in consolidation constitute approximately 14% and 22% of total
 consolidated assets as of December 31, 2000 and 1999, respectively, and whose
 revenues included in consolidation constitute approximately 8%, 9% and 21% of
 total consolidated revenues included in consolidated revenues and gains for the
 years ended December 31, 2000, 1999 and 1998, respectively. We did not audit
 the financial statements of certain associated companies, the Company's
 interest in which, as reflected in the balance sheets as of December 31, 2000
 and 1999, is adjusted NIS 120,904,000 and adjusted NIS 180,904,000,
 respectively, the Company's share in the excess of losses over profits of which
 is a net amount of adjusted NIS 293,000 in 2000, and the Company's share in the
 excess of profits over losses, of which is a net amount of adjusted NIS
 4,169,000 in 1999 and adjusted NIS 5,307,000 in 1998. The financial statements
 of the above subsidiaries and associated companies were audited by other
 independent auditors whose reports have been furnished to us, and our opinion,
 insofar as it relates to amounts included for those companies, is based solely
 on the reports of the other independent auditors.

 We conducted our audits in accordance with auditing standards generally
 accepted in Israel and in the United States, including those prescribed by the
 Israeli Auditors (Mode of Performance) Regulations, 1973. 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 the Board of
 Directors and management, as well as evaluating the overall financial statement
 presentation. We believe that our audits and the reports of the other
 independent auditors provide a reasonable basis for our opinion.

 In our opinion, based upon our audits and the reports of the other independent
 auditors, the financial statements referred to above present fairly, in all
 material respects, the financial position - of the Company and consolidated -
 as of December 31, 2000 and 1999 and the results of operations, changes in
 shareholders' equity and cash flows - of the Company and consolidated - for
 each of the three years in the period ended December 31, 2000, in conformity
 with accounting principles generally accepted in Israel. Furthermore, in our
 opinion, the financial statements referred to above are prepared in accordance
 with the Israeli Securities (Preparation of Annual Financial Statements)
 Regulations, 1993.

                                       2
<PAGE>   154
As explained in note 1b, the financial statements referred to above are
presented in values adjusted for the changes in the general purchasing power of
Israeli currency, in accordance with pronouncements of the Institute of
Certified Public Accountants in Israel.

Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The
application of the latter would have affected the determination of nominal
historical net income and shareholders' equity to the extent summarized in note
17.

The special condensed consolidated financial statements which are presented in
note 17 have been translated into U.S. dollars for the convenience of one of the
Company's shareholders, in accordance with the principles set forth in Statement
of Financial Accounting Standard No. 52 of the Financial Accounting Standards
Board of the United States. In our opinion, the translation has been properly
made.









Tel-Aviv, Israel                                      Kesselman & Kesselman
     February 21, 2001                       Certified Public Accountants (Isr.)

                                       3
<PAGE>   155
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                                 BALANCE SHEETS
                         IN ADJUSTED NEW ISRAELI SHEKELS

<TABLE>
<CAPTION>
                                                                      CONSOLIDATED                 THE COMPANY
                                                                      ------------                 -----------
                                                                       DECEMBER 31                  DECEMBER 31
                                                                      ------------                 -----------
                                                    NOTE             2000      1999             2000         1999
                                                    ----             ----      ----             ----         ----
                                                                      IN THOUSANDS                 IN THOUSANDS
                                                                      ------------                 ------------
<S>                                               <C>          <C>            <C>            <C>            <C>
              A S S E T S                           9c
CURRENT ASSETS:                                     13
     Cash and cash equivalents                                   1,770          4,532            310            328
     Short-term loans to shareholders               12b         52,190         79,591         52,190         79,591
     Short-term investments                         14a        143,684          3,866        143,684          3,866
     Accounts receivable                            14b          1,512         16,746          1,214          5,850
                                                               -------        -------        -------        -------
               T o t a l  current assets                       199,156        104,735        197,398         89,635
                                                               -------        -------        -------        -------
LAND - BUSINESS INVENTORY                         1e;9a(2)      12,313         12,313
                                                               -------        -------
INVESTMENTS:                                         13
     Subsidiaries                                     2                                       70,475         69,970
     Associated companies                             3        185,486        185,130        147,560        147,204
     Other companies                                  4        193,431        244,374        193,431        244,374
     Long-term bank deposit, net of
          current maturities                        14c          1,999          5,861          1,999          5,861
                                                               -------        -------        -------        -------
                                                               380,916        435,365        413,465        467,409
                                                               -------        -------        -------        -------
FIXED ASSETS, net of accumulated
     depreciation                                     5        102,560        101,325         58,832         56,484
                                                               -------        -------        -------        -------
                                                               694,945        653,738        669,695        613,528
                                                               =======        =======        =======        =======
</TABLE>




                                          )  A. KELNER,
               -------------------------  )  CHAIRMAN OF THE BOARD OF DIRECTORS

                                          )  Y. KAPLAN,
               -------------------------  )  MANAGING DIRECTOR



        Date of approval of the financial statements: February 21, 2001

                                       4
<PAGE>   156
<TABLE>
<CAPTION>
                                                                            CONSOLIDATED                  THE COMPANY
                                                                            ------------                  -----------
                                                                             DECEMBER 31                   DECEMBER 31
                                                                             -----------                   -----------
                                                            NOTE         2000         1999            2000          1999
                                                            ----         ----         ----            ----          ----
                                                                           IN THOUSANDS                 IN THOUSANDS
                                                                           ------------                 ------------
<S>                                                       <C>         <C>            <C>            <C>            <C>
    LIABILITIES AND SHAREHOLDERS' EQUITY                    9c
CURRENT LIABILITIES:                                        13
     Bank credit                                            14d        28,713         14,800         25,858         12,060
     Accounts payable and accruals                          14e        15,306         31,331         27,615         30,474
     Short-term loan from a company which is
          an interested party                               14f        11,877                        11,877
                                                                      -------        -------        -------        -------
               T o t a l  current liabilities                          55,896         46,131         65,350         42,534
                                                                      -------        -------        -------        -------
LONG-TERM LIABILITIES:                                      13
     Bank loans (net of current
          maturities)                                        6         86,147         93,889         64,609         70,416
     Capital notes to an associated
          company (the Company - and
          a subsidiary)                                      7        151,601        151,601        151,539        151,539
     Liability for employee rights upon
          retirement, net of amount
          funded                                             8             50             45
     Payables in respect of acquisition
          of land - business inventory -
          related parties                                 9a(2)        11,332         11,418
     Deferred income taxes                                 11b          2,638          2,028            933            441
                                                                      -------        -------        -------        -------
               T o t a l  long-term liabilities                       251,768        258,981        217,081        222,396
                                                                      -------        -------        -------        -------
COMMITMENTS AND CONTINGENT
     LIABILITIES                                             9
                                                                      -------        -------        -------        -------
               T o t a l  liabilities                                 307,664        305,112        282,431        264,930
MINORITY INTEREST                                            2             17             28
SHAREHOLDERS' EQUITY                                        10        387,264        348,598        387,264        348,598
                                                                      -------        -------        -------        -------
                                                                      694,945        653,738        669,695        613,528
                                                                      =======        =======        =======        =======
</TABLE>




         THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL
         STATEMENTS.

                                       5
<PAGE>   157
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                              STATEMENTS OF INCOME
                         IN ADJUSTED NEW ISRAELI SHEKELS

<TABLE>
<CAPTION>
                                                                                                             CONSOLIDATED
                                                                                                             ------------
                                                                                          NOTE       2000       1999         1998
                                                                                          ----       ----       ----         ----
                                                                                                             IN THOUSANDS
                                                                                                             ------------
<S>                                                                                      <C>       <C>         <C>        <C>
REVENUES AND GAINS:
     From lease of buildings                                                                 12a     12,863       9,192      6,388
     Share in profits of associated companies - net                                      3;15a(1)                 2,421      6,493
     Shares in profits of subsidiaries - net                                                   2
     Gain on disposal of marketable shares exchanged for shares in another
          company and increase in value of the marketable shares                               4     55,919
     Gain on conversion of marketable shares  designated as a permanent
          investment into other marketable shares following a merger and
          increase in value of the marketable shares following the conversion                  4      1,769
     Gain on dilution of holding in associated companies resulting
          from sale and issuance of shares to a third party - net                              3                  5,847     13,876
     Gain from sale of land - business inventory                                                                               354
     Gain from sale of investments in other companies                                          4                135,864     11,470
     Gain from sale of partnership in the United States                                                                      5,059
     Gain from sale and increase in value of marketable securities - net                                             80
     Gain from sale of buildings                                                                        453      11,500     15,086
     Dividend received from other companies                                                           8,571         500        485
     Management fees from associated companies and others
          (the Company -and from a subsidiary)                                               12a        840       1,412      1,216
                                                                                                   --------    --------   --------
                                                                                                     80,415     166,816     60,427
                                                                                                   --------    --------   --------
EXPENSES AND LOSSES:
     Share in losses of associated companies - net                                       3;15a(1)       392
     Depreciation of buildings for rent                                                               2,351       2,247      1,234
     Operating cost of buildings for rent                                                               699         677
     Write-down of investments in other companies                                              4      5,400         348      4,054
     Loss from decrease in value of marketable securities - net                                          56                     62
     General and administrative expenses                                                 12a;14i      5,403       5,985      5,348
     Capital loss from sale of fixed assets                                                              33                    254
     Financial expenses - net                                                            12a;14j      1,561       1,841      1,879
                                                                                                   --------    --------   --------
                                                                                                     16,403      11,098     12,831
                                                                                                   --------    --------   --------
INCOME BEFORE TAXES ON INCOME                                                                        64,012     155,718     47,596
TAXES ON INCOME                                                                               11     14,296      64,908     14,420
                                                                                                   --------    --------   --------
INCOME AFTER TAXES ON INCOME                                                                         49,716      90,810     33,176
MINORITY INTEREST IN LOSSES (PROFITS) OF A SUBSIDIARY                                                    11           3        (31)
                                                                                                   --------    --------   --------
NET INCOME FOR THE YEAR                                                                              49,727      90,813     33,145
                                                                                                   ========    ========   ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                                           THE COMPANY
                                                                                                           -----------
                                                                                                    2000       1999        1998
                                                                                                    ----       ----        ----
                                                                                                           IN THOUSANDS
                                                                                                           ------------
<S>                                                                                               <C>        <C>         <C>
REVENUES AND GAINS:
     From lease of buildings                                                                       6,537       3,374        317
     Share in profits of associated companies - net                                                            2,421      5,122
     Shares in profits of subsidiaries - net                                                         353       6,171      4,223
     Gain on disposal of marketable shares exchanged for shares in another
          company and increase in value of the marketable shares                                  55,919
     Gain on conversion of marketable shares  designated as a permanent
          investment into other marketable shares following a merger and
          increase in value of the marketable shares following the conversion                      1,769
     Gain on dilution of holding in associated companies resulting
          from sale and issuance of shares to a third party - net                                              5,847     13,876
     Gain from sale of land - business inventory
     Gain from sale of investments in other companies                                                        135,864     11,470
     Gain from sale of partnership in the United States
     Gain from sale and increase in value of marketable securities - net                                          80
     Gain from sale of buildings                                                                     168       1,896     15,086
     Dividend received from other companies                                                        8,571         500        485
     Management fees from associated companies and others
          (the Company -and from a subsidiary)                                                       840       1,412      1,207
                                                                                                 -------     -------    -------
                                                                                                  74,157     157,565     51,786
                                                                                                 -------     -------    -------
EXPENSES AND LOSSES:
     Share in losses of associated companies - net                                                   392
     Depreciation of buildings for rent                                                            1,371       1,231        197
     Operating cost of buildings for rent                                                            680         546
     Write-down of investments in other companies                                                  5,400         348      4,054
     Loss from decrease in value of marketable securities - net                                      564                     62
     General and administrative expenses                                                           1,509       2,397      1,478
     Capital loss from sale of fixed assets                                                           33                    254
     Financial expenses - net                                                                        988         952      1,039
                                                                                                 -------     -------    -------
                                                                                                  10,937       5,474      7,084
                                                                                                 -------     -------    -------
INCOME BEFORE TAXES ON INCOME                                                                     63,220     152,091     44,702
TAXES ON INCOME                                                                                   13,493      61,278     11,557
                                                                                                 -------     -------    -------
INCOME AFTER TAXES ON INCOME                                                                      49,727      90,813     33,145
MINORITY INTEREST IN LOSSES (PROFITS) OF A SUBSIDIARY
                                                                                                 -------     -------    -------
NET INCOME FOR THE YEAR                                                                           49,727      90,813     33,145
                                                                                                 =======     =======    =======
</TABLE>

         THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL
         STATEMENTS.

                                       6
<PAGE>   158
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                  STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                         IN ADJUSTED NEW ISRAELI SHEKELS

<TABLE>
<CAPTION>
                                                                                                DIFFERENCES FROM
                                                                                                 TRANSLATION OF
                                                                                                FOREIGN CURRENCY
                                                                                                FINANCIAL STATEMENTS
                                                                                                 OF A SUBSIDIARY AND
                                                        SHARE         CAPITAL       RETAINED     ASSOCIATED COMPANY
                                                        CAPITAL       SURPLUS       EARNINGS       (NOTE 1B(4))            TOTAL
                                                        -------       -------       --------       ------------            -----
                                                                                 IN THOUSANDS
                                                                                 ------------
<S>                                                     <C>           <C>           <C>            <C>                 <C>
   BALANCE AT JANUARY 1, 1998                           2,672          57,168        185,443         (247)               245,036
   CHANGES DURING 1998:
     Net income                                                                       33,145                              33,145
     Company's share in erosion of capital
     notes issued by associated
          companies                                                                     (128)                               (128)
     Differences from translation of
          foreign currency financial
          statements of a subsidiary
          and associated company                                                                      503                    503
     Proposed dividend                                                               (20,268)                            (20,268)
                                                       -------        -------        -------        -------              -------
BALANCE AT DECEMBER 31, 1998                            2,672          57,168        198,192          256                258,288
CHANGES DURING 1999:
      Net income                                                                      90,813                              90,813
      Differences from translation of
          foreign currency financial
          statements of a subsidiary                                                                 (408)                  (408)
      Erosion in value of dividend proposed in 1998                                      (95)                                (95)
                                                       -------        -------        -------        -------              -------
BALANCE AT DECEMBER 31, 1999                            2,672          57,168        288,910         (152)               348,598
CHANGES DURING 2000:                                                                  49,727                              49,727
      Net income
      Differences from translation of
          foreign currency financial
          statements of a subsidiary                                                                  152                    152
      Difference between the proceeds
          from sale of investments
          in an associated company and
          other companies to a company
          under common control and the book
          value of the investments                                     18,787                                             18,787
      Dividend                                                                       (30,000)                            (30,000)
                                                       -------        -------        -------        -------              -------
BALANCE AT DECEMBER 31, 2000                            2,672          75,955        308,637           -,-               387,264
                                                       =======        =======        =======        =======              =======
</TABLE>

         THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL
         STATEMENTS.

                                       7
<PAGE>   159
(Continued) - 1
                               OPHIR HOLDINGS LTD.
                             (An Israel Corporation)
                            STATEMENTS OF CASH FLOWS
                         IN ADJUSTED NEW ISRAELI SHEKELS

<TABLE>
<CAPTION>
                                                                                                              CONSOLIDATED
                                                                                                   ---------------------------------
                                                                                                   2000           1999         1998
                                                                                                   ----           ----         ----
                                                                                                              IN THOUSANDS
                                                                                                  ----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                             <C>           <C>          <C>
     Net income for the year                                                                      49,727           90,813    33,145
     Adjustments required to reflect the cash flows from operating activities*                   (60,534)        (130,748)  (32,187)
                                                                                                --------         --------   --------
     Net cash provided by (used in) operating activities                                         (10,807)         (39,935)      958
                                                                                                --------         --------   --------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Proceeds from sale of shares in associated companies (including sale to a
        company which is an interested party)                                                      3,234           21,546    17,724
     Proceeds from sale of investment in other companies (including sale to a
        company which is an interested party)                                                     68,509          165,973    23,560
     Proceeds from disposal of marketable shares exchanges for shares in another
        company                                                                                   65,381
     Proceeds from sale of partnership in the United States                                                                   5,060
     Proceeds from sale of land - business inventory                                                                            370
     Repayment of loans to other companies                                                           767
     Investment in associated companies (including capital notes)                                                 (17,096) (264,684)
     Investment in other companies                                                               (19,158)         (23,814)  (26,554)
     Investment in fixed assets (mainly buildings)                                                (4,552)         (10,337)  (16,867)
     Short-term bank deposit                                                                    (130,000)                     5,926
     Withdrawal of long-term bank deposit                                                          3,695            1,780
     Decrease in land - business inventory                                                                                       134
     Receipts on sale of fixed assets (mainly buildings)                                          10,753            3,896     23,866
     Decrease (increase) in short-term loans granted to associated companies                      (2,251)          (6,795)     (656)
     Collection of capital notes from an associated company                                                                  110,621
     Short-term loans to shareholders                                                                             (78,981)
     Collection of short-term loan to shareholders                                                30,000
     Reduction of share capital by another company                                                                    608        334
                                                                                                --------         --------    -------
     Net cash provided by (used in) investing activities                                          26,378           56,780  (121,166)
                                                                                                --------         --------   --------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Repayment of long-term bank loans                                                            (7,831)         (23,832)  (19,383)
     Increase in loan from a company that is an interested company                                 5,621
     Capital notes from associated companies (the Company - and a subsidiary)                                                153,634
     Dividend paid                                                                               (30,000)         (20,363)  (27,519)
     Short-term bank credit - net                                                                 13,910            6,106    (3,784)
                                                                                                --------         --------   --------
     Net cash provided by (used in) financing activities                                         (18,300)         (38,089)   102,948
                                                                                                --------         --------   --------
 TRANSLATION DIFFERENCES ON CASH BALANCES OF
     A SUBSIDIARY OPERATING INDEPENDENTLY                                                            (33)             (64)
                                                                                                --------         --------   --------
DECREASE IN CASH AND CASH EQUIVALENTS                                                             (2,762)         (21,308)  (17,260)
BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                          4,532           25,840     43,100
                                                                                                --------         --------   --------
BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR                                                1,770            4,532     25,840
                                                                                                ========         ========   ========
</TABLE>





<TABLE>
<CAPTION>
                                                                                                         THE COMPANY
                                                                                              -----------------------------------
                                                                                               2000          1999           1998
                                                                                               ----          ----           ----
                                                                                                        IN THOUSANDS
CASH FLOWS FROM OPERATING ACTIVITIES:                                                         -----------------------------------
<S>                                                                                          <C>           <C>           <C>
     Net income for the year                                                                   49,727        90,813        33,145
     Adjustments required to reflect the cash flows from operating activities*                (49,006)     (131,394)      (37,964)
                                                                                             --------      --------      --------
     Net cash provided by (used in) operating activities                                          721       (40,581)       (4,819)
                                                                                             --------      --------      --------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Proceeds from sale of shares in associated companies (including sale to a
        company which is an interested party)                                                   3,234        21,546        17,724
     Proceeds from sale of investment in other companies (including sale to a
        company which is an interested party)                                                  68,509       165,973        23,560
     Proceeds from disposal of marketable shares exchanges for shares in another
        company                                                                                65,381
     Proceeds from sale of partnership in the United States
     Proceeds from sale of land - business inventory
     Repayment of loans to other companies                                                        767
     Investment in associated companies (including capital notes)                                           (17,096)     (264,684)
     Investment in other companies                                                            (19,158)      (23,814)      (26,554)
     Investment in fixed assets (mainly buildings)                                             (4,502)      (10,300)      (16,783)
     Short-term bank deposit                                                                 (130,000)                      5,926
     Withdrawal of long-term bank deposit                                                       3,695         1,780
     Decrease in land - business inventory
     Receipts on sale of fixed assets (mainly buildings)                                           46         3,531        23,866
     Decrease (increase) in short-term loans granted to associated companies                   (2,251)       (6,795)       32,216
     Collection of capital notes from an associated company                                                                82,976
     Short-term loans to shareholders                                                                       (78,981)
     Collection of short-term loan to shareholders                                             30,000
     Reduction of share capital by another company                                                              608           334
                                                                                             --------      --------      --------
     Net cash provided by (used in) investing activities                                       15,721        56,452      (121,419)
                                                                                             --------      --------      --------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Repayment of long-term bank loans                                                         (5,873)      (21,896)      (17,429)
     Increase in loan from a company that is an interested company                              5,621
     Capital notes from associated companies (the Company - and a subsidiary)                                             153,571
     Dividend paid                                                                            (30,000)      (20,363)      (27,519)
     Short-term bank credit - net                                                              13,792         5,324        (3,772)
                                                                                             --------      --------      --------
     Net cash provided by (used in) financing activities                                      (16,460)      (36,935)      104,851
                                                                                             --------      --------      --------
 TRANSLATION DIFFERENCES ON CASH BALANCES OF
     A SUBSIDIARY OPERATING INDEPENDENTLY
                                                                                             --------      --------      --------
DECREASE IN CASH AND CASH EQUIVALENTS                                                             (18)      (21,064)      (21,387)
BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                         328        21,392        42,779
                                                                                             --------      --------      --------
BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR                                               310           328        21,392
                                                                                             ========      ========      ========
</TABLE>


                                       8
<PAGE>   160
 (Concluded) - 2
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                            STATEMENTS OF CASH FLOWS
                         IN ADJUSTED NEW ISRAELI SHEKELS


<TABLE>
<CAPTION>
                                                                                                             CONSOLIDATED
                                                                                                    ------------------------------
                                                                                                    2000          1999        1998
                                                                                                    ----          ----        ----
                                                                                                             IN THOUSANDS
                                                                                                   --------------------------------
* ADJUSTMENTS REQUIRED TO REFLECT THE CASH FLOWS FROM OPERATING ACTIVITIES:
    Income and expenses not involving cash flows:
<S>                                                                                                 <C>       <C>          <C>
        Share in losses (profits) of associated companies - net                                       392       (2,421)      (6,493)
        L e s s -  dividends received from an associated company                                    1,139        6,131        8,171
        Share in profits of subsidiaries - net
        Depreciation                                                                                2,431        2,348        1,437
        Deferred income taxes - net                                                                   610       (1,895)       4,745
        Gain on dilution of holding in associated companies resulting from sale
            and issuance of shares to a third party - net                                                       (5,847)     (13,876)
        Gain on disposal of marketable shares exchanged for shares in another
             company and increase in value of the marketable shares                               (55,919)
        Gain on conversion of marketable share designated as a permanent
             investment into other marketable share following a merger and
             increase in value of the marketable shares following the conversion                   (1,769)
        Minority interest in profits (losses) of a subsidiary                                         (11)          (3)          31
        Gain from sale of investment in other companies                                                        (135,864)    (11,470)
        Liability for employee rights upon retirement                                                   5           35           10
        Gain from sale of partnership in the United States                                                                   (5,059)
        Capital loss (gain) from sale of fixed assets (mainly buildings) - net                       (420)      (9,649)     (14,832)
        Gain from sale of land - business inventory                                                                            (354)
        Loss (gain) from sale and decrease (increase) in value of marketable
             securities - net                                                                         564          (80)          62
        Write-down of investments in other companies                                                5,400          348        4,054
        Erosion in value of principal of (linkage differences on) long-term bank
             loans                                                                                     91                      (563)
        Erosion in value and interest on short-term bank deposit                                   (1,128)
        Erosion in value of (linkage differences on) principal of long-term bank
             deposit                                                                                   (5)                       62
        Erosion in value of short-term loan to a company which is an interested
             party                                                                                    822
        Linkage differences and interest on loans to shareholders                                  (2,599)       (610)
                                                                                                 --------     --------     --------
                                                                                                  (50,397)    (147,507)     (34,075)
                                                                                                 --------     --------     --------

     Changes in operating asset and liability items:
        Decrease (increase) in accounts receivable                                                  5,788        2,153        2,696
        Increase (decrease) in accounts payable and accruals                                      (15,925)      14,606         (808)
                                                                                                 --------     --------     --------
                                                                                                  (10,137)      16,759        1,888
                                                                                                 --------     --------     --------
                                                                                                  (60,534)    (130,748)     (32,187)
                                                                                                 ========     ========     ========
</TABLE>


<TABLE>
<CAPTION>
                                                                                                       THE COMPANY
                                                                                              ------------------------------
                                                                                                2000        1999        1998
                                                                                                ----        ----        ----
                                                                                                       IN THOUSANDS
                                                                                               ------------------------------
   *    ADJUSTMENTS REQUIRED TO REFLECT THE CASH FLOWS FROM OPERATING
        ACTIVITIES: Income and expenses not involving cash flows:
<S>                                                                                        <C>         <C>          <C>
   Share in losses (profits) of associated companies - net                                      392      (2,421)     (5,122)
   L e s s -  dividends received from an associated company                                   1,139       6,131       5,949
   Share in profits of subsidiaries - net                                                      (353)     (6,171)     (4,223)
   Depreciation                                                                               1,408       1,271         363
   Deferred income taxes - net                                                                  492      (1,968)      4,496
   Gain on dilution of holding in associated companies resulting from sale and
       issuance of shares to a third party - net                                                          (5,847)   (13,876)
   Gain on disposal of marketable shares exchanged for shares in another company
        and increase in value of the marketable shares                                      (55,919)
   Gain on conversion of marketable share designated as a permanent investment
        into other marketable share following a merger and increase in value
        of the marketable shares following the conversion                                    (1,769)
   Minority interest in profits (losses) of a subsidiary
   Gain from sale of investment in other companies                                                       (135,864)  (11,470)
   Liability for employee rights upon retirement
   Gain from sale of partnership in the United States
   Capital loss (gain) from sale of fixed assets (mainly buildings) - net                      (135)        (45)    (14,832)
   Gain from sale of land - business inventory
   Loss (gain) from sale and decrease (increase) in value of marketable
        securities - net                                                                        564         (80)         62
   Write-down of investments in other companies                                               5,400         348       4,054
   Erosion in value of principal of (linkage differences on) long-term bank
        loans                                                                                    72                    (460)
   Erosion in value and interest on short-term bank deposit                                  (1,128)
   Erosion in value of (linkage differences on) principal of long-term bank
        deposit                                                                                  (5)                     62
   Erosion in value of short-term loan to a company which is an interested party                822
   Linkage differences and interest on loans to shareholders                                 (2,599)      (610)
                                                                                            --------    --------    --------
                                                                                            (51,619)   (145,256)    (34,997)
                                                                                            --------    --------    --------

Changes in operating asset and liability items:
   Decrease (increase) in accounts receivable                                                 5,304       2,393        (362)
   Increase (decrease) in accounts payable and accruals                                      (2,691)     11,469      (2,605)
                                                                                           --------    --------    --------
                                                                                              2,613      13,862      (2,967)
                                                                                           --------    --------    --------
                                                                                            (49,006)   (131,394)    (37,964)
                                                                                           ========    ========    ========
</TABLE>





                  THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL
                  STATEMENTS.

                                        9
<PAGE>   161
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                          NOTES TO FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies, applied on a consistent basis, are as
follows:

ONE.        GENERAL:

         1)       Ophir Holdings Ltd. (the "Company") is a holding company which
                  also owns commercial building under construction designated
                  for rent.

                  In March 2000, the Company separated most of its investment
                  activities in hi-tech companies from its real estate and
                  construction initiation activities, in order to improve the
                  focus of its business activities. This was accomplished by way
                  of selling of all the rights in most hi-tech companies to
                  Ophirtech Ltd. ("Ophirtech"), a company under common control,
                  for approximately adjusted NIS 71 million, an amount
                  representing the fair value of the said investments.

                  The subsidiary Merkazim Investments Ltd. is a holding and
                  investment company engaged in the renting of commercial
                  buildings.

                  The subsidiary New Horizons (1993) Ltd. holds a number of
                  properties (designated for sale), which were purchased from an
                  interested party, see also note 9a(2).

                  The subsidiary Ophir Financing Ltd. is inactive.

                  The Company and its subsidiaries receive management services
                  from shareholders in consideration of management fees.

                  As to the activities of the associated companies, see note 3c.

         2)       Definitions:

                  Subsidiary - a company controlled or owned to the extent of
                           over 50%, the financial statements of which have been
                           consolidated with the financial statements of the
                           Company.

                  Associated company - a company controlled to the extent of 20%
                           or over (which is not a subsidiary), or a company
                           less than 20% controlled which complies with the
                           condition relating to "material influence", as
                           prescribed by Opinion 68 of the Institute of
                           Certified Public Accountants in Israel (the "Israeli
                           Institute"), the investment in which is presented by
                           the equity method.

                  Another company - a company controlled to the extent of 20%
                           or less and to which the conditions specified in the
                           preceding paragraph do not apply.

                  The group - the Company and its subsidiaries and associated
                              companies.

                  Interested parties - as defined in the Israeli Securities
                           (Preparation of Annual Financial Statements)
                           Regulations, 1993.

                  Related parties - as defined in Opinion 29 of the Israeli
                           Institute.

                                       10
<PAGE>   162
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):


         b. ADJUSTED FINANCIAL STATEMENTS:

         1)       The financial statements have been prepared on the basis of
                  historical cost adjusted to reflect the changes in the general
                  purchasing power of Israeli currency, in accordance with
                  pronouncements of the Israeli Institute. All figures in the
                  financial statements are presented in adjusted new Israeli
                  shekels (NIS) which have a uniform purchasing power (December
                  2000 adjusted NIS) - based upon the changes in the Israeli
                  consumer price index - the "Israeli CPI" (see also note 13b).

                  The adjustment of the financial statements is based on the
                  accounts of the Company and its Israeli subsidiaries,
                  maintained in nominal NIS. Condensed nominal Israeli currency
                  data of the Company, on the basis of which its adjusted
                  financial statements were prepared, are presented in note 16.

                  The components of the income statements were, for the most
                  part, adjusted as follows: the components relating to
                  transactions carried out during the year were adjusted on the
                  basis of the index for the month in which the transaction was
                  carried out, while those relating to non-monetary balance
                  sheet items (mainly - depreciation and write down of
                  investment in companies) were adjusted on the same basis as
                  the related balance sheet item. The financing component
                  represents financial income and expenses in real terms and the
                  erosion of balances of monetary items during the year.

         2)       As mentioned in (1) above, these financial statements have
                  been drawn up in accordance with the principles of adjustment
                  prescribed by pronouncements of the Israeli Institute, on the
                  basis of the changes in the Israeli CPI. As to subsidiary and
                  associated company whose financial statements are drawn up in
                  foreign currency, see (4) below.

         3)       The adjusted amounts of non-monetary assets do not necessarily
                  represent realization value or current economic value, but
                  only the original historical values, adjusted to reflect the
                  changes in the general purchasing power of Israeli currency.
                  In these financial statements, the term "cost" signifies cost
                  in adjusted Israeli currency.

         4)       A subsidiary and associated company whose financial statements
                  are drawn up in foreign currency

                  For purposes of consolidation or inclusion on the equity
                  basis, the amounts (in foreign currency terms) included in the
                  financial statements of the above companies were treated as
                  follows:

                  Balance sheet items at the end of the year and the results of
                  operations for the year were translated at the exchange rate
                  of the U.S. dollar ("dollar") as compared to Israeli currency
                  at the end of the year. Balance sheet items at the beginning
                  of the year and changes in shareholders' equity items during
                  the year were translated at the relevant exchange rate at the
                  beginning of the year or at the date of each change and then
                  adjusted on the basis of the changes in the Israeli CPI
                  through the end of the year.

                                       11
<PAGE>   163
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):


                  Differences resulting from the above treatment are carried as
                  a separate item under adjusted shareholders' equity
                  ("differences from translation of foreign currency financial
                  statements of a subsidiary and associated company").

         c.       PRINCIPLES OF CONSOLIDATION:

                  1)       The consolidated financial statements include the
                           accounts of the Company and its subsidiaries. The
                           companies included in consolidation are listed in
                           note 2a.

                  2)       Intercompany balances and transactions have been
                           eliminated.

         d.       MARKETABLE SECURITIES

                  These securities (except for investment in shares constituting
                  "permanent investment", see f(3), are stated at market value.

                  The changes in value of the above securities are carried to
                  income.

         e.       LAND - BUSINESS INVENTORY

                  The land is presented at cost which - in managements'
                  estimation - is lower than market value. According to the
                  agreements for the purchase of land, the Company might pay
                  additional costs of up to 90% of the net sale proceeds, see
                  also note 9a(2).

         f.       INVESTMENTS:

                  1)       Subsidiaries

                           In the Company's accounts, the investments in these
                           companies are accounted for by the equity method.

                  2)       Associated companies:

                           (a) The investments in these companies are accounted
                           for by the equity method.

                           (b) The excess of cost of the investment in
                           associated companies over the Company's share in
                           their equity in net assets at date of acquisition
                           ("excess of cost of investment") represents, in part,
                           the amount attributed to land and buildings in
                           certain companies and amounts not attributed to
                           specific assets (goodwill) in other companies. The
                           amount attributed to land and buildings is amortized
                           in equal annual installments of 4% per year, while
                           the amount attributed to goodwill is amortized in
                           equal annual installments over a period of 10 years,
                           commencing in the year of acquisition.

                                       12
<PAGE>   164
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

                  3)       Other companies

                           The investments in the shares of these companies,
                           including investments in quoted shares, which the
                           Company intends to hold for a long period ("permanent
                           investment"), are stated at cost, net of write-down
                           for decrease in value which is not of a temporary
                           nature.

                           Investments in companies which were accounted for by
                           the equity method, was reclassified as an investments
                           in other companies, since the Company no longer had a
                           "significant influence" in them, are stated by the
                           equity method as of the date of the reclassification.

         g.       FIXED ASSETS:

                  1)       These assets are stated at cost.

                  2)       Cost of fixed assets includes the Company's share in
                           a joint venture engaged mainly in construction of a
                           building and rental thereof.

                  3)       Financial expenses in respect of loans and credit
                           applied to finance the construction of buildings -
                           incurred until construction was completed - were
                           charged to cost of the buildings.

                  4)       The assets are depreciated by the straight-line
                           method, on basis of their estimated useful life.

                           Annual rates of depreciation are as follows:
<TABLE>
<CAPTION>

                                                                                                                             %
                                                                                                                             -
<S>                                                                                                                         <C>
                                                Buildings                                                                   2;4
                                                Machinery and equipment                                                     7-15
                                                Vehicles                                                                     15
                                                Office furniture and equipment (including
                                                     computers and peripheral equipment)                                    6-33
</TABLE>

         h.       DEFERRED INCOME TAXES:

                  1)       Deferred taxes are computed in respect of differences
                           between the amounts present in these statements and
                           those taken into account for tax purposes. As to the
                           factors in respect of which deferred taxes have been
                           included - see note 11b.

                           Deferred tax balances are computed at the tax rate
                           expected to be in effect at time of release to income
                           from the deferred tax accounts. The amount of
                           deferred taxes presented in the income statement
                           reflects changes in the above balances during the
                           year.

                  2)       Taxes which would apply in the event of disposal of
                           investments in subsidiaries and associated companies
                           have not been taken into account in computing the
                           deferred taxes, since as of the date of issuance of
                           these financial statements it is the Company's policy
                           to hold these investments, not to realize them.

                                       13
<PAGE>   165
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

         i.       CAPITAL NOTES ISSUED BY ASSOCIATED COMPANIES

                  The erosion of such capital notes, which are not linked and
                  most of which do not bear interest, is carried to retained
                  earnings in the statements of changes in shareholders' equity.

         j.       REVENUE RECOGNITION

                  Income from leasing of buildings is recognized on the accrual
                  basis, in accordance with the terms of the agreements with
                  tenants.

         k.       CASH EQUIVALENTS

                  The group considers all highly liquid investments, which
                  include short-term bank deposits (up to three months from date
                  of deposit) that are not restricted as to withdrawal or use,
                  to be cash equivalents.

         l.       NET INCOME PER NIS 1 OF PAR VALUE OF ORDINARY SHARES

                  The financial statements do not include data regarding net
                  income per NIS 1 of par value of ordinary shares, since that
                  data would not provide significant additional information to
                  that otherwise provided by the financial statements.

         m.       FORMAT OF INCOME STATEMENTS

                  In view of the nature of the Company's activities - holding of
                  companies which operate in different fields - the Company is
                  of the opinion that concentrated presentation of all revenue
                  and gain items as a group, and of all expense and loss items
                  in a separate group is more suitable to reflect its
                  activities.

         n.       LINKAGE BASIS

                  Balances the linkage arrangements in respect of which
                  stipulate linkage to the last index published prior to date of
                  payment are stated on basis of the last index published prior
                  to the latest balance sheet date (the index for November).

                                       14
<PAGE>   166
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 2 - SUBSIDIARIES:

         a.       SUBSIDIARIES CONSOLIDATED ARE AS FOLLOWS:

                  Wholly-owned:

                           Ophir Financing Ltd.

                           Maoz Financial Investments Ltd. - inactive ("Maoz")

                           Merkazim Investments Ltd. a wholly-owned subsidiary
                           of Maoz ("Merkazim")

                           Merkazim New York, Inc. - a wholly-owned subsidiary
                           of Merkazim ("Merkazim New York"). In 2000, Merkazim
                           New York distributed all its assets as a dividend in
                           the amountof $ 932,000 and went into liquidation.

                  80% owned - New Horizons (1993) Ltd. ("New Horizons").

         b.       THE INVESTMENTS ARE COMPOSED AS FOLLOWS:

<TABLE>
<CAPTION>
                                                                     THE COMPANY
                                                                     DECEMBER 31
                                                                 ------------------
                                                                 2000          1999
                                                                 ----          ----
                                                                    ADJUSTED NIS
                                                                    IN THOUSANDS
                                                                 ------------------
<S>                                                             <C>           <C>
Cost of shares                                                     216           216
Share in accumulated undistributed profits                      55,194        54,841
Differences from translation of foreign currency
      financial statements                                                      (152)
Erosion of capital note issued to a subsidiary
      by an associated company                                    (521)         (521)
Merkazim's share in capital surplus derived
      to an associated company - Mivnat Holdings Ltd.
      from sale of its investment in Industrial Buildings
      Ltd. to its shareholders (see note 3c(1))                 15,586        15,586
                                                               -------       -------
                                                                70,475        69,970
                                                               =======       =======
</TABLE>

         c.       THE CHANGES IN INVESTMENTS IN 2000 ARE AS FOLLOWS:

<TABLE>
<CAPTION>
                                                                         THE COMPANY
                                                                         -----------
                                                                         ADJUSTED NIS
                                                                         IN THOUSANDS
                                                                         ------------
<S>                                                                      <C>
Balance at beginning of year                                              69,970
  Changes during the year:
      Share in profits of subsidiaries                                       353
      Differences from translation of foreign
           currency financial statements of a subsidiary                     152
                                                                          ------
Balance at end of year                                                    70,475
                                                                          ======
</TABLE>


                                       15
<PAGE>   167
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 3 - INVESTMENTS IN ASSOCIATED COMPANIES:


         a.       THE INVESTMENTS ARE COMPOSED AS FOLLOWS:

<TABLE>
<CAPTION>
                                                                   CONSOLIDATED            THE COMPANY
                                                              ---------------------     -------------------
                                                                    DECEMBER 31            DECEMBER 31
                                                              ---------------------     -------------------
                                                             2000         1999          2000           1999
                                                             ----         ----          ----           ----
                                                                     ADJUSTED NIS IN THOUSANDS
                                                              ----------------------------------------------
<S>                                                        <C>            <C>           <C>           <C>
Equity in net assets:
     Cost of shares                                        12,993         16,007        11,696        14,845
     Share in accumulated undistributed profit
          (including accumulated erosion of capital
          notes) (1)                                       88,542         87,575        67,499        66,245
Differences from translation of foreign currency
     financial statements of associated companies                           (152)
Share in capital surplus derived by Mivnat
     Holdings Ltd. from sale of its investment
     from Industrial Buildings Ltd. to its
     shareholders                                          62,345         62,345        46,759        46,759
                                                         --------       --------      --------      --------
                                                          163,880        165,775       125,954       127,849
Long-term loans (2)                                        21,606         19,355        21,606        19,355
                                                         --------       --------      --------      --------
                                                          185,486        185,130       147,560       147,204
                                                         ========       ========      ========      ========
</TABLE>


                  (1)      Including gain on dilution of holding in associated
                           companies resulting from sale and issuance of shares
                           to a third party.

                  (2)      The loans are linked to the Israeli CPI, bear
                           interest at annual rates of 4%-5% and have no fixed
                           maturity date.

         b.       THE CHANGES IN THE INVESTMENTS IN 2000 ARE AS FOLLOWS:

<TABLE>
<CAPTION>
                                                              CONSOLIDATED   THE COMPANY
                                                              ------------   -----------
                                                              ADJUSTED NIS IN THOUSANDS
                                                              --------------------------
<S>                                                           <C>            <C>
Balance at beginning of year                                  185,130        147,204
Changes during the year:
     Share in losses of associated companies - net               (392)          (392)
     Dividend received                                         (1,138)        (1,138)
     Sale of investment in an associated company to a
          company under common control                         (3,234)        (3,234)
     Long-term loans                                            2,251          2,251
     Capital gain arising from sale of investment in an
          associated company to a company under common
          control                                               2,869          2,869
                                                             --------       --------
Balance at end of year                                        185,486        147,560
                                                             ========       ========
</TABLE>

                                       16
<PAGE>   168
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 3 - INVESTMENTS IN ASSOCIATED COMPANIES (continued):

         c.       FOLLOWING ARE DETAILS RELATING TO THE ASSOCIATED COMPANIES:

                  1)       Mivnat Holdings ("Mivnat"):

                           (a)      Mivnat was established in March 1993, by the
                                    Company, the subsidiary Merkazim and others,
                                    some of whom are interested parties, for the
                                    purpose of acquiring the Israeli
                                    Government's shares in Industrial Buildings
                                    Ltd. ("Industrial Buildings"). Mivnat
                                    purchased the said shares in March 1993 for
                                    approximately adjusted NIS 975 million.

                           (b)      On December 31, 1998, Mivnat sold its
                                    holding in Industrial Buildings its
                                    shareholders (including the Company). As
                                    part of the transaction, the Company
                                    acquired 13% of Industrial Buildings issued
                                    and paid ordinary shares - 37,227,210
                                    ordinary shares NIS 1 par value - and
                                    2,978,177 warrants (series 3) of Industrial
                                    buildings for a total consideration of
                                    adjusted NIS 264,070,000. 32,227,210 of the
                                    shares so acquired were pledged to secure
                                    loans received from a bank.

                                    In order to secure the exercise of 5,000,000
                                    purchase options (series 1) which were
                                    offered to the public, the Company deposited
                                    5,000,000 shares of Industrial Buildings
                                    with another bank.

                                    The shares which will remain with the other
                                    bank at the end of the exercise period of
                                    the purchase options, the proceeds from the
                                    exercise of the purchase options and the
                                    dividends received in respect of the
                                    5,000,000 shares will be pledged to secure
                                    the loan received from the bank as mentioned
                                    above.

                                    Following this transaction, Mivnat has no
                                    rights whatsoever to Industrial Buildings'
                                    shares.

                                    In March 1999, the Company invested
                                    approximately adjusted NIS 74,000 in Mivnat.

                                    In July 1999, the Company sold 2,846,100
                                    shares of Industrial Buildings. As a result
                                    of the sale, the Company's holding in
                                    Industrial Buildings decreased from
                                    approximately 13.2% to approximately 12.2%.
                                    The Company's pre-tax profit on this sale is
                                    approximately adjusted NIS 5.8 million.

                                    Assuming exercise of all the warrants issued
                                    by Industrial Buildings and purchase
                                    options, the Company's holdings in
                                    Industrial Buildings will decrease from
                                    approximately 12.2% to approximately 11.0%.

                                       17
<PAGE>   169
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 3 - INVESTMENTS IN ASSOCIATED COMPANIES (continued):

                                    Through the third quarter of 1999, the
                                    investment in Industrial Buildings was
                                    accounted for by the equity method.
                                    Following the decrease in shareholding in
                                    that company in July 1999 and the Company's
                                    Board of Directors' resolution to further
                                    reduce the holding therein, and since the
                                    Company no longer has significant influence
                                    in Industrial Buildings, commencing October
                                    1, 1999, the investment in that company has
                                    been reclassified as "investment in another
                                    company" at its carrying value in the
                                    Company's accounts as of September 30, 1999
                                    and is no longer presented by the equity
                                    method.


                           (c)      The percentages of holding in Mivnat at
                                    December 31, 2000 and 1999 are as follows:



<TABLE>
<CAPTION>

                                                                                                                             %
                                                                                                                           -----
<S>                                                                                                                        <C>
                                    Consolidated - the Company and Merkazim                                                25.00
                                                                                                                           =====
                                    The Company                                                                            18.70
                                                                                                                           =====
</TABLE>


                  2)       Shmey-Bar Real Estate 1993 Ltd., Shmey-Bar (T.H.)
                           1993 Ltd. and Shmey-Bar (I.A.) 1993 Ltd. ("Shmey-Bar
                           companies")

                           The Company, along with a group of companies,
                           established the Shmey-Bar companies on December 9,
                           1993. These companies were established for the
                           purpose of dealing in development of fruit bearing
                           properties. They purchased rights to real estate and
                           options to purchase real estate in Tel-Aviv, Haifa,
                           Beer-Sheva, Kiryat Shemona, Eilat, etc., all from
                           Hamashbir Hamerkazi Israel Cooperative Wholesale
                           Society Ltd.

                           The Shmey-Bar companies commenced operations in 1994.

                           In July 1999, Hamashbir Investments (1993) Ltd. gave
                           notice of its intention to offer half of its holding
                           in the Shmey-Bar companies - 16.7% of the share
                           capital thereof - to the other shareholders in the
                           Shmey-Bar companies.

                           The Company, which held 1/6 of the ownership and
                           control of each of the Shmey-Bar companies until that
                           date, decided to take advantage of the above offer
                           and invest approximately adjusted NIS 10.7 million in
                           shares, purchase options and owners' loans of the
                           Shmey-Bar companies. Assuming exercise of the
                           options, this investment will give the Company an
                           additional 5.6% holding in the Shmey-Bar companies.

                           In 1999, the Company invested approximately adjusted
                           NIS 5,972,000 in the Shmey-Bar companies. As a result
                           of this investment, the Company recorded excess of
                           cost amounting to approximately adjusted NIS
                           5,228,000. This excess of cost was attributed to land
                           and buildings.

                                       18
<PAGE>   170
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 3 - INVESTMENTS IN ASSOCIATED COMPANIES (continued):

                  3)       Derdan Financing Ltd. ("Derdan")

                           Derdan was established in June 1993 by the Company
                           along with a group of companies, for the purpose of
                           financing the purchase of rights in real estate which
                           Hamashbir Hamerkazi Israel Cooperative Wholesale
                           Society Ltd. has granted the associated company
                           Shmey-Bar (I.A.) 1993 Ltd. (see (2) above).

                           Derdan commenced operations in 1994. The Company's
                           share in Derdan is 25%.

                  4)       Clark/67 Associates L.P. - limited partnership

                           In August 1994, the subsidiary Merkazim New York and
                           others established a limited partnership in the
                           United States ("the partnership"). The U.S.
                           subsidiary's share in the partnership is 50%. The
                           partnership acquired a commercial building in New
                           Jersey, U.S.A. for a total cost of approximately
                           $ 2.3 million. The partnership invested approximately
                           $ 1 million in renovating the building.

                           In November 1997, Merkazim New York granted an option
                           to a third party for acquisition of its share in the
                           partnership. In February 1998, the option was
                           exercised and as a result, Merkazim New York had a
                           capital gain of approximately adjusted NIS 5,059,000.

                  5)       Lysh The Coastal High-way Ltd. ("L1")

                           In June 1999, the Company entered into an investment
                           agreement with Lysh Commercial and Road Services Ltd.
                           ("L2"), a company controlled by Poalim Investments
                           Ltd. - an interested party in the Company, and with
                           L1, a wholly-owned subsidiary of L2.

                           L1 has a 50% holding in Beit Herut-Lysh Development
                           Company Ltd. ("BHL"), which has invested in a project
                           for the leasing of commercial premises near Moshav
                           Beit Herut (the "project").

                           BHL developed 16,850 square meters of land owned by
                           the Israel Lands Administration (the
                           "Administration"), in accordance with resolution 717
                           of the Administration. A commercial project occupying
                           approximately 9,300 square meters was constructed on
                           that land. The Company's share in L1 is
                           approximately 25% (its share in the project being
                           approximately 12.5%). The construction costs for the
                           commercial project as of December 31, 2000 are
                           approximately adjusted NIS 83.4 million. The project
                           was commercialized in March 2000. As of December 31,
                           2000, the Company had invested approximately adjusted
                           NIS 5 million in L1.

                           The Company has also undertaken to provide guarantees
                           in an amount equivalent to 25% of the construction
                           costs. As of December 31, 2000, BHL had taken bank
                           loans for approximately adjusted NIS 60.4 million,
                           drawn on a credit line extended by the bank in
                           connection with the project.

                                       19
<PAGE>   171
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 3 - INVESTMENTS IN ASSOCIATED COMPANIES (continued):

                  6)       Cipheractive Ltd. (formerly - SVIS, Secure Video
                           Systems Ltd.; "Cipheractive")

                           Cipheractive is a privately held Israeli company,
                           which was established in 1995 and is engaged in
                           developing development of algorithms and software for
                           video encryption and recovery of data and for
                           speeding up of data.

                           In 1997, the Company invested approximately adjusted
                           NIS 1,012,000 in Cipheractive, for 23% of the
                           ownership and control of that company.

                           In 1999, the Company invested approximately adjusted
                           NIS 1,032,000 in Cipheractive. In 2000, the Company
                           invested a further amount of approximately adjusted
                           NIS 1,104,000.

                           As stated in note 1a, in march 2000, the company
                           separated most of its investment activities in
                           hi-tech companies from its real and construction
                           initiation activities, in order to improve the focus
                           of its business activities.

                           As part of this separation process, the Company sold
                           its investment in Cipheractive to Ophirtech, a
                           company under common control, for approximately
                           adjusted NIS 3,234,000, an amount representing the
                           fair value of the said investment. The difference
                           between the proceeds and the book value is carried to
                           the Company's capital surplus, in accordance with the
                           Israeli Securities (Presentation in Financial Reports
                           of Acts between Body Corporate and its Controlling
                           Member) Regulations, 1996, see also note 4(t).

                                       20
<PAGE>   172
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 4 - INVESTMENTS IN OTHER COMPANIES:

<TABLE>
<CAPTION>
                                                                     CONSOLIDATED AND
                                                                       THE COMPANY
                                                                  ----------------------
                                                                       DECEMBER 31
                                                                  ----------------------
                                                                   2000           1999
                                                                  -------        -------
                                                                     ADJUSTED NIS IN
                                                                        THOUSANDS
                                                                  ----------------------
<S>                                                               <C>            <C>
Dovrat, Shrem - Keren Shakim 92 Ltd. ("Keren Shakim") (a)                            341
Mahalachim Investment in Technology Ltd. ("Mahalachim") (b)         1,380          1,380
Carmel Biosensor Ltd. ("Carmel") (c)                                               1,046
Industrial Buildings - quoted shares and quoted warrants (d)      191,019        191,485
Mainsoft Corporation ("Mainsoft") (e)                                              1,162
Netformx Ltd. ("Netformx") (f)                                                     4,280
Elpas Electro-optic Systems Ltd. ("Elpas") (g)                                     4,918
NogaTech Inc. ("NogaTech") (h)                                                     5,895
Combox Ltd. ("Combox") (i)                                                         9,473
RealM Technologies Ltd. ("RealM") (j)                                              1,362
Romidot Ltd. ("Romidot") (k)                                                       2,571
Omegon Networks Ltd. ("Omegon") (formerly - Attune
    Networks Ltd.) (l)                                                             6,173
Camelot Information Technologies Ltd. ("Camelot") (m)                              5,178
StoreAge Networking Technologies Ltd. ("StoreAge") (n)                             4,420
Indocs Online Ltd. ("Indocs") (o)                                                  1,249
Pelican Security Ltd. ("Pelican") (p)                                                437
Expand Networks Ltd. ("Expand") (q)                                                2,302
Memadim Investments Ltd. ("Memadim") (r)                              998            702
Zactus Inc. ("Zactus") (s)                                             34
                                                                  -------        -------
                                                                  193,431        244,374
                                                                  =======        =======
</TABLE>

         (a)      The Company holds 2.9% of the shares of Keren Shakim. The main
                  activity of Keren Shakim is investment in business and
                  securities. Its investments consist mainly of capital
                  investments, primarily in Israel. The investment as of
                  December 31, 2000 and 1999 is presented net of write-down of
                  adjusted NIS 1,120,000. In 1999, a Court approved a reduction
                  of share capital in Keren Shakim. The Company's part in the
                  refund of capital was adjusted NIS 608,000.

                  In 2000, Keren Shakim commenced liquidation procedures and
                  started distributing liquidation dividends.

         (b)      Mahalachim is a venture capital fund. The Company holds shares
                  conferring upon it a 5% holding in this company. The
                  investment as of December 31, 2000 and 1999 is presented net
                  of write-down of adjusted NIS 2,146,000.

         (c)      The Company held preferred shares convertible into ordinary
                  shares, that conferred upon it a 12% holding in Carmel. Carmel
                  develops products to measure the concentration of glucose in
                  the blood without using the mechanical instruments currently
                  available. In 2000, the Company invested adjusted NIS 542,000
                  in Carmel.

                  At December 31, 1999 the investment is presented net of
                  write-down of adjusted NIS 4,000,000.


                                       21

<PAGE>   173
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 4 - INVESTMENTS IN OTHER COMPANIES (continued):

                  In March 2000, the Company sold the investment in Carmel to
                  Ophirtech, see (t) below.

         (d)      Industrial Buildings is engaged in initiation, and
                  construction, of buildings for industry, designated for rental
                  and sale, and in the management of land development and
                  infrastructure preparation for residence and industry.

                  The shares of Industrial Buildings are traded on the Tel-Aviv
                  Stock Exchange. The market value of the holdings of the
                  Company in the shares of Industrial Buildings at December 31,
                  2000 and 1999 is approximately adjusted NIS 208.2 million and
                  adjusted NIS 223.6 million, respectively.

                  As stated in note 3c(1), on December 31, 1998, the Company
                  purchased a part of the Industrial Buildings warrants held by
                  Mivnat. The warrants expired in May 2000.

                  See also note 3c(1).

         (e)      The Company holds shares conferring upon it approximately 3%
                  in Mainsoft. Mainsoft is engaged in the development,
                  production and marketing of software tools for software
                  developers.

                  In 1998, the Company granted Mainsoft loans denominated in
                  dollars. The loans bore interest at the annual rate of 10%.
                  The loans were repaid in 2000.

                  At December 31, 1999, the investment is presented net of
                  write-down of adjusted NIS 2,906,000.

                  In March 2000, The Company sold its investment in Maisoft to
                  Ophirtech, see (t) below.

         (f)      In February 1998, the Company acquired debentures convertible
                  into shares of Netformx, which is engaged in development,
                  marketing and support of software designed for planning,
                  operation and maintenance of computer networks. In December
                  1998, the debentures were converted into shares.

                  In 1999, the Company invested adjusted NIS 784,000 in
                  Netformx.

                  At December 31, 1999 the Company held 4.4% of Netformx shares.

                  At December 31, 1999, the investment is presented net of
                  write-down of adjusted NIS 1,013,000.

                  In March 2000, the Company invested adjusted NIS 3,996,000 in
                  Netformx.

                  In March 2000, the company sold its investment in Netformx to
                  Ophirtech Ltd., see (t) below.


                                       22
<PAGE>   174
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 4 - INVESTMENTS IN OTHER COMPANIES (continued):

         (g)      In 1998, the Company invested in Elpas, a company engaged in
                  development, production and marketing of wireless asset and
                  people tracking systems for hospitals and intelligent
                  buildings, based on infrared technology.

                  In August 1999, the Company invested additional adjusted NIS
                  964,000 in Elpas.

                  In March 2000, the Company sold its investments in Elpas to
                  Ophirtech Ltd., see (t) below.

         (h)      In July 1998, the Company purchased 7.1% (on a fully diluted
                  basis) of the shares of NogaTech, a U.S. corporation with a
                  research and development center in Israel, which is engaged,
                  in development, manufacturing and marketing of video
                  communication compression technology.

                  On May 17, 2000, NogaTech issued 3,500,000 shares in an
                  initial public offering in the United States for $12 per
                  share. The net proceeds from the offering aggregated
                  approximately $35 million. The Company held approximately
                  828,000 shares, which constituted approximately 5.6% of the
                  share capital of NogaTech following the offering.

                  On August 23, 2000, NogaTech entered into a merger agreement
                  under which it agreed that each share of NogaTech would be
                  converted into 0.166 shares of Zoran Corporation (a U.S.
                  Corporation), the shares of which are listed on the NASDAQ;
                  ("Zoran").

                  In consideration for the NogaTech shares it held, the Company
                  received 137,567 Zoran shares. The Zoran shares are presented
                  among current assets in the balance sheet as of December 31,
                  2000, at their market value at that date.

         (i)      In 1998, the Company purchased 18.75% of the shares of Combox
                  which is engaged in the development, manufacturing, marketing
                  and sale of high speed data transmission systems for cable TV
                  and satellite network wireless and related technology. In
                  addition, the Company was granted an eighteen month option for
                  the purchase of an additional 5.9% of Combox's shares.

                  The Company exercised the option in December 1999, for the
                  exercise price of adjusted NIS 3,170,000. Combox raised $5.25
                  million in a private placement (including exercise of
                  options). Following the private placement and the exercise of
                  the options, the Company held approximately 19.7% of Combox's
                  capital.

                  On February 4, 2000, the Company entered into an agreement
                  with Terayon Communication Systems (a U.S. corporation) the
                  shares of which are listed on the NASDAQ; ("Terayon"). Under
                  that agreement, the Company sold Terayon its shareholding in
                  Combox and Terayon purchased the remaining share capital of
                  Combox from its other shareholders. The transaction was
                  consummated on April 18, 2000.


                                       23
<PAGE>   175
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 4 - INVESTMENTS IN OTHER COMPANIES (continued):

                  Under that agreement, in consideration for its shares in
                  Combox, the Company received 301,998 Terayon shares and
                  approximately $50,000 in cash. Of those shares, 33,574 are
                  being held in trust as security for representations made to
                  Terayon.

                  In July 2000, the Company sold 268,424 Terayon shares for
                  approximately $19.4 million. As a result of that sale, the
                  Company had a profit of adjusted NIS 56 million.

                  As of December 31, 2000, the market value of the remaining
                  shares, which are held in trust, as above, is approximately
                  adjusted NIS 551,000.

         (j)      In October 1998, the Company invested in RealM, which is
                  engaged in development of video broadcasting equipment
                  allowing interaction between the viewers and program
                  presenter, using the internet infrastructure.

                  In 1999, the Company invested adjusted NIS 1,254,000 in RealM.
                  In 2000, the Company invested a further adjusted NIS 1,731,000
                  in RealM. The Company's shareholding in RealM was
                  approximately 14%.

                  In March 2000, the Company sold its holding in RealM to
                  Ophirtech, see (t) below.

         (k)      In December 1998, the Company acquired shares in Romidot, a
                  company engaged in development, production and marketing of
                  precision measurement systems for the non-ferrous metal and
                  plastic industries.

                  Romidot is an associated company of an interested party.

                  In March 2000, the Company invested an additional adjusted NIS
                  41,000 in Romidot and in January 2000, the Company invested an
                  additional adjusted NIS 370,000 IN Romidot.

                  In March 2000, the Company sold its holdings in Romidot to
                  Ophirtech, see (t) below.

         (l)      In 1999, the Company purchased shares conferring thereon
                  approximately 16.8% holdings in Omegon. Omegon is engaged in
                  development of a software system to allow quick and
                  uninterrupted identifications of problems and technical
                  difficulties on various communications networks.

                  In March 2000, the Company sold its investment in Omegon to
                  Ophirtech, see (t) hereafter.

         (m)      In July 1999, the Company invested in Camelot, which is
                  engaged in development of security software designed to
                  automatically control access to computer networks within
                  enterprises and real-time detection and response to security
                  breaches by unauthorized users.

                  In March 2000, the Company sold its holdings in Camelot to
                  Ophirtech, see (t) below.


                                       24
<PAGE>   176
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 4 - INVESTMENTS IN OTHER COMPANIES (continued):

         (n)      In November and December 1999, the Company invested in
                  StoreAge, which is engaged in the development of software and
                  innovative Storage Area Network storage solutions for
                  communications networks. The Company's shareholding in
                  StoreAge is approximately 12.8%.

                  StoreAge is partly held by an interested party.

                  In March 2000, the Company sold its holdings in StoreAge to
                  Ophirtech, see (t) below.

         (o)      In December 1999, the Company invested adjusted NIS 1,243,000
                  in Indocs, which is engaged in the development of software for
                  E-commerce technological applications in the printing field,
                  via the internet and web uses.

                  In March 2000, the Company completed its planned investment in
                  Indocs, after investing a further adjusted NIS 4,015,000.

                  In March 2000, the Company sold its holdings in Indocs to
                  Ophirtech, see (t) below.

         (p)      Pelican is a privately held Israeli company, which was
                  established in 1997 and is engaged in developing solutions to
                  the problem of safeguarding information on the internet
                  against viruses and hackers.

                  In December 1997, the Company invested adjusted NIS 2,916,000
                  in Pelican.

                  The Company invested another adjusted NIS 1,059,000 in Pelican
                  in May 1999, and a further adjusted NIS 1,224,000 in the first
                  quarter of 2000.

                  In March 2000, the Company sold its holdings in Pelican to
                  Ophirtech, see (t) below.

         (q)      Expand is a privately held Israeli company engaged in
                  developing technology designed to accelerate communications
                  over diverse network infrastructures (including E1, T1 and
                  frame relay lines) and improve broadband efficiency.

                  In December 1997, the Company invested adjusted NIS 2,839,000
                  in capital of Expand, and a further adjusted NIS 3,856,000 in
                  1999.

                  In March 2000, the Company sold its investment in Expand to
                  Ophirtech, see (t) below.

         (r)      Memadim was established in 1995 by the Company, along with a
                  group of companies one of which is Industrial Buildings, for
                  the purpose of real estate development. The Company directly
                  holds 10% of the ownership and control of Memadim and
                  Industrial Buildings holds 40% of the ownership and control of
                  Memadim.



                                       25
<PAGE>   177
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 4 - INVESTMENTS IN OTHER COMPANIES (continued):

         (s)      In November 2000, the Company purchased the entire holdings of
                  Ophirtech in Zactus (approximately 13.8%, on a fully diluted
                  basis) for approximately adjusted NIS 5,434,000.

                  Zactus is engaged in the development of a web site for the
                  community of musicians, film producers and amateurs. The site
                  is scheduled to supply contents, communications infrastructure
                  and commerce possibilities.

                  The investment as of December 31, 2000, is presented net of a
                  write-down of approximately adjusted NIS 5,400,000.

         (t)      As stated in note 1a, in March 2000, the Company separated
                  most of its investment activities in hi-tech companies from
                  its real estate and construction initiation activities, in
                  order to improve the focus of its business activities.

                  This was accomplished by way of selling of all the rights in
                  most hi-tech companies to Ophirtech, a company under common
                  control, for approximately adjusted NIS 71 million (including
                  NIS 3.2 million in respect of the shares of an associated
                  company, see note 3c(6)), an amount representing the fair
                  value of the said investments. The difference between the
                  proceeds and the book value - adjusted NIS 18.8 million - is
                  carried to the Company's capital surplus, in accordance with
                  the Securities (Presentation in Financial Reports of Acts
                  between Body Corporate and its Controlling Member)
                  Regulations, 1996.

                  Following is a list of the companies that were sold, their
                  book value and the proceeds from sale:

<TABLE>
<CAPTION>
                                                                      BOOK        PROCEEDS -
                                                                     VALUE        FAIR VALUE
                                                                     -----------------------
                                                                          ADJUSTED NIS
                                                                          IN THOUSANDS
                                                                     -----------------------
<S>                                                                  <C>              <C>

                    Carmel                                             1,046            2,904
                    Mainsoft                                             472            1,273
                    Netformx                                           8,315            9,629
                    Elpas                                              4,918            4,968
                    RealM                                              1,670            1,827
                    Romidot                                            2,943            3,260
                    Omegon                                             6,173            6,574
                    Camelot                                            5,178            5,207
                    StoreAge                                           4,420            4,427
                    Indocs                                             5,280            5,285
                    Pelican                                            1,668            5,802
                    Expand                                             2,302            9,147
                    Zactus (payment on account of investment)*         1,228            1,228
                    Interlink*                                         4,936            4,936
                    Techimage*                                         2,046            2,046
                                                                     -------          -------
                                                                      52,595           68,513
                                                                     =======          =======
</TABLE>


                    * Purchased in the first quarter of 2000.


                                       26
<PAGE>   178
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 5 - FIXED ASSETS:

         a.       COMPOSITION OF ASSETS, GROUPED BY MAJOR CLASSIFICATIONS, AND
                  CHANGES THEREIN DURING 2000, ARE AS FOLLOWS:

<TABLE>
<CAPTION>
                                                         COST                                    ACCUMULATED DEPRECIATION
                                     ---------------------------------------------   -----------------------------------------------

                                                             IN RESPECT                                       IN RESPECT
                                                                OF                                                OF
                                     BALANCE AT   ADDITIONS  RETIREMENTS   BALANCE   BALANCE AT   ADDITIONS   RETIREMENTS    BALANCE
                                     BEGINNING     DURING      DURING       AT END   BEGINNING     DURING       DURING       AT END
                                      OF YEAR     THE YEAR    THE YEAR     OF YEAR    OF YEAR     THE YEAR     THE YEAR      OF YEAR
                                     ----------   ---------  -----------   --------  ----------   ---------   -----------    -------
                                                ADJUSTED NIS IN THOUSANDS                        ADJUSTED NIS IN THOUSANDS
                                     ----------------------------------------------  -----------------------------------------------
<S>                                  <C>          <C>        <C>           <C>       <C>          <C>         <C>            <C>
Consolidated:
   Buildings - leased
      (including land)               122,579      4,532                    127,111    22,210        2,351                    24,561
   Machinery and equipment               977                    977                      309                       309
   Vehicles                              289                    140            149        96           43                       139
   Office furniture and equipment
      (including computers and
      peripheral equipment)              208         20         228                      113           37          150
                                    --------    -------     -------       --------   -------      -------      -------      -------
                                     124,053      4,552       1,345        127,260    22,728        2,431          459       24,700
                                    ========    =======     =======       ========   =======      =======      =======      =======
The Company:
   Building - leased out (including   56,988      4,482                     61,470     1,267        1,371                     2,638
   land)
   Machinery and equipment               977                    977                      309                       309
   Office furniture and equipment
      (including computers and
      peripheral equipment)              208         20         228                      113           37          150
                                    --------    -------     -------        -------   -------      -------      -------      -------
                                      58,173      4,502       1,205         61,470     1,689        1,408          459        2,638
                                    ========    =======     =======        =======   =======      =======      =======      =======
</TABLE>

<TABLE>
<CAPTION>
                                             DEPRECIATED
                                              BALANCE AT
                                         --------------------
                                              DECEMBER 31
                                         --------------------
                                           2000        1999
                                         -------      -------
                                       ADJUSTED NIS IN THOUSANDS
                                       -------------------------
<S>                                    <C>            <C>
Consolidated:
   Buildings - leased
      (including land)                   102,550      100,369
   Machinery and equipment                                668
   Vehicles                                   10          193
   Office furniture and equipment
      (including computers and
      peripheral equipment)                                95
                                         -------      -------
                                         102,560      101,325
                                         =======      =======
The Company:
   Building - leased out (including
   land)                                  58,832       55,721
   Machinery and equipment                                668
   Office furniture and equipment
      (including computers and
      peripheral equipment)                                95
                                         -------      -------
                                          58,832       56,484
                                         =======      =======
</TABLE>


                                       27

<PAGE>   179
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (Continued)

NOTE 5 - FIXED ASSETS (continued):

         b.       THE COMPANIES' RIGHTS IN REAL ESTATE ARE AS FOLLOWS:

<TABLE>
<CAPTION>
                                                                                                  ACCUMULATED
                                                                            C O S T              DEPRECIATION
                                                                     --------------------      ------------------
                                                                          DECEMBER 31             DECEMBER 31
                                                                     --------------------      ------------------
                                                                      2000         1999         2000        1999
                                                                     -------      -------      ------      ------
                                                                               ADJUSTED NIS IN THOUSANDS
                                                                     --------------------------------------------
<S>                                                                  <C>          <C>         <C>         <C>
The Company:
    Building - leased out - on land jointly leased with another
       company for 44 years ending October 31, 2037 -
       (the Company's share - 70%) (1)                                61,470       56,988       2,638       1,267
                                                                     -------      -------      ------      ------

Merkazim:
    Buildings on subsidiary's land (2)                                 8,861        8,811       2,760       2,638
    Buildings jointly owned with
       an interested party - the subsidiary's
       share - 50%                                                    11,175       11,175       3,230       3,043
    Buildings on land leased for
       49 years ending March 24, 2022 -
       80% of lease fees are capitalized                              28,545       28,545       8,985       8,547
    Buildings on land leased for
       49 years ending March 31, 2025 -
       80% of lease fees are capitalized                               5,743        5,743       1,822       1,745
    Buildings on land leased for
       49 years ending March 31, 2021                                 11,317       11,317       5,126       4,970
                                                                     -------      -------      ------      ------
       T o t a l - Merkazim                                           65,641       65,591      21,923      20,943
                                                                     -------      -------      ------      ------
       T o t a l - consolidated                                      127,111      122,579      24,561      22,210
                                                                     =======      =======      ======      ======
</TABLE>

                  (1)      In August 1994, the Company and a third party
                           established a joint venture for the construction of
                           an industrial and commercial building on jointly
                           leased land. The Company's share in the joint venture
                           is 70%. The building is 30,500 square meters, of
                           which approximately 17,700 square meters - the main
                           area. The leasing out of areas in the building
                           started in September 1998. In January 1999, 900
                           square meters of the building were sold for
                           approximately adjusted NIS 3,531,000 and the
                           Company's share in the profit is adjusted NIS 45,000.
                           The registration of the Company's land in its name in
                           the Land Registry has not yet been completed.

                  (2)      The buildings of Merkazim are leased out for long
                           periods (up to ten years); the lessees of some of
                           these buildings have been granted a purchase option
                           realizable during, or at termination of, the lease
                           period.


                                       28
<PAGE>   180
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 6 - LONG-TERM BANK LOANS:

         a.       The loans are linked to the Israeli CPI and bear interest at
                  the annual rate of 3.25%-4.4%.

         b.       The loans mature in the following years after the balance
                  sheet dates:

<TABLE>
<CAPTION>
                                                 CONSOLIDATED               THE COMPANY
                                              --------------------      ------------------
                                                  DECEMBER 31              DECEMBER 31
                                              --------------------      ------------------
                                               2000         1999         2000        1999
                                              -------      -------      ------      ------
                                                       ADJUSTED NIS IN THOUSANDS
                                              --------------------------------------------
<S>                                           <C>          <C>          <C>         <C>
First year - current maturities                 7,830        7,827       5,874       5,868
                                              -------      -------      ------      ------
Second year                                     7,831        7,824       5,873       5,868
Third year                                      7,831        7,824       5,873       5,868
Fourth year                                     7,831        7,824       5,873       5,868
Fifth year                                      7,831        7,824       5,873       5,868
Sixth year and thereafter (through 2013)       54,823       62,593      41,117      46,944
                                              -------      -------      ------      ------
                                               86,147       93,889      64,609      70,416
                                              -------      -------      ------      ------
                                               93,977      101,716      70,483      76,284
                                              =======      =======      ======      ======
</TABLE>

         c.       As to pledges to secure the loans and limitations relating to
                  them, see note 9c.

NOTE 7 - CAPITAL NOTES:

         a.       On December 31, 1998, as part of a transaction in which Mivnat
                  - an associated company - sold all its shares in Industrial
                  Buildings (see note 3c(1)(b)), the Company and a subsidiary
                  issued to Mivnat capital notes in the amount of adjusted NIS
                  153,634,000 (par value - NIS 151,601,000), of which adjusted
                  NIS 115,296,000 (par value - NIS 113,770,000) - the Company.

                  The capital notes are as follows:

                  1)       Capital notes in the amount of adjusted NIS
                           153,381,000 (par value - NIS 151,351,000) -
                           consolidated - and adjusted NIS 115,105,000 (par
                           value - 113,582,000) the Company - are unlinked, bear
                           no interest and redeemable, upon request of Mivnat,
                           on January 1, 2004.

                  2)       Capital notes in the amount of adjusted NIS 253,000
                           (par value - 250,000) consolidated - and adjusted NIS
                           191,000 (par value - 188,000) - the Company - are
                           unlinked and bear no interest. Mivnat is entitled to
                           demand payment of the notes each year, upon
                           fulfillment of certain conditions including discharge
                           of the notes referred to in (1) above and Mivnat's
                           entering into liquidation procedures.

         b.       On December 31, 1998, the Company issued a capital note in the
                  amount of adjusted NIS 38,274,000 (par value - 37,769,000) to
                  a subsidiary. The capital note is unlinked, bears no interest
                  and is redeemable, upon request, on January 1, 2004.


                                       29
<PAGE>   181
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 8 - EMPLOYEE RIGHTS UPON RETIREMENT

         Labor laws and agreements require the Company and its subsidiaries to
         pay severance pay to employees dismissed or retiring from their employ
         in certain other circumstances.

         The companies' severance pay liability to their employees is covered
         mainly by regular deposits with recognized severance pay funds in the
         employees' names and/or by purchase of insurance policies. The amounts
         funded as above are not reflected in the balance sheets since they are
         not under the control and management of the companies.

         The amount of liability for severance pay presented in the balance
         sheets reflects that part of the liability not covered by the funds
         mentioned above.


NOTE 9 - COMMITMENTS, CONTINGENT LIABILITIES, PLEDGES AND LIMITATIONS IN
              RESPECT OF LIABILITIES:

         a.       COMMITMENTS:

                  1)       The Company is committed to invest approximately
                           adjusted NIS 5,860,000 in a joint venture (see also
                           note 4(r)) with interested parties and others (the
                           Company's share is 10%). The joint venture will
                           acquire land for construction of buildings for lease.
                           The Company's share in the cost of the buildings is
                           approximately $ 30 million.

                  2)       In December 1996, the subsidiary New Horizons
                           acquired real estate (intended for sale) from a then
                           interested party which holds 20% of New Horizons'
                           shares. The selling company will be entitled to 90%
                           of the profits from the subsequent sale of the real
                           estate, with the balance accruing to New Horizons.
                           The registration of the real estate in New Horizons'
                           name in the Land Registry has not yet been completed.

                  3)       The Company is committed to provide guarantees under
                           an agreement with L1 (see note 3c(5)).

         b.       CONTINGENT LIABILITIES:

                  1)       The Company and Merkazim have each provided
                           guarantees to secure the long-term bank loans of the
                           other.

                  2)       In March 1995, a lawsuit for a commission of
                           approximately adjusted NIS 704,000 in respect of
                           acquisition of real estate was brought against the
                           Company. The Magistrate's Court ruled in favor of the
                           Company. So far, management is not aware of an appeal
                           against that ruling.

                  3)       The Company has provided guarantees for 10% of the
                           debts of Memadim to banks. The guarantee is limited
                           to adjusted NIS 118 million ($ 30 million), see a(1)
                           above and note 4(r). The balance of the loans so
                           guaranteed is approximately adjusted NIS 77 million
                           as of December 31, 2000.

                  4)       As to a contingent liability towards purchasers of
                           purchase options for the shares of Industrial
                           Buildings, see note 3c(1).


                                       30
<PAGE>   182
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 9 - COMMITMENTS, CONTINGENT LIABILITIES, PLEDGES AND LIMITATIONS IN RESPECT
         OF LIABILITIES (continued):

                  5)       In February 1997, the Company entered into an
                           agreement for the sale of a part in a building, to an
                           interested party. After the agreement was signed, the
                           Company received notice from a third party, claiming
                           that the Company had undertaken to lease premises in
                           the building to that third party. The Company
                           rejected this claim, since, in the opinion of the
                           Company's legal counsel, the negotiations with the
                           third party were not concluded and no legal
                           obligation was created.

                  6)       In May 2000, a legal claim was lodged against the
                           Company and a subsidiary in respect of bodily injury
                           to an employee of a contractor who worked on
                           construction of a building belonging to the
                           subsidiary. The amount of the claim is compatible
                           with the claim's being under the jurisdiction of the
                           Magistrate's Court. In Management's opinion, the
                           Company will not bear any costs in respect of this
                           claim, since it has appropriate insurance coverage.

                  7)       As to contingent liabilities to tax authorities, see
                           note 11e, f and g.

         c.       PLEDGES AND RESTRICTIONS IN RESPECT OF LIABILITIES:

                  1)       To secure repayment of long-term bank loans in a
                           total amount at December 31, 2000 of adjusted NIS
                           93.9 million - consolidated and adjusted NIS 64.6
                           million - the Company, the Company and Merkazim have
                           undertaken towards the bank that the Company's
                           shareholders' equity will not fall below adjusted NIS
                           71 million, the total consolidated liabilities will
                           not be more than 3.25 times the shareholders' equity
                           and the average annual net income, at any time, will
                           not fall below adjusted NIS 6.9 million for the last
                           three years.
                           The shares in Industrial Buildings have also been
                           pledged as security for these loans, see note 3c(1).

                  2)       To secure repayment of long and short-term bank loans
                           of third parties, designated for financing a building
                           for rent under construction - in Netanya, the balance
                           of which is adjusted NIS 12.2 million as of December
                           31, 2000, the Company mortgaged its rights in the
                           building.

                  3)       A short-term bank deposit of approximately adjusted
                           NIS 131 million (see note 14a) has been pledged as
                           security for loans granted to the Company's
                           shareholders, proportionately to their holdings in
                           the Company.

NOTE 10 - SHARE CAPITAL

              Composed at December 31, 2000 and 1999 as follows:

<TABLE>
<CAPTION>
                                    NUMBER OF SHARES                  AMOUNT IN NIS
                                -------------------------      ---------------------------
                                               ISSUED AND                       ISSUED AND
                                AUTHORIZED        PAID         AUTHORIZED          PAID
                                ----------     ----------      ----------       ----------
<S>                             <C>            <C>             <C>              <C>
Ordinary shares of NIS 0.001
    par value                     160,000        100,000             160             100
                                  =======        =======         =======         =======
Deferred shares of NIS 0.0001
    par value*                          3              3          0.0003          0.0003
                                  =======        =======         =======        ========
</TABLE>

                  * The deferred shares confer upon their holders the right to
                    receive their par value upon liquidation of the Company.


                                       31
<PAGE>   183
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 11 - TAXES ON INCOME:

         a.       MEASUREMENT OF RESULTS FOR TAX PURPOSES UNDER THE INCOME TAX
                  (INFLATIONARY ADJUSTMENTS (LAW, 1985

                  Under this law, results for tax purposes are measured in real
                  terms, in accordance with the changes in the Israeli CPI. The
                  Company and its Israeli subsidiaries are taxed under this law.

         b.       DEFERRED INCOME TAXES:

                  1)       The composition of the deferred taxes, and the
                           changes therein during the reported years, are as
                           follows:

<TABLE>
<CAPTION>
                                                CONSOLIDATED                                     THE COMPANY
                                  ---------------------------------------------   --------------------------------------------
                                  DEPRECIABLE         PROFITS                     DEPRECIABLE          PROFITS
                                     FIXED          OF INVESTEE                      FIXED           OF INVESTEE
                                    ASSETS*          COMPANIES          TOTAL       ASSETS*           COMPANIES        TOTAL
                                  -----------       -----------         -----     -----------        -----------       -----
                                              ADJUSTED NIS IN THOUSANDS                      ADJUSTED NIS IN THOUSANDS
                                  ---------------------------------------------   --------------------------------------------
<S>                               <C>               <C>                <C>        <C>                <C>              <C>
Balance at January 1, 1999           1,604              2,319            3,923          90               2,319          2,409
Changes in 1999 -
    amounts carried to income          424             (2,319)          (1,895)        351              (2,319)        (1,968)
                                   -------            -------          -------     -------             -------        -------
Balance at December 31, 1999         2,028                -,-            2,028         441                 -,-            441
                                                      =======                                          =======
Changes in 2000 -
    amounts carried to income          610                                 610         492                                492
                                   -------                             -------     -------                            -------
Balance at December 31, 2000         2,638                               2,638         933                                933
                                   =======                             =======     =======                            =======
</TABLE>

         * Taking into account the provisions of Opinion 40 of the Israeli
         Institute, see c. below.

                  2)       The deferred taxes are computed at the rate of 36%.


                                       32
<PAGE>   184
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 11 - TAXES ON INCOME (continued):

         c.       UNDEPRECIATED BALANCE OF COST OF FIXED ASSETS - THE PORTION IN
                  RESPECT OF WHICH DEFERRED TAXES HAVE NOT BEEN PROVIDED

                  The balance of undepreciated cost of certain depreciable fixed
                  assets includes the amounts detailed below which will not be
                  allowed for tax purposes by way of depreciation or as cost
                  upon realization of the assets. These amounts are regarded as
                  permanent differences (in respect of which no deferred taxes
                  are to be provided) in accordance with Opinion 40 of the
                  Israeli Institute:

<TABLE>
<CAPTION>
                                                       CONSOLIDATED
                                                   ---------------------
                                                    2000          1999
                                                   -------       -------
                                                       ADJUSTED NIS
                                                       IN THOUSANDS
                                                   ---------------------
<S>                                                <C>           <C>
      Balance at beginning of year                  19,954        21,403
      Decrease in the above balance due
          to depreciation charge for the year         (707)       (1,449)
                                                   -------       -------
      Balance at end of year                        19,247        19,954
                                                   =======       =======
</TABLE>

         d.       TAXES ON INCOME INCLUDED IN THE INCOME STATEMENTS:

                  1)       As follows:

<TABLE>
<CAPTION>
                                           2000         1999         1998
                                          ------      -------       ------
                                              ADJUSTED NIS IN THOUSANDS
                                          --------------------------------
<S>                                       <C>          <C>           <C>
     Consolidated:
         Current                          13,686       66,803        9,675
         Deferred, see also b. above         610       (1,895)       4,745
                                          ------      -------       ------
                                          14,296       64,908       14,420
                                          ======      =======       ======
     The Company:
         Current                          13,001       63,246        7,061
         Deferred, see also b. above         492       (1,968)       4,496
                                          ------      -------       ------
                                          13,493       61,278       11,557
                                          ======      =======       ======
</TABLE>

                       Current taxes are computed at the tax rates of 36%.


                                       33
<PAGE>   185
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 11 - TAXES ON INCOME (continued):

                  2)       Following is a reconciliation of the theoretical tax
                           expense, assuming all income is taxed at the regular
                           tax rates applicable to companies in Israel (see (1)
                           above), and the actual tax expense:

<TABLE>
<CAPTION>
                                                                                           2000         1999          1998
                                                                                          -------      -------       -------
                                                                                              ADJUSTED NIS IN THOUSANDS
                                                                                          ----------------------------------
<S>                                                                                       <C>          <C>           <C>
    Consolidated:
        Income before taxes on income as reported in the income statements                 64,012      155,718        47,596
        A d d (less) - share in losses (profits) of associated companies - net                392       (2,421)       (6,493)
                                                                                          -------      -------       -------
    B a l a n c e - income                                                                 64,404      153,297        41,103
                                                                                          =======      =======       =======
        Theoretical tax expense                                                            23,185       55,187        14,797
        Increase (decrease) in taxes resulting from permanent
           differences - the tax effect:
           Disallowable deductions                                                          2,102          198         2,437
           Taxes on income subject to different rates - dividends
               received from other companies                                               (3,085)        (180)
           Income taxed by a different tax method:
               Gain from sale of buildings                                                                              (801)
               Gain from sale of investment in another company                                290        8,000        (2,767)
           Income taxed at a different tax rate - gain from sale of
               investment in a partnership                                                                              (346)
           Sundry - net*                                                                    1,804        1,703         1,100
        Decrease in taxes resulting from use of items for which no
           deferred taxes were created in previous years                                  (10,000)
                                                                                          -------      -------       -------
        Taxes on income for the reported year                                              14,296       64,908        14,420
                                                                                          =======      =======       =======
    The company:
        Income before taxes on income, as reported in the income statements                63,220      152,091        44,702
        A d d (less) - profits of subsidiaries and share in profits of associated
           companies - net                                                                     39       (8,592)       (9,345)
                                                                                          -------      -------       -------
    B a l a n c e - income                                                                 63,259      143,499        35,357
                                                                                          =======      =======       =======
        Theoretical tax expense                                                            22,773       51,660        12,728
        Increase (decrease) in taxes resulting from permanent
           differences - the tax effect:
           Disallowable deductions                                                          2,067          150         1,472
           Taxes on income subject to different rates -
               dividends received from other companies                                     (3,085)        (180)
           Income taxed by a different method:
               Gain from sale of buildings                                                                              (801)
               Gain from sale of investment in another company                                290        8,000        (2,767)
           Sundry - net*                                                                    1,448        1,648           925
        Decrease in taxes resulting from use of items for which no
           deferred taxes were created in previous years                                  (10,000)
                                                                                          -------      -------       -------
        Taxes on income for the reported year                                              13,493       61,278        11,557
                                                                                          =======      =======       =======
</TABLE>

                *    Resulting mainly from the difference in computation of
                     linkage to the Israeli CPI for financial statement and tax
                     purposes.


                                       34
<PAGE>   186
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 11 - TAXES ON INCOME (continued):

         e.       TAX LIABILITY RELATING TO LONG-TERM LEASE OF BUILDINGS

                  In March 1993, Merkazim notified the tax authorities that it
                  had leased buildings for a ten year period and that options to
                  extend the leases for a further ten year period or to purchase
                  the property at the end of the original lease period were
                  granted to companies related to the original lessees at the
                  time of signing the leases.

                  In September and October 1999, Merkazim received land
                  appreciation tax assessments in the amount of approximately
                  adjusted NIS 5.5 million in respect of a part of the said
                  buildings.

                  Merkazim received a legal opinion to the effect that the above
                  leases are subject to income tax and not land appreciation
                  tax. Merkazim reported to the tax authorities on this basis.

                  Merkazim has appealed the said land appreciation tax
                  assessments (adjusted NIS 1.7 million of which relates to an
                  asset which does not, and did not, belong to Merkazim).

                  Based on the abovementioned legal opinion and on certificates
                  received from the income tax authorities, management of
                  Merkazim is of the opinion that no additional tax liability
                  will arise in respect of this matter and, accordingly, has not
                  made any provisions for the said assessments.

         f.       LIABILITY FOR REAL ESTATE ACQUISITION TAX AND LAND
                  APPRECIATION TAX

                  In 2000, the Company received an assessment for the payment of
                  acquisition tax of adjusted NIS 1.1 million in respect of the
                  purchase of shares in the Shmey-Bar companies (see note 3c(2),
                  two of which, the Company claims, are not property
                  associations.

                  In 2000, the Company received land appreciation tax assessment
                  in the amount of adjusted NIS 439,000 in respect of the part
                  of the building sold by the joint venture (see note 5b(1)).
                  The Company has appealed this assessment. Management is of the
                  opinion that there is no basis for that assessment;
                  consequently, no provision therefor has been made.

         g.       TAX ASSESSMENTS

                  The Company has received final tax assessments through tax
                  year 1995.

                  Maoz has received final tax assessments through tax year 1990.
                  Ophir Financing Ltd. has received final tax assessments
                  through tax year 1987. Merkazim has received final tax
                  assessments through tax year 1995. New Horizons has not been
                  assessed for tax purposes since incorporation.

                  The Company's tax returns for the years 1996-1998 are
                  presently been audited by the tax authorities and it is
                  anticipated that assessments will be received, which will not
                  recognized losses from marketable securities in a significant
                  amount. In the opinion of the Company's management, based on
                  advice of legal counsel, its approach is justifiable.


                                       35
<PAGE>   187
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 12 - TRANSACTIONS AND BALANCES WITH INTERESTED PARTIES AND RELATED
          PARTIES:

         a.       TRANSACTIONS WITH INTERESTED PARTIES AND RELATED PARTIES:

<TABLE>
<CAPTION>
                                                                         2000          1999          1998
                                                                         ----          ----          ----
                                                                             ADJUSTED NIS IN THOUSANDS
<S>                                                                     <C>           <C>           <C>
 Income (expenses):
     Consolidated:
       Lease fees for buildings - from interested parties (1)                            968          3,580
                                                                                      ======        =======
       Management fees from associated companies                            803        1,412          1,216
                                                                        =======       ======        =======
       General and administrative expenses -
           management fees to shareholders
           (2 companies) (2) (3)                                         (1,095)      (1,092)        (1,394)
                                                                        =======       ======        =======
       Financial expenses - to a bank -
           interested party - net (4)                                                   (255)        (1,214)
                                                                                      ======        =======
       Financial expenses in respect of short-term loans
           from a company which is an interested party                     (747)
                                                                        =======
       Financial income in respect of short-term loans to
           shareholders                                                   2,656
                                                                        =======
       Salary to related party employed by the Company                   (1,938)      (2,228)          (988)
                                                                        =======       ======        =======
</TABLE>


                                       36
<PAGE>   188
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 12 - TRANSACTIONS AND BALANCES WITH INTERESTED PARTIES AND RELATED PARTIES
          (continued):

<TABLE>
<CAPTION>
                                                                           2000          1999            1998
                                                                           ----          ----            ----
                                                                               ADJUSTED NIS IN THOUSANDS
<S>                                                                       <C>            <C>             <C>
   The Company:
      Management fees from an associated company
         and a subsidiary                                                     803         1,412           1,207
                                                                          =======        ======          ======
      Financial expenses - to a bank -
         interested party - net (4)                                                         (28)           (842)
                                                                                         ======          ======
      Financial expenses in respect of short-term loans from
         a company which is an interested party                              (747)
                                                                          =======
      Financial income in respect of short-term loans to
         shareholders                                                       2,656
                                                                          =======
      Participation in expenses of a subsidiary                              (754)        (903)
                                                                          =======        ======
</TABLE>

                  (1)      In management's opinion, the lease fees are similar
                           to those generally prevailing for similar leases.

                  (2)      See also note 1a(1).

                  (3)      The management fees are paid at the end of each
                           quarter in a fixed amount linked to the Israeli CPI
                           in accordance with a shareholders' agreement.

                  (4)      In 1999 - for the three months ended March 31, 1999,
                           when the bank ceased being an interested party.


                  As to other transactions with, and commitments to, interested
                  parties, see note 9.


                                       37
<PAGE>   189
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 12 - TRANSACTIONS AND BALANCES WITH INTERESTED PARTIES AND RELATED PARTIES
          (continued):

             b.   BALANCES WITH INTERESTED PARTIES AND RELATED PARTIES:

         1)       Current and long-term receivables (payables):

<TABLE>
<CAPTION>
                                                                      DECEMBER 31
                                                               ---------------------------
                                                                  2000             1999
                                                                  ----             ----
                                                               ADJUSTED NIS IN THOUSANDS
                                                               ---------------------------
<S>                                                            <C>                 <C>
Consolidated:
   a)  Cash and cash equivalents -
          highest balance during the year(1)                                         2,934
                                                                                   =======
   b)  Short-term loans to shareholders(3):
       Balance at balance sheet date                              52,190            79,591
                                                                 =======           =======
       Highest balance during the year                            79,591            79,591
                                                                 =======           =======
   c)  Long-term receivables - loans to associated
          companies(2)                                            21,606            19,355
                                                                 =======           =======
   d)  Short-term loan from a company which is
          an interested party(4)                                 (11,877)
                                                                 =======
The Company:
   a)  Cash and cash equivalents -
          highest balance during the year(1)                                         1,920
                                                                                   =======
   b)  Short-term loans to shareholders(3):
       Balance at balance sheet date                              52,190            79,591
                                                                 =======           =======
       Highest balance during the year                            79,591            79,591
                                                                 =======           =======
   c)  Long-term receivables - loans to associated
          Companies(2)                                            21,606            19,355
                                                                 =======           =======
   d)  Short-term loans from subsidiaries                        (14,716)           (5,923)
                                                                 =======           =======
   e)  Short-term loan from a company which is
          an interested party(4)                                 (11,877)
                                                                 =======
</TABLE>

                  (1)      The highest balance in 1999 relates to the three
                           months ended March 31, 1999, when the bank ceased
                           being an interested party.

                  (2)      The loans are linked to the Israeli CPI and bear
                           annual interest at the rate of 4%-5%. The balance
                           outstanding as of December 31, 2000 and 1999 was the
                           highest during those years.

                  (3)      The loans are linked to the Israeli CPI and bear 4%
                           annual interest. The loans will be repayable only
                           from dividends that the Company will distribute.

                  (4)      The loan is linked to the Israeli CPI and bears no
                           interest. As to current balances with associated
                           companies, see note 14b.

         2)       Long-term liability in respect of acquisition of land -
                  business inventory - is linked to the Israeli CPI and bears no
                  interest.


                                       38
<PAGE>   190
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 12 - TRANSACTIONS AND BALANCE WITH INTERESTED PARTIES AND RELATED PARTIES
          (continued):

         c.       As to investments in associated companies, some of which are
                  interested parties, see note 3.

         d.       In the ordinary course of business, the Company carries out
                  transactions with entities that are, or could be, included in
                  the definition of interested parties because of their
                  connection with a bank that - until March 31, 1999 - was an
                  interested party in the Company. In view of the above, it is
                  impractical to record the transactions with such entities
                  separately and, therefore, no information thereon is given in
                  these financial statements. Management is of the opinion that,
                  in view of Company procedures and their implementation, such
                  transactions were carried out in the ordinary course of
                  business and at prices and credit terms that do not differ
                  from those generally prevailing on the market.


NOTE 13 - LINKAGE OF MONETARY BALANCES:

         a.       AS FOLLOWS:

<TABLE>
<CAPTION>
                                                                      DECEMBER 31, 2000
                                                      ---------------------------------------------------
                                                        IN, OR
                                                      LINKED TO       LINKED
                                                         THE          TO THE
                                                        DOLLAR      ISRAELI CPI     UNLINKED       TOTAL
                                                      ---------     -----------     --------      -------
                                                                   ADJUSTED NIS IN THOUSANDS
                                                      ---------------------------------------------------
<S>                                                   <C>           <C>             <C>           <C>
Consolidated:
    Assets:
       Current assets:
          Cash and cash equivalents                      1,204            316           250         1,770
          Short-term loans to shareholders                             52,190                      52,190
          Short-term investments                                      134,994         8,690       143,684
          Accounts receivable                                           1,365           147         1,512
          Investments:
           Loans to associated companies                               21,606                      21,606
           Long-term bank deposit                                       1,999                       1,999
                                                       -------        -------       -------       -------
                                                         1,204        212,470         9,087       222,761
                                                       =======        =======       =======       =======
    Liabilities:
       Current liabilities:
           Bank credit                                                               20,883        20,883
           Accounts payable and accruals                               14,203         1,103        15,306
           Short-term loan from a company
              which is an interested party                             11,877                      11,877
       Long-term liabilities:
           Payables in respect of acquisition
              of land - business inventory                             11,332                      11,332
           Bank loans (including
              current maturities)                                      93,977                      93,977
           Capital notes to associated company                                      151,601       151,601
                                                                      -------       -------       -------
                                                                      131,389       173,587       304,976
                                                                      =======       =======       =======
</TABLE>


                                       39
<PAGE>   191
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 13 - LINKAGE OF MONETARY BALANCES (continued):

<TABLE>
<CAPTION>
                                                                         DECEMBER 31, 2000
                                                        ----------------------------------------------------
                                                        IN, OR
                                                       LINKED TO        LINKED
                                                         THE           TO THE
                                                        DOLLAR       ISRAELI CPI      UNLINKED        TOTAL
                                                        -------      -----------      --------       -------
                                                                      ADJUSTED NIS IN THOUSANDS
                                                        ----------------------------------------------------
<S>                                                     <C>          <C>              <C>            <C>
The Company:
    Assets:
       Current assets:
           Cash and cash equivalents                         61                            249           310
           Short-term loans to shareholders                             52,190                        52,190
           Short-term investments                                      134,994           8,690       143,684
           Accounts receivable                                           1,214                         1,214
        Investments receivables:
           Loans to associated companies                                21,606                        21,606
           Long-term bank deposit                                        1,999                         1,999
                                                        -------        -------         -------       -------
                                                             61        212,003           8,939       221,003
                                                        =======        =======         =======       =======
    Liabilities:
       Current liabilities:
           Bank credit                                                                  19,984        19,984
           Accounts payable and accruals                                26,512           1,103        27,615
           Short-term loan from a company
              which is an interested
              party                                                     11,877                        11,877
       Long-term bank loans (including
           current maturities)                                          70,483                        70,483
       Capital notes to associated
           company and subsidiary                                                      151,539       151,539
                                                                       -------         -------       -------
                                                                       108,872         172,626       281,498
                                                                       =======         =======       =======
</TABLE>


                                       40
<PAGE>   192
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 13 - LINKAGE OF MONETARY BALANCES (continued):

         b.       DATA REGARDING THE EXCHANGE RATE AND THE ISRAELI CPI:

<TABLE>
<CAPTION>
                                        EXCHANGE RATE        ISRAELI
                                        OF ONE DOLLAR          CPI*
                                        -------------------------------
<S>                                     <C>               <C>
At end of year:
    2000                                  NIS 4.041       168.5 points
    1999                                  NIS 4.153       168.5 points
    1998                                  NIS 4.160       166.3 points
    1997                                  NIS 3.536       153.1 points

Increase (decrease) during the year:
    2000                                     (2.7)%           0.0%
    1999                                     (0.2)%           1.3%
    1998                                     17.6%            8.6%
</TABLE>

         *        Based on the index for the month ending on each balance sheet
                  date, on the basis of 1993 average = 100.

NOTE 14 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:

         BALANCE SHEETS:

         a.       SHORT-TERM INVESTMENTS:

<TABLE>
<CAPTION>
                                    CONSOLIDATED             THE COMPANY
                               --------------------      ------------------
                                    DECEMBER 31              DECEMBER 31
                               --------------------      ------------------
                                 2000         1999         2000       1999
                               -------      -------      -------      -----
                                         ADJUSTED NIS IN THOUSANDS
                               --------------------------------------------
<S>                            <C>          <C>          <C>          <C>
Marketable shares                8,690          171        8,690        171
Short-term bank deposit*       131,127                   131,127
Current maturities of
    long-term bank
    deposit, see c. below        3,867        3,695        3,867      3,695
                               -------      -------      -------      -----
                               143,684        3,866      143,684      3,866
                               =======      =======      =======      =====
</TABLE>

                  * The deposit is linked to the Israeli CPI, bears annual
                    interest of 1.8% and matures in August 2001.

         b.       ACCOUNTS RECEIVABLE:

<TABLE>
<CAPTION>
                                   CONSOLIDATED                 THE COMPANY
                                   ------------                 -----------
                                   DECEMBER 31                  DECEMBER 31
                               ---------------------       ---------------------
                                2000          1999          2000           1999
                               -------       -------       -------       -------
                                          ADJUSTED NIS IN THOUSANDS
                               -------------------------------------------------

<S>                            <C>           <C>           <C>           <C>
Associated companies
    and others                     539         1,034           539         1,034
Government of Israel                28           103                         103
Purchasers of buildings                       15,447                       4,672
Other                              945           162           675            41
                               -------       -------       -------       -------
                                 1,512        16,746         1,214         5,850
                               =======       =======       =======       =======
</TABLE>


                                       41
<PAGE>   193
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 14 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

         c.       LONG-TERM BANK DEPOSIT

                  The deposit is linked to the Israeli CPI, bears annual
                  interest at the rate of 4.5% and is repayable in twelve equal
                  quarterly payments beginning September 1999.

<TABLE>
<CAPTION>
                                                          CONSOLIDATED                THE COMPANY
                                                          ------------                -----------
                                                          DECEMBER 31                 DECEMBER 31
                                                     ---------------------       ---------------------
                                                       2000         1999          2000          1999
                                                     -------       -------       -------       -------
                                                                  ADJUSTED NIS IN THOUSANDS
<S>                                                  <C>           <C>           <C>           <C>
d. BANK CREDIT:
       Short-term credit and loans*                   20,883         6,973        19,984         6,192
       Current maturities of long-term
         loans, see note 6                             7,830         7,827         5,874         5,868
                                                     -------       -------       -------       -------
                                                      28,713        14,800        25,858        12,060
                                                     =======       =======       =======       =======

   * Unlinked and bearing annual interest of 8.25%.


e. ACCOUNTS PAYABLE AND ACCRUALS:
       Trade                                             390           320           390           320
       Accrued expenses                                              2,033                       1,418
       Government of Israel                           11,796        26,274        11,796        20,486
       Subsidiaries - current accounts                                            14,716         5,922
       Other                                           3,120         2,704           713         2,328
                                                     -------       -------       -------       -------
                                                      15,306        31,331        27,615        30,474
                                                     =======       =======       =======       =======
</TABLE>

         f.       SHORT-TERM LOAN FROM AN INTERESTED PARTY

                  The loan is linked to the Israeli CPI and bears no interest.

         g.       CONCENTRATIONS OF CREDIT RISKS

                  The group's cash and cash equivalents, short-term investments
                  and long-term deposit at December 31, 2000 and 1999 were
                  deposited with Israeli banks. The Company is of the opinion
                  that the credit risk in respect of these balances is remote.

         h.       FAIR VALUE OF FINANCIAL INSTRUMENTS

                  The fair value of financial instruments included in the
                  working capital of the group is usually identical or close to
                  their carrying value. The fair value of long-term loans to
                  associated and other companies, long-term bank deposit and
                  short-term and long-term bank loans also approximates their
                  carrying value, since they bear interest at rates close to
                  prevailing market rates. As to the fair value of the
                  investment in Industrial Buildings - traded in the Tel-Aviv
                  Stock Exchange - see note 4(d). The determination of the fair
                  value of the capital notes from associated companies and
                  subsidiaries, capital notes to associated company and
                  long-term liabilities in respect of acquisition of land (see
                  note 9 (a)(2)), is impractical.


                                       42
<PAGE>   194
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 14 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

              STATEMENTS OF INCOME:

<TABLE>
<CAPTION>
                                                                       2000        1999       1998
                                                                      ------       -----      -----
                                                                        ADJUSTED NIS IN THOUSANDS
                                                                      -----------------------------
<S>                                                                   <C>          <C>        <C>
i.  GENERAL AND ADMINISTRATIVE EXPENSES:
        Consolidated:
           Management fees (mainly to shareholders)                    1,095       1,093      1,088
           Payroll and related expenses                                2,483       3,387      2,243
           Office rent and maintenance                                   227         321        339
           Professional fees                                             992         567        789
           Other                                                         606         617        889
                                                                      ------       -----      -----
                                                                       5,403       5,985      5,348
                                                                      ======       =====      =====
        The Company:
           Payroll and related expenses                                            1,162
           Office rent and maintenance                                   210         301        323
           Professional fees                                             938         511        629
           Other                                                         361         423        526
                                                                      ------       -----      -----
                                                                       1,509       2,397      1,478
                                                                      ======       =====      =====
j.  FINANCIAL EXPENSES - NET:
        Consolidated:
           Expenses:
               In respect of long-term loans                           4,920       4,832      4,458
               In respect of short-term bank credit                    1,202         357        373
               In respect of a short-term loan from a company
                  which is an interested party                           747
               Other                                                     734          40        560
               L e s s  - financial expenses capitalized to cost
                  of buildings under construction                                            (1,006)
                                                                      ------       -----      -----
                                                                       7,603       5,229      4,385
                                                                      ------       -----      -----
           Income:
               In respect of long-term bank deposit                      367         450        455
               In respect of short-term bank deposits                  1,398       1,760
               In respect of short-term loans to shareholders          2,656
               In respect of short-term loans to associated
                  companies                                            1,064         628        507
               Other                                                     557         550      1,544
                                                                      ------       -----      -----
                                                                       6,042       3,388      2,506
                                                                      ------       -----      -----
                                                                       1,561       1,841      1,879
                                                                      ======       =====      =====
</TABLE>


                                       43
<PAGE>   195
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 14 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

<TABLE>
<CAPTION>
                                                               2000        1999       1998
                                                              ------       -----      -----
                                                                ADJUSTED NIS IN THOUSANDS
                                                              -----------------------------
<S>                                                           <C>          <C>        <C>
The Company:
   Expenses:
       In respect of long-term bank loans                      3,879       3,720      4,138
       In respect of short-term bank credit                      960         357        373
       In respect of a short-term loan from a company
          which is an interested party                           747
       Other                                                     840          22        124
       L e s s  - financial expenses capitalized to cost
          of buildings under construction                                            (1,006)
                                                              ------       -----      -----
                                                               6,426       4,099      3,629
                                                              ------       -----      -----
   Income:
       In respect of long-term bank deposit                      367         450        455
       In respect of short-term bank deposits                  1,359       1,760
       Short-term loans to shareholders                        2,599
       In respect of short-term loans to subsidiaries
          and associated companies                               988         800      1,409
       Other                                                     125         137        726
                                                              ------       -----      -----
                                                               5,438       3,147      2,590
                                                              ------       -----      -----
                                                                 988         952      1,039
                                                              ======       =====      =====
</TABLE>

NOTE 15 - INFORMATION ON BUSINESS SEGMENTS AND ON INVESTMENTS IN ASSOCIATED AND
          OTHER COMPANIES CLASSIFIED BY BUSINESS SEGMENTS

                  The Company, through a joint venture, subsidiaries, associated
                  companies and other companies, is engaged in construction,
                  real estate, computers, communications and software.

                  a.       FOLLOWING ARE DATA OF INVESTMENTS IN ASSOCIATED
                           COMPANIES (AS TO THE ACTIVITIES OF THE ASSOCIATED
                           COMPANIES - SEE NOTE 3c):

                           1)       Share in profits (losses) of associated
                                    companies - net (consolidated):

<TABLE>
<CAPTION>
                                2000         1999        1998
                               ------       ------       -----
                                  ADJUSTED NIS IN THOUSANDS
                               -------------------------------
<S>                            <C>          <C>          <C>
Construction and real
    estate                       (392)       6,410       6,649
Computers, communications
    and software                            (3,989)       (156)
                               ------       ------       -----
                                 (392)       2,421       6,493
                               ======       ======       =====
</TABLE>


                                       44
<PAGE>   196
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 15 - INFORMATION ON BUSINESS SEGMENTS AND ON INVESTMENTS IN ASSOCIATED AND
          OTHER COMPANIES CLASSIFIED BY BUSINESS SEGMENTS

                           2)       Investments in associated companies
                                    (consolidated):

<TABLE>
<CAPTION>
                                   DECEMBER 31
                             -------------------------
                                2000         1999
                               -------      -------
                             ADJUSTED NIS IN THOUSANDS
                             -------------------------
<S>                            <C>          <C>
Construction and real
    estate                     185,486      184,765
Computers, communications
    and software                                365
                               -------      -------
                               185,486      185,130
                               =======      =======
</TABLE>

                  b.       INVESTMENTS IN OTHER COMPANIES - CLASSIFIED BY
                           ACTIVITY (SEE ALSO NOTE 4):

<TABLE>
<CAPTION>
                                       DECEMBER 31
                                 -------------------------
                                    2000         1999
                                   -------      -------
                                 ADJUSTED NIS IN THOUSANDS
                                 -------------------------
<S>                              <C>            <C>
Construction and real estate       192,016      192,187
Computers, communications and
   software                             34       46,849
Optical checking instruments                      2,571
Medicine and biotechnology                        1,046
Investment companies and
   venture capital funds             1,381        1,721
                                   -------      -------
                                   193,431      244,374
                                   =======      =======
</TABLE>


                                       45
<PAGE>   197
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 16 - NOMINAL DATA OF THE COMPANY:

         a.       BALANCE SHEET DATA:

<TABLE>
<CAPTION>
                                                                    NOMINAL NIS
                                                                    IN THOUSANDS
                                                                --------------------
                                                                    DECEMBER 31
                                                                --------------------
                                                                 2000         1999
                                                                -------      -------
<S>                                                             <C>          <C>
               A S S E T S
Current assets:
    Cash and cash equivalents                                       310          328
    Short-term loans to shareholders                             52,190       79,591
    Short-term investments                                      143,684        3,866
    Accounts receivable                                           1,214        5,850
                                                                -------      -------
                                                                197,398       89,635
                                                                -------      -------
Investments:
    Subsidiaries                                                 29,285       27,647
    Associated companies                                        137,018      136,633
    Other companies                                             114,849      162,581
    Long-term bank deposit, net of current maturities             1,999        5,861
                                                                -------      -------
                                                                283,151      332,722
                                                                -------      -------
Fixed assets, net of accumulated depreciation                    52,342       49,900
                                                                -------      -------
                                                                532,891      472,257
                                                                =======      =======
              LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Bank credit                                                  25,858       12,060
    Accounts payable and accruals                                27,615       30,474
    Short-term loan from a company which is an
       interested party                                          11,877
                                                                -------      -------
                                                                 65,350       42,534
                                                                -------      -------
Long-term liabilities:
    Bank loans (net of current maturities)                       64,609       70,416
    Capital notes to associated company and a subsidiary        151,539      151,539
    Deferred income taxes                                           944          492
                                                                -------      -------
                                                                217,092      222,447
                                                                -------      -------
           T o t a l  liabilities                               282,442      264,981
Shareholders' equity, see c. below                              250,449      207,276
                                                                -------      -------
                                                                532,891      472,257
                                                                =======      =======
</TABLE>


                                       46
<PAGE>   198
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 16 - NOMINAL DATA OF THE COMPANY (continued):

         b.       OPERATING RESULTS DATA:

<TABLE>
<CAPTION>
                                                                                 NOMINAL NIS IN THOUSANDS
                                                                             ----------------------------------
                                                                              2000        1999           1998
                                                                             -------     --------       -------
<S>                                                                          <C>         <C>            <C>
Revenues and gains:
    From lease of buildings                                                    6,522        3,352           311
    Share in profits of associated companies - net                                         10,427           846
    Share in profits of subsidiaries - net                                     1,639        7,999         2,321
    Gain on disposal of marketable shares exchanged for shares
       in another company and increase in value of the
       marketable shares                                                      55,156
    Gain on conversion of marketable shares designated as
       a permanent investment into marketable shares
       following a merger and increase in value of the
       marketable shares following the conversion                              1,740
    Gain on dilution of holding in associated companies
       resulting from sale and issuance of shares to a
       third party - net                                                                   11,595        12,715
    Gain from sale of investments in other companies                                      136,412        12,251
    Gain from sale and increase in value of
       marketable securities - net                                                             80
    Gain from sale of buildings                                                  168        2,298        18,025
    Dividend received from other companies                                     8,556        1,100           458
    Management fees from associated companies, subsidiaries
       and others                                                                840        1,392           950
    Financial income - net                                                     1,305
                                                                             -------     --------       -------
                                                                              75,926      174,655        47,877
                                                                             -------     --------       -------
Expenses and losses:
    Share in losses of associated companies - net                                504
    Operating cost of buildings for rent (including depreciation)              2,233        1,574
    Write-down of investment in other companies                                5,400          142         4,000
    General and administrative expenses                                        1,216        2,468         1,406
    Loss from decrease in value of marketable securities - net                   550                         51
    Capital loss on sale of fixed assets                                          33
    Financial expenses - net                                                                  692         4,695
                                                                             -------     --------       -------
                                                                               9,936        4,876        10,152
                                                                             -------     --------       -------
Income before taxes on income                                                 65,990      169,779        37,725
Taxes on income                                                               13,456       60,402        11,006
                                                                             -------     --------       -------
Net income for the year - nominal                                             52,534      109,377        26,719
                                                                             =======     ========       =======
</TABLE>


                                       47
<PAGE>   199
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 16 - NOMINAL DATA OF THE COMPANY (continued):

              c.    CHANGES IN SHAREHOLDERS' EQUITY:

<TABLE>
<CAPTION>
                                                                   NOMINAL NIS IN THOUSANDS
                                                      ---------------------------------------------------
                                                       SHARE        CAPITAL       RETAINED
                                                      CAPITAL       SURPLUS       EARNINGS         TOTAL
                                                      --------      --------      --------        -------
<S>                                                   <C>           <C>           <C>             <C>
Balance at January 1, 1998                                   *        31,084       60,096          91,180
Changes during 1998:
    Net income                                                                     26,719          26,719
    Proposed dividend                                                             (20,000)        (20,000)
                                                      --------       -------      -------         -------
Balance at December 31, 1998                                 *        31,084       66,815          97,899
Changes during 1999 -
    net income                                                                    109,377         109,377
                                                      --------       -------      -------         -------
Balance at December 31, 1999                                 *        31,084      176,192         207,276
Changes during 2000:
    Net income                                                                     52,534          52,534
    Difference between the proceeds from
       sale of investments in an associated
       company and other companies to
       a company under common control
       and the book value of the
       investments                                                    20,639                       20,639
    Dividend                                                                      (30,000)        (30,000)
                                                       -------       -------      -------         -------
Balance at December 31, 2000                                 *        51,723      198,726         250,449
                                                       =======       =======      =======         =======
</TABLE>

                           * Represents an amount less than nominal NIS 1,000.


NOTE 17 - SPECIAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:

         a.       GENERAL:

                  1)       As stated in note 1b, the primary financial
                           statements of the Company are drawn up in Israeli
                           currency adjusted for the changes in the Israeli CPI.

                           For incorporation in the financial statements of the
                           Company's U.S. shareholder, Ampal-American Israel
                           Corporation ("Ampal"), the Company also prepared
                           these special condensed consolidated financial
                           statements ("the special statements"), see below.

                  2)       Through December 31, 1992, Ampal translated the
                           nominal Israeli currency data of the Company on the
                           basis of which the primary financial statements were
                           prepared into dollars for the purpose of inclusion in
                           its financial statements. The translation was made in
                           accordance with the principles of remeasurement set
                           forth in Statement of Financial Accounting Standard
                           ("FAS") No. 52 of the Financial Accounting Standards
                           Board of the United States ("FASB") for entities
                           operating in a highly inflationary economy.


                                       48
<PAGE>   200
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 17 - SPECIAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued):


                           The rate of inflation in Israel has decreased
                           considerably in recent years. In view of the above,
                           in 1993, Ampal decided that translation into dollars
                           should be made in accordance with the principles
                           applicable to economies no longer considered highly
                           inflationary.

                  3)       These special statements have been prepared for the
                           purpose of translation into dollars and inclusion in
                           the Ampal consolidated financial statements in
                           accordance with instructions of Ampal, as follows:

                           (a)      The special statements are drawn up in
                                    Israeli currency (NIS) terms.

                           (b)      For determining the applicable Israeli
                                    currency balances as of January 1, 1993,
                                    non-monetary assets and shareholders' equity
                                    items at December 31, 1992 were remeasured
                                    into dollars and translated into Israeli
                                    currency at the dollar exchange rate as of
                                    that date ($1 = NIS 2.764).

                           (c)      Transactions that took place after January
                                    1, 1993 are reflected in the special
                                    statements in their original nominal NIS
                                    values.

                           (d)      The financial data of associated companies,
                                    the financial statements of which are drawn
                                    up in dollars, were translated into Israeli
                                    currency at the exchange rate at December 31
                                    of each year.

                           (e)      Adjustments required to make the data
                                    conform with U.S. generally accepted
                                    accounting principles ("GAAP") have been
                                    made.

                  4)       For the convenience of Ampal, these special
                           statements have been translated into dollars in
                           accordance with the principles set forth in FAS 52.

                  5)       Recently issued accounting pronouncement

                           FAS No. 133, "Accounting for Derivative Instruments
                           and Hedging Activities" introduces a new approach to
                           accounting treatment of these matters. Under FAS 133,
                           derivative financial instruments are to be included
                           in the balance sheet at their fair value. Any changes
                           in fair value are to be reflected as current gains or
                           losses or other comprehensive gains or losses,
                           depending upon whether the derivative is designated
                           as a hedge and what type of hedging relationship
                           exists.

                           The Company adopted FAS 133 as of January 1, 2001.
                           The adoption has no material effect on the Company's
                           results of operation or on its financial position.


                                       49
<PAGE>   201
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 17 - SPECIAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued):

         b.       FOLLOWING ARE THE SPECIAL STATEMENTS:

                  1)       Consolidated balance sheets at December 31, 2000 and
                           1999:

<TABLE>
<CAPTION>
                                                                               TRANSLATED INTO
                                                                                U.S. DOLLARS,
                                                   NEW ISRAELI SHEKELS         SEE a(4) ABOVE
                                                   --------------------      --------------------
                                                       DECEMBER 31               DECEMBER 31
                                                   --------------------      --------------------
                                                    2000         1999         2000         1999
                                                   -------      -------      -------      -------
                                                      IN THOUSANDS              IN THOUSANDS
                                                   --------------------      --------------------
<S>                                                <C>          <C>          <C>          <C>
                     A S S E T S

Current assets:
    Cash and cash equivalents                        1,770        4,532          438        1,091
    Short-term loans to shareholders                52,190       79,591       12,915       19,165
    Short-term investments                         143,684        3,866       35,556          931
    Accounts receivable                              1,512       16,746          361        4,021
                                                   -------      -------      -------      -------
                                                   199,156      104,735       49,270       25,208
                                                   -------      -------      -------      -------
Land - business inventory                           12,313       12,313        3,047        2,935
                                                   -------      -------      -------      -------
Investments:
    Associated companies                           173,321      174,124       42,891       41,927
    Other companies                                210,332      274,231       52,050       66,032
    Long-term bank deposit, net of
       current maturities                            1,999        5,861          495        1,411
                                                   -------      -------      -------      -------
                                                   385,652      454,216       95,436      109,370
                                                   -------      -------      -------      -------
Fixed assets, net of accumulated depreciation       64,586       62,735       15,983       15,083
                                                   -------      -------      -------      -------
                                                   661,707      633,999      163,736      152,596
                                                   =======      =======      =======      =======
</TABLE>


                                       50
<PAGE>   202
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 17 - SPECIAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued):

<TABLE>
<CAPTION>
                                                                                    TRANSLATED INTO
                                                                                     U.S. DOLLARS,
                                                        NEW ISRAELI SHEKELS         SEE a(4) ABOVE
                                                        --------------------      --------------------
                                                             DECEMBER 31              DECEMBER 31
                                                        --------------------      --------------------
                                                          2000         1999        2000         1999
                                                        -------      -------      -------      -------
                                                            IN THOUSANDS              IN THOUSANDS
                                                        --------------------      --------------------
<S>                                                     <C>          <C>          <C>          <C>
           LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
    Bank credit                                          28,713       14,800        7,105        3,564
    Accounts payable and accruals                        15,306       31,331        3,787        7,495
    Short-term loan from a company which is
       an interested party                               11,877                     2,939
                                                        -------      -------      -------      -------
                                                         55,896       46,131       13,831       11,059
                                                        -------      -------      -------      -------
Long-term liabilities:
    Bank loans (net of current maturities)               86,147       93,889       21,318       22,618
    Capital notes to associated company                 151,601      151,601       37,500       36,504
    Liability for employee rights upon
       retirement, net of amount funded                      50           45           12           11
    Payables in respect of acquisition of
       land - business inventory - related parties       11,332       11,418        2,804        2,749
    Deferred income taxes                                15,781       19,437        3,905        4,680
                                                        -------      -------      -------      -------
                                                        264,911      276,390       65,539       66,562
                                                        -------      -------      -------      -------
       T o t a l  liabilities                           320,807      322,521       79,370       77,621
Minority interest                                             8           17            2            4
Shareholders' equity                                    340,892      311,461       84,365       74,971
                                                        -------      -------      -------      -------
                                                        661,707      633,999      163,737      152,596
                                                        =======      =======      =======      =======
</TABLE>


                                       51
<PAGE>   203
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 17 - SPECIAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued):

                  2)       Consolidated income statements for the years ended
                           2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                                              TRANSLATION INTO U.S. DOLLARS
                                                           NEW ISRAELI SHEKELS                       SEE a(4) ABOVE
                                                    --------------------------------         --------------------------------
                                                     2000          1999        1998           2000         1999         1998
                                                    -------       -------     ------         ------       -------      ------
                                                       ADJUSTED NIS IN THOUSANDS                      IN THOUSANDS
                                                    --------------------------------         --------------------------------
<S>                                                 <C>            <C>        <C>            <C>          <C>          <C>
Revenues and gains:
    From lease of buildings                          12,677         9,089      6,296          3,154         2,196       1,594
    Share in profits of associated
       companies - net                                              5,435      1,015                        1,313         257
    Gain on disposal of marketable shares
       exchanged for shares in another
       company and increase in value
       of marketable shares                          55,156                                  13,724
    Gain on conversion of marketable
       securities designated as a permanent
       investment into other securities
       upon merger and increase in value
       of the marketable securities
       following the conversion                       1,740                                     537
    Gain on dilution of holding in
       associated companies resulting
       from sale and issuance of shares
       to a third party - net                                      12,209     14,168                        3,002       3,587
    Gain from sale of investments in other
       companies                                                  136,320                                  33,330
    Gain from sale and increase in value
       of marketable securities - net                                  80                                      19
    Gain from sale of fixed assets
       (mainly buildings)                               582        12,696     14,713            144         3,067       3,725
    Dividend received from another
       company                                        8,556         1,100        474          2,098           265         120
    Management fees from associated
       companies                                        840         1,392      1,086            206           336         275
    Financial income - net                              752                                     188
                                                    -------       -------     ------         ------       -------      ------
                                                     80,303       178,321     37,752         20,051        43,528       9,558
                                                    -------       -------     ------         ------       -------      ------
Expenses and losses:
    Share in losses of associated
       companies - net                                1,018                                     252
    Depreciation of buildings for rent                2,293         1,457        458            381           352         116
    Operating cost of buildings for rent                690         1,574                       172           380
    Write-down of investment in
       other companies                                5,400           142      4,000          1,324            34         961
    Loss from decrease in value of
       marketable securities - net                      550                    3,432            136                       869
    General and on administrative expenses            5,993         4,925      5,170          1,305         1,190       1,309
    Capital loss on sale of fixed assets                 33                                       8
    Financial expenses - net                                        1,918     10,064                          462       2,548
                                                    -------       -------     ------         ------       -------      ------
                                                     15,977        10,016     23,124          3,578         2,418       5,803
                                                    -------        ------     ------         ------       -------      ------
Income before taxes on income                        64,326       168,305     14,628         16,473        41,110       3,755
Taxes on income                                      14,783        60,043      8,094          3,410        13,834       2,131
                                                    -------        ------     ------         ------       -------      ------
Income after taxes on income                         49,543       108,262      6,534         13,063        27,276       1,624
Minority interest in losses of a subsidiary                             4                                       1
                                                    -------        ------     ------         ------       -------      ------
Net income for the year                              49,543       108,266      6,534         13,063        27,277       1,624
                                                     ======       =======     ======         ======        ======       =====
</TABLE>


                                       52
<PAGE>   204
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)


NOTE 17 - SPECIAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued):

                  3)       Statements of changes in shareholders' equity for the
                           years ended December 31, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                              NEW ISRAELI SHEKELS
                                               ----------------------------------------------------------------------------------
                                                                               ACCUMULATED OTHER
                                                                              COMPREHENSIVE INCOME
                                                                              - UNREALIZED INCOME
                                                                                ON MARKETABLE
                                                SHARE            SHARE       SECURITIES AVAILABLE      RETAINED
                                               CAPITAL          PREMIUM         FOR SALE - NET         EARNINGS            TOTAL
                                               -------          -------      ---------------------     --------            -----
                                                                                 IN THOUSANDS
                                               ----------------------------------------------------------------------------------
<S>                                            <C>              <C>          <C>                       <C>               <C>
Balance at January 1, 1998                          434          31,220                                 82,218           113,872
Changes during 1998:
    Net income                                                                                           6,534             6,534
    Other comprehensive income -
       unrealized income on
       marketable securities available
       for sale - net                                                            50,777                                   50,777
                                                                                -------                 ------            ------
    Total comprehensive income                                                   50,777                  6,534            57,311
                                                                                                        ------            ------
    Dividend                                                                                           (20,000)          (20,000)
                                                 ------          ------         -------                 ------            ------
Balance at December 31, 1998                        434          31,220          50,777                 68,752           151,183
Changes during 1999
    Net income                                                                                         108,266           108,266
    Other comprehensive income -
       unrealized income on marketable
       securities available for sale - net                                       52,012                                   52,012
                                                                                -------                 ------            ------
    Total comprehensive income                                                   52,012                108,266           160,278
                                                 ------          ------         -------                 ------            ------
Balance at December 31, 1999                        434          31,220         102,789                177,018           311,461
</TABLE>


                                       53
<PAGE>   205
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 17 - SPECIAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued):

<TABLE>
<CAPTION>
                                                                               NEW ISRAELI SHEKELS
                                                      ------------------------------------------------------------------------
                                                                                ACCUMULATED OTHER
                                                                              COMPREHENSIVE INCOME
                                                                               - UNREALIZED INCOME
                                                                                  ON MARKETABLE
                                                       SHARE      SHARE        SECURITIES AVAILABLE     RETAINED
                                                      CAPITAL    PREMIUM          FOR SALE - NET        EARNINGS       TOTAL
                                                      ------     -------      ---------------------     --------      -------
<S>                                                   <C>        <C>          <C>                       <C>           <C>
Balance at December 31, 1999 - brought forward           434      31,220             102,789            177,018       311,461
                                                      ------      ------             -------            -------       -------
Changes during 2000:
    Net income                                                                                           49,543        49,543
    Other comprehensive income -
       unrealized income on
       marketable securities available
       for sale - net                                                                 (9,789)                          (9,789)
                                                                                    --------             ------       -------
    Total comprehensive income                                                        (9,789)            49,543        39,754
                                                                                    --------             ------       -------
    Differences between the proceeds from sale of
       investments in an associated company and
       other companies to a company owned by
       the shareholders of the company and the book
       value of the investments                                   19,677                                               19,677
                                                                                                                      -------
    Dividend                                                                                            (30,000)      (30,000)
                                                      ------      ------            --------             ------       -------
Balance at December 31, 2000                             434      50,897              93,000            196,561       340,892
                                                      ======      ======            ========             ======       =======
</TABLE>


                                       54
<PAGE>   206
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 17 - SPECIAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued):

<TABLE>
<CAPTION>
                                                                                        TRANSLATED INTO U.S. DOLLARS, SEE a(4) ABOVE
                                                                                        --------------------------------------------
                                                                                                          ACCUMULATED OTHER
                                                                                                            COMPREHENSIVE
                                                                                                            INCOME (LOSS)
                                                                                                          -----------------
                                                                                                             UNREALIZED
                                                                                                             INCOME ON
                                                                                                             MARKETABLE
                                                                                                             SECURITIES
                                                                               SHARE    SHARE   RETAINED    AVAILABLE FOR
                                                                              CAPITAL  PREMIUM  EARNINGS     SALE - NET
                                                                              -------  -------  --------  -----------------
                                                                                                            IN THOUSANDS
                                                                              -----------------------------------------------
<S>                                                                           <C>      <C>      <C>       <C>
Balance at January 1, 1998                                                       157   10,477    23,412
                                                                                                 ------
Changes during 1998:
    Net income                                                                                    1,624
    Other comprehensive income (loss):
       Translation differences
       Unrealized income from marketable securities available for sale - net                                   11,754
                                                                                                 ------       -------
    T o t a l  comprehensive income (loss)                                                        1,624        11,754
                                                                                                 ------       -------
    Dividend                                                                                     (4,808)
                                                                              ------   ------    ------
Balance at December 31, 1998                                                     157   10,477    20,228        11,754
Changes during 1999:
    Net income                                                                                   27,277
    Other comprehensive income (loss):
       Translation differences
       Unrealized income from marketable securities available for sale - net                                   12,971
                                                                                                 ------        ------
    T o t a l  comprehensive income (loss)                                                       27,277        12,971
                                                                              ------   ------    ------        ------
Balance at December 31, 1999                                                     157   10,477    47,505        24,725
                                                                                                 ------        ------
Changes during 2000:
    Net income                                                                                   13,063
    Other comprehensive income (loss):
       Translation differences
       Unrealized income from marketable securities available for sale - net                                   (1,487)
                                                                                                 ------        ------
    T o t a l  comprehensive income (loss)                                                       13,063        (1,487)
                                                                                                 ------        ------
    Differences between the proceeds from sale of investments in an
       associated company and other companies to a company owned by the
       shareholders of the Company and
       the book value of the investments                                                4,916

    Dividend                                                                                     (7,424)
                                                                              ------   ------    ------        ------

Balance at December 31, 2000                                                     157   15,393    53,144        23,238
                                                                              ======   ======    ======        ======
</TABLE>

<TABLE>
<CAPTION>

                                                                        TRANSLATED INTO U.S. DOLLARS, SEE a(4) ABOVE
                                                                        --------------------------------------------
                                                                                      ACCUMULATED OTHER
                                                                                        COMPREHENSIVE
                                                                                        INCOME (LOSS)
                                                                                      -----------------


                                                                               TRANSLATION
                                                                               DIFFERENCES    TOTAL
                                                                               -----------  -----------

                                                                              -------------------------
<S>                                                                            <C>          <C>
Balance at January 1, 1998                                                       (1,843)      32,203
                                                                                -------       ------
Changes during 1998:
    Net income                                                                                 1,624
    Other comprehensive income (loss):
       Translation differences                                                   (4,430)      (4,430)
       Unrealized income from marketable securities available for sale - net                  11,754
                                                                                -------       ------
    T o t a l  comprehensive income (loss)                                       (4,430)       8,948
                                                                                -------       ------
    Dividend                                                                                  (4,808)
                                                                                              ------
Balance at December 31, 1998                                                     (6,273)      36,343
Changes during 1999:
    Net income                                                                                27,277
    Other comprehensive income (loss):
       Translation differences                                                   (1,620)      (1,620)
       Unrealized income from marketable securities available for sale - net                  12,971
                                                                                -------       ------
    T o t a l  comprehensive income (loss)                                       (1,620)      38,628
                                                                                -------       ------
Balance at December 31, 1999                                                     (7,893)      74,971
                                                                                -------       ------
Changes during 2000:
    Net income                                                                                13,063
    Other comprehensive income (loss):
       Translation differences                                                     326           326
       Unrealized income from marketable securities available for sale - net                  (1,487)
                                                                                -------       ------
    T o t a l  comprehensive income (loss)                                          326       11,902
                                                                                -------       ------
    Differences between the proceeds from sale of investments in an
       associated company and other companies to a company owned by the
       shareholders of the Company and
       the book value of the investments                                                       4,916
                                                                                              ------
    Dividend                                                                                  (7,424)
                                                                                -------       ------

Balance at December 31, 2000                                                     (7,567)      84,365
                                                                                =======       ======
</TABLE>


                                       55
<PAGE>   207
                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 17 - SPECIAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued):

                  4)       Reconciliation of nominal/historical net income and
                           shareholders' equity under Israeli generally accepted
                           accounting principles (GAAP) to U.S. GAAP:

<TABLE>
<CAPTION>
                                                                                         NEW ISRAELI SHEKELS
                                                                                --------------------------------------
                                                                                  2000           1999           1998
                                                                                --------       --------       --------
                                                                                             IN THOUSANDS
                                                                                --------------------------------------
<S>                                                                             <C>          <C>              <C>
(a)        Net income for the year:
           Net income - historical/nominal
              amount (see note 16)                                                52,534        109,377         26,719
                                                                                --------       --------       --------
           Reconciliation to U.S. GAAP:
              Effect of application of principles
                  applicable to economies no longer
                  considered highly inflationary:
                  Depreciation                                                      (466)          (465)          (461)
                  Share in profits of associated companies                          (808)        (5,008)           279
                  Deferred income taxes                                           (1,717)         4,362         (2,138)

               Other:
                  Gain (loss) from increase in value of shares which are
                  presented as trading securities while in the Israeli
                  GAAP financial statements the investment in those shares
                  are accounted for by the equity
                  method                                                                                       (11,109)
                  Gain from sale of building - net                                                              (6,756)
                                                                                --------       --------       --------
                                                                                  (2,991)        (1,111)       (20,185)
                                                                                --------       --------       --------
              Net income for the year, as per (2) above                           49,543        108,266          6,534
                                                                                ========       ========       ========
(b)        Shareholders' equity at December 31, 2000,
           1999 and 1998:
           Shareholders' equity - historical/ nominal
               amount (see note 16)                                              250,449        207,276         97,899
           Reconciliation to U.S. GAAP:
               Effect, at beginning of year, of application
                  of principles applicable to economies no
                  longer considered highly inflationary                          104,185         53,284         22,692
               Effect of reconciliation of net income for
                  the year to U.S. GAAP (see(a) above)                            (2,991)        (1,111)       (20,185)
               Unrealized income from marketable
                  securities available for sale - net                             (9,789)        52,012         50,777
               Other                                                                (962)
                                                                                --------       --------       --------
               Shareholders' equity, as per (3) above                            340,892        311,461        151,183
                                                                                ========       ========       ========
</TABLE>


                                       56
<PAGE>   208



                               OPHIR HOLDINGS LTD.
                            (An Israeli Corporation)
                    NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 18 - SPECIAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued):

                  4)    Reconciliation of nominal/historical net income and
                        shareholders' equity under Israeli generally accepted
                        accounting principles (GAAP) to U.S. GAAP:

<TABLE>
<CAPTION>
                                                                                          NEW ISRAELI SHEKELS
                                                                            ----------------------------------------------
                                                                             1999                 1998              1997
                                                                            -------              ------            -------
                                                                                              IN THOUSANDS
                                                                            ----------------------------------------------
<S>                                                                         <C>                 <C>                <C>
        (a)    Net income for the year:
                   Net income - historical/nominal
                      amount (see note 17)                                  109,377              26,719            113,143
                                                                            -------             -------            -------
                   Reconciliation to U.S. GAAP:
                      Effect of application of principles
                          applicable to economies no longer
                          considered highly inflationary:
                          Depreciation                                         (465)               (461)              (456)
                          Share in profits of associated companies           (5,008)                279              5,573
                          Deferred income taxes                               4,362              (2,138)            (3,939)
                       Other:
                          Gain from increase in value of shares
                          which are presented as trading securities
                          while in the Israeli GAAP financial
                          statements the investment in those
                          shares are accounted for by the equity
                          method                                                                (11,109)            11,109
                          Gain from sale of building - net                                       (6,756)             6,756
                                                                            -------             -------            -------
                                                                             (1,111)            (20,185)            19,043
                                                                            -------             -------            -------
                      Net income for the year, as per (2) above             108,266               6,534            132,186
                                                                            =======             =======            =======
        (b)    Shareholders' equity at December 31, 1999,
                   1998 and 1997:
                   Shareholders' equity - historical/ nominal
                       amount (see note 17)                                 207,276              97,899             91,180
                   Reconciliation to U.S. GAAP:
                       Effect, at beginning of year, of application
                          of principles applicable to economies no
                          longer considered highly inflationary              53,284              22,692              3,649
                       Effect of reconciliation of net income for
                          the year to U.S. GAAP (see(a) above)               (1,111)            (20,185)            19,043
                       Unrealized income from marketable
                          securities available for sale - net                52,012              50,777
                                                                            -------             -------            -------
                       Shareholders' equity, as per (3) above               311,461             151,183            113,872
                                                                            =======             =======            =======
</TABLE>



                                ---------------
                           -------------------------
                                ---------------

                                      137


<PAGE>   209

               [Letterhead of Deloitte Touche Brightman Almagor]

                      INDEPENDENT AUDITORS' SPECIAL REPORT

We have audited the balance sheets of Am-Hal Ltd. ("the Company"), and the
consolidated balance sheets of the Company and a consolidated partnership as of
December 31, 2000 and 1999, and the related statements of operations, changes in
shareholders' equity and cash flows - of the Company and on a consolidated basis
- for each of the three years in the period ended December 31, 2000, and have
issued our unqualified report thereon dated February 25, 2001. The
aforementioned financial statements (not presented separately herein) were
prepared in new Israeli shekels ("NIS") on the historical cost basis, adjusted
for changes in the general purchasing power of the NIS in accordance with
standards established by the Institute of Certified Public Accountants in
Israel.

As described in Note 2B, the accompanying Company and consolidated financial
data in U.S. dollars ("dollars") as of the abovementioned dates and for the
abovementioned years ended were prepared on the basis of financial data in
nominal NIS (the basis on which the abovementioned Company and consolidated
adjusted NIS financial statements were also prepared), translated into dollars
in accordance with the principles described in Note 2B.

In our opinion, the accompanying financial data in dollars was translated in
accordance with the principles described in Note 2B.

This report is intended solely for the information and use of the Boards of
Directors and management of the Company and Ampal-American Israel Corp., and
should not be used for any other purpose.


/s/ Brightman, Almagor & Co.
BRIGHTMAN ALMAGOR & CO.
Certified Public Accountants

Tel Aviv, February 25, 2001.




                                      138

<PAGE>   210

                           [Letterhead of Fahn, Kanne & Co.]

                                                        Number 480
                                                        Tel-Aviv, March 15, 2000

                          INDEPENDENT AUDITORS' REPORT
                             TO THE SHAREHOLDERS OF
                         AMPAL INDUSTRIES (ISRAEL) LTD.

We have audited the balance sheets of AMPAL INDUSTRIES (ISRAEL) LTD. as of
December 31, 1999 and 1998 and the related statements of income, shareholders'
equity and cash flows for the three years in the period ended December 31,
1999, expressed in New Israeli Shekels. 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.

Our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits in accordance with generally accepted
auditing standards, including those prescribed under the Auditors Regulations
(Auditor's Mode of Performance), 1973 and, accordingly, we have performed such
auditing procedures as we considered necessary in the circumstances. For
purposes of these financial statements, there is no material difference between
generally accepted Israeli auditing standards and auditing standards generally
accepted in the U.S. These 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 management as well as evaluating the overall financial statement
presentations. We believe that our audit provide a reasonable basis for our
opinion.

The data included in the Company's financial statements relating to the equity
in investee companies and relating to the Company's share in the results of
their operations are based on financial statements which were audited by other
auditors.

In our opinion, based on our audit and the reports of other auditors, the
abovementioned financial statements present fairly the financial position of the
Company as of December 31, 1999 and 1998 and the results of its operations, the
changes in its shareholders' equity and its cash flows for each of the three
years in the period ended December 1999, in conformity with accounting
principles generally accepted in Israel, consistently applied. Also, in our
opinion, the financial statements based on nominal data (Note 18) present
fairly, in conformity with generally accepted accounting principles, the
financial position of the Company as of December 31, 1999 and 1998, the results
of its operations, the changes in shareholders' equity and its cash flows, for
each of the three years in the period ended December 31, 1999, on the basis of
the historical cost convention.

Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The data
regarding this difference is summarized in Note 19 to the financial statements.


                                                    /s/ Fahn, Kanne & Co.
                                                      Fahn, Kanne & Co.
                                             Certified Public Accountants (Isr.)




                                      139
<PAGE>   211

              [Letterhead of Deloitte & Touche Brightman Almagor]

                     AUDITORS' REPORT TO THE SHAREHOLDERS OF
                          BAY HEART LTD. AND SUBSIDIARY

We have audited the accompanying balance sheets of Bay Heart Ltd. ("the
Company") as of December 31, 2000 and 1999, and the consolidated balance sheets
as of such dates, and the related statements of operations, changes in
shareholders' equity and cash flows - of the Company and on a consolidated basis
- for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's Board of Directors
and management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audit in accordance with generally accepted auditing standards,
including those prescribed under the Auditors' Regulations (Auditor's Mode of
Performance) - 1973. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. For purposes of these financial statements, there is
no material difference between generally accepted Israeli auditing standards and
auditing standards generally accepted in the U.S. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by the Board of Directors and management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements present fairly, in all material
respects, the financial position - of the Company and on a consolidated basis -
as of December 31, 2000 and 1999, and the results of operations, changes in
shareholders' equity and cash flows - of the Company and on a consolidated basis
- for each of the three the years in the period ended December 31, 2000, in
accordance with generally accepted accounting principles.

Furthermore, in our opinion, the financial statements are prepared in accordance
with the Israeli Securities Regulations (Preparation of Annual Financial
Statements) - 1993.

As described in Note 2A the aforementioned financial statements have been
prepared in adjusted values on the basis of the changes in the general
purchasing power of the Israeli currency in accordance with pronouncements of
the Institute of Certified Public Accountants in Israel.

The condensed consolidated financial information in U.S. dollars presented in
Note 22 to the financial statements, prepared at the request of an affiliate,
represents a translation of the Company's nominal Israeli currency financial
data in accordance with the basis stated in Note 22A. In our opinion, such
translation into U.S. dollars was properly made in accordance with the basis
stated in Note 22A.

This opinion replaces previous statement with effect from February 19, 2001.

/s/ Brightman Almagor & Co.
BRIGHTMAN ALMAGOR & CO.
Certified Public Accountants

Haifa, March 18, 2001




                                      140
<PAGE>   212

                          [Letterhead of Ernst & Young]

                                AUDITORS' REPORT

                             To the Shareholders of

                         CARMEL CONTAINER SYSTEMS LTD.

     We have audited the accompanying consolidated balance sheets of Carmel
Container Systems Ltd. ("the Company") as of December 31, 1999 and 2000, and the
related consolidated statements of income, changes in equity and cash flows for
each of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's board of directors and
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

     We did not audit the financial statements of certain subsidiaries, whose
assets included in the consolidation constitute approximately 20% and 20% of
total consolidated assets as of December 31, 1999 and 2000, respectively, and
whose revenues included in the consolidation constitute approximately 32%, 31%
and 30% of total consolidation revenues for each of the years ended on those
dates, respectively. The financial statements of those companies were audited by
other auditors whose reports have been furnished to us, and our opinion, insofar
as it relates to amounts included for these companies is based on the reports of
the other auditors.

     We conducted our audits in accordance with generally accepted auditing
standards in the United States and in Israel, including those prescribed by the
Auditors' Regulations (Auditor's Mode of Performance), 1973. 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 the reports of the other auditors
provide a reasonable basis for our opinion.

     In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 1999 and 2000, and the results of its operations, the changes in
its equity and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with generally accepted accounting principles
in Israel, which differ in certain respects from those followed in the United
States (see note 23). Furthermore, in our opinion, the financial statements
referred to above are prepared in accordance with the Securities Regulations
(Preparation of Annual Financial Statements), 1993.

     As explained in Note 2, the financial statements referred to above are
presented in values adjusted for 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
Tel-Aviv, Israel                                    KOST FORER & GABBAY
March 6, 2001                            A Member of Ernst & Young International


                                      141
<PAGE>   213
                       [Letterhead of Fahn, Kanne & Co.]

                INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS
                       OF CORAL WORLD INTERNATIONAL LTD.

We have audited the accompanying consolidated balance sheets of "Coral World
International Ltd." (the "Company") and its subsidiaries as of December 31, 2000
and 1999 and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the board of directors and the management of the Company. Our responsibility is
to express an opinion on these financial statements based on our audits.

We did not audit the financial statements of certain consolidated subsidiaries
whose assets included in the consolidation represent 74% of the total
consolidated assets as of December 31, 2000 and 1999, and whose revenues
included in the consolidation represent 54%, 56% and 52% of the total
consolidated revenues for the three years ended December 31, 2000, 1999, and
1998, respectively. The statements of these subsidiaries were audited by other
auditors whose reports have been furnished to us and our opinion, insofar as it
relates to the amounts included for those subsidiaries, is based on the reports
of the other auditors.

We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed by the Israeli Auditors' Regulations (Mode
of Performance), 1973. For purposes of these financial statements, there is no
material difference between generally accepted Israeli auditing standards and
auditing standards generally accepted in the U.S. 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 by
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 the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Coral World International Ltd. and
subsidiaries as of December 31, 2000 and 1999, and the results of operations,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2000, in accordance with generally accepted
accounting principles.


                                             /s/ Fahn, Kanne & Co.

                                                Fahn, Kanne & Co.
                                       Certified Public Accountants (Isr.)


Tel-Aviv, Israel, March 18, 2001


                                      142




<PAGE>   214

Porat & Co.
--------------------------------------------------------------------------------
Certified Public Accountants (ISR).

                    Report of Independent Public Accountants

                               To The Shareholders

                                       of

                         COUNTRY CLUB KFAR-SABA LIMITED

We have audited the accompanying balance sheets of Country Club Kfar-Saba Ltd.
("the Company") as of December 31, 2000 and 1999, and the related statements of
operations, changes in shareholders' equity and cash flows of the Company for
each of the two years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's Board of Directors and
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audit in accordance with generally accepted auditing standards,
including those prescribed under the Auditors' Regulations (Auditor's Mode of
Performance) - 1973. For purposes of these financial statements there is no
material difference between generally accepted Israeli auditing standards and
auditing standards generally accepted in the U.S. These 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 statement. An audit also includes assessing the accounting
principles and significant estimates made by the Board of Directors and
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2000 and
1999, and the results of operations, change in shareholders' equity and cash
flows of the Company for each of the two years in the period ended December 31,
2000, in accordance with generally accepted accounting principles. Also, in our
opinion, the financial statements based on nominal data (Note 20) present
fairly, in conformity with generally accepted accounting principles, the
financial position of the Company as at December 31, 2000 and 1999, and the
results of its operations, the changes in shareholders' equity, and its cash
flows for each of the three years in the period ended December 31, 2000, on the
basis of the historical cost convention.

As described in Note 2A the aforementioned financial statements have been
prepared in adjusted values on the basis of the changes in the general
purchasing power of the Israeli currency in accordance with pronouncements of
the Institute of Certified Public Accountants in Israel. Condensed nominal
Israeli currency data, on the basis of which the adjusted financial statements
were prepared, is presented in Note 20.


                                      143

<PAGE>   215

                    Report of Independent Public Accountants

                              To The Shareholders

                                       of

                         COUNTRY CLUB KFAR-SABA LIMITED

The condensed financial information in U.S. dollars presented in Note 20 to the
financial statement represents a translation of the Company's nominal Israeli
currency financial data in accordance with the basis stated in Note 2G. In our
opinion, such translation into U.S. dollars was properly made in accordance with
the stated basis.

Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The
application of the latter would have affected the determination of
nominal/historical net income (loss) and shareholders' equity to the extent
summarized in Note 21 to the financial statements.

                                                  Porat & Co.

                                                /s/ Porat & Co.

                                       Certified Public Accountants (Isr.)

Ramat Gan, March 12, 2001


                                      144


<PAGE>   216

              [Letterhead of Deloitte & Touche Brightman Almagor]

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

                             TO THE SHAREHOLDERS OF

                         EPSILON INVESTMENT HOUSE LTD.

We have audited the consolidated balance sheets of EPSILON INVESTMENT HOUSE LTD.
(an Israeli corporation), (hereinafter - "the Company") and its subsidiaries as
at December 31, 2000 and 1999, and the related consolidated statements of
income, comprehensive income and changes in shareholders' equity for each of the
3 years ended December 31, 2000 translated into U.S. dollars. These financial
statements are the responsibility of the Company management. Our responsibility
is to express an opinion on these financial statements, based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance 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 statements
presentation. We believe that our audit provides a reasonable basis for our
opinion.

A Statement of cash flows for the period has not been included in the financial
statements.

In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of the Company and its
subsidiaries, as at December 31, 2000 and 1999, the results of their operations
and the changes in their shareholders' equity, for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.

Also, in our opinion, the translated amounts in the accompanying consolidated
financial statements translated into U.S. Dollars have been computed on the
basis set forth in Note 2 to the consolidated financial statements.

/s/ Brightman, Almagor & Co.

BRIGHTMAN, ALMAGOR & CO.
Certified Public Accountants

Tel-Aviv, February 21, 2001



                                      145
<PAGE>   217

PORAT & CO.
--------------------------------------------------------------------------------
Certified Public Accountants (ISR)

                    Report of Independent Public Accountants

                              To The Shareholders

                                       of

                         Hod Hasharon Sport Center Ltd.

We have audited the accompanying balance sheet of Hod Hasharon Sport Center Ltd.
as at December 31, 2000, and the related statements of income and changes in
shareholders' equity for each of the three years in the period then ended,
December 31, 2000 expressed in New Israel Shekels. 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 audit.

We conducted our audit in accordance with generally accepted auditing standards,
including those prescribed under the Auditors Regulations (Auditor's Mode of
Performance) - 1973. For purposes of these financial statements there is no
material difference between generally accepted Israeli auditing standards and
auditing standards generally accepted in the U.S. These 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 management as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2000 and
1999, and the results of operations, change in shareholders' equity for each of
the three years in the period ended December 31, 2000, in accordance with
generally accepted accounting principles.

As described in Note 2A the aforementioned financial statements have been
prepared in adjusted values on the basis of the changes in the general
purchasing power of the Israeli currency in accordance with pronouncements of
the Institute of Certified Public Accountants in Israel. Condensed nominal
Israeli currency data, on the basis of which the adjusted financial statements
were prepared, is presented in Note 7.


                                      148


<PAGE>   218

PORAT & CO.
--------------------------------------------------------------------------------
Certified Public Accountants (ISR)

                    Report of Independent Public Accountants

                              To The Shareholders

                                       of

                         Hod Hasharon Sport Center Ltd.

The condensed financial information in U.S. dollars presented in Note 7 to the
financial statement represents a translation of the Company's nominal Israeli
currency financial data in accordance with the basis stated in Note 2D. In our
opinion, such translation into U.S. dollars was properly made in accordance with
the stated basis.

                                                Porat and Co.

                                               /s/ Porat and Co

                                       Certified Public Accountants (Isr.)

Ramat Gan, February 22, 2001


                                      149


<PAGE>   219

PORAT & CO.
--------------------------------------------------------------------------------
Certified Public Accountants (ISR)

                    Report of Independent Public Accountants

                                       of

              Hod Hasharon Sport Center (1992) Limited Partnership

We have audited the balance sheet of Hod Hasharon Sport Center (1992) Limited
Partnership as at December 31, 2000 and 1999, and the related statements of
income, partners' capital and cash flows for each of the three years in the
period ended December 31, 2000, expressed in New Israel Shekels. These financial
statements are the responsibility of the partnership management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed under the Auditors' Regulations (Auditor's
Mode of Performance) - 1973. For purposes of these financial statements there is
no material difference between generally accepted Israeli auditing standards and
auditing standards generally accepted in the U.S. These 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 management as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Partnership as of December 31, 2000 and
1999, and the results of operations, change in Partners Capital and cash flows
for each of the three years in the period ended December 31, 2000, in accordance
with generally accepted accounting principles.

As described in Note 2A the aforementioned financial statements have been
prepared in adjusted values on the basis of the changes in the general
purchasing power of the Israeli currency in accordance with pronouncements of
the Institute of Certified Public Accountants in Israel. Condensed nominal
Israeli currency data, on the basis of which the adjusted financial statements
were prepared, is presented in Note 20.


                                      150

<PAGE>   220

PORAT & CO.
--------------------------------------------------------------------------------
Certified Public Accountants (ISR)

                    Report of Independent Public Accountants

                                       of

              Hod Hasharon Sport Center (1992) Limited Partnership

The condensed financial information in U.S. dollars presented in Note 20 to the
financial statement represents a translation of the Partnership nominal Israeli
currency financial data in accordance with the basis stated in Note 2D. In our
opinion, such translation into U.S. dollars was properly made in accordance with
the stated basis.

                                                 Porat and Co.

                                               /s/ Porat and Co.

                                       Certified Public Accountants (Isr.)

Ramat Gan, February 22, 2001


                                      151
<PAGE>   221

[Letterhead of ERNST & YOUNG]
   KOST FORER & GABBAY

                         REPORT OF INDEPENDENT AUDITORS

                             TO THE SHAREHOLDERS OF

                              MIVNAT HOLDING LTD.

      We have audited the accompanying balance sheets of Mivnat Holding Ltd.
("the Company") as of December 31, 1998 and 1997 and its subsidiaries ("the
Consolidated") as of December 31, 1997 and the statements of income, changes in
shareholders' equity and cash flows - the Company and the Consolidated - for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's board of directors and
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

      We conducted our audits in accordance with generally accepted auditing
standards in Israel, including those prescribed by the Israeli Auditors'
Regulations (Mode of Performance), 1973, which do not differ in any significant
respect from generally accepted auditing standards in the United States. These
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, either originating within the financial statements themselves or
due to any misleading statement included therein. 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
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

      The aforementioned financial statements have been prepared on the basis of
the historical cost adjusted to reflect the changes in the general purchasing
power of the Israeli currency, as required by the Statements of the Institute of
Certified Public Accountants in Israel.

      A summary of the Company's financial statements in nominal (historical)
Israeli shekels was not presented in these financial statements.

      In our opinion, except for the matter described in the preceding
paragraph, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 1998
and 1997 and of the Consolidated as of December 31, 1997 and the related results
of operations, changes in shareholders' equity and cash flows - the Company and
the Consolidated - for each of three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles in Israel.
Also, in our opinion, the consolidated financial statements based on nominal
data (Note 26) present fairly, in all material respects, the consolidated
financial position as of December 31, 1997, and the related consolidated results
of operations and changes in shareholders' equity for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles in Israel, on the basis of the historical cost convention.

      Accounting principles generally accepted in Israel differ in certain
respects from accounting principles generally accepted in the United States.
Financial statements based on the application of the latter and their
translation into U.S. dollars based on the principles set forth in SFAS 52, are
presented in Note 26 to the financial statements.

      Pursuant to Section 211 of the Companies Ordinance (New Version) 1983, we
hereby state that we have received all the information and explanations which we
have requested and that our opinion on the above financial statements is given
based on the best of the information and explanations which we received and as
reflected in the books of the Company.

                                           /s/ Kost Forer & Gabbay

Tel-Aviv, Israel                           KOST FORER & GABBAY
March 7, 1999                              Certified Public Accountants (Israel)

                                      152
<PAGE>   222

[LOGO]

                                AUDITORS' REPORT

                             To the shareholders of

                               MORIAH HOTELS LTD.

We have audited the accompanying consolidated balance sheets of Moriah Hotels
Ltd. (an Israeli corporation) (hereinafter - the company) and its subsidiaries
as at December 31, 1998 and 1997, and the related consolidated statements of
income (loss), changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1998, expressed in US dollars.
These financial statements are the responsibility of the board of directors and
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 generally accepted auditing
standards. 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
company's board of directors and 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 Moriah Hotels Ltd. and its
subsidiaries as at December 31, 1998 and 1997, and the results of their
operations, changes in their shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles in Israel, which differ in certain respects from
those followed in the United States (see note 1 to the consolidated financial
statements).

Also, in our opinion, the translated amounts in the accompanying consolidated
financial statements translated into US dollars have been computed on the basis
set forth in note 1a. to the consolidated financial statements.

                                       /s/ Haggai Wallenstein, Dov & Co.

                                       HAGGAI WALLENSTEIN, DOV & CO.

                                       Certified Public Accountants (Isr.)

Ramat-Gan,
  March 14, 1999


                                      153
<PAGE>   223
                         [PRICEWATERHOUSECOOPERS LOGO]

                                                           KESSELMAN & KESSELMAN
                                             Certified Public Accountants (Isr.)
                                                  Trade Tower, 25 Hamered Street
                                                           Tel Aviv 68125 Israel
                                              P.O. Box 452 Tel Aviv 61003 Israel
                                                        Telephone +972-3-7954555
                                                        Facsimile +972-3-7954556


                         REPORT OF INDEPENDENT AUDITORS



To the shareholders of

OPHIRTECH LTD.


We have audited the balance sheet of Ophirtech Ltd. (the "Company") as of
December 31, 2000 and the statements of operations, changes in shareholders'
equity and cash flows for the period from March 29, 2000 (date of
incorporation, see note 1a(1) to December 31, 2000. These financial statements
are the responsibility of the Company's Board of Directors and management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with auditing standards generally accepted
in Israel and in the United States, including those prescribed by the Israeli
Auditors (Mode of Performance) Regulations, 1973. 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 audit provides 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,
2000 and the results of its operations, the changes in its shareholder's equity
and its cash flows for the period from March 29, 2000 to December 31, 2000, in
conformity with accounting principles generally accepted in Israel.
Furthermore, in our opinion, the financial statements referred to above are
prepared in accordance with the Israeli Securities (Preparation of Annual
Financial Statements) Regulations, 1993.

As explained in note 1B, the financial statements referred to above are
presented in values adjusted for the changes in the general purchasing power of
Israeli currency, in accordance with pronouncements of the Institute of
Certified Public Accountants in Israel.

Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The
application of the latter would have affected the determination of nominal
historical net income and shareholders' equity to the extent summarized in note
10.

The special condensed financial statements which are presented in note 10 have
been translated into U.S. dollars for the convenience of one of the Company's
shareholders, in accordance with the principles set forth in Statement of
Financial Accounting Standard No. 52 of the Financial Accounting Standards
Board of the United States. In our opinion, the translation has been properly
made.


                                       /s/  Kesselman & Kesselman

Tel-Aviv                                    Kesselman & Kesselman
February 21, 2001                      Certified Public Accountants (Isr.)
<PAGE>   224

              [Letterhead of Deloitte & Touche Brightman Almagor]

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

                             TO THE SHAREHOLDERS OF

                         RENAISSANCE INVESTMENT CO. LTD

We have audited the consolidated balance sheets of Renaissance Investment Co.,
(an Israeli corporation), (hereinafter - "the Company") as at December 31,
2000 and 1999, and the related consolidated statements of income, comprehensive
income and changes in shareholders' equity for each of the three years ended
December 31, 2000, translated into U.S. dollars. These financial statements are
the responsibility of the Company management. Our responsibility is to express
an opinion on these financial statements, based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance 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 statements
presentation. We believe that our audit provides a reasonable basis for our
opinion.

The statement of cash flows for the period has not been included in the
financial statements.

In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of the Company and its
subsidiaries, as at December 31, 2000 and 1999, the results of their operations
and the changes in their shareholders' equity, for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.

Also, in our opinion, the translated amounts in the accompanying consolidated
financial statements in U.S. Dollars have been computed on the basis set forth
in Note 2 to the consolidated financial statements.

/s/ Brightman, Almagor & Co.,

BRIGHTMAN, ALMAGOR & CO.,
Certified Public Accountants

Tel-Aviv, February 21, 2001


                                      155
<PAGE>   225

                         [Letterhead of Ernst & Young]

Messrs. Ampal Ltd.

            Re:   Financial statements of Shmay-Bar Real Estate (1993) Ltd.
                  ("the Company") translated into U.S. dollars.

      As you know, the Company publishes in Israel financial statements in NIS
adjusted to the changes in the Consumer Price Index, in accordance with
Statements of the Institute of Certified Public Accountants in Israel. These
primary annual financial statements of the Company for the years 2000 and 1999,
which were audited by us, and on which we expressed our opinion on February 18,
2001, have been provided to you.

      We have audited the accompanying translated U.S. dollar balance sheets of
the Company as of December 31, 2000 and 1999, and the related translated U.S.
dollar statements of income for each of the three years in the period ended
December 31, 2000. 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 generally accepted auditing
standards, including those prescribed by the Israeli Auditors Regulations (Mode
of Performance) (Israel), 1973, which do not differ in any significant respect
from United States generally accepted auditing standards. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, either
originating within the financial statements themselves, or due to any misleading
statement included therein. 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.

      The aforementioned translated U.S. dollar financial statements have been
prepared on the basis of nominal NIS historical cost. Disclosure of the effect
of the changes in the general purchasing power of the Israeli currency in the
financial statements as stated in the Opinions of the Institute of Certified
Public Accountants in Israel, has not been included in the above mentioned
statements.

      Full financial statement disclosures and statements of cash flows that are
as required by generally accepted accounting principles have not been presented
and as such, the translated U.S. dollar financial statements mentioned above are
to be read in conjunction with the primary annual audited financial statements
of the Company, as of December 31, 2000 and their accompanying Notes.

      In our opinion, except for the effects of the matters discussed in the
preceding paragraphs, the translated U.S. dollar financial statements referred
to above present fairly, in all material respects, the translated U.S. dollar
financial position of the Company as of December 31, 2000 and 1999, and the
related translated U.S. dollar results of its operations for each of the three
years in the period ended December 31, 2000, in conformity with generally
accepted accounting principles in Israel. As applicable to the Company's
financial statements, accounting principles generally excepted in the United
States and in Israel are substantially identical in all material respects.

      Also, in our opinion, the translation of the aforementioned nominal
figures into U.S. dollars was made in accordance with the principles set forth
in SFAS 52, see Note 2.

      The aforementioned financial statements are designated solely for you as
shareholders of the Company, are not to be published or delivered to others.

                                        /s/ Kost Forer & Gabbay

Tel-Aviv, Israel                           KOST FORER & GABBAY
February 18, 2001                 A Member of Ernst & Young International

                                      156
<PAGE>   226

                         [Letterhead of Ernst & Young]

Messrs. Ampal Ltd.

            Re:   Financial statements of Shmay-Bar (T.H.) 1993 Ltd. ("the
                  Company") translated into U.S. dollars

      As you know, the Company publishes in Israel financial statements in NIS
adjusted to the changes in the Consumer Price Index, in accordance with
Statements of the Institute of Certified Public Accountants in Israel. These
primary annual financial statements of the Company for the years 2000 and 1999,
which were audited by us, and on which we expressed our opinion on February 18,
2001, have been provided to you.

      We have audited the accompanying translated U.S. dollar balance sheets of
the Company as of December 31, 2000 and 1999, and the related translated U.S.
dollar statements of income for each of the three years in the period ended
December 31, 2000. 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 generally accepted auditing
standards, including those prescribed by the Israeli Auditors Regulations (Mode
of Performance) (Israel), 1973, which do not differ in any significant respect
from United States generally accepted auditing standards. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, either
originating within the financial statements themselves, or due to any misleading
statement included therein. 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.

      The aforementioned translated U.S. dollar financial statements have been
prepared on the basis of nominal NIS historical cost. Disclosure of the effect
of the changes in the general purchasing power of the Israeli currency in the
financial statements as stated in the Opinions of the Institute of Certified
Public Accountants in Israel, has not been included in the above mentioned
statements.

      Full financial statement disclosures, statements of cash flows and
Consolidated financial statements of the Company and its subsidiary, which are
as required according to generally accepted accounting principles have not been
presented and as such, the translated U.S. dollar financial statements mentioned
above are to be read in conjunction with the primary annual audited financial
statements of the Company, as of December 31, 2000 and their accompanying Notes.

      In our opinion, except for the effects of the matters discussed in the
preceding paragraphs, the translated U.S. dollar financial statements referred
to above present fairly, in all material respects, the translated U.S. dollar
financial position of the Company as of December 31, 2000 and 1999, and the
related translated U.S. dollar results of its operations for each of the three
years in the period ended December 31, 2000, in conformity with generally
accepted accounting principles in Israel. As applicable to the Company's
financial statements, accounting principles generally excepted in the United
States and in Israel are substantially identical in all material respects.

      Also, in our opinion, the translation of the aforementioned nominal
figures into U.S. dollars was made in accordance with the principles set forth
in SFAS 52, see Note 2.

      The aforementioned financial statements are designated solely for you as
shareholders of the Company, are not to be published or delivered to others.


                                                 /s/ Kost Forer & Gabbay

Tel-Aviv, Israel                                   KOST FORER & GABBAY
February 18, 2001                        A Member of Ernst & Young International

                                      157
<PAGE>   227

                        [Letterhead of Deloitte & Touche
                               Brightman Almagor]

                                AUDITORS' REPORT
                 TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
                      TRINET INVESTMENTS IN HIGH-TECH LTD.

We have audited the accompanying balance sheets of Trinet Investments in
High-Tech Ltd. ("the Company") as of December 31, 2000 and 1999, and the related
statements of operations and changes in shareholders' deficiency for each of the
three years in the period ended December 31, 2000. These financial statements
are the responsibility of the Company's Board of Directors and management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing standards
in Israel, including those prescribed under the Auditors' Regulations (Auditor's
Mode of Performance) - 1973, which, for purposes of these financial statements,
are substantially identical to generally accepted auditing standards in the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the Board of Directors and management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the aforementioned financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2000
and 1999, and the results of its operations and changes in shareholders'
deficiency for each of the three years in the period ended December 31, 2000, in
accordance with generally accepted accounting principles in Israel.

As described in Note 2, the aforementioned financial statements have been
prepared on the basis of historical cost, adjusted to reflect changes in the
general purchasing power of the Israeli currency in accordance with
pronouncements of the Institute of Certified Public Accountants in Israel.



                                      158
<PAGE>   228

The financial information presented in U.S. dollars and in accordance with
generally accepted accounting principles in the United States is based on
nominal historical amounts in Israeli currency and is presented in Note 8 to the
financial statements.


/s/ Brightman Almagor & Co.

Brightman Almagor & Co.
Certified Public Accountants
Tel Aviv, March 20, 2001


                                      159
<PAGE>   229

                        [Letterhead of Deloitte & Touche
                               Brightman Almagor]

                                AUDITORS' REPORT
                 TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
                          TRINET VENTURE CAPITAL LTD.

We have audited the accompanying balance sheets of Trinet Venture Capital Ltd.
("the Company") as of December 31, 2000 and 1999, and the related statements of
operations, changes in shareholders' deficiency and cash flows for each of the
three years in the period ended December 31, 2000. These financial statements
are the responsibility of the Company's Board of Directors and management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We did not audit the financial statements of certain affiliates, the investments
in which are recorded using the equity method of accounting. Those financial
statements were audited by other auditors, whose reports have been furnished to
us and our opinion, insofar as it relates to the amounts included for the
affiliates, is based solely on the reports of the other auditors.

We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed under the Auditors' Regulations (Auditor's
Mode of Performance) - 1973, which, for purposes of these financial statements,
are substantially identical to generally accepted auditing standards in the
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.



                                      160

<PAGE>   230


In our opinion, based on our audits and the reports of other auditors, the
aforementioned financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2000 and 1999, and the
results of operations, changes in shareholders' deficiency and cash flows for
each of the three years in the period ended December 31, 2000, in accordance
with generally accepted accounting principles in Israel.

As described in Note 2, the aforementioned financial statements have been
prepared on the basis of historical cost, adjusted to reflect changes in the
general purchasing power of the Israeli currency in accordance with
pronouncements of the Institute of Certified Public Accountants in Israel.

The financial information in U.S. dollars and in accordance with generally
accepted accounting principles in the United States is based on nominal
historical amounts in Israeli currency and is presented in Note 12. Such
financial information includes investments valued at $8,131 thousand and $8,241
thousand as of December 31, 2000 and 1999, respectively (99% and 98% of the
total assets as of December 31, 2000 and 1999). The values of such investments
have been estimated by the Board of Directors and management in the absence of
readily ascertainable market values. We have reviewed the procedures used by the
Board of Directors and management in arriving at their estimates of value of
such investments and have inspected underlying documentation, and, in the
circumstances, we believe the procedures are reasonable and the documentation
appropriate. However, because of the inherent uncertainty of valuation, those
estimated values may differ significantly from the values that would have been
used had a ready market for the investments existed, and the differences could
be material.

/s/ Brightman, Almagor & Co.

Brightman, Almagor & Co.
Certified Public Accountants

Tel Aviv, March 20, 2001


                                      161
<PAGE>   231

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
30th day of March, 2001.


                                          AMPAL-AMERICAN ISRAEL CORPORATION

                                    By:    /s/ Raz Steinmetz
                                          --------------------------------------
                                          Raz Steinmetz, Chief Executive Officer
                                           and President


         Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on March 30, 2001.

<TABLE>
<CAPTION>
SIGNATURES                                           TITLE                                     DATE
----------                                           -----                                     ----
<S>                                                 <C>                                        <C>
Michael Arnon                                        Director
Benzion Benbassat                                    Director
Yaacov Elinav                                        Director
Kenneth L. Henderson                                 Director
Hillel Peled                                         Director
Daniel Steinmetz                                     Chairman of the Board
                                                      of Directors and Director
Raz Steinmetz                                        Director
Avi A. Vigder                                        Director
Eliyahu Wagner                                       Director


   /s/ Raz Steinmetz
  ----------------------------------                                                           March 30, 2001
      Raz Steinmetz, Chief Executive
     Officer and President (Principal
           Executive Officer)


   /s/ Shlomo Meichor
  ----------------------------------                                                           March 30, 2001
        Shlomo Meichor, Vice
    President-Finance and Treasurer
     (Principal Financial Officer)

   /s/ Alla Kanter
  ----------------------------------                                                           March 30, 2001
           Alla Kanter, Vice
       President-Accounting and
    Controller (Principal Accounting
              Officer)
</TABLE>