---

---

# UNITED STATESSECURITIES AND
EXCHANGE COMMISSIONWashington, D.C. 20549

---

# FORM 10-K

---

# (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, 2008

OR

|o | 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.)
|                                        
|555 Madison Avenue                       |                    
|New York, NY, USA                        | 10022              
|(Address of Principal Executive Offices) | (Zip Code)         

Registrant's telephone number, including area code (866) 447-8636
Securities registered pursuant to Section 12(b) of the Act:

|                                         |                                          
|---------------------------------------- | -----------------------------------------
|
|
|
|
|Title of Each Class                      | Name of Each Exchange on which Registered
|                                        
|Class A Stock, par value $1.00 per share | The NASDAQ Global Market                 
|                                         |                                          

# Securities registered
pursuant to Section 12(g) of the Act: None

---

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

Yes o No x

Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.

Yes o No x

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 o

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. o

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

|                          |                     |                         |                            
|------------------------- | ------------------- | ----------------------- | ---------------------------
|
|
|
|
|Large accelerated filer o | Accelerated filer x | Non-accelerated filer o | Smaller reporting company o
|                          |                     |                         |                            

Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).

Yes o No x

The
aggregate market value of the registrants voting stock held by non  affiliates
of the registrant on June 30, 2008, the last business day of the registrants most
recently completed second fiscal quarter was $110,864,522 based upon the closing market
price of such stock on that date. As of February 23, 2009, the number of shares
outstanding of the registrants Class A Stock, its only authorized and
outstanding common stock, is 56,160,477.



---

---

# AMPAL-AMERICAN ISRAEL
CORPORATION AND SUBSIDIARIES

Index to Form 10-K

|         |                                                                                                              | Page
|-------- | ------------------------------------------------------------------------------------------------------------ | ----
|
|
|
|
|PART I   |                                                                                                              |     
|        
|ITEM 1.  | BUSINESS                                                                                                     | 3   
|ITEM 1A. | RISK FACTORS                                                                                                 | 16  
|ITEM 1B. | UNRESOLVED STAFF COMMENTS                                                                                    | 20  
|ITEM 2.  | PROPERTY                                                                                                     | 20  
|ITEM 3.  | LEGAL PROCEEDINGS                                                                                            | 21  
|ITEM 4.  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                          | 22  
|        
|PART II  |                                                                                                              |     
|        
|ITEM 5.  | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | 23  
|ITEM 6.  | SELECTED FINANCIAL DATA                                                                                      | 24  
|ITEM 7.  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                        | 25  
|ITEM 7A  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                   | 38  
|ITEM 8   | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                  | 39  
|ITEM 9.  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                         | 39  
|ITEM 9A. | CONTROLS AND PROCEDURES                                                                                      | 39  
|ITEM 9B. | OTHER INFORMATION                                                                                            | 39  
|        
|PART III |                                                                                                              |     
|        
|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                       | 40  
|ITEM 11. | EXECUTIVE COMPENSATION                                                                                       | 42  
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS               | 48  
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                    | 51  
|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES                                                                       | 52  
|        
|PART IV  |                                                                                                              |     
|        
|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES                                                                      | 53  
|        
|         | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                  | 1-36
|         |                                                                                                              |     

2

---

---



ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
OF AMPAL-AMERICAN ISRAEL CORPORATION

# PART I

|ITEM 1. | BUSINESS
|------- | --------

| | As
used in this report on Form 10-K (the Report), the term Ampal or
registrant refers to Ampal-American Israel Corporation. The term Company refers
to Ampal and its consolidated subsidiaries. Ampal is a New York corporation founded in
1942.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company primarily acquires interests in businesses located in the State of Israel or that
are Israel-related. Ampals investment focus is principally on companies or ventures
where Ampal can exercise significant influence, on its own or with investment partners,
and use its management experience to enhance those investments. In determining whether to
acquire an interest in a specific company, Ampal considers quality of management,
potential return on investment, growth potential, projected cash flow, investment size
and financing, and reputable investment partners.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys strategy is to invest opportunistically in undervalued assets with an
emphasis in the following sectors: Energy, Chemicals, Real Estate, Project Development
and Leisure Time. We believe that past experience, current opportunities and a deep
understanding of the above-referenced sectors both domestically in Israel and
internationally will allow the Company to bring high returns to its shareholders. The
Company emphasizes investments which have long-term growth potential over investments
which yield short-term returns.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company 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 both in and outside of Israel.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Significant
Developments During 2008
| | ------------------------------------

| | Acquisition
of Additional Ownership Interest in Gadot Chemical Tankers and Terminals Ltd.
| | -----------------------------------------------------------------------------------------

| | On
June 3, 2008, Ampal completed its acquisition of an additional 14.98% of the outstanding
ordinary shares (14.71% on a fully diluted basis) of Gadot Chemical Tankers and Terminals
Ltd. (Gadot) through its wholly owned subsidiary Merhav Ampal Energy Ltd. (MAE).
The total consideration was $17.7 million. The consideration was financed with Ampals
own resources and with borrowings in the amount of $11.3 million.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 12, 2008, Ampal completed its acquisition of an additional 20.6% of the
outstanding ordinary shares and 66.76% of the outstanding convertible debentures of Gadot
and now indirectly holds 100% of the outstanding ordinary shares (99.99% on a fully
diluted basis) of Gadot through MAE. The total consideration was $23.3 million. The
consideration was financed with Ampals own resources and with borrowings in the
amount of $15.4 million.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
transactions followed the acquisition by Ampal of a 65.5% controlling interest (63.66% on
a fully diluted basis) in Gadot on December 3, 2007.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of these transactions, Gadot is now a wholly owned subsidiary of the Company and
its shares and debentures have been delisted from the Tel Aviv Stock Exchange (the TASE).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Gadot
and its group of companies form Israels leading chemical distribution organization.
Gadot ships, stores, and distributes liquid chemicals, oils, and a large variety of
materials to the local industry. For further information regarding Gadot, see Chemicals
 Gadot Chemical Tankers and Terminals Ltd.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3

---

---

| | Ampal
funded the Gadot transactions with a combination of available cash and the proceeds of a
credit facility, dated November 29, 2007 (the Credit Facility), between MAE
and Israel Discount Bank Ltd. (the Lender), for approximately $60.7 million,
which amount was increased, on the same terms and conditions, on June 3, 2008 by
approximately $11.3 million in order to fund the second stage of the transaction and on
September 23, 2008 by approximately $15.4 million in order to fund the third stage of the
transaction. The Credit Facility is divided into two equal loans of approximately $43.7
million. The first loan is a revolving loan that has no principal payments and may be
repaid in full or in part on December 31 of each year until 2019, when a single balloon
payment will become due. The second loan also matures in 2019, has no principal payments
for the first one and a half years, and shall thereafter be paid in equal installments
over the remaining ten years of the term. Interest on both loans accrues at a floating
rate equal to LIBOR plus a percentage spread and is payable on a current basis. Ampal has
guaranteed all the obligations of MAE under the Credit Facility and Ampals interest
in Gadot has also been pledged to the Lender as a security for the Credit Facility. Yosef
Maiman, the Chairman and CEO of Ampal and a member of the controlling shareholder group,
has agreed with the Lender to maintain ownership of a certain amount of the Companys
Class A Stock. The Credit Facility contains customary affirmative and negative
covenants for credit facilities of this type.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Sugarcane
Ethanol Production Project
| | ------------------------------------

| | On
May 29, 2008, Ampal loaned Merhav M.N.F. Ltd. (Merhav) $10 million, in
addition to the currently outstanding $10 million that were loaned on December 25, 2007,
to fund the sugarcane ethanol production project (the Project) in Colombia
being developed by Merhav. The additional loan was made pursuant to the existing
promissory note, dated as of December 25, 2007, by Merhav in favor of Ampal (the Promissory
Note). The Promissory Note was given in connection with an option agreement dated
December 25, 2007 (the Original Option Agreement), with Merhav providing
Ampal with the option (the Option) to acquire up to a 35% equity interest in
the Project. The loan will be convertible into all or a portion of the equity interest
purchased pursuant to the Original Option Agreement.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 25, 2008, Ampal entered into an amendment (the Option Amendment) to
the Original Option Agreement. Under the Original Option Agreement, the Option expired on
the earlier of December 25, 2008 or the date (the Financing Date) on which
both (i) Merhav obtained third-party debt financing for the Project and (ii) an
unaffiliated third party holds at least a 25% equity interest in the Project. The Option
Amendment extends the expiration of the Option to the earlier of December 31, 2009 or the
Financing Date.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Option Amendment also provides that in determining the price to be paid by Ampal for
shares pursuant to the option under the Valuation Model (as defined below), the parties
have agreed to review the discount rate set forth in the Valuation Model to determine
whether the discount rate should be increased, provided, however, that the purchase price
shall not exceed the amount Ampal would have paid without giving effect to the Option
Amendment. The maximum purchase price for any interest in the Project purchased by Ampal
pursuant to the option would be (A) with respect to any portion of such interest being
purchased by conversion of the outstanding balance of the Amended Promissory Note
referred to below, the lesser of (i) a price based on a currently agreed valuation model
as updated from time to time to reflect changes in project, financing and other similar
costs (the Valuation Model) as such updates are reviewed by Houlihan Lokey
Howard &Zukin at the time of the Options exercise or (ii) the lowest price paid
by any unaffiliated third party for an interest in the Project, or (B) with respect to
any portion of such interest in the Project being purchased in excess of the balance of
the Amended Promissory Note, the lowest price paid by an unaffiliated third party for its
interest in the Project, unless no unaffiliated third party has purchased an interest in
the Project, in which case the purchase price will be based on the Valuation Model.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
consideration for Merhav entering into the Option Amendment, Ampal agreed to certain
amendments to the Promissory Note reflected in an Amended and Restated Promissory Note,
dated December 25, 2008 (the Amended Promissory Note). The Amended Promissory
Note provides for (i) an increase in the annual interest rate from LIBOR plus 2.25% to
LIBOR plus 3.25% and (ii) an extension of the maturity date of the Promissory Note to
December 31, 2009. As a condition to amending and restating the Promissory Note, Ampal
received a personal guaranty dated as of December 25, 2008, from Yosef A. Maiman
personally guaranteeing the obligations of Merhav under the Amended Promissory Note.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
loan continues to be secured by Merhavs pledge to Ampal, pursuant to a Pledge
Agreement dated December 25, 2007, between Merhav and Ampal, of all of the shares of Ampals
Class A Common Stock, par value $1.00 per share, owned by Merhav.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Yosef
A. Maiman, the Chairman, President and CEO of Ampal and a member of the controlling
shareholders group of Ampal, is the sole owner of Merhav. Because of the foregoing
relationship, a special committee of the Board of Directors composed of Ampals
independent directors negotiated and approved the transaction.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | East
Mediterranean Gas Company
| | ------------------------------

| | East
Mediterranean Gas Company S.A.E. (EMG), in which Ampal directly and
indirectly owns a 12.5% interest (includes 4.3% held by the Joint Venture (as defined
below)), have reached in February 2009 an agreement in principle with the Egyptian
authorities with regard to repricing gas sold to EMG. The agreement is yet to be
finalized in the form of an amendment to the agreement between EMG and its upstream
supplier.  To the best of Ampals understanding from EMG, the agreement in
principle with the Egyptian authorities includes various provisions designed to avoid
adverse economic impact to EMG, and the two sides have committed to a good faith
intensive effort to reach a definitive agreement with respect to supply and the price of
gas to EMG. There is, however, no assurance that the negotiations will be completed or
that the outcome will not adversely affect EMG. To the best of Ampals
understanding, recently other international companies purchasing gas from Egypt
successfully completed such negotiations to all parties satisfaction. At this stage
EMG is not supplying the full contracted quantities of the gas and to the best of Ampals
knowledge the full contracted quantities should begin to be supplied in the near future.
The said price negotiations commenced on the request of the Egyptian Ministry of Trade
and Infrastructure and were driven by the substantial increase in the energy prices since
the existing gas purchase prices were determined in 2000.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4

---

---

| | In
May 2008, the Government of Egypt adopted legislation that purports to revoke the tax
free status of existing free zone companies operating in the iron, cement, steel,
petroleum, liquification and transport of natural gas industries. The legislation, by its
terms, would apply to EMG. Ampal understands that the impact of this recent change in law
would be to impose a 20% tax on EMGs net future income. It is not clear to what
extent the legislation will be enforced or whether it is valid under Egyptian legal
principles. The legislation is, to Ampals understanding, unusual, and it is not
clear whether EMG will be successful in its negotiations and therefore what if any impact
the legislation will ultimately have on EMG.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2008, Midroog Ltd., an affiliate of Moodys Investors Service, (Midroog)
downgraded the rating on Ampals Series A and Series B Debentures from A2 to A3 and
will continue to maintain Ampal on its Watchlist.Midroog concluded that there
is a possibility that new agreements between EMG and the Egyptian gas supplier may
adversely affect EMGs financial results compared to previous expectations, which
will result in reduced cash flow from EMG to Ampal and other financial parameters
resulting from such reduced cash flow. Midroog added that it will monitor the situation,
including the negotiations between EMG and the Egyptian gas supplier, the regularity of
the gas supply and other matters, and will review Ampals rating accordingly. Ampals
rating will remain on the Watchlist.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Offering
of Series B Debentures
| | -------------------------------

| | On
April 29, 2008, Ampal completed a public offering in Israel of NIS 577.8 million
(approximately $166.8 million) aggregate principal amount of Series B debentures due
2016. The debentures are linked to the Israeli consumer price index and carry an annual
interest rate of 6.6%. The debentures rank pari passu with Ampals unsecured
indebtedness. The debentures will be repaid in five equal annual installments commencing
on January 31, 2012, and the interest will be paid semi-annually. As of December 31,
2008, the outstanding debt under the debentures amounts to $138.7 million, due to the
change in valuation of the New Israeli Shekel as compared to the U.S. dollar. Ampal
deposited an amount of $44.6 million with Clal Finance Trusties 2007 Ltd. in accordance
with a trust agreement dated April 6, 2008, to secure the first four years worth of
payments of interest on the debentures. As of December 31, 2008 the outstanding amount of
the deposit was $35.8 million.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 27, 2008, Midroog rated the Series B debentures as A2 and also raised the rating of
Ampals Series A debentures to A2. On September 15, 2008, Midroog reduced the rating
on the Series A and Series B debentures to A3. For further information, see Significant
Developments During 2008  East Mediterranean Gas Company.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Sale
of Hod Hasharon Sport Center (1992) Limited Partnership
| | ------------------------------------------------------------

| | On
August 7, 2008, the Company signed an agreement for the sale of its 50% holdings of Hod
Hasharon Sport Center (1992) Limited Partnership for a consideration of $2.0 million.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Stock
and Debenture Repurchase Program
| | --------------------------------------

| | Ampals
Board of Directors approved a stock repurchase program, effective as of November 23,
2008. Under the program, Ampal is authorized to repurchase up to $20 million of its
outstanding shares of its Class A Stock, from time to time depending on market
conditions, share price and other factors. The board also approved a repurchase plan,
effective as of November 23, 2008, of Ampals Series A and Series B debentures that
are traded on the TASE.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
repurchases may be made on the open market, in block trades or otherwise and may include
derivative transactions. The program may be suspended or discontinued at any time. Ampal
adopted Rule 10b5-1 trading plan, which will allow Ampal to repurchase its Class A Stock
in the open market during periods in which stock trading is otherwise prohibited to Ampal
due to insider trading laws.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the Company has purchased 1,366,415 shares of Class A Stock for an
aggregate amount of $1.1 million, and it also purchased 5,074,418 Series A debentures and
68,723,757 Series B debentures for an aggregate amount of $2.4 million.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recorded a gain of $13.1 million due to the purchase of the debentures.
| | -----------------------------------------------------------------------------------

| | The
repurchase programs will be funded using Ampals available cash and by possible
future borrowings.
| | ------------------------------------------------------------------------------------------------------

5

---

---

| | Repricing
of Outstanding Stock Options
| | --------------------------------------

| | On
December 8, 2008, Ampals Stock Option and Compensation Committee and its Board of
Directors approved the repricing of outstanding options to purchase, in the aggregate,
2,270,000 shares of Ampals Class A Stock, which were previously granted to ten of
the Companys current employees, executive officers and directors pursuant to Ampals
2000 Incentive Plan. The outstanding options had been originally issued with exercise
prices ranging from $3.12 to $5.35 per share, which represented the then current market
prices of Class A Stock on the dates of the original grants. The repricing was effected
by canceling the outstanding options, and granting to each holder of cancelled
outstanding options a new option, with a 10 year term, to purchase the total number of
shares of Class A Stock underlying such cancelled outstanding options, at an exercise
price equal to $1.17 per share, the closing price of Class A Stock on NASDAQ on December
5, 2008, the most recent closing price prior to the approval by the board and the
committee. The repriced options maintain the vesting schedule of the cancelled
outstanding options.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Investee
Companies by Industry Segment
| | --------------------------------------

| | Listed
below by industry segment are all of the substantial investee companies in which Ampal
had ownership interests as of December 31, 2008, the principal business of each and the
percentage of equity owned, directly or indirectly, by Ampal. Further information with
respect to the more significant investee companies is provided after the following table.
For industry segment financial information and financial information about foreign and
domestic operations, see Note 18 to Ampals consolidated financial statements
included in this Report for the fiscal year ended December 31, 2008.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Industry Segment                          | Principal Business | Percentage
as of
December 31,
2008(1)
| | ----------------------------------------- | ------------------ | -------------------------------------
|
|
|
|
| | Chemicals                                 |                    |                                      
| | Gadot Chemical Tankers and Terminals Ltd. |                    |                                      
| |                                           |                    |                                      
| | Energy                                    |                    |                                      
| | East Mediterranean Gas Company            |                    |                                      
| | Global Wind Energy                        |                    |                                      
| |                                           |                    |                                      
| | Real Estate                               |                    |                                      
| | Bay Heart Ltd.                            |                    |                                      
| |                                           |                    |                                      
| | Leisure-Time                              |                    |                                      
| | Country Club Kfar Saba Ltd.               |                    |                                      
| |                                           |                    |                                      
| | Finance                                   |                    |                                      
| | Ampal (Israel) Ltd.                       |                    |                                      
| | Ampal Holdings (1991) Ltd.                |                    |                                      

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

| | (2)       
           8.2% of which are held directly and 4.3% of which are held through Merhav Ampal
          Energy Holdings, LP, an Israeli limited partnership, which is a joint venture
          between Ampal, the Israel Infrastructure Fund and other institutional investors.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Chemicals

GADOT
CHEMICAL TANKERS AND TERMINALS LTD. (GADOT)

General

On
December 3, 2007, Ampal completed the purchase of a 65.5% controlling interest (63.66% on
a fully diluted basis) in Gadot through its wholly owned subsidiary, MAE. On June 3, 2008,
Ampal purchased an additional 14.98% bringing its controlling interest to 79.3% (78.88% on
a fully diluted basis) and on August 12, 2008, Ampal purchased additional 20.6% bringing
its controlling interest to 100% (99.99% on a fully diluted basis).

Gadot
was founded in 1958 as a privately held Israeli company, with operations in distribution
and marketing of liquid chemicals for raw materials used in industry. Since then, Gadot
has expanded into a group of companies, which currently forms Israels leading
chemical distribution organization. Through its subsidiaries, Gadot ships, stores, and
distributes liquid chemicals, oils, and a large variety of materials to countries across
the globe, with an emphasis on Israel and Western Europe. In our description of
Gadots business operations, the term Gadot refers to Gadot and its
consolidated subsidiaries. Gadot listed its shares for trade on the Tel Aviv Stock
Exchange in 2003 and was delisted from trade as of October 16, 2008 following its
acquisition by Ampal.

6

---

---

Gadots
business is influenced by certain economic factors, which include (i) global changes in
demand for chemicals used as raw materials for industry, (ii) price fluctuations of
chemicals and raw materials, (iii) price fluctuations of shipping costs, ship leases and
ship fuel, (iv) general global financial stability, and (v) currency fluctuations between
the New Israeli Shekel and other currencies, primarily the U.S. dollar.

Gadots
operations are divided into three main service sectors:

| |  | Importing,
marketing and sale of chemicals and other raw materials in Israel and Europe;
| | - | ----------------------------------------------------------------------------------------

| |  | Shipping,
primarily between the European ports of the Atlantic ocean and the Mediterranean sea port
and Agency Services for Shipping Companies and Docked Ships;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Logistical
services in Israel and Europe;
| | - | -----------------------------------------

These
service sectors are synergistic and complimentary, such that Gadot provides its customers
with a full range of services, from acquiring chemicals based on a customers needs,
logistical handling including shipping and transport, offloading, storage and delivery.
Members of the Gadot group of companies also provide services for other members of the
group, strengthening the group as a whole.

On
April 29, 2008, Gadot signed an agreement for the winding-up of Chem-Tankers C.V.
(Chem-Tankers), a limited partnership registered in the Netherlands, which was
engaged in the maritime shipping of chemicals in bulk. The Chem-Tankers was established
pursuant to an agreement signed on October 1, 2005 between Gadot Yam Chemical Shipping
Ltd., a wholly owned and controlled subsidiary of Gadot, and a foreign company registered
in Cyprus (hereafter  the Partners). The agreement sets forth the manner
in which the Chem-Tankers will wind down, including provisions relating to the settling of
accounts between the Partners, the distribution of the operating routes, the ships, and
the fixed assets of the Chem-Tankers and the payment of winding-up expenses. Following the
winding-up of the Chem-Tankers, the Company shall continue to operate the operating routes
that it operated prior to the establishment of the Chem-Tankers in 2005, viz., the North
Europe-Mediterranean Sea route and the North America-Mediterranean Sea route.

Importing, Marketing
and Sale of Chemicals and Other Raw Materials

Gadot
imports, markets and sells chemicals and other raw materials, primarily liquid chemicals
which are imported in tanker ships and via other methods. These chemicals and other
materials are used as raw materials in the medical, cosmetics, paint, plastic,
electronics, agriculture, food and other industries. Other activities of Gadot in this
sector include:

| |  | sale
and  marketing of oils and other  liquid  products  which are used as food  additives in
soft drinks,                meat and poultry;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

| |  | operating
a sales agency in Israel representing well-known manufacturers, selling a wide range of
products, including chemicals, active medicinal agents, electronic components, rubber,
polymers, minerals and materials for the textile and paint industry;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | sale
and marketing of fine chemical agents used in research laboratories and biochemical
industries and marketing of laboratory equipment;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------

| |  | Sale
and marketing of inorganic chemicals.
| | - | ------------------------------------------

The
chemicals that Gadot deals with are in many cases poisonous or hazardous and require Gadot
to obtain permits for handling poisonous materials. Special permits are also obtained from
environmental authorities, fire safety authorities and other governmental bodies for
handling hazardous or flammable substances. Gadot conducts inspections and quality
assurance testing and provides its employees with training and equipment necessary for
working with hazardous and poisonous substances. Gadot has qualified for and received the
ISO-9001:2000 quality standard for its quality assurance in chemical and liquid matter
transport and distribution, as well as the ISO 14001:2004 quality standard for its
environmental management system.

Gadot
generally provides its services in this area of business to long-term customers in Israel
and Benelux that are mostly large industrial factories that use chemicals and other
materials as raw materials in their manufacturing processes. These customers are spread
over a wide variety of industries which reduces the risk of a downturn in any one type of
industry having a significant effect on the revenues of Gadot. Gadot is not dependent on
any single customer in this service sector. Nevertheless, the loss of any long-term
customer may materially affect the short-term or even mid-term revenues and net profits of
Gadot.

Sales,
marketing and distribution are conducted by sales teams consisting of Gadot employees, who
are constantly in touch with existing customers and who also actively seek out new markets
and customers. Sales are made by purchase orders which subsequently are supplied from the
existing stock of Gadot. A relatively small percent of sales is made via backlog orders,
as supply time is generally quick.

7

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The
chemical market is very competitive and Gadot has many competitors in Israel, Europe and
other countries. Gadots competitors include sales agents of large chemical
manufacturers, small importers and factories that import materials themselves for their
own use. Competition is especially fierce in marketing chemicals packaged in barrels and
jugs or in ISO-tanks (special containers used to transport liquid matter), since these do
not require investment in special storage facilities, which makes it easier for
competitors to enter the market.

Gadots
main advantages over its competition in the chemical market are due to:

| |  | its
ability to provide full door-to-door  logistical  services to its customers,  from
purchase,  shipping                and storage, to land transport to the customer's
factory;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | its
ability to purchase and maintain  surplus in large  quantities of different  chemicals
 ready for sale                in a variety of packaging types and sizes;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | owning
the only chemical fluids terminal in Israel, capable of providing storage and transport;
| | - | -----------------------------------------------------------------------------------------------

| |  | decades
of experience in the field;
| | - | -----------------------------------

| |  | stable,
long term relationships with existing customers;
| | - | --------------------------------------------------------

| |  | the
quality of products supplied by it and the reputation and good will of its suppliers; and
| | - | ---------------------------------------------------------------------------------------------

| |  | professional
support provided by suppliers and by Gadot for its products.
| | - | -------------------------------------------------------------------------

Gadots
main disadvantages in the chemical market are (i) the market consisting of highly
sophisticated customers that are very knowledgeable of product pricing and alternatives
from competitors, which makes it hard to increase profitability and (ii) the high costs
involved in purchasing and maintaining large quantities in surplus for immediate supply.

Most
of the raw materials sold by Gadot are manufactured outside of Israel, in Europe, the
United States, South America, the Far East and South Africa. The variety of supply sources
allows for increased availability in changing market conditions.

Gadot
is not dependent on any one supplier in the chemicals market. There are numerous suppliers
for each product sold by it, mostly located outside of Israel. Purchase of chemicals and
raw materials is generally made directly from the manufacturer, by way of purchase orders.

Gadot
revenues for 2008 totaled approximately $535 million compared to approximately $357
million in 2007. The 49% increase in revenues is mainly the result of the following
factors:

| |  | Vopak
Logistic Services (VLS) acquisition towards the end of 2007. The acquisition
contributed an increase of approximately 23% to the revenue growth during 2008.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
crude oil price increase during the first 3 quarters of 2008 translated to an increase in
Gadots petrochemicals materials which are derived from the crude oil price.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Sales
volume during 2008 increased compared to the 2007 volume.
| | - | ---------------------------------------------------------------

| |  | Sale
of products with increased margins.
| | - | ----------------------------------------

| |  | Gross
profit increased by 30% from $34.1 million to $44.5 million. This increase is partly the
result of the VLS acquisition and partly to the devaluation of the USD against the NIS
during 2008 compared to 2007.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Shipping

Gadot
provides its customers (including subsidiaries within the Gadot group of companies) with
shipping services, shipping liquid chemicals in tanker ships both to and from Israel. As
of December 31, 2008, Gadot uses a fleet of 8 vessels, which are either leased or owned by
Gadot, with loading capabilities ranging from 8,000 tons to 17,000 tons. The total
capacity of Gadots fleet as of December 31, 2008, was approximately 100,000 tons.
The main shipping lines operated by Gadot are Israel  Northern Europe and Israel
 United States, with many interim stops in the European ports of the Atlantic ocean
and in Mediterranean sea ports. Gadot also provides logistical support for ships anchored
in the ports of Haifa and Ashdod in Israel. These services include coordination of all
technical procedures while in port, such as payment of port fees, care of the crew and
providing ships with supplies.

Gadots
fleet is subject to strict international regulation with regard to safety of shipping
hazardous chemicals and environmental protection of the seas which mainly provide
standards for ship conditions and maintenance and crew safety and training. In order to
comply with these strict standards and to fulfill customer demand for compliance, all the
ships used in Gadots fleet are double hulled and the tanks used for chemical storage
are made of stainless steel, which reduces the danger of corrosion and leakage. All ships
in the fleet are managed by companies with the experience and knowledge necessary to
comply with such regulations and they are inspected by the relevant authorities at least
once a year for deficiencies. If a ship is found not in compliance with the standards, it
is not permitted to set sail until all deficiencies are remedied.

8

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In
recent years there has been a rise in demand for chemical shipping in tanker ships, which
was mostly due to the growth of the Chinese economy and other emerging markets in Asia,
and the growing trade between these countries with other countries. This trend tempered
and even decreased during the last quarter of 2005 and the first quarter of 2006, due
mainly to the natural disasters that occurred in the United States during that time. This
affected Gadots Trans-Atlantic lines and caused a decrease in profitability during
that period. In the first half of 2007 shipping prices generally rose, particularly in the
spot shipping assignments. In the second half of 2007 prices stabilized,
however the price of ship fuel continued to rise, which caused gross profit to decline
compared with the first half of 2007. During 2008 the shipping prices gradually rose. To
wards the end of 2008 the shipping prices decreased. The price of ship fuel rose during
the first half of 2008 and decreased substantially during the second half of the year.

There
are a number of critical factors necessary for succeeding in the chemical shipping
business, including:

| |  | managing
a modern fleet of ships capable of transporting a variety of chemicals with a variety of
different capacities in order to meet customer needs and strict regulation;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | availability
of ships on the various shipping lines;
| | - | ----------------------------------------------------

| |  | professional
operation of cargo, in order to increase efficiency and safety;
| | - | ----------------------------------------------------------------------------

| |  | having
a strategy of buying or leasing ships at low prices, while entering into long-term
shipping contracts with customers at high prices, in order to minimize exposure to
changes in the shipping market and to increase profitability;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | creating
and maintaining strategic relationships with key customers; and
| | - | ------------------------------------------------------------------------

| |  | Cooperation
with other companies operating in the field, in order to increase the amount of ships
working the same line or market and to penetrate new markets.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

Competition
in the field of shipping is concentrated mainly in the availability of ships and the price
of transport. Larger shipping companies have an advantage over smaller ones because they
have more and higher quality ships. Therefore, the large companies are usually chosen by
customers with large scale shipping needs for long-term periods of time. The mid-size and
small shipping companies usually compete for the spot shipping assignments.
Most of Gadots competitors in this service sector are shipping companies of the same
size as Gadot. Gadots success is dependent to a large extent on the shipping fees it
charges its customers and on its ability to lease ships at reasonable costs. Gadots
main strengths over its competitors are its steady lines to Israeli ports, along the
Mediterranean Sea and from Europe to Central America, and its new and modern fleet. Its
main weakness is in international shipping lines, where its competitors have larger fleets
capable of providing more frequent service.

Most
of Gadots shipping contracts are for periods of between one to five years, some with
options to extend the term. The remainder of its contracts are made on an ad hoc basis.
Gadot has two open term contracts that terminate only by consent of the parties. These
shipping contracts are drafted according to a global standard, called a Tanker
Voyage Charter Party contract. These contracts state the shipping fee and quantity
and provide other standard terms, such as type of goods, size, handling instructions, port
of loading and off-loading, loading and off-loading time, late fees, time tables,
jurisdiction and insurance. These contracts also incorporate by reference the provisions
of certain standardized shipping contracts.

Gadot
is not dependent on any single customer in this sector.

Gadot leases
the vessels in its fleet according to Time Charter Party contracts, which
provide for the lease of a ship together with its crew. These contracts are drafted
according to a global standard, except for the specific terms, such as the lease period
and fees. The average lease period of ships in the Gadot fleet is from one to five years,
usually with an option to extend the term. The lease fee may fluctuate based on market
conditions, or renewal or exit points in the contract. These contracts usually provide for
the state of the vessel upon delivery to the lessee, maintenance requirements,
indemnification to the owners, permission to sub-lease, insurance, inspection rights,
compliance with technical specifications and jurisdiction. Sometimes such contracts
include an option to purchase the ship at previously agreed terms. Vessels are operated
commercially by the lessee, by designating shipping lines and cargo for the vessel, while
the lessor operates the technical aspects of running the ship and crew.

Agency
Services for Shipping Companies and Docked Ships

Gadot
acts as a general agent for shipping companies and for ships docked in Israel. It is also
the exclusive representative in Israel of a large shipping company.

Gadots
services to ships at port include logistical support for ships anchored in port in Israel.
These services include coordination of all technical procedures while in port, such as
payment of port fees, care for the needs of the ships crew and providing ships with
supplies.

9

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Gadots
services to shipping companies include logistical support for cargo arriving in Israel,
such as finding local storage facilities for a ships cargo, coordinating loading and
off-loading of ships, locating and identifying cargo, replacement crews and other
services.

ISO-Tank
Transportation

Gadot
provides transportation services for liquid chemicals in ISO-tanks. ISO-tanks are
transported in various ways, including by truck, train, ferry and ship. ISO-tank transport
allows the customer to purchase liquid chemicals directly from the supplier, without
requiring storage and off-loading. The quantities transported in ISO-tanks are usually
significantly smaller than quantities transported by tanker.

Gadot
currently owns 142 ISO-tanks and it leases additional ISO-tanks from external sources from
time to time in order to meet customer demand. Gadot also leases ISO-tanks to third
parties, which include heating systems and upper or lower off-loading apparatuses, as
needed.

Logistical
Operations in Europe

Since
the end of 2007, Gadot has been offering its customers logistical services for chemicals
and hazardous materials in Western Europe, including off-loading and storage, filling
barrels and containers, door-to-door transport and handling sensitive chemicals. Gadot
provides full services to its customers throughout the whole supply chain.

The
services provided by Gadot in this sector include:

| |  | Delivery
 import and export of goods to and from Europe to other destinations around the
world, including contracting with shipping companies, dealing with tax authorities, port
release and documentation.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Storage
 storage of customers materials in storage facilities, often under
specialized conditions (such as temperature control, etc.).
| | - | ----------------------------------------------------------------------------------------------------------------------------------------

| |  | Transport
 complete door-to-door service, from arrival of goods in port, storage, packaging
and delivery to final destination.
| | - | -------------------------------------------------------------------------------------------------------------------------------

| |  | Packaging
 packaging of dry and liquid chemicals in barrels, containers or sacks.
| | - | ----------------------------------------------------------------------------------

Gadot
also provides one customer with paint mixing services.

Gadot has
long-term leases over storage facilities in three countries for providing these services,
with an aggregate area of approximately 180,000 square meters. These storage facilities
maintain very high standards and Gadot is the only entity within the storage sector in
Europe with facilities in several countries. This gives Gadot a considerable advantage
over its competitors in this field. Gadot also contracts with land and sea transport
companies to facilitate its logistical services.

Operating
in this sector requires Gadot to obtain appropriate licenses from authorities and to
maintain strict European standards for handling hazardous materials and for operating
storage facilities. Stored chemicals are categorized by their hazard level and each
facility has in place the appropriate approvals and restrictions for the relevant type of
material. Regulation in this field changes from time to time and Gadot needs to constantly
conform itself to the existing requirements.

This
sector has experienced growth in recent years in Western Europe, since an increasing
number of companies and manufacturers prefer to outsource their logistical operations, due
to the strict regulatory requirements.

Some
of the main criteria for success in this service sector are: (i) location of storage
facilities near industrial factories or seaports, (ii) wide geographic spread of
facilities and (iii) ability to provide quality service at an all-inclusive manner.

The
main entry barrier in operating in the logistics sector is compliance with licensing
requirements. Applying for such licenses is an expensive and often long process, without
certainty of the outcome. Another entry barrier is the necessity to maintain specialized
storage facilities capable of storing chemicals and hazardous materials.

Gadots
customers in this service sector include chemical manufacturers and distributors that
import or export their goods in Europe. Gadot is not dependent on any one customer in this
sector.

Most
customers enter into a framework agreement with Gadot which stipulates the scope of
services and fees for each service. Fees are generally adjusted annually. Most agreements
do not have a minimum quantity requirement.

Gadots
marketing and distribution efforts are conducted by Gadots sale people in each
country whose goal is to locate potential customers for logistical services.

Gadot
takes great measures to protect the environment in its facilities in Western Europe. The
storage facilities are equipped with cement or ceramic flooring, drainage systems and
holding tanks to avoid ground contamination. Gadot has qualified for and received the
ISO-9001:2000 quality standard for its quality assurance in this sector. Gadots
facilities have also been inspected a number of times by the CEFIC (the European Chemical
Industry Council) according to a safety and quality assessment plan of the CEFIC. The
storage facilities are periodically tested by local authorities for ground contamination
and fire safety.

10

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Logistical
Operations in Israel

The
logistical services provided by Gadot in Israel include:

| |  | land
transport;
| | - | ---------------

| |  | storage,
loading and off-loading of materials;
| | - | ----------------------------------------------

| |  | ISO-tank
transportation;
| | - | ------------------------

Land
Transport

Gadot
offers land transport services to its customers for chemicals and other materials from
Israeli ports to the customers factory, and vice versa. Land transportation from
chemical plants outside of Israel to Gadots ships is provided by subcontractors.

Gadot
currently owns a fleet of 73 tanker trucks and 123 trailers (of which 80 trailers are
capable of transporting hazardous materials). The fleet of tanker trucks is generally in
full use by Gadot, which occasionally is required to lease additional tanker trucks from
other companies in order to fulfill demand. The trailer fleet is generally not in full
use, due to the number of tanker trucks Gadot owns and the highly specialized purpose of
each trailer.

Gadot
faces much competition in this field, and it holds an estimated Israeli market share of
15% to 17%.

Storage,
Loading and Off-Loading of Materials

Gadot
provides storage, loading and off-loading services of chemicals and other materials to its
customers (including to subsidiaries in the Gadot group of companies) in an area located
near the southern terminal of the Kishon port in Haifa.

Gadot
is currently the only provider of chemical storage, loading and off-loading services in
Israel. These services were declared a monopoly by the Israeli Antitrust Authority and are
therefore subject to regulation, which includes a price list stipulated by the Antitrust
Authority, and periodical inspections of profitability, the result of which may require
Gadot to reduce its prices for these services. To date, Gadot has never received such an
instruction. Gadots quality control process for storage and loading has qualified
for and received the ISO-9001 quality standard.

Gadots
facility currently has 80 storage tanks with capacities of between 30 to 2,650 cubic
meters each, which are constantly maintained. The total storage capacity of these tanks is
approximately 46,000 cubic meters. The facility also has a pipe loading system which
allows for direct off-loading of liquid chemicals from a ships tank to a storage
tank.

# Energy

EAST
MEDITERRANEAN GAS COMPANY S.A.E

EMG,
an Egyptian joint stock company, organized in accordance with the Egyptian Special Free
Zones system, has been granted the right to export natural gas from Egypt to Israel, other
locations in the East Mediterranean basin and to other countries. EMG has linked the
Israeli energy market with the Egyptian national gas grid via an East Mediterranean
pipeline with the first gas delivery occurring on May, 2008. EMG is the developer, owner
and operator of the pipeline and its associated facilities on shore in both the point of
departure at El Arish, Egypt and the point of entry in Ashkelon, Israel. In the Israeli
market, EMGs first contract was signed in late 2005 with the Israel Electric
Corporation for a quantity of 2.1 BCM annually over 15-20 years. EMG is in the process of
negotiating several additional agreements covering much of the anticipated 7.0 BCM
annually earmarked for the Israeli market. This project is governed by an agreement signed
between Israel and Egypt which designates EMG as the authorized exporter of Egyptian gas,
secures EMGs tax exemption in Israel and provides for the Egyptian governments
guarantee for the delivery of the gas to the Israeli market.

On
November 29, 2007, Ampal and the Israel Infrastructure Fund (IIF), leading a
group of institutional investors, purchased a 4.3% interest in EMG, through Merhav Ampal
Energy Holdings, LP, an Israeli limited partnership (the Joint Venture), from
Merhav for a purchase price of approximately $95.4 million, using funds provided by the
Investors. In addition to the Joint Ventures purchase from Merhav., Ampal
contributed into the Joint Venture an additional 4.3% interest in EMG already held by
Ampal. The Joint Venture now holds a total of 8.6% of the outstanding shares of EMG.
Ampals contribution was valued at the same price per EMG share as the Joint
Ventures purchase. This amount is equivalent to the purchase price (on a per share
basis) paid by Ampal for its December 2006 purchase of EMG shares from Merhav.

11

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As
of December 31, 2008, the Companys Financial Statements reflect a 16.8% interest in
shares of EMG, with 8.2% held directly and 8.6% held through the Joint Venture (of which
Ampal owns 50%). For more information concerning our interest in EMG please see Item
7  Management Discussion and Analysis of Financial Condition and Results of
Operations below.

EMG,
in which Ampal directly and indirectly owns a 12.5% interest (includes 4.3% held by the
Joint Venture), have reached on February 2009 an agreement in principle with the Egyptian
authorities with regard to repricing gas sold to EMG. The agreement is yet to be finalized
in the form of an amendment to the agreement between EMG and its upstream supplier. 
To the best of Ampals understanding from EMG, the agreement in principle with the
Egyptian authorities includes various provisions designed to avoid adverse economic impact
to EMG, and the two sides have committed to a good faith intensive effort to reach a
definitive agreement with respect to supply and the price of gas to EMG. There is,
however, no assurance that the negotiations will be completed or that the outcome will not
adversely affect EMG. To the best of Ampals understanding, recently other
international companies purchasing gas from Egypt successfully completed such negotiations
to all parties satisfaction. At this stage EMG is not supplying the full contracted
quantities of the gas and to the best of Ampals knowledge the full contracted
quantities should begin to be supplied in the near future. The said price negotiations
commenced on the request of the Egyptian Ministry of Trade and Infrastructure and were
driven by the substantial increase in the energy prices since the existing gas purchase
prices were determined in 2000.

In
May 2008, the Government of Egypt adopted legislation that purports to revoke the tax free
status of existing free zone companies operating in the iron, cement, steel, petroleum,
liquification and transport of natural gas industries. The legislation, by its terms,
would apply to EMG. Ampal understands that the impact of this recent change in law would
be to impose a 20% tax on EMGs net future income. It is not clear to what extent the
legislation will be enforced or whether it is valid under Egyptian legal principles. The
legislation is, to Ampals understanding, unusual, and it is not clear whether EMG
will be successful in its negotiations and therefore what if any impact the legislation
will ultimately have on EMG.

On
September 2008, , Midroog downgraded the rating on Ampals Series A and Series B
Debentures from A2 to A3 and will continue to maintain Ampal on its Watchlist.
Midroog concluded that there is a possibility that new agreements between EMG and the
Egyptian gas supplier may adversely affect EMGs financial results compared to
previous expectations, which will result in reduced cash flow from EMG to Ampal and other
financial parameters resulting from such reduced cash flow. Midroog added that it will
monitor the situation, including the negotiations between EMG and the Egyptian gas
supplier, the regularity of the gas supply and other matters, and will review Ampals
rating accordingly. Ampals rating will remain on the Watchlist.

Global
Wind Energy Ltd. (GWE)

On
November 25, 2007, Merhav Ampal Energy Ltd. (MAE) signed a joint venture
agreement with Clal Electronics Industries Ltd. (Clal), an Israel-based
holding company, for the formation of a joint venture that will focus on the new
development and acquisition of controlling interests in renewable energy, including wind
energy projects outside of Israel. The joint venture, owned equally by Clal and the
Company through MAE, will seek to either develop or acquire wind energy opportunities with
a goal of establishing at least 150MW of installed capacity within the next 3.5 years. The
joint ventures initial project is the development of a wind farm in Greece. The
Company has approved a Euro 25 million budget for these projects

As
of December 2008, the Company has invested $ 2.2 million in GWE.

# Real Estate

BAY
HEART LTD. (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 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. In 2008, the Mall
completed extensive renovations, including the construction of a new complex of 23 movie
theaters and entertainment facilities.

# Leisure-Time

COUNTRY
CLUB KFAR SABA LTD. (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 estate property on which the Club
is situated. The Clubs facilities include swimming pools, tennis courts and a club
house.

The
Club, which has a capacity of 2,000 member families, operated at capacity for the 2008
season. The Company owns 51% of Kfar Saba.

12

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# EMPLOYEES

The
executive officers of Ampal are listed in Item 10 below.

As
of December 31, 2008:

| |  | Ampal
(Israel) Ltd. had 15 employees; and
| | - | -----------------------------------------

| |  | Gadot,
a wholly owned subsidiary of Ampal, had 660 employees; and
| | - | -----------------------------------------------------------------

| |  | Country
 Club Kfar Saba Ltd.,  of which the Company  owns a 51%  interest,  had 6 employees  and
97 hourly                based employees.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------

Relations
between the Company 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, varying as to degree and
intensity, exists between Israel and the Arab countries and the Palestinian Authority (the
PA). 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 PA 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. Hamas, an Islamist movement, won the
majority of the seats in the Parliament of the PA in January 2006 and took control of Gaza
by force in June 2007. During the summer of 2006, Israel waged a war with the Hezbollah
movement in Lebanon, which involved thousands of missile strikes in Northern Israel. Since
June 2007, thousands of missiles have been fired from Gaza at population centers in
southern Israel, leading to an armed conflict between Israel and Hamas in January 2009. In
the meantime, Iran has threatened to attack Israel and is widely believed to be developing
nuclear weapons. This security situation has had an adverse effect on Israels
economy, primarily in the relevant geographic areas, and increased the political
and military uncertainty in Israel and the Middle East. See Item 1A  Risk
Factors below for a further discussion of the possible impact of the political and
military situation in Israel on the Company.

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. Some 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 its business in a state of
emergency in which large numbers of individuals are called up for active duty.

# 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

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. The corporate tax
rate in Israel is 27% for the 2008 tax year. Following an amendment to the Israeli Income
Tax Ordinance, which came into effect on January 1, 2006 (Amendment No. 147),
the corporate tax rate is scheduled to be reduced as follows: 26% for the 2009 tax year
and 25% for the 2010 tax year and thereafter. The Israeli tax rate on capital gains
derived by a corporation after January 1, 2003, is generally 25%, however certain
exemptions from capital gains tax may apply to non-Israeli resident corporations.

A
tax treaty between Israel and the United States became effective on January 1, 1995
(the Treaty). The Treaty has not substantially affected the tax position of
the Company in either the United States or in Israel.

13

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Under
Israeli domestic law Ampal, as a non-resident, is generally subject to withholding tax at
a rate of 25% on dividends it receives from Israeli companies (20% for dividends received
after January 1, 2006, under certain circumstances). This rate may be reduced to either
15% or 12.5%, (under Israeli law and/or the provisions of the Treaty), depending on the
ownership percentage in the investee company, and on the type of income generated by such
investee company from which the dividend is distributed (by contrast, dividends received
by one Israeli company from another Israeli company are generally exempt from Israeli
corporate tax, unless (i) they arise from income generated from sources outside of Israel,
in which case they are generally subject to tax at a rate of 25%/ corporate tax rate
(certain tax credits may be available for tax paid or withheld at source); or (ii) they
are paid out of the profits of an approved enterprise to either residents or
non-residents, in which case tax is withheld at a rate of 15%).

Pursuant
to an arrangement with the Israeli tax authorities, Ampals income from Israeli
sources has been taxed based on principles generally applied in Israel to income of
non-residents. Ampal has filed agreed upon tax returns with the Israeli tax authorities
through the tax year 2007. Based on the tax returns filed by Ampal through 2007, it has
not been required to make any additional tax payments in excess of the tax withheld on
dividends it has received. In addition, pursuant to Ampals arrangement with the
Israeli tax authorities, the aggregate taxes paid by Ampal in Israel and in the United
States on interest, rent and dividend income derived from Israeli sources has not exceeded
the tax 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 to be in effect in the future. This
arrangement does not apply to taxation of Ampals Israeli subsidiaries.

Generally,
under the provisions of the Israeli Income Tax Ordinance, taxable income from Israeli
sources paid to non-residents of Israel by residents of Israel is subject to withholding
tax at the rate of 25%. However, such rate of withholding tax may be reduced under the
Treaty, with respect to certain payments made by Israeli tax residents to US tax residents
that qualify for benefits of the Treaty. For example, under the Treaty, the rate of
withholding tax applicable to interest is generally reduced to 17.5%. The continued tax
treatment of Ampal by the Israeli tax authorities in the manner described above is based,
among other things, 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, Israeli tax residents are taxed on capital gains generated from sources in
Israel or outside of Israel, whereas non-residents are taxable only with respect to gains
generated from sources in Israel. Gains are generally regarded as being from Israeli
sources if arising from the sale of assets either located in Israel or which represent a
right to assets located in Israel (including gains arising from the sale of shares in
companies resident in Israel, and of rights in non-resident entities that mainly represent
ownership and rights to assets located in Israel, with regard to such assets). Under the
Treaty, US tax residents are subject to Israeli capital gains tax on the sale of shares in
Israeli companies if they have held 10% or more of the voting rights in such companies at
any time during the 12 months immediately preceding the sale.

Since
January 1, 1994, the portion of the gain attributable to inflationary differences prior to
that date is taxable at a rate of 10%, while the portion of the gain attributable to
inflationary differences between such date and the date of disposition of the asset is
exempt from tax. 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 tax
residents if they elect 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, rather than the change in the Israeli consumer price index.
Beginning January 1, 2006, the section of the Israeli Tax Ordinance under which the
regulations providing such tax exemption to non-Israeli residents were promulgated, was
rescinded. It is therefore unclear whether this exemption shall continue to be applicable.
The remainder of the gain (Real Capital Gain), if any, is taxable to
corporations at the rate of 25%. However, Real Capital Gains arising from the sale of
capital assets that had been acquired prior to January 1, 2003 shall be apportioned on a
linear basis to the periods before and after the same date, namely  the portion of
the gain attributed to the period before January 1, 2003 shall be subject to tax at a rate
equal to the corporate tax rate in affect at the time of the sale (in 2008  27%) and
a marginal tax rate (in 2008  47%) for individuals, whereas the portion of the gain
attributed to the period after January 1, 2003 shall be taxed at the rate of 25%. Special
rules apply with respect to listed securities.

Foreign
corporations are generally exempt from tax on gains from the sale of shares in publicly
traded companies if the capital gain was not generated from their permanent establishment
in Israel. Amendment No. 147 introduces a broader exemption under domestic law for
non-residents regardless of their percentage holding in an Israeli company (not holding
real estate rights) to include capital gains from the sale of securities (even where not
traded in Israel), which are purchased between July 1, 2005 through December 31, 2008,
provided certain conditions are met. Amendment No. 169 to the Israeli Income Tax
Ordinance, effective from January 1, 2009, expanded the earlier exemption from Israeli
capital gains tax so that it applies to shares in an Israeli company acquired on or after
January 1 2009 by any foreign resident investors, provided certain conditions are met.
However, according to section 68A(a) of the Israeli Income Tax Ordinance, non-Israeli
corporations are not entitled to any such exemption from Israeli capital gains tax if
Israeli residents (i) have a controlling interest of 25% or more in such non-Israeli
corporation, or (ii) are the beneficiaries or are entitled to 25% or more of the revenues
or profits of such non-Israeli corporation, whether directly or indirectly.

The
Income Tax Law (Adjustment for Inflation), 1985 (Inflationary Adjustment Law),
which had been in force until December 31. 2007, with respect 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. Under the Inflationary Adjustment Law, results for
tax purposes are measured in real terms. 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. Conversely, if the depreciated cost of Fixed Assets
exceeds shareholders equity, then such excess, multiplied by the annual inflation
change, is added to taxable income.

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In
February 2008, the Israeli legislature passed Amendment No. 20 to the Income Tax Law
(Adjustment for Inflation), repealing the Income Tax Law (Adjustment for Inflation) as of
January 1, 2008, with certain transitional orders. Under the Inflationary Adjustment Law,
results for tax purposes were measured in real terms.

Individuals
and companies in Israel pay value added tax (VAT) at a rate of 15.5% of the
price of assets (excluding shares) sold and services rendered. In computing its VAT
liability, certain of Ampals Israeli subsidiaries may be entitled to claim as a
deduction input VAT they have incurred with respect to goods and services acquired for the
purpose of their business, to the extent such transactions are subject to VAT.

# United States Federal
Taxation of Ampal

Ampal
and its United States subsidiaries (in the following discussion, generally referred to
collectively as Ampal U.S.) are subject to United States taxation on their
taxable income, as computed on a consolidated basis, from domestic as well as foreign
sources. The gross income of Ampal U.S. for United States tax purposes includes or may
include (i) income earned directly by Ampal U.S., (ii) Ampal U.S.s pro rata share of
certain types of income, primarily subpart F income earned by certain
Controlled Foreign Corporations in which Ampal U.S. owns or is considered as owning 10
percent or more of the voting power; and (iii) Ampal U.S.s pro rata share of
ordinary income and capital gains earned by certain Passive Foreign Investment Companies
in which Ampal U.S. owns stock, and with respect to which Ampal has elected that such
company be treated as a Qualified Electing Fund. Subpart F income includes, among other
things, dividends, interest and certain rents and capital gains. Since 1993, the maximum
federal rate applicable to domestic corporations is 35%.

Certain
of Ampals non-U.S. subsidiaries have elected to be treated as partnerships for U.S.
tax purposes. As a result, Ampal is generally subject to U.S. tax on its distributive
share of income earned by such subsidiaries (generally computed with reference to
Ampals proportionate interest in such entity), as it is earned, i.e.  without
regard to whether or not such income is distributed by the subsidiary. Certain of
Ampals wholly-owned non-U.S. subsidiaries have elected to be treated as
disregarded entities for U.S. federal tax consequences. As a result, Ampal is
subject to US tax on all income earned by such subsidiaries, as it is earned.

Ampal
U.S. is generally 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 U.S. receives dividends from a non-US corporation in
which it owns 10% or more of the voting stock, Ampal U.S. is treated (in determining the
amount of foreign income taxes paid by Ampal U.S. for purposes of the foreign tax credit)
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 U.S. may claim is limited to the same
proportion of Ampal U.S.s United States income taxes that its foreign source taxable
income bears to its taxable income from all sources, US and non-US. This limitation is
applied separately with respect to passive and active items of income, which may further
limit Ampals ability to claim foreign taxes as a credit against its U.S. tax
liability. The use of foreign taxes as an offset against United States tax liability is
further limited by certain rules pertaining to the sourcing of income and the allocation
of deductions. As a result of the combined operation of these rules, it is possible that
Ampal U.S. would exercise its right to elect to deduct the foreign taxes, in lieu of
claiming such taxes as a foreign tax credit.

Ampal
U.S. may also 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 as well as net operating losses
(NOLs), both of which are separately calculated under AMT rules. The NOL is
generally limited to 90% of the alternative minimum taxable income.

# Available information

We
maintain a website at www.ampal.com. We make available on our website under Investor
Relations  SEC Filings, free of charge, our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports as soon as reasonably practicable after we electronically file or furnish such
material with the Securities and Exchange Commission.

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# FORWARD-LOOKING
STATEMENTS

This
Report (including but not limited to factors discussed in the Managements
Discussion and Analysis of Financial Condition and Results of Operations, as well as
those discussed elsewhere in this Report) includes forward-looking statements (as such
term is defined in the Private Securities Litigation Reform Act of 1995) and information
relating to the Company that are based on the beliefs of management of the Company as well
as assumptions made by and information currently available to the management of the
Company. When used in this Report, the words anticipate, believe,
estimate, expect, intend, plan, and
similar expressions, as they relate to the Company or the management of the Company,
identify forward-looking statements. Such statements reflect the current views of the
Company with respect to future events or future financial performance of the Company, the
outcome of which is subject to certain risks and other factors which could cause actual
results to differ materially from those anticipated by the forward-looking statements,
including among others, the economic and political conditions in Israel, the Middle East,
including the situation in Iraq, the impact of the credit crisis and in the global
business and economic conditions in the different sectors and markets where the
Companys portfolio companies operate. These risks and uncertainties include, but are
not limited to, those described in Item 1A  Risk Factors and elsewhere
in this Report and those described from time to time in our future reports filed with the
Securities and Exchange Commission.

SHOULD
ANY OF THOSE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE
INCORRECT, ACTUAL RESULTS OR OUTCOME MAY VARY FROM THOSE DESCRIBED THEREIN AS ANTICIPATED,
BELIEVED, ESTIMATED, EXPECTED, INTENDED OR PLANNED. SUBSEQUENT WRITTEN AND ORAL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE
EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS IN THIS PARAGRAPH AND
ELSEWHERE DESCRIBED IN THIS REPORT AND OTHER REPORTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING
STATEMENTS.

|ITEM 1A. | RISK FACTORS
|-------- | ------------

An
investment in our securities involves risks and uncertainties. These risks and
uncertainties could cause our actual results to differ materially from our historical
results or the results contemplated by any forward-looking statements contained in this
Report or that we make in other filings with the SEC under the Securities and Exchange Act
of 1934 or in other public statements. The risks described below are not the only risks
facing the Company. Additional risks and uncertainties not currently known to us or that
we currently deem to be immaterial also may materially adversely affect our business,
financial condition and/or operating results. You should consider the following factors
carefully, in addition to the other information contained in this Report, before deciding
to purchase, sell or hold our securities.

Because most of the companies
in which we invest conduct their principal operations in Israel, we may be adversely
affected by the economic, political, social and military conditions in the Middle East.

Most
of the companies in which we directly or indirectly invest have principal operations that
are Israel-related. We may, therefore, be directly affected by economic, political, social
and military conditions in the Middle East, including Israels relationship with the
Palestinian Authority and Arab countries. In addition, many of the companies in which we
invest are dependent upon materials imported from outside of Israel. We also have
interests in companies that import and export significant amounts of products to and from
Israel. Our existing 100% stake in Gadot (99.99% on a fully diluted basis), and our
existing 16.8% stake in EMG (8.6% of which is held by the Joint Venture, of which Ampal
owns 50%), an Egyptian joint stock company, together represent a substantial portion of
our investment portfolio and may be particularly sensitive to conditions in the Middle
East. Accordingly, our operations could be materially and adversely affected by acts of
terrorism or if major hostilities should continue or occur in the future in the Middle
East or trade between Israel and its present trading partners should be curtailed,
including as a result of acts of terrorism in the United States. Any such effects may
impact our value and the value of our investee companies.

Hamas,
an Islamist movement, won the majority of the seats in the Parliament of the PA in January
2006 and took control of Gaza by force in June 2007. During the summer of 2006, Israel
waged a war with the Hezbollah movement in Lebanon, which involved thousands of missile
strikes in Northern Israel. Since June 2007, thousands of missiles have been fired from
Gaza at population centers in southern Israel, leading to an armed conflict between Israel
and Hamas in January 2009. In the meantime, Iran has threatened to attack Israel and is
widely believed to be developing nuclear weapons. This security situation has had an
adverse effect on Israels economy, primarily in the
relevant geographic areas. Although we do not believe that this situation has
had a material adverse effect on our business or financial condition, if such situation
resumes and/or escalates, the adverse economic effect may deepen and spread to
additional areas and may materially adversely affect the Company and its
subsidiaries business and financial condition.

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Because of our significant
investment in Gadot, we may be adversely affected by changes in the financial condition,
business, or operations of Gadot.

As
of December 31, 2008, the Company beneficially owns 100% of Gadot (99.99% on a fully
diluted basis) and we consolidate Gadot in the accompanying financial statements. This
investment constitutes one of our largest holdings. As a result, changes in the financial
condition, business or operations of Gadot (see Risk Factors  Risks Associated
with Gadots Business) will significantly affect our financial condition and results
of operations. Furthermore, the current global economic downturn may materially adversely
affect Gadots business (see Risk Factors  Conditions and changes in the
national and global economic and political environments may adversely affect our business
and financial results). Although Gadot has historically paid dividends to its
shareholders, changes in Gadots operations may limit their ability to pay dividends
in the future. Further, as a component of Ampals consolidated financial statements
any dividends paid will not be reflected as income by Ampal. While the payment of
dividends would not impact Ampals consolidated earnings, it could limit the
financial resources available to operate the holding company which could adversely affect
our operations and financial condition.

Because of our significant
investment in EMG, we may be adversely affected by changes in the financial condition,
business, or operations of EMG.

As
of December 31, 2008, the Company beneficially owns approximately 16.8% of EMG (8.6% of
which is held by the Joint Venture, of which Ampal owns 50%), a result of a series of
transactions with our controlling shareholder, which was accounted as transaction between
entities under common control. This investment constitutes one of our largest holdings. As
a result, changes in the financial condition, business or operations of EMG, including,
without limitation, gas supply interruptions such as those experienced during 2008, the
completion of the pipeline, and the ability of EMG to utilize the pipeline, whether as a
result of environmental, regulatory or political issues or otherwise, may impact our
ability to receive dividends from EMG which could adversely affect our operations and
financial condition. Additionally, we have a minority interest in EMG, and therefore, do
not have the ability to significantly influence or direct the affairs of EMG.

EMG
have reached in February 2009 an agreement in principle with the Egyptian authorities with
regard to repricing gas sold to EMG. The agreement is yet to be finalized in the form of
an amendment to the agreement between EMG and its upstream supplier.  To the best of
Ampals understanding from EMG, the agreement in principle with the Egyptian
authorities includes various provisions designed to avoid adverse economic impact to EMG,
and the two sides have committed to a good faith intensive effort to reach a definitive
agreement with respect to supply and the price of gas to EMG. There is, however, no
assurance that the negotiations will be completed or that the outcome will not adversely
affect EMG. To the best of Ampals understanding, recently other international
companies purchasing gas from Egypt successfully completed such negotiations to all
parties satisfaction. At this stage EMG is not supplying the full contracted
quantities of the gas and to the best of Ampals knowledge the full contracted
quantities should begin to be supplied in the near future. The said price negotiations
commenced on the request of the Egyptian Ministry of Trade and Infrastructure and were
driven by the substantial increase in the energy prices since the existing gas purchase
prices were determined in 2000.

In
May 2008, the Government of Egypt adopted legislation that purports to revoke the tax free
status of existing free zone companies which would also apply to EMG. The impact of this
recent change in law would be to impose a 20% tax on EMGs future income. It is not
clear to what extent the legislation will be enforced or whether it is valid under
Egyptian legal principles. If such legislation is enforceable or valid under Egyptian law,
it could adversely affect our operations and financial condition.

Conditions and changes in
the national and global economic and political environments may adversely affect our
business and financial results.

Adverse
economic conditions in markets in which our investee companies operate can harm our
business. Current global financial conditions have been characterized by increased
volatility and several financial institutions have either gone into bankruptcy or have had
to be rescued by governmental authorities. It is believed that the current recession will
continue and worsen. With major financial institutions de-levering their balance sheets,
credit was constricted for much of 2008 and may likely remain so for an extended period.
Partly as a result, entire industries are facing extreme contraction and even the prospect
of collapse. If economic growth in the United States and other countries continues to
decline, this may have a negative impact on our liquidity, financial condition and stock
price, which may impact the ability of the Company to obtain financing and other sources
of funding in the future on terms favorable to the Company, if at all. Additionally, these
factors, as well as other related factors, may cause decreases in asset values that are
deemed to be other than temporary, which may result in impairment losses. If such
increased levels of volatility and market turmoil continue, it may materially adversely
affect the Companys results of operations.

The SEC may re-examine,
suspend or modify our exemption from the Investment Company Act of 1940, as amended.

In
1947, the SEC granted us an exemption from the 1940 Act, pursuant to an exemptive order.
The exemptive order was granted based upon the nature of our operations. There can be no
assurance that the SEC will not re-examine the exemptive order and revoke, suspend or
modify it. A revocation, suspension or material modification of the exemptive order could
materially and adversely affect us unless we were able to obtain other appropriate
exemptive relief. In the event that we become subject to the provisions of the 1940 Act,
we could be required, among other matters, to make changes, which might be material, to
our management, capital structure and methods of operation, including our dealings with
principal shareholders and their related companies.

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As most of our investee
companies conduct business outside of the United States, we are exposed to foreign
currency and other risks.

We
are subject to the risks of doing business outside the United States, including, among
other risks, foreign currency exchange rate risks, changes in interest rates, equity price
changes of our investee companies, import restrictions, anti-dumping investigations,
political or labor disturbances, expropriation and acts of war. No assurances can be given
that we will be protected from future changes in foreign currency exchange rates that may
impact our financial condition or performance.

Foreign
securities or illiquid securities in our portfolio involve higher risk and may subject us
to higher price volatility. Investing in securities of foreign issuers involves risks not
associated with U.S. investments, including settlement risks, currency fluctuations, local
withholding and other taxes, different financial reporting practices and regulatory
standards, high costs of trading, changes in political conditions, expropriation,
investment and repatriation restrictions, and settlement and custody risks.

Changes in taxation
requirements could affect our financial results.

We
are subject to income tax in the numerous jurisdictions in which we generate revenues.
Increases in income tax rates could reduce our after-tax income from affected
jurisdictions.

We have had a history of
losses which may ultimately compromise our ability to implement our business plan.

We
have had losses in four of the past five fiscal years. We will continue to make
investments opportunistically and to divest ourselves from certain assets which we believe
lack growth potential. However, if we are not able to generate sufficient revenues or we
have insufficient capital resources, we will not be able to implement our business plan of
investing in, and growing, companies with strong long-term growth prospectus and investors
will suffer a loss in their investment. This may result in a change in our business
strategies.

The loss of key
executives could cause our business to suffer.

Yosef
A. Maiman, the Chairman of our Board of Directors, President & CEO, and other key
executives, have been key to the success of our business to date. The loss or retirement
of such key executives and the concomitant loss of leadership and experience that would
occur could adversely affect us.

We are controlled by a group of
investors, which includes Yosef A. Maiman, our Chairman, and this control relationship
could discourage attempts to acquire us.

A
group of shareholders consisting of Yosef A. Maiman, the Chairman of our Board of
Directors, President & CEO, Ohad Maiman, Noa Maiman, and Yoav Maiman, and the
companies Merhav (De Majorca), De Majorca Holdings Ltd. and Di-Rapallo
Holdings Ltd. (Di-Rapallo) beneficially owns approximately 61.22% of the
voting power of our Class A Stock. The group was formed in recognition of the Maiman
familys strong connection with the Company and in furtherance of the groups
common goals and objectives as shareholders, including the orderly management and
operation of the Company. By virtue of its ownership of Ampal, this group is able to
control our affairs and to influence the election of the members of our Board of
Directors. This group also has the ability to prevent or cause a change in control of
Ampal. Mr. Maiman owns 100% of the economic shares and one-quarter of the voting shares of
De Majorca and Di-Rapallo. Merhav is wholly owned by Mr. Maiman.

Because we are a
controlled company, we are exempt from complying with certain listing
standards of the NASDAQ Global Market (NASDAQ).

Because
a group of investors who are acting together pursuant to an agreement hold more than 50%
of the voting power of our Class A Stock, we are deemed to be a controlled
company under the rules of NASDAQ. As a result, we are exempt from the NASDAQ rules
that require listed companies to have (i) a majority of independent directors on the board
of directors, (ii) a compensation committee and nominating committee composed solely of
independent directors, (iii) the compensation of executive officers determined by a
majority of the independent directors or a compensation committee composed solely of
independent directors and (iv) a majority of the independent directors or a nominating
committee composed solely of independent directors elect or recommend director nominees
for selection by the board of directors. Accordingly, our directors who hold management
positions or who are otherwise not independent have greater influence over our business
and affairs.

We do not publish the
value of our assets.

It
is our policy not to publish the value of our assets or our views on the conditions of or
prospects for our investee companies. To the extent the value of our ownership interests
in our investee companies were to experience declines in the future, our performance would
be adversely impacted.

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We do not typically pay
cash dividends on our Class A Stock.

We
have not paid a dividend on our Class A Stock other than in 1995. Past decisions not to
pay cash dividends on Class A Stock reflected our policy to apply retained earnings,
including funds realized from the disposition of holdings, to finance our business
activities and to redeem or repay our outstanding debt, including our $216.7 million (as
of December 31, 2008) unsecured notes on which principal payments commence in 2011. The
payment of cash dividends in the future will depend upon our operating results, cash flow,
working capital requirements and other factors we deem pertinent.

The market price per share of
our Class A Stock on NASDAQ and TASE fluctuates and has traded in the past at less than
our book value per share.

Stock
prices of companies, both domestically and abroad, are subject to fluctuations in trading
price. Therefore, as with a company like ours that invests in stocks of other companies,
our book value and market price will fluctuate, especially in the short term. As of
February 23, 2009 the market price on NASDAQ was $1.29 per share. However our shares have
in the past traded below book value. You may experience a decline in the value of your
investment and you could lose money if you sell your shares at a price lower than you paid
for them.

Our
listing on NASDAQ requires us to satisfy a number of conditions, including a minimum bid
price of at least $1.00 per share. The NASDAQ has currently suspended this requirement
until April 20, 2009. After this date, unless NASDAQ extends this requirement suspension,
we will have to regain compliance with such requirement. We cannot assure you that we will
be able to satisfy the minimum bid, or continue to meet the other continued listing
requirements of NASDAQ in the future. If we are delisted from the NASDAQ, trading in our
Class A Stock may be conducted, if available, on the OTC Bulletin Board or another medium.
In the event of such delisting, an investor would likely find it significantly more
difficult to dispose of, or to obtain accurate quotations as to the value of our Class A
Stock, and our ability to raise future capital through the sale of our Class A Stock could
be severely limited.

Our Class A Stock may not
be liquid.

Our
Class A Stock is currently traded on NASDAQ and the TASE. The trading volume of our Class
A Stock may be adversely affected due to the limited marketability of our Class A Stock as
compared to other companies listed on NASDAQ and the TASE. Accordingly, any substantial
sales of our Class A Stock may result in a material reduction in price of our Class A
Stock because relatively few buyers may be available to purchase our Class A Stock.

A further downgrade, or
suspension or withdrawal of the rating assigned by a rating agency to our debentures could
cause the liquidity or market value of the debentures to decline significantly.

As
a result of events concerning EMG, Midroog downgraded the rating on Ampals Series A
and Series B Debentures from A2 to A3 and will continue to maintain Ampal on its
Watchlist. Midroog stated that it will monitor the situation, including the
negotiations between EMG and the Egyptian gas supplier, the regularity of the gas supply
and other matters, and will review Ampals rating accordingly. Ampals rating
will remain on the Watchlist. If Midroog further downgrades, suspends or withdraws the
ratings of our debentures, we may experience increased difficulty in raising debt
financing in the future.

Risks Associated with
Gadots Business

Global
Economic Conditions. The overall demand for chemical products, especially commodity
chemicals, is highly dependent on general economic conditions. During 2008, both the
prices and demand for chemicals have been volatile. The economic indicators from the
United States and Europe have started to negatively influence demand. The economic slow
down is already being felt in the construction sector, mainly in the United States, which
had enjoyed significant growth in recent years. The construction sector is a large
consumer of chemical products. A downturn in demand for chemical products may impact the
financial condition or performance of Gadots chemical products business.

Price
Fluctuation. Gadot is exposed to fluctuations in chemical prices on the international
market. It minimizes this risk by keeping surplus in stock only for its immediate needs,
based on expected demand and past experience. Gadot is also exposed to fluctuations in
shipping prices resulting from global supply and demand. Since Gadots ship leases
are generally for long term periods, a downturn in shipping prices may impact the
financial condition or performance of Gadots shipping business.

Price
Fluctuation of Ship Fuel. Gadot is exposed to fluctuations in ship fuel prices, which
have a direct affect on the profitability of its shipping operations. It minimizes this
risk by using price adjustment mechanisms tracking the price of ship fuel in its shipping
contracts with customers, especially in its long term contracts.

Exchange
Rates. Exchange rate fluctuations between the U.S. dollar and the New Israeli Shekel
(NIS) may negatively affect Gadots earnings. A substantial majority of
Gadots revenues and expenses are denominated in U.S. dollars. However, a significant
portion of the expenses associated with Gadots Israeli operations, including
personnel and facilities related expenses, are incurred in NIS. Consequently, inflation in
Israel will have the effect of increasing the dollar cost of Gadots operations in
Israel, unless it is offset on a timely basis by a devaluation of the NIS relative to the
U.S. dollar. In addition, if the value of the U.S. dollar decreases against the NIS,
Gadots earnings may be negatively impacted. In 2007, the U.S. dollar depreciated
against the NIS by 8.53% and inflation increased by 3.5%. We cannot predict any future
trends in the rate of inflation in Israel or the rate of devaluation or appreciation of
the NIS against the U.S. dollar or of the U.S. dollar against the NIS. If the U.S. dollar
cost of Gadots operations in Israel increases and if the current trend of
depreciation of the U.S. dollar against the NIS continues, Gadots dollar-measured
results of operations will be adversely affected. In addition, exchange rate fluctuations
in countries other than Israel where Gadot operates and does business may also negatively
affect its earnings.

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Interest
Rate Fluctuations. Gadots operations are funded mostly through short term and
long term bank debt, which causes an exposure to interest rate fluctuations.

Ecological
Concerns and Licensing Requirements. Some of Gadots products are characterized
by high risk to those who might be exposed to them in the course of their handling and
shipping. Some of the products may also potentially cause ecological damage and pollution,
if not handled properly. The clean up and correction of such damage could cause Gadot to
incur high costs.

Ongoing
environmental pollution or contamination is not covered by Gadots insurance policies
for ecological damage. These policies only cover pollution caused by sudden, accidental
and unexpected occurrences. Gadot takes safety measures to avoid such risks, such as
laying concrete buffers to protect soil, continuous maintenance of chemical tanks and
periodical ground sampling in the vicinity of chemical tanks. However, these precautions
cannot ensure total prevention of contaminating water sources or ground.

In
addition, licensing requirements around the world are becoming stricter, due to growing
ecological awareness. Gadot may have to invest increasing amounts of money and resources
in order to fulfill all international licensing requirements necessary for its operations.

Storage
Facility License. Gadots chemical storage facility is located on land owned by
the Haifa port authority. A cancellation or termination of the licenses permitting Gadot
to use the land would materially adversely affect Gadots ability to operate its
chemical storage facility.

|ITEM 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------

None.

|ITEM 2. | PROPERTY
|------- | --------

We
lease our headquarters located at 10 Abba Even St., Herzliya. The lease is for a period of
10 years commencing on January 24, 2007. The annual rent for this lease is $326,000. We
sublease part of the offices for an annual sublease rent of $90,805.

We
also lease a headquarters office at 555 Madison Avenue in New York City from Rodney
Company N.V., Inc. The lease is for a period of seven years commencing on October 15,
2002. The annual rent for this lease is $125,268. On March 31, 2004, the Company closed
this office and reopened it at the beginning of 2009. The office space has been subleased
during the time that the Company did not use it.

Gadot
leases a 17,000 square meter storage tank facility located in the northern bank of the
Kishon port in Haifa from the port authority, The annual rent for this lease is $1,4
million. The lease expires in 2022. Gadot also leases an additional 56,000 square meter
area from the port authority located in the southern terminal of the Kishon port in Haifa
in connection with its storage and loading services. The annual rent for this lease is
$1,6 million. See Item 1  Business  Chemicals  Gadot Chemical
Tankers and Terminals Ltd.  Storage, Loading and Off-Loading of Materials.
This lease expires in 2014.

Gadot
also owns an additional 20,000 square meters area adjacent to the northern terminal,
serving as its Israeli logistics facility and for its analytical and quality assurance
laboratory. Gadot also leases a 1,100 square meter building in Ohr Akiva, Israel the
annual rent for this lease is $75,750, a 7,500 square meter area in the Ashdod, Israel,
industrial zone, the annual rent for this lease is $115,992 and a 6,300 square meter area
in Kiryat Atta, Israel, the annual rent for this lease is $56,023.

Gadot
owns approximately 45,000 square meters of land in Greece, which was occupied by a
chemical terminal. This terminal was destroyed by a fire in July 2006.

As
of December 31st, 2008, Gadot leases seven vessels, with an aggregate loading
capability of approximately 87,000 tons. The lease period for four of the vessels is until
2011, out of which one vessel purchase option has been declared to be exercised during
2009. The lease period for an additional three of the vessels shall expire during 2009
with an option to extend the time-charter terms for two additional years. An additional
leased vessel was returned to the owner during October 2008. The aggregate lease fees for
the eight leased vessels in 2008 amounted to $34 million. In 2009, the lease payments are
expected to amount to approximately $24.8 million deu to returning of two vessels and are
expected to decrease to $9.9 million for the year 2010 and thereafter are expected to
decrease to $6.4 million.

20

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Gadot
has contracted a shipyard for the construction of four additional vessels built with a
loading capability of 17,500 each, for a consideration of approximately $29 million per
vessel. These vessels will be delivered during 2010 and 2011.

Country
Club Kfar Saba Ltd. occupies a 7-1/4 acre lot in the town of Kfar Saba 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 2008 totaled $235,645.

Other
properties of the Company are discussed elsewhere in this Report. See Item 1 
Business.

|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------

On
January 1, 2002, Galha (1960) Ltd. (Galha) filed a suit against the Company
and other parties, including directors of Paradise Industries Ltd. (Paradise)
appointed by the Company, in the Tel Aviv District Court, in the amount of NIS 11,560,000
($3 million). Galha claimed that the Company, which was a shareholder of Paradise, and
another shareholder of Paradise, misused funds that were received by Paradise from an
insurance company for the purpose of reconstructing an industrial building owned by Galha
and used by Paradise which burnt down. Paradise is currently involved in liquidation
proceedings. Ampal issued a guarantee in favor of Galha for the payment of an amount of up
to NIS 4,172,000 ($1,085,000) if a final judgment against the Company will be given.

On
May 26, 2003, the Company and the directors of Paradise appointed by the Company filed a
third party claim against Arieh Israeli Insurance Company Ltd. in the Tel Aviv District
Court claiming that, to the extent the court decides that the directors of Paradise
appointed by the Company will have to pay any amounts to Galha, Arieh will pay such
amounts on behalf of the directors in accordance with the Directors and Officers insurance
policy that the Company had at that time with Arieh. Arieh filed a statement of defense
and stated that the policy does not cover the claim. The dispute was submitted to
mediation. In the mediation procedure the parties arrived to an agreement that was
approved as a judgment of the Tel Aviv District Court on January 13, 2009. According to
the judgment Ampal paid the Plaintiffs an amount of NIS 834,200 ($219,411), Arieh paid an
amount of $150,000 and a third defendant paid an amount of NIS 135,800 ($35,718). The
judgment stated that claim was declined against all defendants and the guarantee Ampal
issued in favor of the Galha was cancelled.

Claims
Against Subsidiaries and Affiliates

Legal
claims arising in the normal course of business have been filed against subsidiaries and
affiliates of the Company.

Gadot
has received third party notices in a number of lawsuits regarding pollution of the Kishon
River in Israel. These lawsuits have been filed by various claimants who claim harm by the
polluted water of the river, including soldiers from various units in the Israeli Defense
Forces who trained in the river, fishermen who fished in the river, the Haifa rowing club
and industrial companies that use the river. Some of the lawsuits are claims for monetary
damages (some of the claims are unlimited in amount; one is for approximately $6 million)
and some are for injunctions against further pollution of the river. Gadot denies
liability in all these claims and has filed statements of defense for each claim. Part of
Gadots storage tank facility is leased from the Haifa port authority. In 2001 the
port authority requested that Gadot participate in an offer to find a consultant to
examine ground contamination in the area surrounding the facility.. Gadot has responded,
denying the existence of ground contamination and, in any case, that it is the source of
such contamination. Gadot believes that if there is contamination, its source is the
contaminated waters of the Kishon River or the Mediterranean Sea.

21

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

At
an annual meeting of shareholders called and convened on November 5, 2008, the following
proposals were approved by the margins indicated below:

| | 1. | Proposal
to elect the nine directors listed below to the Board of Directors of
               Ampal to hold office for one-year terms and until their respective
successors                shall be elected and qualified:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      | For | Withheld
Authority
|--------------------- | --- | ------------------
|
|
|
|
|Yosef A. Maiman       |     |                   
|Leo Malamud           |     |                   
|Dr. Joseph Yerushalmi |     |                   
|Dr. Nimrod Novik      |     |                   
|Yehuda Karni          |     |                   
|Eitan Haber           |     |                   
|Menahem Morag         |     |                   
|Joseph  Geva          |     |                   
|Erez I. Meltzer       |     |                   
|                      |     |                   

| | 2. | Proposal
to ratify the appointment of Kesselman & Kesselman, a member firm                of
PricewaterhouseCoopers International Limited, as the independent registered
               public accounting firm of Ampal for the fiscal year ending December 31,
2008.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|For | Against    | Abstained
|--- | ---------- | ---------
|
|
|
|
|    | 45,347,246 |          
|    |            |          

22

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# PART II

|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------

# PRICE RANGE OF CLASS A
STOCK

Ampals
Class A Stock is listed on NASDAQ Global Market under the symbol AMPL. The
following table sets forth the high and low bid prices for the Class A Stock, by quarterly
period for the fiscal years 2008 and 2007, as reported by NASDAQ Global 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.

| |                | High | Low
| | -------------- | ---- | ---
|
|
|
|
| | 2008:          |      |    
| | Fourth Quarter |      |    
| | Third Quarter  |      |    
| | Second Quarter |      |    
| | First Quarter  |      |    
| |                |      |    
| | 2007:          |      |    
| | Fourth Quarter |      |    
| | Third Quarter  |      |    
| | Second Quarter |      |    
| | First Quarter  |      |    
| |                |      |    

As
of February 23, 2009, there were approximately 1,258 record holders of Class A Stock.

Ampal
listed its Class A Stock on the TASE on August 6, 2006, and since then it has been a dual
listed company.

# VOTING RIGHTS

The
holders of Class A Stock are entitled to one vote per share on all matters voted upon. The
shares of Class A Stock do not have cumulative voting rights in relation to the election
of the Companys directors, which means that any holder of at least 50% of the Class
A Stock can elect all of the members of Board of Directors of Ampal.

# DIVIDEND POLICY

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 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. Ampal is subject to limitations on
certain distributions and dividends to stockholders. See Item 7 
Managements Discussion and Analysis of Financial Condition and Results of
Operation.

For
equity compensation plan information required by Item 201(d) of Regulation S-K, please see
Item 12" below.

# ISSUER PURCHASES OF
EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Ampals
Board of Directors approved a stock repurchase program, effective as of November 23, 2008.
Under the program, Ampal is authorized to repurchase up to $20 million of its outstanding
shares of its Class A Stock, from time to time depending on market conditions, share price
and other factors. The repurchases may be made on the open market, in block trades or
otherwise and may include derivative transactions. The program may be suspended or
discontinued at any time. Ampal also adopted a Rule 10b5-1 trading plan, which allows
Ampal to repurchase its Class A Stock in the open market during periods in which stock
trading is otherwise prohibited to Ampal due to insider trading laws. The repurchase
programs is funded using Ampals available cash and by possible future borrowings.

23

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During
the fourth quarter of the fiscal year ended December 31, 2008, Ampal made the
following stock repurchases pursuant to the stock repurchase program:

|                                         | (a) | (b) | (c) | (d)      
|---------------------------------------- | --- | --- | --- | ---------
|
|
|
|
|Month #1 (October 1st to October 31st)   |     |     |     | 29,882   
|                                         |     |    
|Month #2 (November 1st to November 30th) |     |     |     | -        
|                                         |     |    
|Month #3 (December 1st to December 31st) |     |     |     | 1,366,415
|                                         |     |    
|Total                                    |     |     |     | 1,396,297

|(1) | On November 24, 2008, Ampal announced that its Board of Directors approved
          a repurchase program, effective November 23, 2008, to repurchase up to $20
          million of its Class A Stock.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | These purchases were made by Merhav, an affiliated purchaser as
          defined by Rule 10b-18(a)(3) of the Securities Exchange Act of 1934, as amended,
          pursuant to a Rule 10b5-1 trading plan, which was terminated on October 7, 2008.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------

The
selected consolidated statement of operations data for the years ended December 31, 2006,
2007 and 2008 and consolidated balance sheet data as of December 31, 2007 and 2008 have
been derived from our audited consolidated financial statements included in this Report.
The selected consolidated statement of operations data for the years ended December 31,
2004 and 2005 and the selected consolidated balance sheet data as of December 31, 2004,
2005 and 2006 have been derived from our unaudited consolidated financial statements not
included herein.

24

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This
data should be read in conjunction with our consolidated financial statements and related
notes included herein and Item 7  Managements Discussion and Analysis of
Financial Condition and Results of Operations.

|                                                       | Fiscal year ended December 31,
|------------------------------------------------------ | ------------------------------
|
|
|
|
|Revenues                                               |                               
|                                                       |                               
|Loss from continuing operations                        |                               
|Income (loss) from discontinued operations, net of tax |                               
|                                                       |                               
|Net income (loss)                                      |                               
|                                                       |                               
|Basic and diluted EPS(2):                              |                               
|Loss from continuing operations                        |                               
|Income (loss) from discontinued operations, net of tax |                               
|                                                       |                               
|                                                       |                               
|                                                       |                               
|Total assets                                           |                               
|                                                       |                               
|Notes, loans and debentures payable                    |                               
|                                                       |                               

|(1) | Results
have been restated for the discontinued operations of our real estate
          operations, which was sold in August 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(2) | Computation
for the years 2006, 2005 and 2004 is based on net income (loss)           after deduction
of preferred stock dividends (in thousands) of $2,438, $191 and           $200,
respectively for those years. On July 31, 2006, all of the preferred stock           was
converted into Class A Stock.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | In
2006, the Company changed the method by which it accounts for share-based
          compensation by adopting SFAS 123R, which resulted in expenses of $1,365, $783
          and $720 thousand for the years 2008, 2007 and 2006, respectively and impacted
          the EPS by $ (0.03), $(0.015) and $(0.03) respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|------- | -------------------------------------------------------------------------------------

# OVERVIEW

We
seek to maximize shareholder value through acquiring and investing in companies that we
consider have the potential for growth. In utilizing our core competencies and financial
resources, our investment portfolio primarily focuses on Israel-related companies engaged
in various market segments including Chemicals, Energy, Real Estate, Project Development
and Leisure Time.

Our
investment focus is primarily on companies or ventures where we can exercise significant
influence, on our own or with investment partners, and use our management experience to
enhance those investments. We are also monitoring investment opportunities, both in Israel
and abroad, that we believe will strengthen and diversify our portfolio and maximize the
value of our capital stock. In determining whether to acquire an interest in a specific
company, we consider the quality of management, return on investment, growth potential,
projected cash flow, investment size and financing, and reputable investment partners. We
also provide our investee companies with ongoing support through our involvement in the
investee companies strategic decisions and introductions to the financial community,
investment bankers and other potential investors both in and outside of Israel.

For
a description of significant developments during 2008, see Item 1  Business
 Significant Developments during 2008.

Our
results of operations are directly affected by the results of operations of our investee
companies. A comparison of the financial statements from year to year must be considered
in light of our acquisitions and dispositions during each period.

25

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The
results of investee companies which are greater than 50% owned by us are included in the
consolidated financial statements. We account for our holdings in investee companies over
which we exercise significant influence, generally 20% to 50% owned companies
(affiliates), under the equity method. Under the equity method, we recognize
our 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. The 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 our carrying value per share for such
affiliate results in our 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 our
carrying value per share for such affiliate results in our recognizing a loss for the
period in which such issuance is made. We account for our holdings in investee companies,
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. In addition, we review investments
accounted for under the cost method and those accounted for under the equity method
periodically in order to determine whether to maintain the current carrying value or to
write down some or all of the investment. For more information as to how we make these
determinations, see Critical Accounting Policies.

For
those subsidiaries and affiliates whose functional currency is considered to be a currency
other than the US dollar, 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 exchange rate of those other currencies change against the U.S. dollar,
cumulative translation adjustments are likely to be effected in the shareholders
equity. As of December 31, 2008, the accumulated effect on shareholders equity was a
decrease of approximately $1.3 million. Upon the disposition of an investment, the related
cumulative translation adjustment balance will be recognized in determining gains or
losses.

# CRITICAL ACCOUNTING
POLICIES

The
preparation of Ampals consolidated financial statements is in conformity with
generally accepted accounting principles in the United States (US GAAP) which
requires management to make estimates and assumptions in certain circumstances that affect
amounts reported in the accompanying consolidated financial statements and related
footnotes. Actual results may differ from these estimates. To facilitate the understanding
of Ampals business activities, described below are certain Ampal accounting policies
that are relatively more important to the portrayal of its financial condition and results
of operations and that require managements subjective judgments. Ampal bases its
judgments on its experience and various other assumptions that it believes to be
reasonable under the circumstances. Please refer to Note 1 to Ampals consolidated
financial statements included in this Report for the fiscal year ended December 31, 2008
for a summary of all of Ampals significant accounting policies.

Business combinations

Business
combinations have been accounted for using the purchase method of accounting. Under the
purchase method of accounting the results of operations of the acquired business are
included from the date of acquisition. The costs of acquiring companies, including
transactions costs, have been allocated to the underlying net assets of each acquired
company in proportion to their respective fair values. Any excess of the purchase price
over estimated fair values of the identifiable net assets acquired has been recorded as
goodwill.

Investment in EMG and
other cost basis investments

The
Company accounts for its 16.8% equity interest (includes 8.6% held by the Joint Venture)
in EMG and a number of other investments on the basis of the cost method. EMG, which is
one of the Companys most significant holdings as of December 31, 2008, was acquired
by Ampal and by a joint venture in which Ampal is a party in a series of transactions from
Merhav, which is an entity controlled by one of the members of the Companys
controlling shareholder group. As a result, the transactions were accounted for as
transfers of assets between entities under common control, which resulted in Merhav
transferring the investment in EMG at carrying value. Due to the nature of Merhavs
operations, this entity would be treated as an investment company under US GAAP, and as
such, the carrying value of the investment in EMG would equal fair value. As a result, the
16.8% investment in EMG was transferred at carrying value, which equals fair value.
Application of the cost basis method requires the Company to periodically review these
investments in order to determine whether to maintain the current carrying value or to
write down some or all of the investment. While the Company uses some objective
measurements in its review, such as the portfolio companys liquidity, burn rate,
termination of a substantial number of employees, achievement of milestones set forth in
its business plan or projections and seeks to obtain relevant information from the company
under review, the review process involves a number of judgments on the part of the
Companys management. These judgments include assessments of the likelihood of the
company under review to obtain additional financing, to achieve future milestones, make
sales and to compete effectively in its markets. In making these judgments the Company
must also attempt to anticipate trends in the particular companys industry as well
as in the general economy. There can be no guarantee that the Company will be accurate in
its assessments and judgments. To the extent that the Company is not correct in its
conclusion it may decide to write down all or part of the particular investment.

26

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Marketable Securities

We
determine the appropriate classification of marketable securities at the time of purchase.
We hold marketable securities classified as trading securities that are carried at fair
value. We classify investment in marketable securities as investment in trading
securities, if those securities are bought and held principally for the purpose of selling
them in the near term (held for only a short period of time). All the other securities are
classified as available for sale securities.

SFAS
115, Accounting for Certain Investments in Debt and Equity Securities, and
Securities and Exchange Commission (SEC) Staff Accounting Bulletin
(SAB) 59, Accounting for Noncurrent Marketable Equity Securities,
provides guidance on determining when an investment is other-than-temporarily impaired.
Investments are reviewed quarterly for indicators of other-than-temporary impairment. This
determination requires significant judgment. In making this judgment, we evaluate, among
other factors, the duration and extent to which the fair value of an investment is less
than its cost; the financial health of the investee; and our intent and ability to hold
the investment. Investments with an indicator are further evaluated to determine the
likelihood of a significant adverse effect on the fair value and amount of the impairment
as necessary. If market, industry and/or investee conditions deteriorate, we may incur
future impairments.

Long- lived assets

On
January 1, 2002, Ampal adopted SFAS 144, Accounting for the Impairment or Disposal
of Long- Lived Assets. SFAS 144 requires that long-lived assets, to be held and used
by an entity, be reviewed for impairment and, if necessary, written down to the estimated
fair values, whenever events or changes in circumstances indicate that the carrying amount
of the assets may not be recoverable through undiscounted future cash flows.

Accounting for Income
Taxes

As
part of the process of preparing our consolidated financial statements, we are required to
estimate our income taxes in each of the jurisdictions in which we operate. This process
involves us estimating our current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are included in our
consolidated balance sheet. We must then assess the likelihood that our deferred tax
assets will be recovered from future taxable income, and, to the extent we believe that
recovery is not likely, we must establish a valuation allowance. To the extent we
establish a valuation allowance or increase this allowance in a period, we must include an
expense within the tax provision in the statement of operations. A valuation allowance is
currently set against certain tax assets because management believes it is more likely
than not that these deferred tax assets will not be realized through the generation of
future taxable income.

Significant
management judgment is required in determining our provision for income taxes, our
deferred tax assets and liabilities and our future taxable income for purposes of
assessing our ability to realize any future benefit from our deferred tax assets. In the
event that actual results differ from these estimates or we adjust these estimates in
future periods, our operating results and financial position could be materially affected.

We
account for uncertain tax positions in accordance with FIN 48. The application of income
tax law is inherently complex. As such, we are required to make many assumptions and
judgments regarding our income tax positions and the likelihood of such tax positions
being upheld if challenged by applicable regulatory authorities. Interpretations and
guidance surrounding income tax laws and regulations change over time. As such, changes in
our assumptions and judgments can materially affect amounts recognized in the consolidated
balance sheets and statements of operations.

Employee Stock-Based
Compensation

Prior
to January 1, 2006, we accounted for employees share-based payment under the
intrinsic value model in accordance with Accounting Principles Board Opinion No.25,
Accounting for Stock Issued to Employees (APB 25) and related
interpretations. In accordance with Statement of Financial Accounting Standards No. 123
 Accounting for Stock-Based Compensation (FAS 123), as
amended by Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure, we disclosed pro forma
information assuming we had accounted for employees share-based payments using the
fair value-based method defined in FAS 123.

Effective
January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised
2004), Share-based Payment (FAS 123(R)). FAS 123(R) supersedes APB
25 and related interpretations and amends Statement of Financial Accounting Standards No.
95, Statement of Cash Flows (FAS 95). FAS 123(R) requires awards
classified as equity awards to be accounted for using the grant-date fair value method.
The fair value of stock options is determined based on the number of shares granted and
the price of our common stock, and determined based on the Black-Scholes models, net of
estimated forfeitures. We estimated forfeitures based on historical experience and
anticipated future conditions.

In
March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No.
107 (SAB 107). SAB 107 provides supplemental implementation guidance on FAS
123(R), including guidance on valuation methods, inventory capitalization of share-based
compensation cost, income statement effects, disclosures and other issues. SAB 107
requires share-based payment to be classified in the same expense line items as cash
compensation. We have applied the provisions of SAB 107 in our implementation of FAS
123(R).

27

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We
elected to adopt the modified prospective transition method, permitted by FAS 123(R).
Under such transition method, FAS 123(R) was implemented as of the first quarter of 2006
with no restatement of prior periods. The valuation provisions of FAS 123(R) apply to new
awards and to awards modified, repurchased, or cancelled after January 1, 2006.
Additionally, compensation cost for the portion of awards for which the requisite service
has not been rendered that are outstanding as of January 1, 2006, is recognized over the
remaining service period using the grant-date fair value of those awards as calculated for
pro forma disclosure purposes under FAS123.

The
cumulative effect of our adoption of FAS 123(R), as of January 1, 2006, was not material.

# RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENTS

SFAS No. 157  Fair
Value Measurements

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(SFAS 157), which provides guidance on how to measure assets and liabilities
that use fair value. SFAS 157 will apply whenever another US GAAP standard requires (or
permits) assets or liabilities to be measured at fair value but does not expand the use of
fair value to any new circumstances. This standard also will require additional
disclosures in both annual and quarterly reports. SFAS 157 will be effective for fiscal
years beginning after November 15, 2007 (January 1, 2008 for the Company). In February
2008, the FASB deferred for one additional year the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at least
annually). The adoption of the parts of SFAS 157 that became effective in 2008 did not
have a material impact on the Companys financial statements. The Company is
currently evaluating the impact, if any, the adoption of the remaining parts of SFAS 157
will have on its financial statements.

SFAS No. 141R 
Business Combinations

In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS 141R) which replaces SFAS No. 141,
Business Combination. SFAS 141R establishes the principles and requirements
for how an acquirer: (1) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in
the acquiree; (2) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and (3) discloses the business combination.
This Statement applies to all transactions in which an entity obtains control of one or
more businesses, including transactions that occur without the transfer of any type of
consideration. SFAS 141R will be effective on a prospective basis for all business
combinations on or after January 1, 2009, with the exception of the accounting for
valuation allowances on deferred taxes and acquired tax contingencies. Early adoption is
not allowed. The Company is in process of evaluating the impact, if any, the adoption of
SFAS 141R will have on the Companys consolidated results of operations or financial
position.

SFAS No. 160 
Noncontrolling Interests in Consolidated Financial Statements

In
December 2007, the FASB issued SFAS No. 160 Noncontrolling Interests in
Consolidated Financial Statementsan amendment of ARB
No. 51" (SFAS 160). SFAS 160 amends ARB No. 51 and
establishes accounting and reporting standards that require noncontrolling interests
(previously referred to as minority interests) to be reported as a component of equity,
changes in a parents ownership interest while the parent retains its controlling
interest be accounted for as equity transactions, and upon a loss of control, retained
ownership interest will be remeasured at fair value, with any gain or loss recognized in
earnings. SFAS 160 will be effective for the Company commencing January 1, 2009,
except for the presentation and disclosure requirements, which will be applied
retrospectively. Early adoption is not allowed. The Company is in process of evaluating
the impact, if any, that the adoption of SFAS 160 will have on the Companys
consolidated results of operations or financial position.

SFAS No. 161 
Disclosures about Derivative Instruments and Hedging Activities

In
March 2008, FASB issued Statement No. 161, Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133 (FAS 161). FAS 161
amends and expands the disclosure requirements of FAS 133 to clarify how and why companies
use derivative instruments. In addition, FAS 161 requires more disclosures regarding how
companies account for derivative instruments and the impact derivatives have on a
companys financial statements. This statement is effective for us beginning in 2009
and will only impact our disclosures. It will have no impact on our financial position,
results of operations and cash flows.

SFAS No. 142-3 
Determination of the Useful Life of Intangible Assets

In
April 2008, the FASB issued FASB Staff Position (the FSP) FAS
No. 142-3, which amends the factors that must be considered in developing renewal or
extension assumptions used to determine the useful life over which to amortize the cost of
a recognized intangible asset under FAS No. 142, Goodwill and Other Intangible
Assets. The FSP requires an entity to consider its own assumptions about renewal or
extension of the term of the arrangement, consistent with its expected use of the asset,
and is an attempt to improve consistency between the useful life of a recognized
intangible asset under FAS No. 142 and the period of expected cash flows used to
measure the fair value of the asset under FAS No. 141, Business
Combinations. The FSP is effective for fiscal years beginning after
December 15, 2008, and the guidance for determining the useful life of a recognized
intangible asset must be applied prospectively to intangible assets acquired after the
effective date. The FSP is not expected to have a significant impact on the Companys
results of operations, financial condition or liquidity.

28

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---

# RESULTS OF OPERATIONS

Fiscal year ended December 31,
2008 compared to fiscal year ended December 31, 2007:

General

The
Company recorded a consolidated net loss of $16.7 million for the fiscal year ended
December 31, 2008, as compared to a net income of $7.8 million for the same period in
2007. The decrease in earnings is primarily attributable to the gain on sale of
discontinued operations in 2007, the increase in interest expense and increase in the
Israeli consumer price index that the Companys debentures (issued in 2008) are
linked to.

In
2008 the Company included the results of operations of Gadot, which was purchased in three
parts, on December 3, 2007, June 3, 2008 and August 12, 2008. In 2007, the Company
included the result of operations of Gadot for one month  December. Below is data
of Gadot results of operations (in millions of dollar):

|                                                  | 2008 | December 2007
|------------------------------------------------- | ---- | -------------
|
|
|
|
|Chemical income                                   |      |              
|                                                  |      |              
|Chemical expense                                  |      |              
|                                                  |      |              
|Marketing expense                                 |      |              
|                                                  |      |              
|Other expense (mainly general and administrative) |      |              
|                                                  |      |              
|                                                  |      |              
|Interest expense                                  |      |              
|                                                  |      |              
|Net gain                                          |      |              
|                                                  |      |              

In
the fiscal year ended December 31, 2008, the Company recorded $10.8 million of marketing
expense, as compared to $0.7 million of marketing expense in the corresponding period in
2007. These expenses are attributable to Gadot, whose results of operation were
consolidated for the first time in December 2007. Marketing expense is composed mainly of
salary and commission expenses.

In
the fiscal year ended December 31, 2008, the Company recorded a $41.4 million of general,
administrative and other expense, as compared to $14.7 million in the corresponding period
in 2007. The increase is mainly due to consolidating Gadot for the first time in December
2007.

In
the fiscal year ended December 31, 2008, the Company recorded a $1.4 million of Minority
interests in gain of subsidiaries, net, as compared to $1.6 million in the corresponding
period in 2007. These losses are mainly attributable to translation gain in the notes
issued to the partners in the Joint Venture, resulting from valuation of the New Israeli
Shekel compared to the U.S. Dollar.

In
the fiscal year ended December 31, 2008, the Company recorded a $41.1million interest
expense, as compared to a $10.1 million interest expense for the corresponding period in
2007. The increase in interest expense relates to the increase in notes payable which the
Company received to finance the purchase of Gadot, issuance of the Companys Series B
debentures, increase in the Israeli consumer price index and the interest expense of Gadot
which the Company included for the first time in December 2007.

In
the fiscal year ended December 31, 2008, the Company recorded a $13.2 million translation
gain, as compared to a $3.1 million translation loss for the corresponding period in 2007.
The increase in translation gain is related to a change in the valuation of the New
Israeli Shekel as compared to the U.S. Dollar that mainly influenced the Companys
Series B debentures that were issued in April, 2008.

In
the fiscal year ended December 31, 2008, the Company recorded $1.3 million of net realized
gain on investments, compared to $0.6 million of net realized gain in the same period in
2007. The net gain recorded in 2008 was primarily attributable to the sale of Hod Hasharon
Limited Partnership ($0.8 million gain), the sale of certain assets by PSINet Europe, one
of the holdings of one of Ampals investee companies Telecom Partners
(TP) ($0.2 million gain), sale of certain assets by Ophir Holdings ($0.2
million gain) and the sale of certain assets by FIMI Opportunity Fund L.P
(FIMI) ($0.1 million gain).

29

---

---

Result of Operations
Analyzed by Segments

|                                | 2008 | 2007
|------------------------------- | ---- | ----
|
|
|
|
|Revenues:                       |      |     
|Chemicals                       |      |     
|Energy                          |      |     
|Finance                         |      |     
|Real Estate                     |      |     
|Leisure-Time                    |      |     
|Intercompany adjustments        |      |     
|                                |      |     
|                                |      |     
|Equity in earning of affiliates |      |     
|                                |      |     
|Total                           |      |     
|                                |      |     
|                                |      |     

In
the fiscal year (i.e. twelve months of operation) ended December 31, 2008, the Company recorded $556.6 million in revenue
which was comprised of $535.4 million in the Chemicals segment, due to the acquisition of
Gadot in 2007 and 2008, $19.9 million in the Finance segment, $2.8 million in the
Leisure-Time segment and a $1.4 million loss in equity, as compared to $37.8 million for
the same period in 2007 which was comprised of $31.9 million in the Chemicals segment,
$4.9 million in the Finance segment, $2.5 million in the Leisure-Time segment and a $1.5
million loss in equity. The increase in the Finance segment revenue is primarily related
to the increase in realized and unrealized gains on marketable securities and interest
income from deposits.         All the Chemicals revenues are attributed to Gadot. Gadots
revenues in the year ended December 31, 2008 increased by 49% as compared to the revenues
in the year ended December 31, 2007. This increase is mainly attributed to the
consolidation for the first time of a subsidiary of Gadot that Gadot purchased in 2008. If
eliminating the contribution to revenues of such subsidiary, the revenues of Gadot in the
year ended December 31, 2008 decreased by 26% as compared to the revenues in the year
ended December 31, 2007. This increase in revenues is attributed to the winding-up of Chem
Tankers C.V., a 50% limited partnership, as of April 30, 2008, resulting in the
distribution of the operating routes between the partners, previously presented as Equity
earning of unconsolidated subsidiary, and to the increase in crude oil prices and its
derivatives in the petrochemical industry.

|             | 2008 | 2007
|------------ | ---- | ----
|
|
|
|
|Expenses:    |      |     
|Chemicals    |      |     
|Energy       |      |     
|Finance      |      |     
|Real Estate  |      |     
|Leisure-Time |      |     
|             |      |     
|Total        |      |     
|             |      |     
|             |      |     

In
the fiscal year (i.e. twelve months of operation) ended December 31, 2008, the Company recorded $578.5 million in expenses
which was comprised of $540.4 million in the Chemicals segment, due to the acquisition of
Gadot in 2007 and 2008, $35.3 million in the Finance segment and $2.8 million in the
Leisure-Time segment, as compared to $55.4 million expense for the same period in 2007
which was comprised of $27.8 million in the Chemicals segment, $25.2 million in the
Finance segment and $2.4 million in the Leisure-Time segment. The increase in expenses in
the Finance segment is primarily attributable to the increase in interest expense related
to the notes issued to institutional investors in Israel and loans payable received from
Israel Discount Bank Ltd..         All the Chemicals expenses are attributed to Gadot.
Gadots expenses in the year ended December 31, 2008 increased by 51% as compared to
the expenses in the year ended December 31, 2007. This increase is mainly attributed to
the consolidation for the first time of a subsidiary of Gadot that Gadot purchased in the
year ended December 31, 2008. If eliminating the contribution to expenses of such
subsidiary, the expenses of Gadot in the year ended December 31, 2008 increased by 26% as
compared to the expenses in the year ended December 31, 2007. This increase in expenses is
attributed to winding-up of Chem Tankers C.V., a 50% limited partnership, as of
April 30, 2008, a 50%limited partnership resulting in the distribution of the operating
routes between the partners, previously presented as Equity earning of unconsolidated
subsidiary, and to the increase in crude oil prices and its derivatives in the
petrochemical industry.

30

---

---

Fiscal year ended December 31,
2007 compared to fiscal year ended December 31, 2006:

General

The
Company recorded a consolidated net income of $7.8 million for the fiscal year ended
December 31, 2007, as compared to a net loss of $7.1 million for the same period in 2006.
The increase in earnings is primarily attributable to the gain on sale of discontinued
operations, increase in interest income and including Gadots operation for the month
of December 2007 for the year ended December 31, 2007, as compared to the same period in
2006. This increase in earnings was partially offset by decrease in net realized gains
from investments, losses from affiliates, decrease in marketable securities gain, increase
in gain from sale of fixed assets, increase from impairment of investment and increase in
interest expenses and translation loss.

On
December 3, 2007, the Company completed the purchase of a 65.5% controlling interest
(63.66% on a fully diluted basis) in Gadot. The results of operations of Gadot were
included in the consolidated financial statements of the Company commencing November 30,
2007. The Company believes that the results of operations of Gadot will have an impact on
its results in future periods.

Gadots
revenues for the one month, which were included in our results of operations for the year
ended December 31, 2007, were approximately $31.9 million and its net income was
approximately $2.8 million ($1.8 million net of Minority).

On
August 5, 2007, the Company sold all of its interest in Am-Hal, a 100% wholly owned
subsidiary, which accounted for a majority of the Companys Real Estate Segment, for
$29.3 million. The recorded gain relating to the sale is $29.4 million ($21.8 million net
of taxes) and it was recorded as a gain on sale from discontinued operation. Loss for 2007
attributable to Am-Hal of $0.4 million compared to a $1.1 million loss for 2006 is
recorded as a loss from discontinued operations.

Income
from equity of affiliates decreased to a net loss of $1.5 million for the fiscal year
ended December 31, 2007, compared to a net gain of $1.6 million for the same period in
2006. The decrease is primarily attributable to the sale of Coral World International
Limited (CWI) in June 2006, which had recorded a gain of $1.6 million in 2006,
the increase in losses from Bay-Heart which recorded a loss of $1.5 million in 2007
compared to $0.7 million in 2006, the sale of Carmel in May 2007, which recorded earnings
of $0.1 million in 2007, compared to earnings of $0.5 million in 2006 and loss from
Chem-Tankers C.V. a 50% partnership held by Gadot.

In
the fiscal year ended December 31, 2007, the Company recorded $0.6 million of net realized
gain on investments, as compared to $4.4 million of net realized gain in the same period
in 2006. On May 21, 2007, the company sold all of its investment in Carmel Containers Ltd.
(Carmel) for $4.6 million. No gain was recorded relating to the sale of Carmel
since an impairment was recorded during the first quarter of 2007. The additional sale of
certain assets by FIMI Opportunity Fund L.P (FIMI) contributed most of the
gain in 2007 ($0.5 million gain). The net gain recorded in 2006 was primarily attributable
to the sale of CWI ($4.2 million gain), additional proceeds from the sale of Modem Art
Ltd. (Modem Art) ($0.6 million gain), the sale of certain assets by PSINet
Europe, one of the holdings of one of Ampals investee companies, Telecom Partners
(TP) ($0.4 million gain) and the sale of certain assets by FIMI ($0.2 million
gain). These gains were offset partially by a loss from the sale of Ophir Holdings Ltd.
(Ophir) ($1.0 million loss).

The
Company recorded realized and unrealized gain from marketable securities in the amount of
$0.2 million in fiscal year ended December 31, 2007, compared to $1.1 million in the same
period in 2006.

The
Company recorded realized gain of $3.4 million from the sale of a ship by Chem-Tankers
C.V. in fiscal year ended December 31, 2007, compared to $2.2 million gain from the sale
of a real estate in the same period in 2006.

In
the fiscal year ended December 31, 2007, the Company recorded $0.5 million of losses from
the impairment of its investment in Carmel and Clalcom Ltd. ($0.1 million). In the same
period in 2006, the Company recorded no such impairments.

In
the fiscal year ended December 31, 2007, the Company recorded $10.1 million of interest
expense, compared to $4.3 million for the same period in 2006. The increase in interest
expense is primarily attributable to the notes issued to institutional investors in
Israel, a loan payable at the amount $60.7 million received from Israel Discount Bank Ltd.
and the convertible promissory note (the Convertible Promissory Note) issued
to Merhav, which were issued in November and December 2006, respectively. On September 20,
2007, Merhav exercised its option to convert the outstanding balance of $20.8 million
(which includes accrued interest of $0.8 million) on the Convertible Promissory Note into
4,476,389 shares of Class A Stock of the Company.

In
the fiscal year ended December 31, 2007, the Company recorded a $3.1 million translation
loss, as compared to a $1.3 million translation gain for the same period in 2006. The
increase in translation loss is related to a change in the valuation of the New Israeli
Shekel as compared to the U.S. dollar.

31

---

---

The
management of the Company currently believes that inflation has not had a material impact
on the Companys operations.

Result of Operations
Analyzed by Segments

|                                | 2007 | 2006
|------------------------------- | ---- | ----
|
|
|
|
|Revenues:                       |      |     
|Chemicals                       |      |     
|Energy                          |      |     
|Finance                         |      |     
|Real Estate                     |      |     
|Leisure-Time                    |      |     
|Intercompany adjustments        |      |     
|                                |      |     
|                                |      |     
|Equity in earning of affiliates |      |     
|                                |      |     
|Total                           |      |     
|                                |      |     
|                                |      |     

In
the fiscal year ended December 31, 2007, the Company recorded $37.8 million in revenue
which was comprised of $31.9 million in the Chemicals segment, due to the acquisition of
Gadot in December 2007, $4.9 million in the Finance segment, $2.5 million in the
Leisure-Time segment and a $1.5 million loss in equity, as compared to $14.5 million for
the same period in 2006 which was comprised of $4.2 million in the Finance segment, $2.4
million in the Real Estate segment, $6.3 million in the Leisure-Time segment and a $1.6
million gain in equity. The increase in the Finance segment revenue is primarily related
to the increase in interest income offset by the decrease in realized and unrealized gains
on marketable securities and the decrease in realized gain from investments relating to
finance segment, which the Company recorded $0.6 million in 2007 compared to $1.2 million
in the same period in 2006. The decrease in the Real Estate segment is related to the sale
of Am-Hal, a wholly owned subsidiary. The decrease in the Leisure-Time segment is
primarily related to the gain of $4.2 million from the sale of CWI which was recorded in
2006.

|             | 2007 | 2006
|------------ | ---- | ----
|
|
|
|
|Expenses:    |      |     
|Chemicals    |      |     
|Energy       |      |     
|Finance      |      |     
|Real Estate  |      |     
|Leisure-Time |      |     
|             |      |     
|Total        |      |     
|             |      |     
|             |      |     

In
the fiscal year ended December 31, 2007, the Company recorded $55.4 million in expenses
which was comprised of $27.8 million in the Chemicals segment, due to the acquisition of
Gadot in December 2007, $25.2 million in the Finance segment and $2.4 million in the
Leisure-Time segment, as compared to $17.9 million expense for the same period in 2006
which was comprised of $15.7 million in the Finance segment, $0.3 million in the Real
Estate segment and $1.9 million in the Leisure-Time segment. The increase in expenses in
the Finance segment is primarily attributable to the increase in interest expense relate
to the notes issued to institutional investors in Israel, a loan payable at the amount
$60.7 million received from Israel Discount Bank Ltd. and the Convertible Promissory Note
issued to Merhav, which were issued in November and December of 2006, respectively. On
September 20, 2007, Merhav exercised its option to convert the outstanding balance of
$20.8 million (which includes accrued interest of $0.8 million) on the Convertible
Promissory Note into 4,476,389 shares of Class A Stock of the Company.

32

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# SELECTED QUARTERLY
FINANCIAL DATA

|                                    | First
Quarter | Second
Quarter | Third
Quarter | Fourth
Quarter
|----------------------------------- | ------------- | -------------- | ------------- | --------------
|
|
|
|
|Fiscal Year Ended December 31, 2008 |               |                |               |               
|Revenues                            |               |                | $             | 128,729       
|Net interest expense                |               |                |               | 3,777         
|Net (loss) income                   |               |                |               | (10,275       
|Basic EPS:                          |               |               
|Earnings (Loss) per Class A share   |               |                |               | (0.18         
|                                    |               |                |               |               
|                                    |               |               
|Diluted EPS:                        |               |               
|Earnings (Loss) per Class A share   |               |                |               | (0.18         

|                                                       | First
Quarter | Second
Quarter | Third
Quarter | Fourth
Quarter
|------------------------------------------------------ | ------------- | -------------- | ------------- | --------------
|
|
|
|Fiscal Year Ended December 31, 2007                    |               |                |               |               
|Revenues                                               |               |                | $             | 1,089         
|Net interest expense                                   |               |                |               | 1,398         
|Income (loss) from continuing operations               |               |                |               | (4,367        
|Income (loss) from discontinued operations, net of tax |               |                |               | (682          
|                                                       |               |                |               |               
|Net (loss) income                                      |               |                |               | (5,049        
|Basic EPS:                                             |               |               
|Loss from continuing operations                        |               |                |               | (0.10         
|Discontinued operations                                |               |                |               | (0.01         
|                                                       |               |                |               |               
|Earnings (Loss) per Class A share                      |               |                |               | (0.11         
|Diluted EPS:                                           |               |               
|Loss from continuing operations                        |               |                |               | (0.1          
|Discontinued operations                                |               |                |               | (0.01         
|Earnings (Loss) per Class A share                      |               |                |               | (0.11         
|                                                       |               |                |               |               

# LIQUIDITY AND CAPITAL
RESOURCES

Cash Flows

On
December 31, 2008, cash, cash equivalents and marketable securities were $121.6 million,
as compared with $66.7 million at December 31, 2007. The increase is attributable to the
issuance of the Companys Series B debentures and partly offset by purchasing an
additional interest in Gadot.

As
of December 31, 2008, the Company had $52.9 million of marketable securities as compared
to $22.5 million in 2007. The increase is attributable to the purchasing of marketable
securities with part of the proceeds from the issuance of the Companys Series B
debentures and due to consolidating Gadot for the first time in 2008.

The
Company may also receive cash from operations and investing activities and amounts
available under credit facilities, as described below. The Company believes that these
sources are sufficient to fund the current requirements of operations, capital
expenditures, investing activities and other financial commitments of the Company for the
next 12 months. However, to the extent that contingencies and payment obligations
described below and in other parts of this Report require the Company to make
unanticipated payments, the Company would need use its cash. The Company may need to draw
upon other sources of cash, which may include additional borrowing, refinancing of its
existing indebtedness or liquidating other assets, the value of which may also decline.

In
addition, Ampals interest in Gadot has been pledged and cash equal to $2.7 million
has been placed as a compensating balance for various loans provided to the Company and
would therefore be unavailable if the Company wished to pledge them in order to provide an
additional source of cash.

33

---

---

Cash
flows from operating activities

Net
cash used in operating activities totaled approximately $.1.0 million for the fiscal year
ended December 31, 2008, as compared to approximately $23.7 million used by operating
activities at the same period in 2007. The decrease in cash used in operating activities
is primarily attributable to (i) the $2.1 million of net proceeds from the sale of
marketable securities ($2.2 million proceeds offset by $0.1 million investment) as
compared to $5.8million of net investment from the sale of marketable securities ($23.8
million investment offset by $18.0 million proceeds) in the same period of 2007, and (ii)
the receipt of a $4.6 million dividends from affiliates for the fiscal year ended December
31, 2008, as compared to approximately $0.2 million at the same period in 2007.

Cash
flows from investing activities

Net
cash used in investing activities totaled approximately $171.2 million for the fiscal year
ended December 31, 2008, as compared to approximately $149.7 million used in investing
activities for the same period in 2007. The increase in net cash used in investment
activities is primarily attributable to an increase in deposits of $44.6 million, $41.2
million for capital improvements, $47.7 million for the purchase of marketable securities
that are available for sale and $34.9 million for decreased consideration from sale of
investments. The increase in net cash was offset by a $128.4 million decrease in
investment amounts in our investee companies (Gadot, Bay Heart and GWE), $12.7 million
proceeds from sale of available for sale securities and a $6 million increase in the
amounts returned from deposits.

Cash
flows from financing activities

Net
cash provided by financing activities was approximately $195.6 million for the fiscal year
ended December 31, 2008, as compared to approximately $179.7 million of net cash provided
by financing activities for the same period in 2007. The increase in net cash provided by
financing activities is primarily attributable to $166.9 million from the Series B
Debentures issued in Israel, $17.1 million increase in loans received (which were set off
from $28.0 million increase in loan repayment), $95.4 million received from a partnership
during 2007, $18.0 million received from the exercise of options during 2007 and $23.7
million for the repurchase of shares and debentures of the Company during 2008.

Investments

On
December 31, 2008, the aggregate fair value of trading and available-for-sale securities
were approximately $52.9 million, as compared to $22.4 million at December 31, 2007. The
increase in 2008 is mainly attributable to the purchase of Gadot and to the tradable
securities held by Gadot.

|a) | In
2008, the Company made the following investments:
|-- | ----------------------------------------------------

| | 1. | On
June 3, 2008, Ampal completed its acquisition of an additional 14.98% of the outstanding
ordinary shares (14.71% on a fully diluted basis) of Gadot through its wholly owned
subsidiary MAE. The total consideration was $17.7 million. The consideration was financed
with Ampals own resources and with borrowings in the amount of $11.4 million.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 12, 2008, Ampal completed its acquisition of an additional 20.6% of the
outstanding ordinary shares and 66.76% of the outstanding convertible debentures of Gadot
and now indirectly holds 100% of the outstanding ordinary shares (99.99% on a fully
diluted basis) of Gadot through MAE. The total consideration was $23.3 million. The
consideration was financed with Ampals own resources and with borrowings in the
amount of $15.4 million.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
transactions follow the acquisition by Ampal of a 65.5% controlling interest (63.66% on a
fully diluted basis) in Gadot on December 3, 2007.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

| | As
result of these transactions, Gadot is now a wholly owned subsidiary of the Company and
its shares and debentures have been delisted from the TASE.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Option
Agreement for Sugarcane Ethanol Project in Colombia
| | -- | ----------------------------------------------------------

| | On
May 29, 2008, Ampal loaned Merhav $10 million, in addition to the currently outstanding
$10 million that were loaned on December 25, 2007, to fund the Project in Colombia being
developed by Merhav. The additional loan was made pursuant to the Promissory Note, by
Merhav in favor of Ampal. The Promissory Note was given in connection with the Original
Option Agreement, with Merhav providing Ampal with the Option to acquire up to a 35%
equity interest in the Project. The loan will be convertible into all or a portion of the
equity interest purchased pursuant to the Original Option Agreement.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 25, 2008, Ampal entered the Option Amendment to the Original Option Agreement.
Under the Original Option Agreement, the Option expired on the earlier of December 25,
2008 or the Financing Date. The Option Amendment extends the expiration of the Option to
the earlier of December 31, 2009 or the Financing Date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

34

---

---

| | The
Option Amendment also provides that in determining the price to be paid by Ampal for
shares pursuant to the option under the Valuation Model, the parties have agreed to
review the discount rate set forth in the Valuation Model to determine whether the
discount rate should be increased, provided, however, that the purchase price shall not
exceed the amount Ampal would have paid without giving effect to the Option Amendment.
The maximum purchase price for any interest in the Project purchased by Ampal pursuant to
the option would be (A) with respect to any portion of such interest being purchased by
conversion of the outstanding balance of the Amended Promissory Note referred to below,
the lesser of (i) a price based on the Valuation Model as updated from time to time to
reflect changes in project, financing and other similar costs as such updates are
reviewed by Houlihan Lokey Howard & Zukin at the time of the Options exercise
or (ii) the lowest price paid by any unaffiliated third party for an interest in the
Project, or (B) with respect to any portion of such interest in the Project being
purchased in excess of the balance of the Amended Promissory Note, the lowest price paid
by an unaffiliated third party for its interest in the Project, unless no unaffiliated
third party has purchased an interest in the Project, in which case the purchase price
will be based on the Valuation Model.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
consideration for Merhav entering into the Option Amendment, Ampal agreed to certain
amendments to the Promissory Note reflected the Amended Promissory Note, dated December
25, 2008. The Amended Promissory Note provides for (i) an increase in the annual interest
rate from LIBOR plus 2.25% to LIBOR plus 3.25% and (ii) an extension of the maturity date
of the Promissory Note to December 31, 2009. As a condition to amending and restating the
Promissory Note, Ampal received a personal guaranty dated as of December 25, 2008, from
Yosef A. Maiman personally guaranteeing the obligations of Merhav under the Amended
Promissory Note.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
loan continues to be secured by Merhavs pledge to Ampal, pursuant to a Pledge
Agreement dated December 25, 2007, between Merhav and Ampal, of all of the shares of Ampals
Class A Common Stock, par value $1.00 per share, owned by Merhav.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Yosef
A. Maiman, the Chairman, President and CEO of Ampal and a member of the controlling
shareholders group of Ampal, is the sole owner of Merhav. Because of the foregoing
relationship, a special committee of the Board of Directors composed of Ampals
independent directors negotiated and approved the transaction.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Additional
investment of $2.1 million in GWE.
| | -- | ---------------------------------------------

| | 4. | A
loan to Bay Heart of $8.6 million, for a shopping mall in Haifa, Israel.
| | -- | --------------------------------------------------------------------------

| | 5. | On
September 22, 2008, Gadot purchased from Milchen Communications Ltd.           (Milchen)
a segment of its business engaged in operating a sales           agency in Israel
representing well-known manufacturers, selling a wide range of           products,
including chemicals and polymers and other materials for the printing           and press
industry. Gadot purchased this segment of activity for approximately           $1.3
million, out of which approximately $0.4 million were paid for material
          inventory and approximately $0.9 million for goodwill.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) | In
2008, Ampal made the following dispositions:
|-- | -----------------------------------------------

| | 1. | During
2008, the Company received proceeds in the total amount of $0.2 million           from
the sales of certain investments by FIMI.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------

| | 2. | On
March 2008, the Company received $0.3 million from the sale of certain           assets
by PSINet Europe, one of the holdings of TP.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------

| | 3. | On
August 7, 2008, the Company signed an agreement for the sale of its 50%
          holdings of Country Club Hod Hasharon Sport Center for a consideration of 1.9
          million.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | During
2008, the Company received $0.6 million from the sale of certain assets           by
Ophir Holdigns Ltd.
| | -- | ---------------------------------------------------------------------------------------------------------------

Debt

Notes
issued to institutional investors in Israel and other loans payable pursuant to bank
borrowings are either in U.S. dollars, linked to the Consumer Price Index in Israel or in
unlinked New Israel Shekels, with interest rates varying depending upon their linkage
provision and mature between 2009-2019.

The
Company finances its general operations and other financial commitments through bank loans
from Bank Hapoalim, Union Bank of Israel and Israel Discount Bank Ltd. As of December 31,
2008, the outstanding indebtedness under these bank loans totaled $379.7 million and the
loans mature through 2009-2019.

35

---

---

On
April 29, 2008, Ampal completed a public offering in Israel of NIS 577.8 million
(approximately $166.8 million) aggregate principal amount of Series B debentures due 2017.
The debentures are linked to the Israeli consumer price index and carry an annual interest
rate of 6.6%. The debentures rank pari passu with Ampals unsecured indebtedness. The
debentures will be repaid in five equal annual installments commencing on January 31,
2012, and the interest will be paid semi-annually. As of December 31, 2008, the
outstanding debt under the debentures amounts to $138.7 million, due to the change in
valuation of the New Israeli Shekel as compared to the U.S. dollar. Ampal deposited an
amount of $44.6 million with Clal Finance Trusties 2007 Ltd. in accordance with a trust
agreement dated April 6, 2008, to secure the first four years worth of payments of
interest on the debentures. As of December 31, 2008, the outstanding amount of the deposit
was $35.8 million. The debt offering was made solely to certain non-U.S. institutional
investors in accordance with Regulation S under the U.S. Securities Act of 1933, as
amended. The notes have not been and will not be registered under the U.S. securities
laws, or any state securities laws, and may not be offered or sold in the United States or
to United States persons without registration unless an exemption from such registration
is available.

On
March 27, 2008, Midroog rated the Series B debentures as A2 and also raised the rating of
Ampals Series A debentures to A2. On September 15, 2008, Midroog reduced the rating
on the Series A and Series B debentures to A3. For further information, see
Significant Developments During 2008  East Mediterranean Gas Company.

Ampal
funded the Gadot transaction with a combination of available cash and the proceeds of the
Credit Facility, dated November 29, 2007, between MAE and the Lender, for approximately
$60.7 million, which amount was increased, on the same terms and conditions, on June 3,
2008 by approximately $11.3 million in order to fund the second stage of the transaction
and on September 23, 2008 by approximately $15.4 million in order to fund the third stage
of the transaction. The Credit Facility is divided into two equal loans of approximately
$43.7 million. The first loan is a revolving loan that has no principal payments and may
be repaid in full or in part on December 31 of each year until 2019, when a single balloon
payment will become due. The second loan also matures in 2019, has no principal payments
for the first one and a half years, and shall thereafter be paid in equal installments
over the remaining ten years of the term. Interest on both loans accrues at a floating
rate equal to LIBOR plus a percentage spread and is payable on a current basis. Ampal has
guaranteed all the obligations of MAE under the Credit Facility and Ampals interest
in Gadot has also been pledged to the Lender as a security for the Credit Facility.
 Yosef Maiman has agreed with the Lender to maintain ownership of a certain amount of
the Companys Class A Common Stock. The Credit Facility contains customary
affirmative and negative covenants for credit facilities of this type.

As
of December 31, 2008, the Company has a $8.3 million loan with Union Bank of Israel that
bears interest at the rate of LIBOR plus 2% to be repaid in six annual installments
commencing on April 2, 2008 and various other loans with Union Bank of Israel in the
aggregate amount of $7.5 million bearing interest at rates between 4.7% and 5.25% to be
repaid until 2009. The loan agreement contains financial and other covenants.

As
of December 31, 2008, the Company has a $18.0 million loan with Bank Hapoalim as part of a
$27.0 million dollar loan facility. The funds borrowed under the loan facility are due in
nine annual installments commencing on December 31, 2007 and bear interest at an annual
rate of LIBOR plus 2%. The related loan agreement contains financial and other covenants
including an acceleration of payment upon the occurrence of certain changes in the
ownership of the Companys Class A Stock. As of December 31, 2008, The Company is in
compliance with its debt covenants after receiving a certain waiver from the bank valid
through the end of 2009.

On
November 20, 2006, the Company entered into a trust agreement with Hermetic Trust (1975)
Ltd. pursuant to which the Company issued Series A debentures to institutional investors
in Israel in the principal aggregate amount of NIS 250.0 million (approximately $58.0
million) with an interest rate of 5.75%, which is linked to the Israeli consumer price
index. The notes shall rank pari passu with our unsecured indebtedness. The notes will be
repaid in five equal annual installments commencing on November 20, 2011, and the interest
will be paid semi-annually. As of December 31, 2008, the outstanding debt under the notes
amounts to $69.0 million, due to the change in valuation of the New Israeli Shekel as
compared to the U.S. dollar. The Company deposited an amount of $10,207,000 with Hermetic
Trust (1975) Ltd. to secure the first three years worth of payments of interest on the
debentures. As of December 31, 2008, the outstanding amount of the deposit was $3.8
million.

The
Company has a short term loan from Bank Hapoalim in the amount of $3.5 million; bearing
interest of 5.8%, to be repaid by December 31, 2009.

Other
long term borrowings in the amount of $0.2 million are linked to the Consumer Price Index
in Israel, mature between 2009 and 2010 and bear annual interest of 5.7%.

As
of December 31, 2008, Gadot had $112 thousand outstanding under its convertible
debentures. Gadots debentures were listed on the TASE in December 2003, are linked
to the Consumer Price Index in Israel, bear annual interest at the rate of 6.5%, and are
repayable at December 5, 2009. The debentures are convertible into ordinary shares of
Gadot, each incremental amount of NIS 3.53 of outstanding debentures (linked to the
Consumer Price Index in Israel) is convertible into one ordinary share of Gadot of
NIS 0.1 par value, subject to adjustments.

As
of December 31, 2008, Gadot had $11.4 million outstanding under its other debentures.
These debentures are not convertible into shares and are repayable in five equal annual
installments on September 15, of each of the years 2008 through 2012. The unsettled
balance of the principal of the debentures bears annual interest at the rate of 5.3%. The
principal and interest of the debentures are linked to the Consumer Price Index in Israel
and the interest is payable in semi-annual installments on March 15 and
September 15 of each of the years 2006 through 2012.

36

---

---

As
of December 31, 2008, Gadot, a wholly owned subsidiary of Ampal, has short term loans,
including current maturities, payable in the amount of $95.9 million and long term loans
payable in the amount of $62.2 million. The various short term loans payable are either
unlinked or linked to the USD or Euro and bear interest at rates between 3% to 7%. The
various long term loans payable are either unlinked or linked to the Consumer Price Index
in Israel or linked to the USD or Euro and bear interest at rates between 4.4% to 11.38% (the 11.38% relates to a loan in the amount of $34 thousand).
The loans agreements contains financial and other covenants.

The
weighted average interest rates and the balances of these short-term borrowings at
December 31, 2008 and December 31, 2007 were 5.1% on $157.2 million and 6.3% on $136.6
million, respectively.

|                                                       | Payments due by period (in thousands)
|------------------------------------------------------ | -------------------------------------
|
|
|
|
|Long-Term Debt                                         |                                      
|Debentures                                             |                                      
|Convertible Debentures                                 |                                      
|Short-Term Debt                                        |                                      
|Expected interest payment (3)                          |                                      
|Capital Call Obligation (1)                            |                                      
|Operating Lease Obligation (2)                         |                                      
|Capital Lease Obligation                               |                                      
|Vessels Purchase Obligations                           |                                      
|Other Long-Term Liabilities Reflected on the Company's |                                      
|Balance Sheet Under GAAP                               |                                      
|Total                                                  |                                      
|                                                       |                                      
|                                                       |                                      

| | (1) | See
Note 20(i) to Ampals consolidated financial statements included in           this
Report for the fiscal year ended December 31, 2008.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | See
Note 20 to Ampals consolidated financial statements included in this
          Report for the fiscal year ended December 31, 2008.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------

| | (3) | In
calculating estimated interest payments on outstanding debt obligations, the
          Company assumed an exchange rate as at December 31, 2008 of NIS 3.802 to 1 U.S.
          dollar.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
of December 31, 2008, the Company had issued guarantees on certain outstanding loans to
its investees and subsidiaries in the aggregate principal amount of $67.4 million. This
includes:

|1. | $8.1
million guarantee on indebtedness incurred by Bay Heart in connection with
               the development of its property. Bay Heart recorded losses in 2008. There
can be                no guarantee that Bay Heart will become profitable or that it will
generate                sufficient cash to repay its outstanding indebtedness without
relying on the                Companys guarantee.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | $1.1
million guarantee to Galha as described in Item 3 of this Report.
|-- | ----------------------------------------------------------------------

|3. | $58.2
million guarantees issued by Gadot for outstanding loans.
|-- | ---------------------------------------------------------------

Off-Balance Sheet
Arrangements

Other than the foreign currency
contracts specified below, the Company has no off-balance sheet arrangements.

Foreign Currency Contracts

The
Companys derivative financial instruments consist of foreign currency forward
exchange contracts to purchase or sell U.S. dollars. These contracts are utilized by the
Company, from time to time, to manage risk exposure to movements in foreign exchange
rates. None of these contracts have been designated as hedging instruments. These
contracts are recognized as assets or liabilities on the balance sheet at their fair
value, which is the estimated amount at which they could be settled, based on market
prices or dealer quotes, where available, or based on pricing models. Changes in fair
value are recognized currently in earnings.

As
of December 31, 2008, the Company had open foreign currency forward exchange contracts to
purchase U.S. dollars and sell Euros in the amount of $1.6 million, to purchase Euro and
sell U.S. dollars in the amount of $2.2 million, to purchase U.S. dollars and sell NIS in
the amount of $5.0 million and to purchase NIS and sell U.S. dollars in the amount of $5.0
million.

37

---

---

On
May 15, 2008, the Company entered into a SWAP agreement with respect to its Series B
debentures, in the principal amount of $165.7 million, due 2016. As a result of these
agreements the Company is currently paying an effective interest rate of LIBOR plus 5.12%
on $43.9 million of these debentures, as compared to the original 6.6% fixed rate
which is linked to the Israeli consumer price index.

As
of December 31, 2008, the value of the currency SWAP resulted in a $4.2 million decrease
in other assets and a corresponding increase in interest expense.

# CHANGES IN SHAREHOLDERS
EQUITY

During
the fourth quarter of the fiscal year ended December 31, 2008, the Company
repurchased 1,366,415 class A stocks at the average price of $0.787 per share which was
recorded as treasury stocks. The repurchases were pursuant to the stock repurchase program
which was approved on Ampals Board of Directors, effective as of November 23, 2008.

|ITEM 7A | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

# MARKET RISKS AND
SENSITIVITY ANALYSIS

The
Company is exposed to various market risks, including changes in interest rates, foreign
currency exchange 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, 2008, and are sensitive to the above market
risks.

During the fiscal year ended December
31, 2008, there have been no material changes in the market risk exposures facing the
Company as compared to those the Company faced in the fiscal year ended December 31, 2007,
other than exposure to the Euro exchange rate due to the Companys acquisition of
Gadot and the consumer price index due to the issuance of Series B debentures.

# Interest Rate Risks

At
December 31, 2008, the Company had financial assets totaling $113.1 million and financial
liabilities totaling $596.6 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, 2008, the Company did not have fixed rate financial assets and had variable
rate financial assets of $113.1 million. A ten percent decrease in interest rates would
not increase the unrealized fair value of the fixed rate assets.

At
December 31, 2008, the Company had fixed rate debt of $337.6 million and variable rate
debt of $259.0 million. A ten percent decrease in interest rates would increase the
unrealized fair value of the financial debts in the form of the fixed rate debt by
approximately $3.9 million.

The
net decrease in earnings and cash flow for the next year resulting from a ten percent
interest rate increase would be approximately $1.4 million, holding other variables
constant.

# Foreign Currency
Exchange Rate Sensitivity Analysis

The
Companys exchange rate exposure on its financial instruments results from its
investments and ongoing operations. As of December 31, 2008, the Company had open foreign
currency forward exchange contracts to purchase U.S. dollars and sell Euros in the amount
of $1.6 million, to purchase Euro and sell U.S. dollars in the amount of $2.2 million, to
purchase U.S. dollars and sell NIS in the amount of $5.0 million and to purchase NIS and
sell U.S. dollars in the amount of $5.0 million. Holding other variables constant, if
there were a ten percent devaluation of the foreign currency, the Companys
cumulative translation loss reflected in the Companys accumulated other
comprehensive loss would increase by $2.6million, and regarding the statements of
operations a ten percent devaluation of the U.S. Dollar exchange rate would be reflected
in a net increase in earnings and cash flow would be $27.2 million, and a ten percent
devaluation of the Euro exchange rate would be reflected in a net increase in earnings and
cash flow would be $1.3 million.

# Equity Price Risk

The Companys investments at
December 31, 2008 included trading marketable securities which are recorded at a fair
value of $4.4 million, including a net unrealized gain of $0.2 million, and $48.5 million
of trading securities that are classified as available for sale, including a net
unrealized loss of $2.1 million. Those securities have exposure to equity price risk. The
estimated potential loss in fair value resulting from a hypothetical ten percent decrease
in prices quoted on stock exchanges is approximately $5.3 million. There will be no impact
on cash flow resulting from a hypothetical ten percent decrease in prices quoted on stock
exchanges.

38

---

---

|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------

See pages 1 through 36 of the
financial statements attached to this annual report.

|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------

| | None.
| | -----

|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------

# Disclosure Controls and
Procedures

The
Companys management with the participation of the Companys Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the Companys
disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act)) as of the end of the period covered by this Report. Based on such evaluation,
the Companys Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Companys disclosure controls and procedures
are effective. Notwithstanding the foregoing, a control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance that it will
detect or uncover failures within the Company to disclose material information otherwise
required to be set forth in the Companys periodic reports.

# Managements Annual
Report on Internal Control Over Financial Reporting

The
Companys management is responsible for establishing and maintaining adequate
internal control over financial reporting (as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f)). The Companys management with the participation of the
Companys Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of the Companys internal control over financial
reporting as of December 31, 2008 based on the framework in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on that evaluation, the Companys management concluded that the Companys
internal control over financial reporting was effective as of December 31, 2008.

# Attestation Report of
the Registered Public Accounting Firm

Managements
assessment of the effectiveness of the Companys internal control over financial
reporting as of December 31, 2008 has been audited by Kessleman & Kesselman, a member
of PricewaterhouseCoopers International Limited, an independent registered public
accounting firm, as stated in their report attached hereto.

# Changes in Internal
Control Over Financial Reporting

There
have not been any changes in the Companys internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during
the Companys fourth fiscal quarter that have materially affected, or are reasonably
likely to materially affect the Companys internal control over financial reporting.

|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------

| | None.
| | -----

39

---

---

# PART III

|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|-------- | ------------------------------------------------------

# MANAGEMENT

The
following table sets forth certain information regarding Ampals directors and
executive officers as of February 23, 2009:

|Name                     | Position                                                              
|------------------------ | ----------------------------------------------------------------------
|
|
|
|
|Yosef A. Maiman          | President, Chief Executive Officer, Chairman of the Board of Directors
|Leo Malamud(1)           | Director                                                              
|Dr. Joseph Yerushalmi(1) | Director                                                              
|Dr. Nimrod Novik         | Director                                                              
|Yehuda Karni(1)(2)(3)(4) | Independent Director                                                  
|Eitan Haber              | Director                                                              
|Menahem Morag(2)(3)(4)   | Independent Director                                                  
|Joseph Geva              | Director                                                              
|Erez I. Meltzer          | Director                                                              
|Daniel Vaknin(2)(3)(4)   | Independent Director                                                  
|Irit Eluz                | CFO, Senior Vice President - Finance and Treasurer                    
|Yoram Firon              | Vice President-Investments and Corporate Affairs and Secretary        
|Amit Mantsur             | Vice President-Investments                                            
|Zahi Ben-Atav            | Vice President - Accounting and Controller                            
|                         |                                                                       

---

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.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Member
of the Audit Committee of the Board which reviews functions of the           outside
auditors, auditors fees and related matters. Mr. Karni is the           Chairman of
the Audit Committee of the Board.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Member
of the Stock Option and Compensation Committee of the Board.
| | --- | -------------------------------------------------------------------

| | (4) | Member
of the Special Committee of the Board.
| | --- | ---------------------------------------------

There
are no family relationship between any of Ampals directors and executive officers.

In
2008, the Board met 5 times and acted 9 times by written consent; the Executive Committee
did not meet or act by written consent; and the Audit Committee met 5 times and did not
act by written consent. The Stock Option and Compensation Committee met 1 time and acted
once by written consent. The Special Committee met 5 times and did not act by written
consent. All directors attended more than 75% of the aggregate of (1) the total number of
Board meetings held during the period in 2008 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 2008 (during the period of such service). Each director of the Board
is elected for a one year term and serves until his or her successor is duly elected and
qualified.

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

YOSEF
A. MAIMAN, 63, has been the Chairman of the Board of Ampal since April 25, 2002 and
President and Chief Executive Officer of Ampal since October 1, 2006. Mr. Maiman has been
President and Chief Executive Officer of Merhav, one of the largest international project
development companies based in Israel, since its founding in 1975. Mr. Maiman is the
Chairman of the Board of Directors of Gadot. Mr. Maiman is also the Chairman of the Board
of Directors of Channel 10 Ltd. (Channel 10), a commercial television station
in Israel, a director of Eltek, Ltd. (Eltek), a developer and manufacturer of
printed circuit boards and Honorary Consul to Israel from Peru. Mr. Maiman is also a
member of the Board of Trustees of the Tel Aviv University, Chairman of the Israeli Board
of the Jaffee Center for Strategic Studies at Tel Aviv University, a member of the Board
of Governors of Ben Gurion University, and the Chairman of the Board of Trustees of the
International Policy Institute for Counter Terrorism.

LEO
MALAMUD, 56, has been a director of Ampal since March 6, 2002. Since 1995, Mr. Malamud has
served as Senior Vice President of Merhav Mr. Malamud is also a director of Gadot, a
wholly owned subsidiary of Ampal, Channel 10, 10 News Ltd. and Nana 10 Ltd.

40

---

---

Dr.
          JOSEPH YERUSHALMI, 70, has been a director of Ampal since August 16, 2002.
Since           1995, Dr. Yerushalmi has served as Senior Vice President  Head of
Energy           and Infrastructure Projects of Merhav M.N.F. Ltd. Dr. Yerushalmi is also
a           Director of Gadot, a wholly owned subsidiary of Ampal.

Dr.
          NIMROD NOVIK, 63, has been a director of Ampal since September 19, 2006. Since
          1995, Dr. Novik has served as Senior Vice President of Merhav, responsible for
          Middle East projects (including the MIDOR petroleum refinery in Egypt and the
          EMG project for the export of Egyptian natural gas to Israel) as well as for
          corporate, media and government relations. Mr. Novik is also a Director of EMG
          and Channel 10 News Ltd. Mr. Novik is an advisor to the Israeli National
          Security Council as well as to several members of the Israeli cabinet, and a
          former Special Ambassador of the State of Israel as well as Chief Advisor on
          Foreign Policy to Israels Prime Minister and Minister of Foreign Affairs.

YEHUDA
KARNI, 79, has been a director of Ampal since August 16, 2002. From 1961 to 2000, Mr.
Karni was a senior partner in the law firm of Firon Karni Sarov & Firon.

EITAN
HABER, 69, has been a director of Ampal since August 16, 2002. From July 1992 to November
1995, Mr. Haber was the Head of Bureau for the former Prime Minister of Israel, Yitzhak
Rabin. Since 2001, Mr. Haber has served as Chief Executive Officer of Kavim Ltd. Since
1996, Mr. Haber has served as President and Chief Executive Officer of Geopol Ltd. Mr.
Haber is also a Director of Africa Israel Ltd. and of Israel Experience Co.

MENAHEM
MORAG, 57, has been a director of Ampal since January 27, 2004. From 1996 to 1999, Mr.
Morag was the Head of Finance and Budget at the Israeli Prime Ministers office in
Tel Aviv. From 1999 to 2001, Mr. Morag was the Controller and Ombudsman at the Israeli
Prime Ministers office in Tel Aviv. From 2001 to 2003, Mr. Morag was the Head of
Human Resources Department at the Israeli Prime Ministers office in Tel Aviv. From
2003 to 2006, Mr. Morag served as the Head of the Council of the Pensioners Association of
the Israeli Prime Ministers office in Tel Aviv. From 2004 to 2006, Mr. Morag was a
Director of Palram Industries, and from 2005 to 2006, he was the Chief Executive Officer
of Keren-Shemesh Foundation for the Encouragement of Young Entrepreneurs. Since 2006 Mr.
Morag serves as a Deputy General Manager  Head of Resources Division of Union Bank
of Israel Ltd. and as a Director in several of the subsidiaries of Union Bank of Israel
Ltd.

JOSEPH
GEVA , 58, has been a director of Ampal since November 5, 2008. Since January 2001, Mr.
Geva has been the Chief Executive Officer of Milchan Group Israel. Since 2005, Mr. Geva
has served as a Director of Channel 10. Since 2007, Mr. Geva has been Co-Manager at a new
energy project in Israel for producing electricity in Pumped Storage Station at the Gilboa
Mountain in Israel.

EREZ
I. MELTZER, 51, has been a director of Ampal since November 5, 2008. Since November 2008,
Mr. Meltzer has served as Chief Executive Officer of Gadot, a wholly owned subsidiary of
Ampal. Mr. Meltzer also serves as a Director and Executive Vice Chairman of Gadot. From
2006 to 2007, Mr. Meltzer was the Chief Executive Officer of Africa Israel Group. From
2002 to 2006, Mr. Meltzer was the President and Chief Executive Officer of Netafim Ltd.
From 1999 to 2001, Mr. Meltzer was the President and Chief Executive Officer of
CreoScitex. Mr. Meltzer served as a colonel in the Israeli Defense Forces  Armored
Corps. (reserves). Mr. Meltzer is the Chairman of the Lowenstein Hospital Friends
Association since 1999, and the honorary chairman of the Israeli Chapter of YPO (the Young
Presidents Organization).

DANIEL
VAKNIN, 53, has been a director of Ampal since November 5, 2008. Since August 2007 Mr.
Vaknin has served as Chief Executive Officer of Israel Financial Levers Ltd. From 2005 to
2007 Mr. Vaknin served as the Chief Executive Officer of Phoenix Investments and Finance
Ltd. From 2004 to 2005 Mr. Vaknin served as the Vice Chief Executive Officer of I.D.B
Development Company Ltd. Prior to that Mr. Vaknin was a Senior Partner at Kesselman &
Kesselman CPA, a member firm of PricewaterhouseCoopers International Limited. Mr. Vaknin
also serves as a Director in Macpell Industries Ltd., and its subsidiaries, and of SLS
Sails Ltd.

IRIT
ELUZ, 41, has been the Chief Financial Officer and Senior Vice President  Finance
and Treasurer since October 2004. From May 2002 to October 2004, Ms. Eluz was Chief
Financial Officer and Vice President  Finance and Treasurer. Since July 2006 Ms.
Eluz serves as an Independent Director of Kamor Ltd. From January 2000 to April 2002, Ms.
Eluz was the Associate Chief Financial Officer of Merhav M.N.F. Ltd. From June 1995 to
December 1999, Ms. Eluz was the Chief Financial Officer of Kamor Group.

YORAM
FIRON, 40, has been Secretary and Vice President  Investments and Corporate Affairs
since May 2002. From 1997 to 2002, Mr. Firon was a Vice President of Merhav M.N.F. Ltd.
and a partner in the law firm of Firon Karni Sarov & Firon.

AMIT
MANTSUR, 38, has been Vice President  Investments since March 2003. From September
2000 to December 2002, Mr. Mantsur served as Strategy and Business Development Manager at
Alrov Group. From February 1997 to September 2000, Mr. Mantsur was a projects manager at
the Financial Advisory Services of KPMG Somekh Chaikin.

ZAHI
BEN-ATAV, 35, has been Vice-President  Accounting and Controller Since May 2008.
From November 2005 to March 2008, Mr. Ben-Atav served as a controller at Celltick
Technologies Ltd. From November 2003 to November 2005, Mr. Ben-Atav was a controller at
ClearForest Ltd. From January 2000 to November 2003, Mr. Ben-Atav worked as a senior
manager at the accounting firm of Kesselman & Kesselman CPA, a member firm of
PricewaterhouseCoopers International Limited.

41

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# AUDIT COMMITTEE

The
Company has an Audit Committee of the Board consisting of Messrs. Karni, Morag and Vaknin,
each of whom is an independent director as defined under the rules of the National
Association of Securities Dealers, Inc. and the rules promulgated by the Securities and
Exchange Commission. Prior to Mr. Vaknins appointment to the Board and Audit
Committee on November 5, 2008, Mr. Haber served on the Audit committee. The Board has
determined that Mr. Morag and Mr. Vaknin are each an audit committee financial
expert for purposes of the rules promulgated by the Securities and Exchange
Commission.

# SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE

Section
16(a) of the Securities Exchange Act of 1934, as amended, requires Ampals executive
officers and directors, and persons who own more than 10% of a registered class of
Ampals equity securities, to file with the Securities and Exchange Commission
initial statements of beneficial ownership (Form 3), and statements of changes in
beneficial ownership (Forms 4 and 5), of Class A Stock of Ampal. To the Companys
knowledge, based solely on its review of the copies of such forms received by it, all
filing requirements applicable to its executive officers, directors and greater than
10-percent stockholders were complied with as of February 23, 2009.

# CODE OF ETHICS

The
Company has adopted a code of ethics (as defined in the rules promulgated under the
Securities Exchange Act of 1934) that applies to the Companys principal executive
officer, principal financial officer, principal accounting officer, or person performing
similar functions. A copy of the Companys code of ethics is available on the
Companys website at www.ampal.com (the Companys Website).

# CODE OF CONDUCT

The
Company has adopted a code of conduct that applies to all of the Companys employees,
directors and officers. A copy of the code of conduct is available on the Companys
Website.

|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

# COMPENSATION DISCUSSION
AND ANALYSIS

# Objectives of
Compensation Program

This
section contains a discussion of the material elements of compensation awarded to, earned
by or paid to the principal executive and principal financial officers of the Company, and
the other three most highly compensated executive officers of the Company. These
individuals are referred to as the Named Executive Officers in this Report on
Form 10-K.

The
objectives of our compensation program are (i) to attract and retain qualified personnel
in the Israeli marketplace, (ii) to provide incentives and rewards for their contributions
to the Company, and (iii) to align their interests with the long-term interests of the
Companys shareholders.

Our
Named Executive Officers compensation has three primary components: salary, an annual cash
incentive bonus and stock option awards. In addition, we provide our Named Executive
Officers with benefits that are generally available to our salaried employees.

We
determine the appropriate level for each compensation component based in part, but not
exclusively, on competitive benchmarking consistent with a broad spectrum of companies in
Israel and in the United States.

Due
to the small size of our executive team and the need to tailor each Named Executive
Officers compensation package for retention and recruitment purposes, we have not
adopted any formal policies or guidelines for allocating compensation between long term
and currently payable compensation, between cash and non cash compensation or among
different forms of compensation.

# Responsibilities

The
Compensation Committee is composed of independent directors as defined under the rules of
NASDAQ and the SEC. The Compensation Committee does not operate pursuant to a written
charter.

The
Compensation Committee is responsible for (i) administering the Option Plans and
determining the officers and key employees who are to be granted options under the Option
Plans and the number of shares subject to such options and (ii) determining the annual
base salary and non-equity based annual bonus for Mr. Maiman in his capacity as Chairman,
President and Chief Executive Officer.

42

---

---

Mr.
          Maiman is responsible for (i) determining the annual base salary and non-equity
          based annual bonuses for all executive officers (other than the Chief Executive
          Officer) and for (ii) recommending to the Board directors compensation and
          benefit programs. Mr. Maiman also may attend and participate in meetings of the
          Compensation Committee.

No
outside compensation consultant is engaged by the Company at this time, although the
Company may elect to do so in the future.

# Elements of Compensation

The
material elements of the Companys executive compensation program for Named Executive
Officers includes three primary components: salary, an annual cash incentive bonus and
stock option awards. In addition, we provide our Named Executive Officers with benefits
that are generally available to our salaried employees.

Base
Salary

We
set our salaries for our Named Executive Officers generally based on what we believe
enables us to hire and retain individuals in the competitive environment in Israel and
rewards individual performance and the contribution to our overall business goals. We also
take into account the base salaries paid by similarly situated companies in Israel and in
the United States with which we believe we generally compete for talent. There are no
formal guidelines or formulas used by us to determine annual base salary for our Named
Executive Officers, as annual salary determinations are made on a case by case basis from
year to year to react to compensation market trends in Israel and to take into account the
Named Executive Officers performance. Additionally, stock price performance has not
been a factor in determining annual compensation because the price of the Companys
common stock is subject to a variety of factors outside our control. Our approach to
annual base salary is designed to retain our Named Executive Officers so that they will
continue to operate at high levels in the best interests of the Company.

Determinations
for annual base salary for the fiscal year ended December 31, 2008, were made by the
Compensation Committee regarding Mr. Maiman and by Mr. Maiman regarding other executive
officers.

Annual
Cash Incentive Bonus Compensation

The
non-equity based annual bonus compensation is based on each Named Executive Officers
individual performance for the Company over the fiscal year, which is measured in terms of
overall effort, performance and contribution to the Company. In 2008, we considered the
performance of our Named Executive Officers with respect to certain material transactions
and the amount of funds raised during the year and allocated an amount among the Named
Executive Officers who were involved in those special efforts. We take into account the
amount of annual base salary paid to each Named Executive Officers in determining such
Named Executive Officers non-equity based annual bonus compensation. Determinations
for non-equity based annual bonus compensation for the fiscal year ended December 31, 2008
were made by Mr. Maiman.

Long-Term
Equity Incentive Compensation

At
this time, we do not award long-term equity incentive compensation to our Named Executive
Officers on an annual basis, however we may elect to award this form of compensation in
the future. Following the April 2002 acquisition by Y.M. Noy Investments Ltd. of a
controlling interest in the Company, we awarded long-term equity incentive compensation in
April 2002 to provide the new management team with incentives aligned with shareholder
interests and in December 2004, in recognition of the Named Executive Officers
assistance to a Special Committee of the Board of Directors that had been appointed to
consider alternatives available to the Company to maximize shareholder value. In December
2006, the Stock Option Committee granted Mr. Maiman an option to acquire 250,000 shares of
our Class A Stock for his service as Chairman of the Board. The amount of this award was
consistent with the amount of the option grant previously awarded to Mr. Maiman in August
2002, which became fully vested in August 2006.

On
December 8, 2008, the Compensation Committee and the Board of Directors approved the
repricing of outstanding options to purchase, in the aggregate, 2,270,000 shares of
Ampals Class A Stock, which were previously granted to ten of the Companys
current employees, executive officers and directors pursuant to the 2000 Plan, including
the Named Executive Officers (except for Mr. Gilboa who held no options). See Stock
Option Plans below.

While
our current policy is to award option grants to our executive officers and directors, the
awards granted under the Option Plans may be in the form of options, restricted stock,
dividend equivalent awards and/or stock appreciation rights. There are no formal
guidelines or formulas used by us to determine equity compensation awards for our Named
Executive Officers.

As
stated above, the Compensation Committee is responsible for determining long-term equity
incentive compensation in accordance with the Option Plans. Such determinations are made
in consultation with Mr. Maiman and other executive officers from time to time.

43

---

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Perquisites

As
is customary in Israel, we provide each Named Executive Officer with the use of a car,
mobile phone, one meal per day, telephone expenses, economic newspapers, and stipends for
traveling out of the country from time to time. The value of the specific car an employee
receives varies according to his or her pay grade within the Company.

Additionally,
consistent with practice in the Israeli marketplace, the Company reimburses the Named
Executive Officers for a portion of the taxes associated with the use of the car and
mobile phone.

Severance
and Change of Control Benefits

Israeli
labor laws and agreements require payment of severance pay upon dismissal of an employee
or upon termination of employment in certain other circumstances, including retirement.
The Companys severance pay is calculated based upon length of service and the latest
monthly base salary (one months salary for each year worked). Severance pay is paid
from a fund into which the Company contributes up to 8 1/3% of the employees base
salary each month, in accordance with Israeli law and the customary practice in Israel.
The Companys liability for severance pay pursuant to Israeli law is partly offset by
insurance policies, where the Named Executive Officers are the beneficiaries of such
insurance policies.

In
addition to the above the Named Executive Officers are eligible to participate in a
Pension Plan in which both the employee and the Company contribute up to 5% of the
employees base salary each month. The Named Executive Officers are eligible to
receive the fund upon termination of employment, including retirement.

In
addition to the above benefits, each of the employment agreements of certain executive
officers provide that such executive officer shall receive an additional payment of six
months salary (together with all related benefits for the six month period including
social benefits, use of a vehicle, mobile telephone and any other rights accompanying the
executive officers employment by the Company) in the event (i) of a change of
control of Ampal and (ii) such executive officers employment is terminated within
six months from the date of the change of control of Ampal. These arrangements were
designed to provide these key employees with an additional benefit consistent with Israeli
practice for employees in comparable positions.

Pursuant
to the terms of the employment agreements of each of the certain executive officers,
following the termination of employment, such executive officers shall not be involved,
directly or indirectly, with any business or entity that is in the field of the
Companys activities and/or is in direct competition in the field of the
Companys activities for a period of six months following the termination of
employment. Furthermore, during the term of employment at the Company and for a period of
twenty four months following the termination of employment, each of these executive
officers shall abstain from providing services in any manner whatsoever, including
consulting services, either paid or not paid, to any business or occupation in which the
Company was involved.

Education
Fund

The
Named Executive Officers are eligible to participate in an education fund in which both
the employee and the Company contribute up to 2.5% and 7.5% respectively of the
employees base salary each month. The Named Executive Officers are eligible to
receive the fund upon termination of employment, including retirement. The education fund
contribution, which is customary in Israel, can be used by the Named Executive Officers at
any time for professional education and every 6 years for any other purpose. As is
customary in Israel, the Company also reimburses the Named Executive Officers for taxes
associated with Company contributions to this fund beyond the maximum contributed amount
allowed according to the Israel Tax law.

Vacation
Provision and Recreation Pay

The
Named Executive Officers are eligible to take one month vacation per year. Additionally,
pursuant to Israeli employment laws, each Named Executive Officer is entitled to a certain
amount of recreation pay to be used for any other purpose. Each Named Executive Officer is
entitled to receive 13 days of recreation pay, which amounts to approximately $1,690 on an
annual basis.

Stock
Ownership and Retention Guidelines

The
Company does not have any stock ownership or retention guidelines or policies.

44

---

---

# Summary Compensation
Table 
For Fiscal Year Ended
December 31, 2008

The following table sets forth all of
the compensation awards to our Named Executive Officers for the year ended December 31,
2008.

|Name and Principal Position              | Year | Salary | Bonus | Stock
Awards | Option
Awards
(10) | All Other
Compensation
(7) | Total (8)
|---------------------------------------- | ---- | ------ | ----- | ------------ | ------------------ | -------------------------- | ---------
|
|
|
|
|Yosef A. Maiman (1) (9)                  |      |        |       |              |                    |                            |          
|Chairman of the Board, President and CEO |      |        |       | 2008         |                    |                            | 1,028,812
|                                         |      |        |       | 2007         |                    |                            | 890,344  
|                                         |      |        |       | 2006         |                    |                            | 632,144  
|                                         |      |       
|Irit Eluz (2) (8)                        |      |        |       |              |                    |                            |          
|CFO - SVP                                |      |        |       |              |                    |                            |          
|Finance & Treasurer                      |      |        |       | 2008         |                    |                            | 342,937  
|                                         |      |        |       | 2007         |                    |                            | 304,989  
|                                         |      |        |       | 2006         |                    |                            | 263,848  
|                                         |      |       
|Yoram Firon (3) (8)                      |      |        |       |              |                    |                            |          
|Secretary, Vice                          |      |        |       |              |                    |                            |          
|President Investments                    |      |        |       | 2008         |                    |                            | 239,348  
|                                         |      |        |       | 2007         |                    |                            | 227,470  
|                                         |      |        |       | 2006         |                    |                            | 206,194  
|                                         |      |       
|Amit Mantsur (4)                         |      |        |       |              |                    |                            |          
|Vice President Investments               |      |        |       | 2008         |                    |                            | 170,963  
|                                         |      |        |       | 2007         |                    |                            | 155,486  
|                                         |      |        |       | 2006         |                    |                            | 141,538  
|                                         |      |       
|Ofer Gilboa (5)                          |      |        |       |              |                    |                            |          
|Vice President Investments               |      |        |       | 2008         |                    |                            | 188,059  
|                                         |      |       
|Erez I. Meltzer (6)                      |      |        |       |              |                    |                            |          
|Vice Chairman and CEO of Gadot           |      |        |       | 2008         |                    |                            | 189,769  
|                                         |      |        |       |              |                    |                            |          

(1)
          Mr. Maiman has been employed by Ampal since April 25, 2002 as Chairman of the
          Board; On September 19, 2006 Mr. Maiman was appointed as the President and CEO
          of Ampal.

(2)
          Ms. Eluz has been employed by Ampal since April 25, 2002.

(3)
          Mr. Firon has been employed by Ampal since April 25, 2002.

(4)
          Mr. Mantsur has been employed by Ampal since February 2, 2003.

(5)
          Mr. Gilboa has been employed by Ampal from December 27, 2007 until January 31,
          2009.

(6)
          Mr. Meltzer has been employed by Gadot since November 1, 2008.

(7)
          Comprised of Ampal (Israels) contribution pursuant to: (i) Ampal
          (Israels) pension plan and (ii) Ampal (Israels) education fund and
          (iii) use of car and (iv) use of mobile and (v) final account settlement and
          (vi) redemption of vacation provision and (vii) reimbursed for the payment of
          taxes.

(8)
          Eligible to receive an additional payment of up to six months salary (i) in the
          event of a change of control of the Company and (ii) such executive
          officers employment is terminated within six months from the date of the
          change of control of the Company.

(9)
          All cash compensation is paid in New Israeli Shekels. The amounts in the table
          are converted from the New Israeli Shekel to U.S. dollars based on the exchange
          rate of 3.8020 for 2008, which represents the exchange rate as of December 31,
          2008, of 4.0355 for 2007, which represents the exchange rate as of December 31,
          2007 and of 4.2250 for 2006, which represents the exchange rate as of December
          31, 2006.

(10)
          Represents the compensation cost in 2008 in accordance with SFAS No. 123R for
          stock options, which includes amounts from awards granted in and prior to 2008.

(11)
          Of such amount, for services as director, $22,000 was paid in cash.

(12)
          For services as director. See also the footnotes to the Director
          Compensation Table below.

45

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Outstanding Equity Awards
For Fiscal Year Ended December 31, 2008
Option Awards

|Name            | Number of Securities
Underlying
Unexercised
Options (Exercisable)
(1) | Number of Securities
Underlying
Unexercised
Options
(Unexercisable) | Option Exercise
Price ($) | Option Expiration Date
|--------------- | --------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------- | ----------------------
|
|
|
|
|Yosef A. Maiman |                                                                       |                                                                     |                           | 390,625               
|Irit Eluz       |                                                                       |                                                                     |                           | 358,500               
|Yoram Firon     |                                                                       |                                                                     |                           | 258,500               
|Amit Mantsur    |                                                                       |                                                                     |                           | 73,000                
|Erez I. Meltzer |                                                                       |                                                                     |                           | -                     
|Ofer Gilboa     |                                                                       |                                                                     |                           | -                     
|                |                                                                       |                                                                     |                           |                       

(1)
          The underlying securities reflect the repricing of Ampals outstanding
          options to ten employees, which was approved by the Compensation Committee and
          the Board of Directors on December 8, 2008. For further information, see
          Stock Option Plans below.

(2)
          359,375 shares were vested and exercisable on December 8, 2008. 140,625 shares
          shall vest and become exercisable, in installments of 15,625 shares, beginning
          on December 12, 2008 and thereafter on the 12th day of the month of each
          subsequent three-month period until and including December 12, 2010.

(3)
          All vested and exercisable as of December 8, 2008.

Compensation of Directors

Directors
of Ampal (other than Mr. Maiman) receive $2,000 per Board meeting attended. Directors of
Ampal 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.

For
attending Special Committee, Audit Committee and Executive Committee meetings Mr. Karni,
the Chairman of the Special and the Audit Committee, is entitled to $40,000 per year. Each
of Mr. Vaknin and Mr. Morag are entitled to $30,000 per year, for attending Special
Committee and Audit Committee meetings.

In
connection with the formation of the Special Committee on October 28, 2004, the Company
entered into an Indemnification and Compensation Agreement with each of Messrs. Karni,
Vaknin and Morag. In consideration for serving as a member of the Special Committee, the
Company has agreed pursuant to the terms of the Indemnification and Compensation
Agreement, among other things, to indemnify and hold harmless each Director with respect
to his service on, and any matter or transaction considered by, the Special Committee to
the fullest extent authorized or permitted by law. A copy of the form of this
Indemnification and Compensation Agreement is attached as Exhibit 10j to the
Companys Annual Report on Form 10-K for the year ended December 31, 2004.

On
December 8, 2008, Stock Option and Compensation Committee of the Board and the Board of
Directors approved the grant, pursuant to the Companys 2000 Incentive Plan, to each
of Erez I. Meltzer, Daniel Vaknin and Joseph Geva, of an option to purchase 180,000 shares
of Class A Stock at an exercise price of $1.17 per share, vesting in sixteen equal
quarterly installments.

Director Compensation
For Fiscal Year Ended December 31, 2008

|Name                 | Fees Paid
in Cash ($) | Option(1)
Award ($) | Total ($)
|-------------------- | --------------------- | ------------------- | ---------
|
|
|
|
|Yehuda Karni         |                       |                     |          
|Jack Bigio           |                       |                     |          
|Menahem Morag        |                       |                     |          
|Eitan Haber          |                       |                     |          
|Leo Malamud          |                       |                     |          
|Dr. Yossi Yerushalmi |                       |                     |          
|Dr. Nimrod Novik     |                       |                     |          
|Joseph Geva (2)      |                       |                     |          
|Daniel Vaknin (2)    |                       |                     |          
|                     |                       |                     |          

(1)
          Represents the compensation cost in 2008 in accordance with SFAS 123(R) for
          stock options.

(2)
          In fiscal year 2008, Messrs. Meltzer, Vaknin and Geva were each granted an
          option to purchase 180,000 shares of our Class A Stock, each with a grant date
          fair value of $1.17.

46

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The
following table sets forth certain information regarding stock options granted to purchase
our Class A Stock to our directors during the fiscal year ended December 31, 2008.

|                    | 2008
|------------------- | ----
|
|
|
|
|Joseph Geva (1)     |     
|Erez I. Meltzer (1) |     
|Daniel Vaknin (1)   |     
|                    |     

(1)
          Director since November 5, 2008.

Stock Option Plans

On
February 15, 2000, the Compensation Committee approved an Incentive Plan (2000
Plan), under which the Company has reserved 4 million shares of Class A Stock,
permitting the granting of options to all employees, officers and directors. 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.

On
December 8, 2008, the Compensation Committee and the Board of Directors approved the
repricing of outstanding options to purchase, in the aggregate, 2,270,000 shares of
Ampals Class A Stock, which were previously granted to ten of the Companys
current employees, executive officers and directors pursuant to the 2000 Plan. The
outstanding options had been originally issued with exercise prices ranging from $3.12 to
$5.35 per share, which represented the then current market prices of Class A Stock on the
dates of the original grants. The repricing was effected by canceling the outstanding
options, and granting to each holder of cancelled outstanding options a new option, with a
ten year term, to purchase the total number of shares of Class A Stock underlying such
cancelled outstanding options, at an exercise price equal to $1.17 per share, the closing
price of Class A Stock on NASDAQ on December 5, 2008, the most recent closing price prior
to the approval by the board and the committee. The repriced options maintain the vesting
schedule of the cancelled outstanding options.

The
2000 Plan remains in effect for a period of ten years from the date of the repricing. As
of December 31, 2008, 2,921,000 options of the 2000 Plan are outstanding.

The
options granted under the 2000 Plan may be either incentive stock options, at an exercise
price to be determined by the Compensation 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 Compensation Committee. The
Compensation 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 2000 Plan were granted either at market value or above.

Under
the 2000 Plan, all granted but unvested options become immediately exercisable upon the
occurrence of a change in control of the Company.

# COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION

The
current members of Compensation Committee are Mr. Yehuda Karni, Mr. Daniel Vaknin and Mr.
Menahem Morag, none of whom is an officer or employee or former officer or employee of the
Company. During 2008, no executive officer of the Company served on the compensation
committee or the Board of Directors of another entity whose executive officer(s) served on
the Companys Compensation Committee for the Board of Directors.

Effective
as of September 19, 2006, the Board determined that Mr. Yosef A. Maiman, our President and
CEO, shall be responsible for (i) determining the annual base salary and non-equity based
annual bonuses for all executive officers (other than the Chief Executive Officer) and for
(ii) recommending to the Board director compensation and benefit programs. The Stock
Option and Compensation Committee shall continue to be responsible for (i) administering
the Option Plans and determining the officers and key employees who are to be granted
options under the Option Plans and the number of shares subject to such options and (ii)
determining the annual base salary and non-equity based annual bonus for Mr. Maiman in his
capacity as Chairman, President and Chief Executive Officer. Mr. Maiman also may attend
and participate in meetings of the Stock Option Committee.

47

---

---

# COMPENSATION COMMITTEE
REPORT

The
Stock Option and Compensation Committee and Yosef A. Maiman have reviewed and discussed
the Compensation Discussion and Analysis required by Regulation S-K, Item 402(b) with
management. Based on the review and discussions referred to in the preceding sentence, the
Stock Option and Compensation Committee and Yosef A. Maiman recommended to the Board of
Directors that the Compensation Discussion and Analysis be included in this Report.

Yehuda KarniDaniel
VakninMenahem MoragYosef A. Maiman

|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
|-------- | ----------------------------------------------------------------------------------------------

|                                               | Equity Compensation Plan Information(1)
|---------------------------------------------- | ---------------------------------------
|
|
|
|
|Equity compensation plans approved by security |                                        
|holders                                        |                                        
|                                               |                                        
|Equity compensation plans not approved by      |                                        
|security holders                               |                                        
|                                               |                                        
|Total                                          |                                        
|                                               |                                        

| | (1) | All
information provided as of December 31, 2008.
| | --- | -------------------------------------------------

| | (2) | The
number of securities remaining available for future issuance under 2000 Plan           is
1,558,625.
| | --- | --------------------------------------------------------------------------------------------------------

48

---

---

# PRINCIPAL SHAREHOLDERS
OF AMPAL

The
following table sets forth information as of February 23, 2009, 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. As of February 23, 2009, there were 56,160,477(not
including treasury shares) shares of Class A Stock of Ampal outstanding.

Security Ownership of
Certain Beneficial Owners

|Name and Address
of Beneficial Owner     | Title of Class | Number of Shares
and Nature
of Beneficial Ownership | Percent
of Outstanding
Shares of
Class A Stock
|---------------------------------------- | -------------- | --------------------------------------------------- | ----------------------------------------------
|
|
|
|
|Di-Rapallo Holdings Ltd., of             |                |                                                     |                                               
|33 Havazelet Hasharon St.,               |                |                                                    
|Herzliya, Israel                         |                |                                                     |                                               
|                                         |                |                                                    
|De-Majorca Holdings Ltd., of             |                |                                                    
|33 Havazelet Hasharon St.,               |                |                                                    
|Herzliya, Israel                         |                |                                                     |                                               
|                                         |                |                                                    
|Yosef A. Maiman of                       |                |                                                    
|33 Havazelet Hasharon St.                |                |                                                    
|Herzliya, Israel                         |                |                                                     |                                               
|                                         |                |                                                    
|Ohad Maiman of                           |                |                                                    
|33 Havazelet Hasharon St.,               |                |                                                    
|Herzliya, Israel                         |                |                                                     |                                               
|                                         |                |                                                    
|Noa Maiman, of                           |                |                                                    
|33 Havazelet Hasharon St.,               |                |                                                    
|Herzliya, Israel                         |                |                                                     |                                               
|                                         |                |                                                    
|Yoav Maiman, of                          |                |                                                    
|33 Havazelet Hasharon St.,               |                |                                                    
|Herzliya, Israel                         |                |                                                     |                                               
|                                         |                |                                                    
|Merhav M.N.F. Ltd., of                   |                |                                                    
|33 Havazelet Hasharon St.,               |                |                                                    
|Herzliya, Israel                         |                |                                                     |                                               
|                                         |                |                                                    
|Clal Finance Ltd.                        |                |                                                    
|and                                      |                |                                                    
|Clal Insurance Enterprises Holdings Ltd. |                |                                                    
|37 Menachem Begin St.,                   |                |                                                    
|Tel-Aviv 65220, Israel                   |                |                                                     |                                               
|                                         |                |                                                     |                                               

| | (1) | Consists
of 9,650,132 shares of Class A Stock held directly by Di-Rapallo Yosef                A.
Maiman owns 100% of the economic shares and one-fourth of the voting shares
               of Di-Rapallo In addition, Mr. Maiman holds an option to acquire the
remaining                three quarters of the voting shares of Di-Rapallo (which are
currently owned by                Ohad Maiman, Noa Maiman and Yoav Maiman, the son,
daughter and son,                respectively, of Mr. Maiman).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Consists
of 18,850,153 shares of Class A Stock held directly by De-Majorca Yosef                A.
Maiman owns 100% of the economic shares and one-fourth of the voting shares
               of De-Majorca In addition, Mr. Maiman holds an option to acquire the
remaining                three quarters of the voting shares of De-Majorca (which are
currently owned by                Ohad Maiman, Noa Maiman and Yoav Maiman, the son,
daughter and son,                respectively, of Mr. Maiman).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Includes
390,625 shares of Class A Stock underlying options which are currently
               exercisable or exercisable within 60 days of February 23, 2009, by Mr.
Maiman                and 6,043,623 shares of Class A Stock held directly by Merhav Yosef
A. Maiman                owns 100% of Merhav
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Yosef
A. Maiman owns 100% of Merhav
| | --- | -----------------------------------

49

---

---

| | (5) | Consists
of 34,996 shares of Class A Stock beneficially owned by Clal Finance                Ltd. (Clal
Finance), none of which are held for its own account; and                3,441,326
shares of Class A Stock beneficially owned by Clal Insurance                Enterprises
Holdings Ltd. (Clal), of which (i) 2,921,919 shares of                Class A
Stock are held for members of the public through, among others,                provident
funds, mutual funds, pension funds and insurance policies, which are
               managed by subsidiaries of Clal, each of which subsidiaries operates under
               independent management and makes independent voting and investment
decisions,                (ii) 232 shares of Class A Stock are held by unaffiliated
third-party client                accounts managed by Clal Finance Batucha Investment
Management Ltd.                (CFB) as portfolio managers, each of which
subsidiaries operates                under independent management and makes investment
decisions independent of Clal                and has no voting power in such client
accounts, and (iii) 554,171 shares of                Class A Stock are beneficially held
for its own account.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Clal
Finance is a majority owned subsidiary of Clal. Through Clal Finances wholly owned
subsidiary, CFB, Clal may be deemed to beneficially own 232 shares of Class A Stock (the
CFB Shares). Clal may be deemed to beneficially own an aggregate of 3,441,326
shares of Class A Stock (the Clal Shares). The CFB Shares are included in the
Clal Shares. Clal is a majority owned subsidiary of IDB Development Corporation Ltd., an
Israeli public corporation (IDB Development). By reason of IDB Developments
control of Clal, IDB Development may be deemed to be the beneficial owner of, and to
share the power to vote and dispose of, the shares of Class A Stock owned beneficially by
Clal. IDB Development is a majority owned subsidiary of IDB Holding Corporation Ltd., an
Israeli public corporation (IDB Holding). By reason of IDB Holdings
control (through IDB Development) of Clal, IDB Holding may be deemed beneficial owner of,
and to share the power to vote and dispose of, the shares of Class A Stock owned
beneficially by Clal. Mr. Nochi Dankner, Mrs. Shelly Bergman, Mrs. Ruth Manor and Mr.
Avraham Livnat may, by reason of their interests in, and relationships among them with
respect to, IDB Holding, be deemed to control the corporations referred to in this
footnote. By reason of the control of IDB Holding by Nochi Dankner, Shelly Bergman, Ruth
Manor and Avraham Livnat, and the relations among them, Nochi Dankner, Shelly Bergman,
Ruth Manor and Avraham Livnat may each be deemed beneficial owner of, and to share the
power to vote and dispose of, the shares of Class A Stock owned beneficially by Clal.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
information regarding the holdings of Clal Finance and Clal, and the beneficial ownership
thereof, is based upon a Schedule 13G/A filed by Clal with the SEC on February 13, 2009.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Security Ownership of
Management

The
following table sets forth information as of February 23, 2009 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 ownership is direct unless
otherwise noted. The table does not include directors or named executive officers who do
not own any such shares:

|Name                                            | Number of Shares and
Nature of Beneficial
Ownership
of Class A Stock | Percent of
Outstanding
Shares of
Class A Stock
|----------------------------------------------- | -------------------------------------------------------------------- | ----------------------------------------------
|
|
|
|
|Yosef Maiman                                    |                                                                      |                                               
|Irit Eluz                                       |                                                                      |                                               
|Yoram Firon                                     |                                                                      |                                               
|Amit Mantsur                                    |                                                                      |                                               
|Zahi Ben-Atav                                   |                                                                      |                                               
|Leo Malamud                                     |                                                                      |                                               
|Dr. Joseph Yerushalmi                           |                                                                      |                                               
|Dr. Nimrod Novik                                |                                                                      |                                               
|Eitan Haber                                     |                                                                      |                                               
|Yehuda Karni                                    |                                                                      |                                               
|Menahem Morag                                   |                                                                      |                                               
|Joseph Geva                                     |                                                                      |                                               
|Erez I. Meltzer                                 |                                                                      |                                               
|Daniel Vaknin                                   |                                                                      |                                               
|All Directors and Executive Officers as a Group |                                                                      |                                               
|                                                |                                                                      |                                               

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

|(1) | Attributable
to 9,650,132, 18,850,153 and 6,043,623 shares of Class A Stock held           directly by
Di-Rapallo Holdings Ltd., De-Majorca and Merhav, respectively. See           Security
Ownership of Certain Beneficial Owners. In addition, this           represents
390,625 shares underlying options for Yosef Maiman which are           presently
exercisable or exercisable within 60 days of February 23, 2009.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents
shares underlying options which are presently exercisable or           exercisable within
60 days of February 23, 2009.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

50

---

---

|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|-------- | -------------------------------------------------------------------------

On
May 29, 2008, Ampal loaned Merhav $10.0 million in addition to the currently outstanding
$10.0 million that were loaned on December 25, 2007, to fund the the Project in Colombia
being developed by Merhav. The additional loan was made pursuant to the Promissory Note,
dated as of December 25, 2007, by Merhav in favor of Ampal. The Promissory Note was given
in connection with the Original Option Agreement dated December 25, 2007, with Merhav
providing Ampal with the Option to acquire up to a 35% equity interest in the Project. The
loan will be convertible into all or a portion of the equity interest purchased pursuant
to the Original Option Agreement.

On
December 25, 2008, Ampal entered into the Option Amendment to the Original Option
Agreement. Under the Original Option Agreement, the option expired on the earlier of
December 25, 2008 or the Financing Date. The Option Amendment extends the expiration of
the option to the earlier of December 31, 2009 or the Financing Date.

The
Option Amendment also provides that in determining the price to be paid by Ampal for
shares pursuant to the option under the Valuation Model, the parties have agreed to review
the discount rate set forth in the Valuation Model to determine whether the discount rate
should be increased, provided, however, that the purchase price shall not exceed the
amount Ampal would have paid without giving effect to the Option Amendment. The maximum
purchase price for any interest in the Project purchased by Ampal pursuant to the option
would be (A) with respect to any portion of such interest being purchased by conversion of
the outstanding balance of the Amended Promissory Note referred to below, the lesser of
(i) a price based on a currently agreed Valuation Model as updated from time to time to
reflect changes in project, financing and other similar costs as such updates are reviewed
by Houlihan Lokey Howard & Zukin at the time of the options exercise or (ii) the
lowest price paid by any unaffiliated third party for an interest in the Project, or (B)
with respect to any portion of such interest in the Project being purchased in excess of
the balance of the Amended Promissory Note, the lowest price paid by an unaffiliated third
party for its interest in the Project, unless no unaffiliated third party has purchased an
interest in the Project, in which case the purchase price will be based on the Valuation
Model.

In
consideration for Merhav entering into the Option Amendment, Ampal agreed to certain
amendments to the Promissory Note reflected in the Amended Promissory Note, dated December
25, 2008. The Amended Promissory Note provides for (i) an increase in the annual interest
rate from LIBOR plus 2.25% to LIBOR plus 3.25% and (ii) an extension of the maturity date
of the Promissory Note to December 31, 2009. As a condition to amending and restating the
Promissory Note, Ampal received a personal guaranty dated as of December 25, 2008, from
Yosef A. Maiman personally guaranteeing the obligations of Merhav under the Amended
Promissory Note.

The
loan continues to be secured by Merhavs pledge to Ampal, pursuant to a Pledge
Agreement dated December 25, 2007, between Merhav and Ampal, of all of the shares of
Ampals Class A Common Stock, par value $1.00 per share, owned by Merhav.

Yosef
A. Maiman, the Chairman, President and CEO of Ampal and a member of the controlling
shareholders group of Ampal, is the sole owner of Merhav. Because of the foregoing
relationship, a special committee of the Board of Directors composed of Ampals
independent directors negotiated and approved the transaction.

In
connection with the offering of its Series B debentures, Ampal entered into a trust
agreement (the Agreement) with Clal Finance Trustees 2007 Ltd. (the
Trustee) which became effective on April 28, 2008, pursuant to which the
Company issued its Series B debentures to investors in Israel. The Trustee is a member of
a group of affiliated companies, controlled by and affiliated with IDB Holding Corporation
Ltd. (collectively, the IDB Group), that owns approximately 5.43% of the
Companys outstanding Class A stock as of the date of this annual report. In November
2007, Clal Electronics Industries Ltd. (Clal Electronics), also a member of
the IDB Group, entered into a previously disclosed joint venture with the Company, through
a wholly-owned subsidiary of the Company, that will focus on the new development and
acquisition of controlling interests in wind energy projects outside of Israel. The joint
venture is owned equally by Clal Electronics and the Company through its wholly-owned
subsidiary. Clal Finance, also a member of the IDB Group, led distributors in the offering
in Israel of the Series B debentures, and members of the IDB Group purchased a portion of
the Series B debentures. A member of the IDB Group is acting as a market maker on the Tel
Aviv Stock Exchange for the purchase and sale of the Companys Class A stock and
Series A debentures.

Ampal
entered into a management services agreement with Merhav, according to which Merhav
provides Ampal and its subsidiaries with management, marketing, financial, development and
other administrative services for an annual consideration of NIS 10 million ($ 2.6
million).

Review and Approval of
Transactions with Management and Others

Pursuant
to its written charter and the marketplace rules of the NASDAQ Global Market, the Audit
Committee must review with management and approve all transactions or courses of dealing
with parties related to the Company. In determining whether to approve a related person
transaction, the Audit Committee will consider a number of factors including whether the
related person transaction is on terms and conditions no less favorable to us than may
reasonably be expected in arms-length transactions with unrelated parties. The Audit
Committee has the authority to engage independent legal, financial and other advisors. A
special committee of the Board of Directors composed of the Companys independent
directors, who also constitute all of the members of the Companys Audit Committee,
has reviewed and approved the terms of each of the transactions described above.

51

---

---

Director Independence

Because
a group of shareholders (as defined under Rule 13d-5(b)(1) of the Securities
Exchange Act of 1934, as amended) consisting of Yosef A. Maiman, Ohad Maiman, Noa Maiman,
and Yoav Maiman, and the companies Merhav, De Majorca and Di-Rapallo beneficially owns
more than 50% of the voting power in the Company, the Company is deemed to be a
controlled company under the rules of the NASDAQ Global Market. As a result,
we are exempt from the NASDAQ rules that require listed companies to have (i) a majority
of independent directors on the Board of Directors, (ii) a compensation committee and
nominating committee composed solely of independent directors, (iii) the compensation of
executive officers determined by a majority of the independent directors or a compensation
committee composed solely of independent directors and (iv) a majority of the independent
directors or a nominating committee composed solely of independent directors elect or
recommend director nominees for selection by the Board of Directors. The Company has an
Audit Committee of the Board consisting of Messrs. Karni, Morag and Vaknin, each of whom
is an independent director as defined under the rules of the National Association of
Securities Dealers, Inc. and the rules promulgated by the Securities and Exchange
Commission. Other than the members of the Audit Committee, there are no other independent
directors that serve on the Board of Directors.

|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES.
|-------- | ---------------------------------------

AUDIT
FEES. The fees of Kesselman & Kesselman (Kesselman) CPA (ISR) for
professional services rendered for the audit of the Companys annual financial
statements for the fiscal years ended December 31, 2008 and December 31, 2007 on Form 10-K
and reviewing the financial statements included in the Companys quarterly reports on
Form 10-Q were $707,750 and $477,000, respectively.

AUDIT-RELATED
FEES. Kesselmans fees for audit related services for the fiscal years ended December
31, 2008 and December 31, 2007 were $331,353 and $44,000, respectively.

TAX
FEES. Kesselmans tax fees for the fiscal years ended December 31, 2008 and December
31, 2007, were $232,889 and $53,665, respectively.

ALL
OTHER FEES. Kesselmans fees for other services for the fiscal years ended December
31, 2008 and December 31, 2007, were $0 and $309,142, respectively.

All
of the services provided to Ampal by our principal accounting firm described above under
the captions Audit Fees, Tax Fees and All Other Fees
were approved by Ampals Audit Committee. The Audit Committee has determined that the
rendering of professional services described above by Kesselman is compatible with
maintaining the auditors independence.

# Audit Committee
Pre-Approval Policies

The
Companys Audit Committee Charter provides that the Audit Committee shall approve in
advance all audit services and all non-audit services provided by the independent auditors
based on policies and procedures developed by the Audit Committee from time to time. The
Audit Committee will not approve any non-audit services prohibited by applicable SEC
regulations or any services in connection with a transaction initially recommended by the
independent auditor, the purpose of which may be tax avoidance and the tax treatment of
which may not be supported by the Internal Revenue Code and related regulations.

Our
Audit Committee requires that our independent auditor, in conjunction with our Chief
Financial Officer, be responsible for seeking pre-approval for providing services to us
and that any request for pre-approval must inform the Audit Committee about each service
to be provided and must provide detail as to the particular service to be provided.

52

---

---

# PART IV

|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|-------- | ---------------------------------------

(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 Registered Public Accounting Firm                                                         | 1                  
|                                                                                                               
|Consolidated Balance Sheets as of December 31, 2008 and 2007                                                    | 2                  
|                                                                                                               
|Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006                      | 4                  
|                                                                                                               
|Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006                      | 5                  
|                                                                                                               
|Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2008, 2007 and 2006 | 7                  
|                                                                                                               
|Consolidated Statements of Comprehensive Income for the years ended December 31, 2008, 2007 and 2006           
|(included as part of the Statements of Changes in Shareholders' Equity for the respective years)                | 7                  
|                                                                                                               
|Notes to Consolidated Financial Statements                                                                      | 10                 
|                                                                                                               
|Supplementary Data:                                                                                            
|                                                                                                               
|                                                                                                                |                    
|Selected quarterly financial data for the years ended December 31, 2008 and 2007                                | 33 of annual report
|                                                                                                                |                    

(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, 2008:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

Representative Rates of Exchange
Between the U.S. dollar and the New Israeli Shekel
For the Three Years Ended December 31, 2008

| | The
following table shows the amount of New Israeli Shekels equivalent to one U.S. dollar on
the dates indicated (or the nearest date thereto, if the exchange rate was not publicized
on that date):
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |              | 2008 | 2007 | 2006
| | ------------ | ---- | ---- | ----
|
|
|
|
| | March 31     |      |      |     
| | June 30      |      |      |     
| | September 30 |      |      |     
| | December 31  |      |      |     
| |              |      |      |     

| | (ii)
          Consolidated financial statements filed pursuant to Rule 3-09 of Regulation
S-X:
| | -----------------------------------------------------------------------------------------------

| | Bay
Heart Ltd.
| | --------------

| | Report of Certified Public Accountants
Consolidated Balance Sheets as at December 31, 2006 and 2005
Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
Notes to Financial Statements
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

53

---

---

| | Coral
World International Ltd.
| | ------------------------------

| | Report of Certified Public Accountants
Consolidated Balance Sheets as at December 31, 2006 and 2005
Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
Notes to Financial Statements
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii)
Reports of Other Certified Public Accountants filed pursuant to Rule 2-05 of Regulation
S-X:
| | --------------------------------------------------------------------------------------------------

| | Bay Heart Ltd.
Carmel Containers Systems Limited
Chemship B.V .
Finlog B.V.
Hod Hasharon Sport Center Ltd.
Hod Hasharon Sport Center (1992) Limited Partnership
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

# Exhibit 2  Plan of
Acquisition, Reorganization, Arrangement, Liquidation or Succession

None

# Exhibit 3 
Articles of Incorporation and By-Laws

|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. | Certificate
of Amendment of Certificate of Incorporation, dated July 18, 2006                (Filed
as Exhibit 3.1 to Form 8-K, filed with the SEC on July 19, 2006, and
               incorporated herein by reference).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3c. | Certificate
of Amendment of Certificate of Incorporation, dated July 18, 2006                (Filed
as Exhibit 3.1 to Form 8-K, filed with the SEC on July 19, 2006, and
               incorporated herein by reference).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3d. | Certificate
of Amendment of Certificate of Incorporation, dated February 7, 2007
               (Filed as Exhibit 3.4 to Form S-3, filed with the SEC on February 28,
2007, and                incorporated herein by reference).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3e. | By-Laws
of Ampal-American Israel Corporation as amended, dated February 14, 2002
               (incorporated by reference to Exhibit 3b. of Ampals Form 10-K filed
on                March 27, 2002).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 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).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4c. | English
translation of the original Hebrew language Trust Deed dated November                20,
2006 between Ampal-American Israel Corporation and Hermetic Trust (1975)
               Ltd. for debt offering. (Filed as Exhibit 4c to Report on Form 10-K for
the                fiscal year ended December 31, 2006, File No. 000-00538).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4d. | English
translation of the original Hebrew language Trust Deed dated April 6,
               2008, between Ampal-American Israel Corporation and Clal Finance Trustees
2007                Ltd., as amended, for Series B debentures offering in Israel (Filed
as Exhibit                4.a to Form 10-Q, filed with the SEC on May 7, 2008, and
incorporated herein by                reference).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

54

---

---

# 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).
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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. | 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).
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10d. | 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).
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10e. | Sale
and Purchase Agreement, dated November 8, 2000, between Ampal Realty
               Corporation and Second 800 LLC. (Filed as Exhibit 10I to Form 10-K for the
               fiscal year ended December 31, 2002, File No. 000-00538).
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10f. | The
Companys 2000 Incentive Plan (Filed as an exhibit to the                Companys
Proxy Statement for the 2000 Annual Meeting of Shareholders).*
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------

|10g. | Amendment
to the Companys 2000 Incentive Plan adopted by the Board of
               Directors on February 14, 2002. (Filed as Exhibit 10i to the report on
Form 10-K                filed on March 27, 2003). *
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10h. | Compensation
and Indemnification Agreement, dated as of December 13, 2004,                between
Ampal-American Israel Corporation and each of Mr. Yehuda Karni, Mr.                Eitan
Haber and Mr. Menachem Morag. (Filed as Exhibit 10j to the report on Form
               10-K filed on March 15, 2005).
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10i. | Stock
Option Cancellation Agreement, dated as of November 30, 2004, between
               Ampal-American Israel Corporation and Dafna Sharir. (Filed as Exhibit 10k
to the                report on Form 10-K filed on March 15, 2005).
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10j. | Omnibus
Agreement, dated as of December 1, 2005, between Merhav Ampal Energy                Ltd.
and Merhav M.N.F. Ltd. (Filed as Exhibit 10l to the report on Form 10-K
               filed on March 29, 2006).
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10k. | Stock
Purchase and Indemnification Agreement, dated as of August 30, 2005, by
               and among Motorola Israeli Ltd., Ampal Communications Limited Partnership
and                MIRS Communications Ltd. (Filed as Exhibit 99.1 of Form 8-K, filed
with the SEC                on October 3, 2005, and incorporated herein by reference).
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10l. | Form
of Option Agreement pursuant to the 2000 Incentive Plan (Filed as Exhibit
               99.1 of Form 8-K, filed with the SEC on October 11, 2005, and incorporated
               herein by reference). *
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10m. | Form
of Option Agreement for December 12, 2006 grants pursuant to the 2000
               Incentive Plan. (Filed as Exhibit 10o to Report on Form 10-K for the
fiscal year                ended December 31, 2006, File No. 000-00538). *
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10n. | Stock
Purchase Agreement between Merhav Ampal Energy Ltd.and Merhav M.N.F. Ltd.,
               dated August 1, 2006 (Filed as Exhibit 10 of Form 8-K, filed with the SEC
on                August 3, 2006, an incorporated herein by reference).
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10o. | Stock
Purchase Agreement between Merhav Ampal Energy Ltd. and Merhav M.N.F.
               Ltd., dated November 28, 2006 (Filed as Exhibit 10.1 to Form 8-K, filed
with the                SEC on December 1, 2006, and incorporated herein by reference).
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10p. | Agreement
of Certain Shareholders between Merhav Ampal Energy Ltd. and Merhav                M.N.F.
Ltd. dated August 1, 2006. (Filed as Exhibit 10r to Report on Form 10-K
               for the fiscal year ended December 31, 2006, File No. 000-00538).
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10q. | Form
of Convertible Promissory Note between Ampal-American Israel Corporation
               and Merhav M.N.F. Ltd. (Filed as Exhibit 10.2 to Form 8-K, filed with the
SEC on                December 1, 2006, and incorporated herein by reference).
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10r. | Form
of Securities Purchase Agreement, dated as of November 28, 2006, between
               Ampal-American Israel Corporation and certain investors (Filed as Exhibit
10.1                of 8-K, filed with the SEC on January 3, 2007, and incorporated
herein by                reference).
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10s. | Form
of Warrant Agreement, dated as of December 28, 2006, between Ampal-American
               Israel Corporation and certain investors (Filed as Exhibit 10.2 of 8-K,
filed                with the SEC on January 3, 2007, and incorporated herein by
reference).
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10t. | Form
of Registration Rights Agreement, dated as of December 28, 2006, between
               Ampal-American Israel Corporation and certain investors (Filed as Exhibit
10.3                of 8-K, filed with the SEC on January 3, 2007, and incorporated
herein by                reference).
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

55

---

---

|10u. | Share
Sale and Purchase Agreements dated May 22, 2006, between Ampal-American
               Israel Corporation and Red Sea Underwater Observatory Ltd. for the sale of
Coral                World International Ltd. shares and Ted Sea Marinland Holdings 1973
Ltd. (Filed                as Exhibit 10w to Report on Form 10-K for the fiscal year
ended December 31,                2006, File No. 000-00538).
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10v. | English
translation of the original Hebrew language Form of Employment Agreement
               for each of Yosef A. Maiman, Irit Eluz, Yoram Firon, Amit Mantsur and Zahi
               Ben-Atav. (Filed as Exhibit 10x to Report on Form 10-K for the fiscal year
ended                December 31, 2006, File No. 000-00538). *
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10w. | English
translation of the original Hebrew language Employment Agreement for                Ofer
Gilboa (incorporated by reference to Exhibit 10x. of Ampals Form 10-K
               filed on April 2, 2007).*
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10x. | Understanding
for the Repayment of a Foreign Currency Loan between Bank Hapoalim                BM and
Ampal (Israel) Ltd. dated April 26, 2007. (Filed as Exhibit 10.1 to                Report
on Form 10-Q, filed with the SEC on May 15, 2007).
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10y. | Letter
of Understanding between Bank Hapoalim BM and Ampal Israel (Ltd), dated
               April 26, 2007. (Filed as Exhibit 10.2 to Report on Form 10-Q, filed with
the                SEC on May 15, 2007).
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10z. | Letter
of Understanding between Bank Hapoalim BM and Ampal-American Israel
               Corporation, dated April 26, 2007 (Filed as Exhibit 10.3 to Report on Form
10-Q,                filed with the SEC on May 15, 2007).
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10aa. | Agreement
among Ampal Industries Inc., Phoenix Holdings Ltd. and Golden Meybar
               (2007) Ltd., dated July 10, 2007 (Filed as Exhibit 10.2 to Form 10-Q,
filed with                the SEC on August 8, 2007, and incorporated herein by
reference).
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10bb. | Agreement
between Merhav Ampal Energy Ltd. and Netherlands Industrial Chemical
               Enterprises B.V., dated November 20, 2007, to purchase a 65.5% controlling
               interest in Gadot Chemical Tankers and Terminals Ltd. (Filed as Exhibit
10ee to                Report on Form 10-K for the fiscal year ended December 31, 2007,
File No.                000-00538).
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10cc. | Credit
Facility between Merhav Ampal Energy Ltd. and Israel Discount Bank Ltd.,
               dated November 29, 2007, for the funding of the Gadot transaction (Filed
as                Exhibit 10ff to Report on Form 10-K for the fiscal year ended December
31, 2007,                File No. 000-00538).
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10dd. | Option
Agreement between the Company and Merhav M.N.F. Ltd., dated December 25,
               2007, providing Ampal with the option to acquire up to a 35% equity
interest in                a sugarcane ethanol production project in Colombia (Filed as
Exhibit 10gg to                Report on Form 10-K for the fiscal year ended December 31,
2007, File No.                000-00538).
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10ee. | Amended
Option Agreement between the Company and Merhav M.N.F. Ltd., dated
               December 25, 2008, providing Ampal with the option to acquire up to a 35%
equity                interest in a sugarcane ethanol production project in Colombia.
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10ff. | Promissory
Note, dated as of December 25, 2007, by Merhav M.N.F. Ltd. in favor                of
Ampal (Filed as Exhibit 10hh to Report on Form 10-K for the fiscal year ended
               December 31, 2007, File No. 000-00538).
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10gg. | Amended
and Restated Promissory Note, dated as of December 25, 2008, by Merhav
               M.N.F. Ltd. in favor of Ampal.
|----- | ----------------------------------------------------------------------------------------------------------------------------

|10hh. | Pledge
Agreement, dated December 25, 2007, between Merhav M.N.F. Ltd. and Ampal
               (Filed as Exhibit 10ii to Report on Form 10-K for the fiscal year ended
December                31, 2007, File No. 000-00538).
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10ii. | Guaranty
Agreement, dated December 25, 2008, between Yosef A. Maiman, Merhav                M.N.F.
Ltd. and Ampal.
|----- | ------------------------------------------------------------------------------------------------------------------

|10jj. | Form
of Stock Option Certificate pursuant to the 2000 Incentive Plan for
               Repricing of Options on December 8, 2008 (Filed as Exhibit 10.1 to the
Current                Report on Form 8-K, filed with the SEC on December 12, 2008, and
incorporated                herein by reference).*
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10kk. | Form
of Stock Option Certificate pursuant to the 2000 Incentive Plan for Options
               Granted on December 8, 2008 (Filed as Exhibit 10.2 to the Current Report
on Form                8-K, filed with the SEC on December 12, 2008, and incorporated
herein by                reference).*
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

* Management contract, compensatory
plan or arrangement.

56

---

---

# Exhibit 11 
Statement re Computation of Earnings Per Share

# Exhibit 12  Statement
re Computation of Ratios

# Exhibit 21 
Subsidiaries of the Registrant

Ampal Financial Services
Ltd., an Israeli company

Ampal Development
(Israel) Ltd., an Israeli company

Nir Ltd., an Israeli company (in voluntary liquidation)

Ampal Realty Corporation,
a New York corporation

Ampal Communications,
Inc., a Delaware corporation

Ampal Enterprises Ltd, an
Israeli Company

Ampal Holdings (1991)
Ltd., an Israeli company

Ampal Industries, Inc., a Delaware
corporation

Ampal Industries (Israel) Ltd. an Israeli company (in voluntary liquidation)

Ampal International
Ventures (2000) Ltd., an Israeli company

Ampal (Israel) Ltd., an
Israeli company

Ampal Properties Ltd., an
Israeli company

Ampal Communication LP, an Israeli
limited partnership

Ampal Communication
Holdings Ltd., an Israeli company

Ampal Energy Ltd., an
Israeli company

Merhav-Ampal Energy Ltd.,
an Israeli company

Ampal Fuels Ltd., an
Israeli company

Country Club Kfar Saba
Ltd., an Israeli company

Merhav Ampal Energy
Limited Partnership, an Israeli limited partnership

Merhav Ampal I.I.F
General Partner Ltd, an Israeli company

Gadot Chemicals Tankers
& Terminals Ltd., an Israeli company

Gadot Chemicals Terminals
(1985) Ltd., an Israeli company

Gadot Yam Chemical
Shipping Ltd., an Israeli company

GCT Ltd., a USA company

Shelah Chemical Haulage
Service Co. Ltd., an Israeli company

GCT Netherlands B.V., a Dutch company

Chemship B.V.., a Dutch company

Gadot A.S.M Ltd., an
Israeli company

Gadot Lab Supplies Ltd.,
an Israeli company

Euro Gama
Properties Ltd., an Israeli company

GCT-EST B.V., a Dutch
company

GCT Holding B.V., a Dutch company

Gadot Storage &
Handling Limited Partnership, an Israeli limited partnership

Chemichlor (2005)
Chemicals Marketing Ltd., an Israeli company

Bax holding B.V, a Dutch company

57

---

---

Bax Chemicals B.V., a
Dutch company

Bax Chemicals France
S.A.R.L., a French company

Bax Chemicals Export Overseas
B.V., a Dutch company

Chyma Bulk Chemicals Shipping S.A. Greece,
a Greek company

Chyma Hellas S.A. Greece,
a Greek company

Finlog B.V. (Holding), a
Dutch company

VLS Group Germany GmbH, a
German company

Vopak Logistic Services
Pernis B.V, a Dutch company

Vopak Logistic Services Belgium
N.V., a Belgian company

VLS Dusseldorf GmbH, a
German company

VLS Netherlands.B.V. , a
Dutch company

VLS Moerdijk B.V., a Dutch company

Zurgadim Ltd.

# Exhibit 23 
Consents of Experts and Counsel:

|     |                                                                                                 |       
|---- | ----------------------------------------------------------------------------------------------- | ------
|
|
|
|
|23.1 | Kesselman & Kesselman CPAs (Isr) A member of PricewaterhouseCoopers International Limited       | E-23.1
|    
|23.2 | Brightman Almagor & Co., Certified Public Accountants A member firm of Deloitte Touche Tohmatsu | E-23.2
|    
|23.3 | Kost Forer Gabbay & Kasierer Member of Ernst & Young Global                                     | E-23.3
|    
|23.4 | Mazars Paardekooper Hoffman Accountants N.                                                      | E-23.4
|    
|23.5 | Fahn, Kanne & Co. Certified Public Accountants (Isr.)                                           | E-23.5
|    
|23.6 | Mazars Paardekooper Hoffman Accountants N.V                                                     | E-23.6
|    
|23.7 | KPMG Somekh Chaikin, Certified Public Accountants                                               | E-23.7
|    
|23.8 | KPMG Somekh Chaikin, Certified Public Accountants                                               | E-23.8
|     |                                                                                                 |       

Exhibit 31.1  Certification of Yosef A. Maiman pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2  Certification
of Irit Eluz pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1  Certification of
Yosef A. Maiman pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

Exhibit 32.2  Certification
of Irit Eluz pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

58

---

---

# 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 5th day of March, 2009.

| |  | AMPAL-AMERICAN  ISRAEL CORPORATIONBy: /s/ YOSEF A. MAIMAN
Yosef A. Maiman, Chief ExecutiveOfficer and President (Principal Executive Officer)
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

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 5, 2009.

|           |  | 
|---------- |  | 
|
|
|
|
|Signatures |  | 

|/s/ YOSEF A. MAIMAN
       Yosef A. Maiman | Chairman of the Board ofDirectors, President & CEO | March 5, 2009
|-------------------------------------------------------- | -------------------------------------------------- | -------------

|/s/ LEO MALAMUD 
       Leo Malamud | Director | March 5, 2009
|------------------------------------------------- | -------- | -------------

|/s/ DR. JOSEPH YERUSHALMI 
       Dr. Joseph Yerushalmi | Director | March 5, 2009
|--------------------------------------------------------------------- | -------- | -------------

|/s/  DR. NIMROD NOVIK
       Dr. Nimrod Novik | Director | March 5, 2009
|----------------------------------------------------------- | -------- | -------------

|/s/ YEHUDA KARNI
       Yehuda Karni | Director | March 5, 2009
|-------------------------------------------------- | -------- | -------------

|/s/ EITAN HABER
       Eitan Haber | Director | March 5, 2009
|------------------------------------------------ | -------- | -------------

|/s/ MENAHEM MORAG
       Menahem Morag | Director | March 5, 2009
|---------------------------------------------------- | -------- | -------------

|/s/ JOSEPH GEVA 
       Joseph Geva | Director | March 5, 2009
|------------------------------------------------- | -------- | -------------

|/s/ EREZ I. MELTZER
       Erez I. Meltzer | Director | March 5, 2009
|-------------------------------------------------------- | -------- | -------------

|/s/ DANIEL VAKNIN  
       Daniel Vaknin | Director | March 5, 2009
|------------------------------------------------------ | -------- | -------------

|/s/ IRIT ELUZ 
       Irit Eluz | CFO, Senior Vice President - Finance and Treasurer(Principal Financial Officer) | March 5, 2009
|--------------------------------------------- | ------------------------------------------------------------------------------- | -------------

|/s/ ZAHI BEN-ATAV
       Zahi Ben-Atav | VP Accounting & Controller  (Principal Accounting Officer) | March 5, 2009
|---------------------------------------------------- | ---------------------------------------------------------- | -------------

59

---

---

# FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

# Report of Independent
Registered Public Accounting Firm

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

In our opinion, based on our audits
and the report of other auditors, the accompanying consolidated balance sheets and the
related consolidated statements of operations, cash flows, changes in shareholders
equity present fairly, in all material respects, the financial position of Ampal-American
Israel Corporation and subsidiaries (the Company) at December 31, 2008 and
2007, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2008, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion the Company maintained, in
all material respects, effective internal control over financial reporting as of December
31, 2008 and 2007, based on criteria established in Internal Control  Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Companys management is responsible for these financial statements, for
maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in
Managements Report on Internal Control over Financial Reporting appearing under Item
9(A) of the 2008 Annual Report to Shareholders. Our responsibility is to express opinions
on these financial statements and on the Companys internal control over financial
reporting based on our audits which were an integrated audits in 2008 and 2007. We did not
audit the financial statements of certain consolidated subsidiaries whose assets
constitutes approximately 9.0% and 7.8% of the consolidated assets as of December 31, 2008
and 2007, respectively and whose revenues constitutes approximately 26.7% and 23.4% of the
consolidated revenues as of December 31, 2008. We did not audit the financial statements
of affiliated companies, the Companys interest in which, as reflected in the balance
is of $5,598 thousands and $7,417 thousands as of December 31, 2008 and 2007, respectively
and total share in equity income (loss) of $ ($2,429), ($1,581) and $1,620 for each of the
three years in the period ended December 31, 2008. The financial statements of those
consolidated subsidiaries and affiliated companies were audited by other auditors whose
report thereon has been furnished to us, and our opinion on the financial statements
expressed herein, insofar as it relates to the amounts included for those companies, is
based solely on the report of the other auditors. We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits and the report of other auditors provide a
reasonable basis for our opinions.

As discussed in Note 1 to the
consolidated financial statements, in 2007 the Company changed the manner in which it
accounts for income tax uncertainties and in 2006 the Company changed the manner in which
it accounts for stock-based compensation and defined benefit pension and other
postretirement plans.

A companys internal control
over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets
that could have a material effect on the financial statements.

Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

As described in Managements
Report on Internal Control over Financial Reporting, management has excluded Gadot
Chemical Tankers and Terminals Ltd. from its assessment of internal control over financial
reporting as of December 31, 2007 because it was acquired by the Company in a purchase
business combination on December 3, 2007.

/s/ Kesselman & Kesselman Certified Public Accountants (Isr.)
A member of PricewaterhouseCoopers International Limited
Tel Aviv, Israel
March 5, 2009

1

---

---

AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                                                                           | Assets As At
|-------------------------------------------------------------------------- | ------------
|
|
|
|
|Current assets:                                                            |             
|Cash and cash equivalents                                                  |             
|Marketable securities (Note 2)                                             |             
|Accounts receivable (Net of allowance for doubtful amount $0.3 and $0)     |             
|Deposits, notes and loans receivable                                       |             
|Inventories                                                                |             
|Other assets                                                               |             
|                                                                           |             
|Total current assets                                                       |             
|                                                                           |             
|Non-current assets:                                                        |             
|Investments (Notes 2, 3 and 17):                                           |             
|Fixed assets, less accumulated depreciation of $13,175 and $3,697 (Note 7) |             
|Deposits, notes and loans receivable                                       |             
|Deferred tax                                                               |             
|Other assets                                                               |             
|Goodwill (Note 6)                                                          |             
|Intangible assets (Note 5)                                                 |             
|                                                                           |             
|Total Non-current assets                                                   |             
|                                                                           |             
|                                                                           |             
|TOTAL ASSETS                                                               |             
|                                                                           |             

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

2

---

---

AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                                                                                          | Liabilities and Shareholders'
Equity As At
|----------------------------------------------------------------------------------------- | ------------------------------------------
|
|
|
|
|LIABILITIES                                                                               |                                           
|                                                                                          |                                           
|Current liabilities:                                                                      |                                           
|Notes and loans payable and current maturities (Note 8)                                   |                                           
|Accounts payable, accrued expenses and others (Note 10)                                   |                                           
|                                                                                          |                                           
|Total current liabilities                                                                 |                                           
|                                                                                          |                                           
|Long term liabilities:                                                                    |                                           
|Notes and loans payable (Note 8)                                                          |                                           
|Debentures (Note 9)                                                                       |                                           
|Deferred tax                                                                              |                                           
|Other long term liabilities (Note10)                                                      |                                           
|                                                                                          |                                           
|Total long term liabilities                                                               |                                           
|                                                                                          |                                           
|                                                                                          |                                           
|Commitments and Contingencies (note 20)                                                   |                                           
|                                                                                          |                                           
|                                                                                          |                                           
|Total liabilities                                                                         |                                           
|                                                                                          |                                           
|Minority interests, net (Note 11)                                                         |                                           
|                                                                                          |                                           
|                                                                                          |                                           
|SHAREHOLDERS' EQUITY(Note 12)                                                             |                                           
|                                                                                          |                                           
|Class A Stock $1 par value; December 31,2008 and 2007, respectively authorized            |                                           
|100,000,000 and 100,000,000 shares; issued 63,277,321 and 63,277,321 shares; outstanding  |                                           
|56,425,867 and 57,702,532 shares                                                          |                                           
|                                                                                          |                                           
|Additional paid-in capital                                                                |                                           
|                                                                                          |                                           
|Retained earnings                                                                         |                                           
|                                                                                          |                                           
|Accumulated other comprehensive loss                                                      |                                           
|                                                                                          |                                           
|Treasury stock, at cost (December 31,2008 and 2007, respectively 6,851,454 and 5,574,789) |                                           
|                                                                                          |                                           
|                                                                                          |                                           
|Total shareholders' equity                                                                |                                           
|                                                                                          |                                           
|                                                                                          |                                           
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                |                                           
|                                                                                          |                                           

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

3

---

---

AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                          | Fiscal Year Ended December 31,
|------------------------------------------------------------------------- | ------------------------------
|
|
|
|
|REVENUES:                                                                 |                               
|Chemical income                                                           |                               
|Real estate income                                                        |                               
|Equity in earnings (losses) of affiliates (Note 17)                       |                               
|Realized gains on investments (Note 3)                                    |                               
|Realized and unrealized gains (losses) on marketable securities           |                               
|Gain (loss) on sale of fixed assets (Note 3)                              |                               
|Interest income                                                           |                               
|Leisure-time income                                                       |                               
|Gain from redemption of debt, gain from change in ownership interest in a |                               
|subsidiary and other income                                               |                               
|                                                                          |                               
|Total revenues                                                            |                               
|                                                                          |                               
|                                                                          |                               
|EXPENSES:                                                                 |                               
|Chemical expense - cost of goods sold                                     |                               
|Real estate expenses                                                      |                               
|Realized losses on investments (Note 3)                                   |                               
|Loss from impairment of investments & real estate (Note 3)                |                               
|Interest expense                                                          |                               
|Translation (gain) loss                                                   |                               
|Marketing expense                                                         |                               
|General and administrative and other                                      |                               
|                                                                          |                               
|Total expenses                                                            |                               
|                                                                          |                               
|Loss before income taxes                                                  |                               
|Provision for income taxes (tax benefits) (Note 15)                       |                               
|                                                                          |                               
|Loss after income taxes (tax benefits)                                    |                               
|Minority interests in profits of subsidiaries, net                        |                               
|                                                                          |                               
|Loss from continuing operations                                           |                               
|                                                                          |                               
|Discontinued operation:                                                   |                               
|Gain disposal, net of tax                                                 |                               
|Loss from operation of discontinued, net of tax                           |                               
|                                                                          |                               
|                                                                          |                               
|                                                                          |                               
|Net income (loss) for the year                                            |                               
|                                                                          |                               
|                                                                          |                               
|Basic and diluted EPS (Note 14):                                          |                               
|Loss from continuing operations                                           |                               
|Discontinued operations                                                   |                               
|                                                                          |                               
|                                                                          |                               
|                                                                          |                               
|                                                                          |                               
|Shares used in calculation (in thousands)                                 |                               
|                                                                          |                               

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

4

---

---

AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                             | Fiscal Year Ended December 31,
|---------------------------------------------------------------------------- | ------------------------------
|
|
|
|
|Cash flows from operating activities:                                        |                               
|Net income (loss)                                                            |                               
|Adjustments to reconcile net income (loss) to net cash provided by (used in) |                               
|operating activities:                                                        |                               
|Equity in losses (earnings) of affiliates                                    |                               
|Realized and unrealized gains on investments, net                            |                               
|Gain on disposal of discontinued operations, net of tax                      |                               
|Gain on sale of fixed assets                                                 |                               
|Depreciation and amortization expense                                        |                               
|Loss (gain) from amortization of tenants deposits                            |                               
|Impairment of investments                                                    |                               
|Non cash stock based compensation                                            |                               
|Interest on convertible note to related party                                |                               
|Minority interests in profits (losses) of subsidiaries, net                  |                               
|Translation (gain) loss                                                      |                               
|Decrease (increase) in other assets                                          |                               
|Increase (decrease) in accounts payable, accrued expenses and other          |                               
|Investments made in trading securities                                       |                               
|Proceeds from sale of trading securities                                     |                               
|Gain from change in ownership interest in a subsidiary                       |                               
|Dividends received from affiliates                                           |                               
|                                                                             |                               
|                                                                             |                               
|Net cash (used in) provided by operating activities                          |                               
|                                                                             |                               
|Cash flows from investing activities:                                        |                               
|Deposits, notes and loans receivable collected                               |                               
|Deposits, notes and loans receivable granted                                 |                               
|Capital improvements                                                         |                               
|Investments made in available for sale shares                                |                               
|Investments made in Gadot, net of cash(1)                                    |                               
|Investments made in EMG, affiliates and others                               |                               
|Proceeds from sale of available for sale share                               |                               
|Proceeds from disposal of investments:                                       |                               
|Affiliate and others                                                         |                               
|Proceeds from sale of Am-Hal(2),net                                          |                               
|Proceeds from sale of fixed assets                                           |                               
|                                                                             |                               
|                                                                             |                               
|Net cash used in investing activities                                        |                               
|                                                                             |                               

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

5

---

---

AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                   | Fiscal Year Ended December 31,
|---------------------------------------------------------------------------------- | ------------------------------
|
|
|
|
|Cash flows from financing activities:                                              |                               
|Proceeds from notes and loans payable issued                                       |                               
|Proceeds from long term loan from partnership minority                             |                               
|Notes and loans payable repaid                                                     |                               
|Proceeds from exercise of stock options and warrants                               |                               
|Debentures repaid and shares repurchased                                           |                               
|Proceeds from issuance of shares, net                                              |                               
|Proceeds from issuance of debentures                                               |                               
|Deferred expense relating to issuance of debentures                                |                               
|Contribution (distribution) to partnership by minority interests                   |                               
|Dividends paid on preferred stock                                                  |                               
|                                                                                   |                               
|                                                                                   |                               
|Net cash provided by financing activities                                          |                               
|                                                                                   |                               
|Effect of exchange rate changes on cash and cash equivalents                       |                               
|                                                                                   |                               
|Net increase in cash and cash equivalents                                          |                               
|Cash and cash equivalents at beginning of year                                     |                               
|                                                                                   |                               
|                                                                                   |                               
|Cash and cash equivalents at end of year                                           |                               
|                                                                                   |                               
|                                                                                   |                               
|Supplemental Disclosure of Cash Flow Information Cash paid during the year:        |                               
|Interest                                                                           |                               
|                                                                                   |                               
|                                                                                   |                               
|Income taxes paid                                                                  |                               
|                                                                                   |                               
|                                                                                   |                               
|Supplemental Disclosure of Non-Cash investing and financing activity:              |                               
|                                                                                   |                               
|Consideration for sale of an investment recorded as other assets                   |                               
|                                                                                   |                               
|                                                                                   |                               
|Consideration for sale of fixed assets recorded as other assets                    |                               
|                                                                                   |                               
|                                                                                   |                               
|Capital improvement recorded as account payable                                    |                               
|                                                                                   |                               
|                                                                                   |                               
|Investment made in consideration for sale of shares capital                        |                               
|                                                                                   |                               
|                                                                                   |                               
|Investment made in investee by issuance of promissory note payable                 |                               
|                                                                                   |                               
|                                                                                   |                               
|Dividend from an equity investment recorded as payable accounts in previous period |                               
|                                                                                   |                               
|Conversion of promissory note to class A stock                                     |                               
|                                                                                   |                               
|                                                                                   |                               
|Issuance of shares for cash receipt on previous year                               |                               
|                                                                                   |                               
|                                                                                   |                               
|Conversion of preferred stock to class A stock                                     |                               
|                                                                                   |                               

|(1) | Assets
and liabilities purchased in Gadot - see Note 3
|--- | ------------------------------------------------------

|(2) | Assets
and liabilities disposed of in the sale of Am-Hal discontinued operation:
|--- | --------------------------------------------------------------------------------

| |                                                   | 
| | ------------------------------------------------- | 
|
|
|
|
| | Current assets (net of cash and cash equivalents) | 
| | Fixed assets                                      | 
| | Deferred tax                                      | 
| | Debt                                              | 
| | Deposits from tenants                             | 
| | Current liabilities                               | 
| | Minority interest                                 | 
| | Difference from translation                       | 
| | Gain on disposal of Am-Hal                        | 
| |                                                   | 
| | Proceeds from sale of Am-Hal                      | 
| |                                                   | 

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

6

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---

AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. Dollars in thousands)

|                             | Class A stock |  |  |        | 
|---------------------------- | ------------- |  |  | ------ | 
|
|
|
|
|BALANCE AT JANUARY 1, 2008   |               |  |  | 63,277 | 
|CHANGES DURING 2008:         |               | 
|Net Loss                     |               |  |  |        | 
|Unrealized gain from         |               | 
|marketable securities        |               |  |  |        | 
|Foreign currency             |               | 
|translation adjustments      |               |  |  |        | 
|                             |               |  |  |        | 
|Total comprehensive income   |               |  |  |        | 
|Shares issued for            |               | 
|investment made              |               |  |  |        | 
|Share based compensation     |               | 
|expense                      |               |  |  |        | 
|Purchase of 1,366,415 shares |               |  |  |        | 
|Reissuance of 89,750         |               | 
|treasury shares for          |               | 
|exercise of stock option     |               |  |  |        | 
|                             |               |  |  |        | 
|BALANCE AT DECEMBER 31, 2008 |               |  |  | 63,277 | 
|                             |               |  |  |        | 

*In thousands

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

7

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---

AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. Dollars in thousands)

|                             | Class A stock |  |  |        | 
|---------------------------- | ------------- |  |  | ------ | 
|
|
|
|
|BALANCE AT JANUARY 1, 2007   |               |  |  | 46,328 | 
|CHANGES DURING 2007:         |               | 
|Net income                   |               |  |  |        | 
|Adjustment upon adoption of  |               | 
|FIN 48                       |               |  |  |        | 
|Change in deferred tax       |               | 
|asset relating to adoption   |               | 
|of FIN 48                    |               |  |  |        | 
|                             |               |  |  |        | 
|                             |               |  |  |        | 
|Unrealized gain from         |               | 
|marketable securities        |               |  |  |        | 
|Foreign currency             |               | 
|translation adjustments      |               |  |  |        | 
|Release of foreign currency  |               | 
|translation adjustment       |               | 
|relating to disposal of      |               | 
|subsidiary and affiliates    |               |  |  |        | 
|                             |               |  |  |        | 
|Total comprehensive income   |               |  |  |        | 
|Shares issued for            |               | 
|investment made              |               |  |  | 8,603  | 
|Shares issued upon           |               | 
|conversion of convertible    |               | 
|note                         |               |  |  | 4,476  | 
|Share based compensation     |               | 
|expense                      |               |  |  |        | 
|Issuance of shares for       |               | 
|exercise of Warrants         |               |  |  | 3,870  | 
|                             |               |  |  |        | 
|BALANCE AT DECEMBER 31, 2007 |               |  |  | 63,277 | 
|                             |               |  |  |        | 
|                             |               |  |  |        | 

*In thousands

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

8

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---

AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(U.S. Dollars in thousands)

|                           | Class A stock | 4% Preferred stock | 6.5% Preferredstock |        |  |  |        |  |  |     
|-------------------------- | ------------- | ------------------ | ------------------- | ------ |  |  | ------ |  |  | ----
|
|
|
|
|BALANCE AT JANUARY 1, 2006 |               |                    |                     | 25,827 |  |  | 25,827 |  |  | 114 
|CHANGES DURING 2006:       |               |                   
|Net loss                   |               |                    |                     |        |  |  |        |  |  |     
|Other comprehensive        |               |                   
|income (loss):             |               |                   
|Foreign currency           |               |                   
|translation                |               |                   
|adjustments                |               |                    |                     |        |  |  |        |  |  |     
|Unrealized gain on         |               |                   
|marketable securities      |               |                    |                     |        |  |  |        |  |  |     
|Sale of available for      |               |                   
|sale securities            |               |                    |                     |        |  |  |        |  |  |     
|                           |               |                    |                     |        |  |  |        |  |  |     
|Total comprehensive loss   |               |                    |                     |        |  |  |        |  |  |     
|Conversion of 110,848      |               |                   
|4% preferred stock         |               |                   
|and 518,887 6.5%           |               |                   
|preferred stock into       |               |                   
|Class A stock              |               |                    |                     | 2,111  |  |  | 2,111  |  |  | (111
|Elimination of             |               |                   
|treasury stock             |               |                    |                     |        |  |  |        |  |  | (3  
|Shares issued for          |               |                   
|investment made            |               |                    |                     | 10,248 |  |  | 10,248 |  |  |     
|Shares issued and          |               |                   
|warrants in a private      |               |                   
|placement                  |               |                    |                     | 8,142  |  |  | 8,142  |  |  |     
|Share based                |               |                   
|compensation expense       |               |                    |                     |        |  |  |        |  |  |     
|Reissuance of 176,250      |               |                   
|treasury stock for         |               |                   
|exercise of stock          |               |                   
|options                    |               |                    |                     |        |  |  |        |  |  |     
|Dividend - 4%              |               |                   
|Preferred stock - 6.5%     |               |                    |                     |        |  |  |        |  |  |     
|                           |               |                    |                     |        |  |  |        |  |  |     
|Preferred stock            |               |                    |                     |        |  |  |        |  |  |     
|                           |               |                    |                     |        |  |  |        |  |  |     
|BALANCE AT                 |               |                   
|DECEMBER 31, 2006          |               |                    |                     | 46,328 |  |  | 46,328 |  |  | -   
|                           |               |                    |                     |        |  |  |        |  |  |     

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

9

---

---

AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

# Note 1  Summary of
Significant Accounting Policies

|(a) | General
|--- | -------

| | (1) | Ampal-American
Israel Corporation is a New York corporation founded in 1942. The                Company
primarily acquires interests in businesses located in the State of                Israel
or that are Israel-related.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | As
used in these financial statements, the term the Company refers
               to Ampal-American Israel Corporation (Ampal) and its
consolidated                subsidiaries. As to segment information see Note 17".
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | The
consolidated financial statements are prepared in accordance with accounting
               principals generally accepted in the United States of America (US
               GAAP).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | 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 controlled and
majority owned entities. Inter-company transactions and balances are eliminated in
consolidation.

|(c) | Translation
of Financial Statement in Foreign Currencies
|--- | --------------------------------------------------------

For
those subsidiaries and affiliates whose functional currency is other than the US Dollar,
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 are included in accumulated other
comprehensive income (loss).

In
subsidiaries where the primary currency is the U.S. Dollar, accounts maintained in
currencies other than the U.S. Dollar are remeasured into U.S. Dollars using the
representative foreign exchange rate at the balance sheet date. Operational accounts and
nonmonetary balance sheet accounts are measured and recorded at the rate in effect at the
date of the transaction. The effects of foreign currency remeasurement are reported in
current operations.

|(d) | Foreign
Exchange Derivative Contracts
|--- | -------------------------------------

The
Companys derivative financial instruments consist of foreign currency forward
exchange contracts and SWAP contracts. These contracts are utilized by the Company, from
time to time, to manage risk exposure to movements in foreign exchange rates. None of
these contracts qualify for hedge accounting. These contracts are recognized as assets or
liabilities on the balance sheet at their fair value, which is the estimated amount at
which they could be settled based on market prices or dealer quotes, where available, or
based on pricing models. Changes in fair value are recognized currently in earnings.

As
of December 31, 2008, the Company had open foreign currency forward exchange contracts to
purchase U.S. dollars and sell Euros in the amount of $1.6 million, to purchase Euro and
sell U.S. dollars in the amount of $2.2 million, to purchase U.S. dollars and sell NIS in
the amount of $5.0 million and to purchase NIS and sell U.S. Dollars in the amount of $5.0
million.

On
May 15, 2008, the Company entered into a SWAP agreement with respect to its Series B
debentures, in the principal amount of $165.7 million, due 2016. As a result of these
agreements the Company is currently paying an effective interest rate of LIBOR plus 5.12%
on $43.9 million of these debentures, as compared to the original 6.6% fixed rate
which is linked to the Israeli consumer price index.

As
of December 31, 2008, the value of the currency SWAP resulted in a $4.2 million liability
and an interest expense in the same amount.

|(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 and in other
comprehensive income its proportional share in translation difference on net investments
and in other comprehensive income (loss). 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.

10

---

---

| | (ii) | Cost
Basis Investments
| | ---- | ----------------------

Equity
investments of less than 20% in non-publicly traded companies are carried at cost subject
to impairment.

| | (iii) | Investments
in Marketable Securities
| | ----- | ------------------------------------

Marketable
equity securities, other than equity securities accounted for by the equity method, are
reported based upon quoted market prices of the securities. For those securities, which
are classified as trading securities, realized and unrealized gains and losses are
reported in the statements of operations. Unrealized gains and losses net of taxes from
those securities that are classified as available-for-sale, are reported as a separate
component of shareholders equity and are included in accumulated other comprehensive
income (loss) until realized. Decreases in value determined to be other than temporary on
available-for-sale securities are included in the statements of income (loss).

|(f) | Business
combinations
|--- | ---------------------

Business
combinations have been accounted for using the purchase method of accounting. Under the
purchase method of accounting the results of operations of the acquired business are
included from the date of acquisition. The costs of acquiring companies, including
transactions costs, have been allocated to the underlying net assets of each acquired
company in proportion to their respective fair values. Any excess of the purchase price
over estimated fair values of the identifiable net assets acquired has been recorded as
goodwill.

|(g) | Inventories
|--- | -----------

Inventories
 mainly chemicals and other materials intended for sale, are valued at the lower of
cost or market. Cost is determined based on the moving average basis.

|(h) | Risk
Factors and Concentrations
|--- | -------------------------------

Financial
instruments that subject the Company to credit risk consist primarily of cash, cash
equivalents, bank deposits, marketable securities and notes and loans receivable. The
Company invests cash equivalents and short-term investments through high-quality financial
institutions. The Companys management believes that the credit risk in respect of
these balances is not material.

The
company evaluates its allowance for doubtful accounts by analyzing specifically identified
debts whose collection is doubtful.

|(i) | Long
 Lived Assets
|--- | -------------------

The
assets are recorded at cost, depreciating these costs over the expected useful life of the
related assets.

Fixed
assets of subsidiaries which existed at the time of the subsidiarys acquisition by
the company are included at their fair value as that date.

Financial
expenses incurred during the construction period have been capitalized to the cost of the
land and building.

The
Company applies the provisions of SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived assets (SFAS 144). SFAS 144 requires that
long-lived assets, to be held and used by an entity, be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. Under SFAS 144, if the sum of the expected future cash flows (undiscounted
and without interest charges) of the long-lived assets is less than the carrying amount of
such assets, an impairment loss would be recognized, and the assets are written down to
their estimated fair values.

|(j) | Discontinued
operations
|--- | -----------------------

Under
SFAS 144, when a component of an entity, as defined in SFAS 144, has been disposed of or
is classified as held for sale, the results of its operations, including the gain or loss
on its disposal should be classified as discontinued operations. That is, provided that
the operations, assets and liabilities and cash flows of the component have been
eliminated from the Companys consolidated operations and the Company will no longer
have any significant continuing involvement in the operations of the component. In 2007
the Company sold its interest in Am-Hal, a wholly owned subsidiary, and classified Am-Hal
as discontinued operations.

11

---

---

|(k) | Fixed
assets
|--- | ------------

(i)
          These assets are stated at cost. Fixed assets of subsidiaries, which existed at
          the time of the subsidiarys acquisition by the Company, are included at
          their fair value as of that date.

(ii)
          Depreciation is computed by the straight-line method, on the basis of the
          estimated useful life of the assets.

Annual
rates of depreciation are as follows:

| |                    | %
| | ------------------ | -
|
|
|
|
| | Vessels            |  
| | Trailers           |  
| | Land               |  
| | Real estate        |  
| | Storage tankers    |  
| | Vehicles           |  
| | Equipment          |  
| | Rental improvement |  
| |                   

*As per the rental years remaining.

Leasehold
improvements are amortized by the straight-line method over the term of the lease, which
is shorter than the estimated useful life of the improvements.

(iii)
          Vessels are depreciated over their estimated economic lives. For the purpose of
          computing the depreciation, an estimation of the salvage value was deducted
from           the depreciable base of the ships.

(iv)
          Vehicles leased by the companies under capital leases are presented as the
          companies assets and are recorded, at the inception of the lease, at the
          lower of the assets fair value or the present value of the minimum lease
          payments (not including the financial component).

|(l) | Goodwill
and Other Intangible Assets
|--- | ------------------------------------

In
accordance with SFAS No. 142,  "Goodwill and Other Intangible  Assets," goodwill is not
amortized but is subject to impairment tests annually on December 31 or more often when
events or circumstances indicate that the carrying amount of goodwill may not be
recoverable. A goodwill impairment loss is recognized to the extent the carrying amount
of goodwill exceeds the implied fair value of goodwill. In accordance with SFAS 144,
the Company assesses intangible assets subject to amortization, when events or
circumstances indicate that the carrying amount of those assets may not be recoverable.
Impairments of intangible assets are recognized when the carrying values of the assets
are less than the expected cash flows of the assets on an undiscounted basis. All
amortizable assets are amortized over their estimated useful lives.

|(m) | Income
Taxes
|--- | ------------

The
Company applies the asset and liability method of accounting for income taxes, whereby
deferred taxes are recognized for the tax consequences of temporary
differences by applying estimated future tax effects of differences between
financial statements carrying amounts and the tax bases of existing assets and
liabilities. Deferred tax assets are created to the extent management believes that it is
more likely than not that it will be utilized, otherwise a valuation is provided for those
assets that do not qualify under this term.

The
Company does not record deferred income taxes on undistributed earnings of foreign
subsidiaries adjusted for translation effect since such earnings are currently expected to
be permanently reinvested outside the United States.

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.

On
January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No.
109 (FIN 48). FIN 48 provides recognition criteria and a related
measurement model for tax positions taken by companies. In accordance with FIN 48, a tax
position is a position in a previously filed tax return or a position expected to be taken
in a future tax filing that is reflected in measuring current or deferred income tax
assets and liabilities. Tax positions are recognized only when it is more likely than not
(likelihood greater than 50 percent), based on technical merits, that the position will be
sustained upon examination. Tax positions that meet the more likely than not threshold are
measured using a probability weighted approach as the largest amount of tax benefit that
is greater than 50 percent likely of being realized upon settlement.

12

---

---

|(n) | Revenue
Recognition
|--- | -------------------

The
Company recognizes revenue in accordance with Staff Accounting Bulletin (SAB) No. 104
 Revenue Recognition. Revenue is recognized when (a) the significant
risks and rewards of ownership of the goods have been transferred to the buyer; (b) the
Company retains neither continuing managerial involvement to the degree usually associated
with ownership nor effective control over the goods sold; (c) the amount of revenue can be
measured reliably; (d) it is probable that the economic benefits associated with the
transaction will flow to the Company; and (e) the costs incurred or to be incurred in
respect of the transaction can be measured reliably.

Chemical
income derives from the following activities: sales of a wide range of liquid chemicals,
providing maritime shipping services of chemicals by ships and providing other services
which include logistics and storage services for chemicals.

Revenue
for services is recognized as follows:

| |  | Revenues
arising from the provision of marine transport services proportionally over the period of
the marine transport services. As to voyages uncompleted in which a loss is expected, a
full provision is made in the amount of the expected loss.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Revenues
from chemical brokerage commissions are recognized when the right to receive them is
created.
| | - | ------------------------------------------------------------------------------------------------------

| |  | Rental
income is recorded over the rental period. Revenues from services provided to tenants and
country-club subscribers are recognized ratably over the contractual period or as
services are performed. Revenue from amortization of tenant deposits (included in
discontuinued operation) was calculated at a fixed periodic rate based on the specific
terms in the occupancy agreement signed with the tenants.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Income
from other services is recognized over the period during which those services are
preformed.
| | - | ---------------------------------------------------------------------------------------------------

|(o) | Cash
and Cash Equivalents
|--- | -------------------------

Cash
equivalents are short-term, highly liquid investments (bank accounts and bank deposits)
that have original maturity dates of three months or less and that are readily convertible
into cash.

Cash
equal to $2.7 million has been placed as a compensating balance for various loans provided
to the Company.

|(p) | Earning
(loss) per share (EPS)
|--- | ------------------------------

Basic
and diluted net earning (loss) per share are presented in accordance with SFAS No. 128
Earnings per share (SFAS No. 128) and with EITF 03-06
participating securities and the two-class method under FAS 128". In 2008, 2007
and 2006, all outstanding stock options have been excluded from the calculation of the
diluted loss per share because all such securities are anti-dilutive for these periods
presented. Also, participating 4% Convertible Preferred Stock was not taken into account
in the computation of the basic EPS in 2006, since its shareholders do not have
contractual obligation to share in the losses of the Company.

|(q) | Comprehensive
Income
|--- | --------------------

SFAS
No. 130, Reporting Comprehensive Income, (SFAS No. 130)
established standards for the reporting and display of comprehensive income (loss), its
components and accumulated balances in a full set of general purpose financial statements.
The Companys components of comprehensive income (loss) are net income (losses), net
unrealized gains or losses on available for sale investments and foreign currency
translation adjustments, which are presented net of income taxes.

|(r) | Employee
Stock Based Compensation
|--- | ---------------------------------

Effective
January 1, 2006, the Company adopted SFAS No. 123R, using the Modified
Prospective Approach. SFAS No. 123R revises SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123) and supersedes Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees (APB No. 25). SFAS No. 123R requires the cost of
all share-based payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values at grant date, or the
date of later modification, over the requisite service period. In addition, SFAS
No. 123R requires unrecognized cost (based on the amounts previously disclosed in the
pro forma footnote disclosure) related to options vesting after the date of initial
adoption to be recognized in the financial statements over the remaining requisite service
period.

13

---

---

Under
the Modified Prospective Approach, the amount of compensation cost recognized includes:
(i) compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated in
accordance with the provisions of SFAS No. 123 and (ii) compensation cost for
all share-based payments that will be granted subsequent to January 1, 2006, based on
the grant date fair value estimated in accordance with the provisions of SFAS
No. 123R. Upon adoption, the Company recognizes the stock based compensation of
previously granted share-based options and new share-based options under the straight-line
method over the requisite service period.

The
Company has applied the provisions of SAB 107 in its adoption of SFAS 123R. The Company
recognizes no income tax benefit on its stock compensation expense and will not be able to
utilize them to offset future income taxes.

|(s) | Treasury
stock
|--- | --------------

These
shares are presented as a reduction of shareholders equity at their cost to the
Company. Gains, net of losses and of the related tax, on the sale of these shares are
carried to other capital surplus. Losses, net of gains, on the sale of these
shares, are deducted from retained earnings.

The
Company records treasury shares repurchased at cost.

|(t) | Recently
Issued Accounting Pronouncements
|--- | -----------------------------------------

SFAS No. 157  Fair
Value Measurements

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(SFAS 157), which provides guidance on how to measure assets and liabilities
that use fair value. SFAS 157 will apply whenever another US GAAP standard requires (or
permits) assets or liabilities to be measured at fair value but does not expand the use of
fair value to any new circumstances. This standard also will require additional
disclosures in both annual and quarterly reports. SFAS 157 will be effective for fiscal
years beginning after November 15, 2007 (January 1, 2008 for the Company). In February
2008, the FASB deferred for one additional year the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at least
annually). The adoption of the parts of SFAS 157 that became effective in 2008 did not
have a material impact on the Companys financial statements. The Company is
currently evaluating the impact, if any, the adoption of the remaining parts of SFAS 157
will have on its financial statements.

SFAS No. 141R 
Business Combinations

In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS 141R) which replaces SFAS No. 141,
Business Combination. SFAS 141R establishes the principles and requirements
for how an acquirer: (1) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in
the acquiree; (2) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and (3) discloses the business combination.
This Statement applies to all transactions in which an entity obtains control of one or
more businesses, including transactions that occur without the transfer of any type of
consideration. SFAS 141R will be effective on a prospective basis for all business
combinations on or after January 1, 2009, with the exception of the accounting for
valuation allowances on deferred taxes and acquired tax contingencies. Early adoption is
not allowed. The Company is in process of evaluating the impact, if any, the adoption of
SFAS 141R will have on the Companys consolidated results of operations or financial
position.

SFAS No. 160 
Noncontrolling Interests in Consolidated Financial Statements

In
December 2007, the FASB issued SFAS No. 160 Noncontrolling Interests in
Consolidated Financial Statementsan amendment of ARB
No. 51" (SFAS 160). SFAS 160 amends ARB No. 51 and
establishes accounting and reporting standards that require noncontrolling interests
(previously referred to as minority interest) to be reported as a component of equity,
changes in a parents ownership interest while the parent retains its controlling
interest be accounted for as equity transactions, and upon a loss of control, retained
ownership interest will be remeasured at fair value, with any gain or loss recognized in
earnings. SFAS 160 will be effective for the Company commencing January 1, 2009,
except for the presentation and disclosure requirements, which will be applied
retrospectively. Early adoption is not allowed. The Company is in process of evaluating
the impact, if any, that the adoption of SFAS 160 will have on the Companys
consolidated results of operations or financial position.

SFAS No. 161
Disclosures about Derivative Instruments and Hedging Activities

In
March 2008, FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133
(FAS 161). FAS 161 amends and expands the disclosure requirements of FAS 133
to clarify how and why companies use derivative instruments. In addition, FAS 161 requires
more disclosures regarding how companies account for derivative instruments and the impact
derivatives have on a companys financial statements. This statement is effective for
us beginning in 2009 and will only impact our disclosures. It will have no impact on our
financial position, results of operations and cash flows.

14

---

---

SFAS No. 142-3 
Determination of the Useful Life of Intangible Assets

In
April 2008, the FASB issued FASB Staff Position (the FSP) FAS
No. 142-3, which amends the factors that must be considered in developing renewal or
extension assumptions used to determine the useful life over which to amortize the cost of
a recognized intangible asset under FAS No. 142, Goodwill and Other Intangible
Assets. The FSP requires an entity to consider its own assumptions about renewal or
extension of the term of the arrangement, consistent with its expected use of the asset,
and is an attempt to improve consistency between the useful life of a recognized
intangible asset under FAS No. 142 and the period of expected cash flows used to
measure the fair value of the asset under FAS No. 141, Business
Combinations. The FSP is effective for fiscal years beginning after
December 15, 2008, and the guidance for determining the useful life of a recognized
intangible asset must be applied prospectively to intangible assets acquired after the
effective date. The FSP is not expected to have a significant impact on the Companys
results of operations, financial condition or liquidity.

# Note 2  Investments

# a. Non-current
investments

The
balance of investments as of December 31, 2008 and 2007, are composed of the following
items:

| |                          | As of December 31,
| | ------------------------ | ------------------
|
|
|
|
| | EMG                      |                   
| |                          |                   
| | Investment in Affiliates |                   
| |                          |                   
| | Other Investments        |                   
| |                          |                   
| |                          |                   
| |                          |                   
| |                          |                   

# b. Marketable securities

The
Companys investments in Marketable securities are mainly in government debenturesand the Company classifies such investments as trading securities or
available-for-sale securities.

| | (a) | Trading
Securities
| | --- | ------------------

| | The
cost and market values of Trading securities at December 31, 2008 and 2007 are as follows:
| | ----------------------------------------------------------------------------------------------

|               |  | Cost | Unrealized
Gains | Unrealized
(Loss) | Market
Value
|-------------- |  | ---- | ---------------- | ----------------- | ------------
|
|
|
|
|Trading stocks |  |      |                  | 2008              |             
|Debentures     |  |      |                  | 2008              |             
|               |  |      |                  |                   |             
|               |  |      |                  |                   |             
|               |  |      |                  |                   |             
|               |  |     
|Trading stocks |  |      |                  | 2007              |             
|Debentures     |  |      |                  | 2007              |             
|               |  |      |                  |                   |             
|               |  |      |                  |                   |             
|               |  |      |                  |                   |             

15

---

---

| | (b) | Available-For-Sale
Securities
| | --- | -----------------------------

|               |  | Cost | Unrealized
gains | Unrealized
(Loss) | Market
Value
|-------------- |  | ---- | ---------------- | ----------------- | ------------
|
|
|
|
|Trading stocks |  |      |                  | 2008              |             
|Debentures     |  |      |                  | 2008              |             
|               |  |      |                  |                   |             
|               |  |      |                  |                   |             
|               |  |      |                  |                   |             
|               |  |     
|Trading stocks |  |      |                  | 2007              |             
|Debentures     |  |      |                  | 2007              |             
|               |  |      |                  |                   |             
|               |  |      |                  |                   |             
|               |  |      |                  |                   |             

# Note 3 
Acquisitions and Dispositions

|a) | In
2008, the Company made the following investments:
|-- | ----------------------------------------------------

| | 1. | On
June 3, 2008, Ampal completed its acquisition of an additional 14.98% of the outstanding
ordinary shares (14.71% on a fully diluted basis) of Gadot Chemical Tankers and Terminals
Ltd. (Gadot) through its wholly owned subsidiary Merhav Ampal Energy Ltd. (MAE).
The total consideration was $17.7 million. The consideration was financed with Ampals
own resources and with borrowings in the amount of $11.3 million.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
acquisition was accounted for by the purchase method. The consideration for the
acquisition was attributed to net assets on the basis of fair value of assets acquired
and liabilities assumed, based on an appraisal performed by management, which included a
number of factors, including the assistance of independent appraisers.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
identified tangible and intangible assets acquired amounted to approximately $5.8 million
and $6.4 million, respectively. The main assets included are ships and tankers and option
to purchase and lease ships, of approximately $4.0 million and $4.5 million,
respectively, to be amortized over an estimated useful life of 12 and 5 years,
respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 12, 2008, Ampal completed its acquisition of an additional 20.6% of the
outstanding ordinary shares and 66.76% of the outstanding convertible debentures of Gadot
and now indirectly holds 100% of the outstanding ordinary shares (99.99% on a fully
diluted basis) of Gadot through MAE. The total consideration was $23.3 million. The
consideration was financed with Ampals own resources and with borrowings in the
amount of $15.4 million.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
acquisition was accounted for by the purchase method. The consideration for the
acquisition was attributed to net assets on the basis of fair value of assets acquired
and liabilities assumed, based on an appraisal performed by management, which included a
number of factors, including the assistance of independent appraisers.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
identified tangible and intangible assets acquired amounted to approximately $3.4 million
and $4.3 million, respectively. The main assets included are ships and tankers and option
to purchase and lease ships, of approximately $4.4 million and $3.2 million,
respectively, to be amortized over an estimated useful life of 12 and 5 years,
respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
transactions follow the acquisition by Ampal of a 65.5% controlling interest (63.66% on a
fully diluted basis) in Gadot on December 3, 2007.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of these transactions, Gadot is now a wholly owned subsidiary of the Company and
its shares and debentures have been delisted from the Tel Aviv Stock Exchange (the TASE).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Gadot
and its group of companies form Israels leading chemical distribution organization.
Gadot ships, stores, and distributes liquid chemicals, oils, and a large variety of
materials to the local industry. For further information regarding Gadot, see Item 1
 Chemicals  Gadot Chemical Tankers and Terminals Ltd. Of Ampals
Annual Report on Form 10-K for the year ended December 31, 2008.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16

---

---

| | 2. | Option
Agreement for Sugarcane Ethanol Project in Colombia
| | -- | ----------------------------------------------------------

| | On
May 29, 2008, Ampal loaned Merhav M.N.F. Ltd. (Merhav) $10.0 million, in
addition to the currently outstanding $10.0 million that were loaned on December 25,
2007, to fund the sugarcane ethanol production project (the Project) in
Colombia being developed by Merhav The additional loan was made pursuant to the existing
promissory note, dated as of December 25, 2007, by Merhav in favor of Ampal (the Promissory
Note). The Promissory Note was given in connection with an option agreement dated
December 25, 2007 (the Original Option Agreement), with Merhav providing
Ampal with the option (the Option)to acquire up to a 35% equity interest in
the Project. The loan will be convertible into all or a portion of the equity interest
purchased pursuant to the Original Option Agreement.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 25, 2008, Ampal entered into an amendment (the Option Amendment) to
the Original Option Agreement. Under the Original Option Agreement, the Option expired on
the earlier of December 25, 2008 or the date (the Financing Date) on which
both (i) Merhav obtained third-party debt financing for the Project and (ii) an
unaffiliated third party holds at least a 25% equity interest in the Project. The Option
Amendment extends the expiration of the Option to the earlier of December 31, 2009 or the
Financing Date.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Option Amendment also provides that in determining the price to be paid by Ampal for
shares pursuant to the option under the Valuation Model (as defined below), the parties
have agreed to review the discount rate set forth in the Valuation Model to determine
whether the discount rate should be increased, provided, however, that the purchase price
shall not exceed the amount Ampal would have paid without giving effect to the Option
Amendment. The maximum purchase price for any interest in the Project purchased by Ampal
pursuant to the option would be (A) with respect to any portion of such interest being
purchased by conversion of the outstanding balance of the Amended Promissory Note
referred to below, the lesser of (i) a price based on a currently agreed valuation model
as updated from time to time to reflect changes in project, financing and other similar
costs (the Valuation Model) as such updates are reviewed by Houlihan Lokey
Howard &Zukin at the time of the options exercise or (ii) the lowest price paid
by any unaffiliated third party for an interest in the Project, or (B) with respect to
any portion of such interest in the Project being purchased in excess of the balance of
the Amended Promissory Note, the lowest price paid by an unaffiliated third party for its
interest in the Project, unless no unaffiliated third party has purchased an interest in
the Project, in which case the purchase price will be based on the Valuation Model.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
consideration for Merhav entering into the Option Amendment, Ampal agreed to certain
amendments to the Promissory Note reflected in an Amended and Restated Promissory Note,
dated December 25, 2008 (the Amended Promissory Note). The Amended Promissory
Note provides for (i) an increase in the annual interest rate from LIBOR plus 2.25% to
LIBOR plus 3.25% and (ii) an extension of the maturity date of the Promissory Note to
December 31, 2009. As a condition to amending and restating the Promissory Note, Ampal
received a personal guaranty dated as of December 25, 2008, from Yosef A. Maiman
personally guaranteeing the obligations of Merhav under the Amended Promissory Note.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
loan continues to be secured by Merhavs pledge to Ampal, pursuant to a Pledge
Agreement dated December 25, 2007, between Merhav and Ampal, of all of the shares of Ampals
Class A Common Stock, par value $1.00 per share, owned by Merhav.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Yosef
A. Maiman, the Chairman, President and CEO of Ampal and a member of the controlling
shareholders group of Ampal, is the sole owner of Merhav. Because of the foregoing
relationship, a special committee of the Board of Directors composed of Ampals
independent directors negotiated and approved the transaction.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Additional
investment of $2.1 million in GWE.
| | -- | ---------------------------------------------

| | 4. | A
loan to Bay Heart Ltd. (Bay Heart) of $8.6 million, for a shopping
               mall in Haifa, Israel.
| | -- | ------------------------------------------------------------------------------------------------------------

| | 5. | On
September 22, 2008, Gadot purchased from Milchen Communications Ltd.                (Milchen)
a segment of its activities engaged in operating a sales                agency in Israel
representing well-known manufacturers, selling a wide range of                products,
including chemicals and polymers and other materials for the printing                and
press industry. Gadot purchased this segment of activity for approximately
               $1.3 million, out of which approximately $0.4 million were paid for
material                inventory and approximately $0.9 million for goodwill.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) | In
2008, Ampal made the following dispositions:
|-- | -----------------------------------------------

| | 1. | During
2008, the Company received proceeds in the total amount of $0.2 million
               from the sales of certain investments by FIMI Opportunity Fund, L.P.
               (FIMI).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | On
March 2008, the Company received $0.3 million from the sale of certain assets
               by PSINet Europe, one of the holdings of Telecom Partners (TP).
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

17

---

---

| | 3. | On
August 7, 2008, the Company signed an agreement for the sale of its 50%
               holdings of Country Club Hod Hasharon Sport Center for a consideration of
$2                million.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | During
2008, the Company received $0.6 million from the sale of certain assets                by
Ophir Holdigns Ltd.
| | -- | --------------------------------------------------------------------------------------------------------------------

|c) | In
2007, the Company made the following investments:
|-- | ----------------------------------------------------

| | 1. | On
December 3, 2007, Ampal completed its acquisition of 65.5% of the control and ownership
(63.66% on a fully diluted basis) of Gadot. The total consideration including direct
transaction expenses was $91.2 million. The cash consideration was financed with Ampals
own resources and with borrowings in the amount of $60.7 million.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Gadot
and its group of companies is an Israeli chemical distribution organization. Gadot ships,
stores, and distributes liquid chemicals, oils, and a large variety of materials to the
local industry.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
acquisition was accounted for by the purchase method. The results of operations of Gadot
were included in the consolidated financial statements of Ampal commencing November 30,
2007. The consideration for the acquisition was attributed to net assets on the basis of
fair value of assets acquired and liabilities assumed, based on an appraisal performed by
management, which included a number of factors, including the assistance of independent
appraisers. The following table summarizes the final fair values of the assets acquired
and liabilities assumed, with reference to Gadot balance sheet data as of November 30,
2007:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                | U.S. dollars in millions
|----------------------------------------------- | ------------------------
|
|
|
|
|Current assets                                  |                         
|Investments and other non-current assets        |                         
|Fixed assets                                    |                         
|Identifiable intangible assets                  |                         
|Goodwill                                        |                         
|                                                |                         
|Total assets acquired                           |                         
|                                                |                         
|Current liabilities                             |                         
|Long-term liabilities, including deferred taxes |                         
|Minority interest                               |                         
|                                                |                         
|Total liabilities assumed                       |                         
|                                                |                         
|Net assets acquired                             |                         
|                                                |                         

| | Under
the purchase method of accounting, the total consideration of $91.2 million allocated to
Gadots identifiable tangible and intangible assets and liabilities assumed based on
their estimated fair values as of the date of the completion of the transaction.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Below
are the unaudited pro forma combined statements of operations data for the years ended
December 31, 2007 and 2006 as if the acquisition of Gadot had occurred on January 1, 2007
and 2006, respectively, after giving effect to: (a) purchase accounting adjustments,
including amortization of identifiable intangible assets; and (b) estimated additional
interest expense due to the loan granted to Ampal in connection with the acquisition.
This pro forma financial information is not necessarily indicative of the combined
results that would have been attained had the acquisition taken place at the beginning of
2007 and 2006, respectively, nor is it necessarily indicative of future results.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         | 2007 | 2006
|---------------------------------------- | ---- | ----
|
|
|
|
|Total revenues                           |      |     
|Income (loss) from continuing operations |      |     
|                                         |      |     
|Basic and diluted Earning per share:     |      |     
|Loss income from continuing operations   |      |     
|                                         |      |     

| | 2. | During
2007, the Company made an additional investment in East Mediterranean Gas
               Company S.A.E. (EM as follows:
| | -- | -------------------------------------------------------------------------------------------------------------------------------

| | On
June 4, 2007, EMG called for additional capital from its shareholders. As a result, Ampal
paid an additional $5.8 million in order to maintain its pro rata beneficial interest in
EMG.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18

---

---

| | On
November 29, 2007, Ampal and the Israel Infrastructure Fund (IIF), leading a
group of institutional investors (the Investors), purchased a 4.3% interest
in EMG, through Merhav Ampal Energy Holdings, LP, an Israeli limited partnership (the
Joint Venture), from Merhav M.N.F. Ltd. for a purchase price of approximately
$95.4 million, using funds provided by the Investors. In addition to the Joint Ventures
purchase from Merhav., Ampal contributed into the Joint Venture an additional 4.3%
interest in EMG already held by Ampal. The Joint Venture now holds a total of 8.6% of the
outstanding shares of EMG. Ampals contribution was valued at the same price per EMG
share as the Joint Ventures purchase. This amount is equivalent to the purchase
price (on a per share basis) paid by Ampal for its December 2006 purchase of EMG shares
from Merhav, which was accounted for as a transfer of assets between entities under
common control, which resulted in Merhav transferring the investment in EMG to Ampal at
carrying value. Due to the nature of Merhav Merhavs operations, Merhav.would be
treated as an investment company under US GAAP, and as such, the carrying value of the
investment in EMG would equal fair value. On this basis, the said investment in EMG was
transferred to Ampal at carrying value, which also equals fair value. Based on the terms
stipulated in the shareholders agreement of the general partner of the Joint Venture,
Ampal and Israel Infrastructure G.P. Ltd. have equal rights in governing the affairs of
the Joint Venture. However, in certain events and under certain conditions, matters
relating to decisions on how to vote the EMG shares held by the Joint Venture shall be
decided by the directors of the general partner of the Joint Venture appointed by Ampal.
As such, Ampal has consolidated the results of the Joint Venture in its financial
statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys Financial Statements reflect a 16.8% interest in shares of EMG, with 8.2%
held directly and 8.6% held through the Joint Venture (of which Ampal owns 50%).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Yosef
A. Maiman, the Chairman, President and CEO of the Company and a member of the controlling
shareholder group of the Company, is the sole owner of Merhav.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Wind
Energy Joint Venture
| | -- | -------------------------

| | On
November 25, 2007, Merhav Ampal Energy Ltd. (MAE) signed a joint venture
agreement with Clal Electronics Industries Ltd. (Clal), an Israel-based
holding company, for the formation of a joint venture that will focus on the new
development and acquisition of controlling interests in wind energy projects outside of
Israel. The joint venture, owned equally by Clal and the Company through MAE, will seek
to either develop or acquire wind energy opportunities with a goal of establishing at
least 150MW of installed capacity within the next 3.5 years.The joint ventures
initial project is the development of a wind farm in Greece. The Company has approved a
$25 million budget for these projects
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Option
Agreement for Sugarcane Ethanol Project in Colombia
| | -- | ----------------------------------------------------------

| | On
December 25, 2007, Ampal entered into the Original Option Agreement referred to above
with Merhav providing Ampal with the Option to acquire up to a 35% equity interest in the
Project being developed by Merhav under the Original Option Agreemnt, the Option was to
expire on the earlier of December 25, 2008 or the date on which both (i) Merhav has
obtained third-party debt financing for the Project and (ii) an unaffiliated third party
holds at least a 25% equity interest in the Project. The Original Option Agreement
provided that the purchase price for any interest in the Project purchased by Ampal
pursuant to the Original Option Agreement would be (A) with respect to any portion of
such interest being purchased by conversion of the outstanding balance of the Promissory
Note, the lesser of (i) a price based on a currently agreed Valuation Model as updated
from time to time to reflect changes in project, financing and other similar costs as
such updates are reviewed by Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
at the time of the options exercise or (ii) the lowest price paid by any
unaffiliated third party for an interest in the Project, or (B) with respect to any
portion of such interest in the Project being purchased in excess of the balance of the
Promissory Note, the lowest price paid by an unaffiliated third party for its interest in
the Project, unless no unaffiliated third party has purchased an interest in the Project,
in which case the purchase price will be based on the Valuation Model. As described in
Note 3(a) above, the Original Option Agreement was amended by the Option Amendment.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
stated above, Ampal loaned Merhav M.N.F. Ltd. $10 million to fund the purchase of the
11,000 hectares of property in Colombia required for growing sugarcane and the
construction of an ethanol production facility for the Project, pursuant to the
Promissory Note, dated as of December 25, 2007, by Merhav in favor of Ampal. Under the
Promissory Note, Ampal agreed to advance up to an additional $10 million to fund the
Project pursuant to the Promissory Note. Under the Promissiory Note, the loan bore
interest at an annual rate equal to LIBOR plus 2.25%, and was convertible into all or a
portion of the equity interest purchased pursuant to the option. As stated in Note 3(a)
above, the Promissory Note was amended by the Amended Promissory Note.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
security for the loan, Merhav has pledged to Ampal, pursuant to a pledge agreement, dated
December 25, 2007, between Merhav and Ampal, all of the shares of Ampals Class A
Stock, par value $1.00 per share, owned by Merhav.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19

---

---

| | Yosef
A. Maiman, the Chairman, President and CEO of Ampal and a member of the controlling
shareholders group of Ampal, is the sole owner of Merhav Because of the foregoing
relationship, a special committee of the Board of Directors composed of Ampals
independent directors negotiated and approved the transaction. Houlihan Lokey Howard &Zukin
Financial Advisors, Inc., which has been retained as financial advisor to the special
committee, advised the special committee on this transaction.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | Additional
investment of $0.1 million in FIMI
| | -- | ---------------------------------------------

| | 6. | A
loan to Bay Heart of $3.6 million, for a shopping mall in Haifa, Israel.
| | -- | --------------------------------------------------------------------------

|d) | In
2007, Ampal made the following dispositions:
|-- | -----------------------------------------------

| | 1. | On
May 21, 2007, the Company closed the sale of its equity method holdings in
               Carmel Containers Limited (CWI), a packaging manufacturer
affiliate                based in Israel. Pursuant to this transaction, Ampal and its
subsidiaries sold                to Carmel an aggregate of 522,350 ordinary shares of
Carmel for an aggregate                sales price of approximately $4.6 million. The
Company recorded no gain since                impairment was recorded in the first
quarter of 2007.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | During
2007, the Company received proceeds in the total amount of $0.8 million
               from the sales of certain investments by FIMI.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | On
August 5, 2007, the Company completed the sale of its holdings in Am-Hal Ltd.
               (Am-Hal) for an aggregate consideration of $29.3 million and
               recorded a gain of approximately $29.4 million (approximately $21.7
million, net                of taxes). The gain and Am-Hals results of operations
until June 30, 2007,                were recorded as discontinued operations for all
periods presented.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | On
December 2007 Chem-Tankers C.V. sold a ship for $6.9 million (capital gain of
               $3.4 million).
| | -- | --------------------------------------------------------------------------------------------------------------

|e) | In
2006, the Company made the following investments:
|-- | ----------------------------------------------------

| | 1. | During
2006, the Company made additional investments of $229.9 million in EMG as
          follows:
| | -- | ---------------------------------------------------------------------------------------------------

| | The
Company, through MAE, a wholly-owned subsidiary of the Company, entered into an agreement
with Merhav for the purchase from Merhav a portion of its interest in EMG, an Egyptian
joint stock company. The sole owner of Merhav is Yosef A. Maiman, who is also the
Chairman, President and CEO of the Company and a member of the controlling shareholder
group of Ampal.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 1, 2006 the Company acquired the beneficial ownership of 4.6% of the outstanding
shares of EMGs capital stock from Merhav. The transaction was accounted for as a
transfer of assets between entities under common control, which resulted in Merhav
transferring the investment in EMG to Ampal at carrying value. Due to the nature of Merhavs
operations, this entity would be treated as an investment company under US GAAP, and as
such, the carrying value of the investment in EMG would equal fair value. On this basis,
the 4.6% investment in EMG was transferred to Ampal at carrying value, which also equals
fair value. The purchase price for the shares was $100.0 million, of which, $50.0 million
was paid in cash and the balance was paid in 10,248,002 shares of the Company Class A
Stock (based on a purchase price of $4.88 per share) that was accounted for at a fair
value of $49.0 million (the fair value was determined based on the average price per
share from 2 days before the agreement press release through 2 days after the agreement
press release). The issuance of the shares of Class A Stock received the approval of the
shareholders of the Company as required by the marketplace rules of the NASDAQ Global
Market. As a result of this transaction, the Company beneficially owned 6.6% of the total
outstanding shares of EMG. Through August 2008, the purchase price may be adjusted
downward should Merhav sell any of its remaining shares of EMG to a third-party purchaser
at a purchase price per share lower than the price per share paid by the Company pursuant
to the agreement. Additionally, pursuant to the agreement, the Company was granted an
option for a period of up to two years to have the right to acquire up to an additional
5.9% of the total outstanding shares of EMG stock.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Yosef
A. Maiman, the Chairman, President and CEO of the Company and a member of the controlling
shareholder group of the Company, is the sole owner of Merhav. Because of the foregoing
relationships, a special committee of the Board of Directors composed of the Companys
independent directors, who also constitute all of the members of the Companys Audit
Committee, negotiated and approved the transaction. Houlihan Lokey Howard & Zukin
Financial Advisors, Inc., which was retained as financial advisor to the special
committee, delivered a fairness opinion to the special committee regarding the
transaction.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 22, 2006, EMG called for additional capital from all of its shareholders. As a
result, the Company paid an additional $2.7 million in order to maintain its pro rata
beneficial interest in this investment.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 21, 2006, the Company acquired the beneficial ownership of an additional 5.9% of
the outstanding shares of EMGs capital stock pursuant to an option granted by
Merhav in August 2006. The transaction was accounted for as a transfer of assets between
entities under common control, which resulted in Merhav transferring the investment in
EMG to Ampal at carrying value. Due to the nature of Merhavs operations, Merhav
would be treated as an investment company under US GAAP, and as such, the carrying value
of the investment in EMG would equal fair value. On this basis, the 5.9% investment in
EMG was transferred to Ampal at carrying value, which also equals fair value.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20

---

---

| | The
purchase price for the shares was approximately $128.3 million, of which approximately
$68.3 million was paid in cash, $40 million was paid in 8,602,151 shares of the Companys
Class A Stock and the balance was satisfied by the issuance of a promissory note in the
principal amount of $20 million (the Convertible Promissory Note), which, at
the option of Merhav, could have been paid in cash, additional shares of the Company
Class A Stock (based on a price per share of $4.65 per share), or a combination thereof.
As permitted under the stock purchase agreement, Merhav assigned its right to the
8,602,151 Shares to De Majorca Holdings Limited (De Majorca) as part of Merhavs
restructuring process. The Convertible Promissory Note bore interest at 6 months LIBOR
(5.375%) and matured on the earlier of September 20, 2007 or upon demand by Merhav. On
September 20, 2007, Merhav exercised its option to convert the outstanding balance of
$20.8 million (which includes accrued interest of $0.8 million) on the Convertible
Promissory Note into 4,476,389 shares of Class A Stock of the Company. As a result of
this transaction, Ampal beneficially owns 16.8% of the total outstanding shares of EMG
(8.6% of which is held by the Joint Venture, of which Ampal owns 50%). The issuance of
the 8,602,151 shares and the shares underlying the Convertible Promissory Note received
the approval of the shareholders of the Company on February 7, 2007, as required by the
marketplace rules of the NASDAQ Global Market. Due to the agreement of the controlling
shareholder group to vote in favor of the issuance of these shares to Merhav as of the
closing date of the EMG transaction (which ensured that the proposal would be adopted by
the requisite shareholder vote on February 7, 2007), the Company classified for
accounting purposes the sale of these shares as part of the exchange with Merhav on
December 21, 2006, and recognized the $40 million within shareholders equity as
Receipt on account of unallocated shares. The investment in EMG is included
in the energy segment.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Yosef
A. Maiman, the Chairman, President and CEO of the Company and a member of the controlling
shareholder group of the Company, is the sole owner of Merhav. Because of the foregoing
relationships, a special committee of the Board of Directors composed of the Companys
independent directors, who also constitute all of the members of the Companys Audit
Committee, negotiated and approved the transaction. Houlihan Lokey Howard & Zukin
Financial Advisors, Inc., which was retained as financial advisor to the special
committee, advised the special committee on these transactions.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Additional
investment of $0.4 million in FIMI.
| | -- | ----------------------------------------------

| | 3. | A
loan to Bay Heart of $1.7 million, for a shopping mall in Haifa, Israel
| | -- | -------------------------------------------------------------------------

|f) | In
2006, Ampal made the following dispositions (none of which were discontinued
          operations):
|-- | ------------------------------------------------------------------------------------------------------

| | 1. | In
June and December 2006, the Company received proceeds in the total amount of
               $0.6 million from the sales of certain investments by FIMI.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | On
June 13, 2006, the Company sold its holdings in Coral World International for
               $21.0 million and recorded a gain of $4.2 million. The gain is included in
the                leisure-time segment.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | In
March 2006, the Company received additional proceeds from the sale of Modem
               Art Ltd. in the amount of $0.6 million.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------

| | 4. | In
April 2006, the Company received additional proceeds in the amount of $0.4
               million from the sale of certain assets by PSINet Europe, one of the
holdings of                Ampals investee company, TP.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | On
May 8, 2006, the Company sold its holdings in Ophir Holdings Ltd. for $1.1
               million and recorded a loss of $1.0 million.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------

| | 6. | In
September 2006, the Company sold the building in Tel-Aviv containing its
               headquarters for a proceeds of $4.6 million and recorded a gain of $2.2
million.                The new owner agreed to lease to the Company the office space
containing the                Companys headquarters for a period of up to 2 years
commencing on November                28, 2006. The annual rent for this lease was
$162,000. The gain from the sale is                included in the real-estate segment.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 4  Fair value
measurement

| | On
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements(SFAS
157), which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair-value
measurements. The Company adopted SFAS 157 effective January 1, 2008 for all
financial assets and liabilities and any other assets and liabilities that are recognized
or disclosed at fair value on a recurring basis. Although the adoption of SFAS 157 did
not materially impact the Companys financial condition, results of operations or
cash flows, the Company is required to provide additional disclosures within its
condensed consolidated financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21

---

---

| | SFAS
157 defines fair value as the price that would be received to sell an asset or paid to
transfer the liability (an exit price) in an orderly transaction between market
participants and also establishes a fair value hierarchy which requires an entity to
maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The fair value hierarchy within SFAS 157 distinguishes between
three levels of inputs that may be utilized when measuring fair value including level 1
inputs (using quoted prices in active markets for identical assets or liabilities), level
2 inputs (using inputs other than level 1 prices such as quoted prices for similar assets
and liabilities in active markets or inputs that are observable for the asset or
liability) and level 3 inputs (unobservable inputs supported by little or no market
activity based on the companys own assumptions used to measure assets and
liabilities). A financial assets or liabilitys classification within the
above hierarchy is determined based on the lowest level input that is significant to the
fair value measurement.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company also adopted SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 permits entities to choose
to measure many financial assets and financial liabilities at fair value. Unrealized
gains and losses on items for which the fair value option has been elected are reported
in earnings. SFAS 159 is effective for fiscal years after November 15, 2007. The Company
did not elect to apply the fair value option available under SFAS 159 for any of its
eligible instruments.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Financial
assets and liabilities measured at fair value on a recurring basis as at December 31,
2008 consisted of the following (in thousands):
| | -----------------------------------------------------------------------------------------------------------------------------------------------

Fair Value Measurements as at December 31, 2008 Using:

|                                       | Level 1 | Level 2 | Total
|-------------------------------------- | ------- | ------- | -----
|
|
|
|
|Trading securities *                   |         |         | $    
|Available for sale securities *        |         |         |      
|Derivative assets - forward agreements |         |         |      
|Derivative liabilities **              |         |         |      
|                                       |         |         |      
|Total                                  |         |         | $    
|                                       |         |         |      

| | Marketable
securities that are classified in level 1 consist of available-for-sale and trading
securities for which market prices are readily available and marketable securities that
are classified in level 2 consist of trading securities for which there are quoted prices
in active brokers markets. The fair value of derivative assets are determined based
on inputs that can be derived from information available in publicly quoted markets.
Unrealized gains or losses from available-for-sale securities are recorded in accumulated
other comprehensive (loss) income.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | *
The trading securities and available for sale securities are mainly traded debentures
| | ---------------------------------------------------------------------------------------

| | **
Out of which $ 4.2 million is attributable to a SWAP agreement and the remaining to
forward agreements.
| | ----------------------------------------------------------------------------------------------------------

# Note 5  Intangible
assets

The following table presents the
components of the Companys acquired intangible assets with definite lives:

|                               |  | Original amount | Amortized balance
|------------------------------ |  | --------------- | -----------------
|
|
|
|
|Options to purchase ships *    |  |                 |                  
|Ships leasing                  |  |                 |                  
|Supplier relation              |  |                 |                  
|Customer relation              |  |                 |                  
|                               |  |                 |                  
|Identifiable intangible assets |  |                 |                  

The annual estimated amortization
expense relating to Ampals amortizable intangible assets existing as of December 31,
2008, for each of the four years in the period ending December 31, 2012, is approximately
$2.1 million.

* The options expire in 2009 and
2012.

22

---

---

# Note 6  Goodwill

The changes in the carrying amount of
goodwill for the years ended December 31, 2008 and 2007 are as follows:

|(U.S. $ in thousands)             | 
|--------------------------------- | 
|
|
|
|
|Balance as of January 1, 2007     | 
|Changes during 2007:              | 
|Goodwill acquired during the year | 
|Balance as of December 31, 2007   | 
|Changes during 2008:              | 
|Goodwill acquired during the year | 
|Translation differences           | 
|Balance as of December 31, 2008   | 

As part of the purchase of Gadot, the Company recorded the goodwill and as such it is part of the chemical
segment.

Note 7 - Fixed assets

The balance of fixed assets as of December 31, 2008 and 2007 is comprised as follows:

|                         | As of December 31,
|------------------------ | ------------------
|
|
|
|
|Cost:                    |                   
|                         |                   
|Vessels                  |                   
|Trailers                 |                   
|Land                     |                   
|Real estate              |                   
|Tankers                  |                   
|Motor vehicles           |                   
|Equipment                |                   
|Leashold improvement     |                   
|                         |                   
|                         |                   
|                         |                   
|Accumulated depreciation |                   
|                         |                   
|Fixed assets, net        |                   

Depreciation expenses amounted to approximately
$9,345, $417and $208 (in thousands) for the years ended December 31, 2008, 2007 and 2006,
respectively.

23

---

---

# Note 8  Notes and
Loans Payable

| | Notes
issued to institutional investors in Israel (in the amount of $96 million), the convertible note issued to Merhav and
other loans payable pursuant to bank borrowings are either in U.S. dollars, linked to the
Consumer Price Index in Israel or in unlinked New Israel Shekels, with interest rates
varying depending upon their linkage provision and mature between 2008-2019.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company finances its general operations and other financial commitments through bank
loans from Bank Hapoalim, Union Bank of Israel and Israel Discount Bank Ltd. (IDB).
As of December 31, 2008, the outstanding indebtedness under these bank loans totaled
$379.7 million and the loans mature through 2008-2019
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the Company has a $8.3 million loan with Union Bank of Israel that
bears interest at the rate of LIBOR plus 2% to be repaid in six annual installments
commencing on April 2, 2008 and various other loans with Union Bank of Israel in the
aggregate amount of $7.7 million bearing interest at rates between 4.7% and 5.25% to be
repaid until 2009.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the Company has a $18 million loan with Bank Hapoalim as part of a
$27 million dollar loan facility. The funds borrowed under the loan facility are due in
six annual installments commencing on December 31, 2007 and bear interest at an annual
rate of LIBOR plus 2%. The related loan agreement contains financial and other covenants
including an acceleration of payment upon the occurrence of certain changes in the
ownership of the Companys Class A Stock. As of December 31, 2008, the Company is in
compliance with its debt covenants.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
short term loan from Bank Hapoalim in the amount of $3.5 million bears interest of 5.8%
and is to be repaid by December 31, 2009.
| | -----------------------------------------------------------------------------------------------------------------------------------

| | Other
long term borrowings in the amount of $0.2 million are linked to the Consumer Price Index
in Israel, mature between 2009 and 2010 and bear annual interest of 5.7%.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, Gadot, a wholly owned subsidiary of Ampal, has short term loans,
including current maturities, payable in the amount of $95.9 million and long term loans
payable in the amount of $62.2 million. The various short term loans payable are either
unlinked or linked to the USD or Euro and bear interest at rates between 3% to 7%. The
various long term loans payable are either unlinked or linked to the Consumer Price Index
in Israel or linked to the USD or Euro and bear interest at rates between 4.4% to 11.38%.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Ampal
funded the Gadot transaction with a combination of available cash and the proceeds of a
new credit facility, dated November 29, 2007 between MAE and IDB, for approximately $60.7
million which amount was increased on June 3, 2008, on the same terms and conditions, by
approximately $11.3 million and also was increased on September 23, 2008, on the same
terms and conditions, by approximately $15.4 million (the Credit Facility).
The Credit Facility is divided into two equal loans of approximately $43.7 million. The
first loan is a revolving loan that has no principal payments and may be repaid in full
or in part on December 31 of each year until 2019, when a single balloon payment will
become due. The second loan also matures in 2019, has no principal payments for the first
1.5 years, and shall thereafter be paid in equal installments over the remaining 9.5
years of the term. Interest on both loans accrues at a floating rate equal to LIBOR plus
a percentage spread and is payable on a current basis. Ampal has guaranteed all the
obligations of MAE under the Credit Facility and Ampals interest in Gadot has also
been pledged to IDB as a security for the Credit Facility.  Yosef Maiman has agreed
to maintain ownership of a certain amount of the Companys Class A Common Stock. The
Credit Facility contains customary affirmative and negative covenants for credit
facilities of this type.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
weighted average interest rates and the balances of these short-term borrowings at
December 31, 2008 and December 31, 2007 were 5.1% on $157.2 million and 6.3% on $136.6
million, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Payments
due as of December 31, 2008:
| | -------------------------------------

| |                 | (U.S. Dollars in thousands)
| | --------------- | ---------------------------
|
|
|
|
| | 2009            |                            
| | 2010            |                            
| | 2011            |                            
| | 2012            |                            
| | 2013            |                            
| | After year 2013 |                            
| |                 |                            
| |                 |                            
| |                 |                            

24

---

---

# Note 9  Debentures

On
April 29, 2008, Ampal completed a public offering in Israel of NIS 577.8 million
(approximately $166.8 million) aggregate principal amount of Series B Debentures due 2017.
The debentures are linked to the Israeli consumer price index and carry an annual interest
rate of 6.6%. The debentures rank pari passu with Ampals unsecured indebtedness. The
debentures will be repaid in five equal annual installments commencing on January 31,
2012, and the interest will be paid semi-annually. As of December 31, 2008, the
outstanding debt under the debentures amounts to $138.7 million, due to the change in
valuation of the New Israeli Shekel as compared to the U.S. dollar. Ampal deposited an
amount of $44.6 million with Clal Finance Trusties 2007 Ltd. in accordance with a trust
agreement dated April 6, 2008, to secure the first three years worth of payments of
interest on the debentures. As of December 31, 2008 the outstanding amount of the deposit
was $35.8 million.

On
November 20, 2006, the Company entered into a trust agreement with Hermetic Trust (1975)
Ltd. pursuant to which the Company issued notes to institutional investors in Israel in
the principal aggregate amount of NIS 250,000,000 (approximately $58.0 million) with an
interest rate of 5.75%, which is linked to the Israeli consumer price index. The notes
shall rank pari passu with the Companys unsecured indebtedness. The notes
will be repaid in five equal annual installments commencing on November 20, 2011, and the
interest will be paid semi-annually. As of December 31, 2008, the outstanding debt under
the notes amounts to $69.0 million, due to the change in valuation of the New Israeli
Shekel as compared to the U.S. dollar. The Company deposited an amount of $10.2 million
with Hermetic Trust (1975) Ltd. to secure the first three years worth of payments of
interest on the debentures. As of December 31, 2008, the outstanding amount of the deposit
was $3.8 million. Prior to the issuance of the debentures Midroog Ltd., an affiliate of
Moodys Investors Service, rated the Company as A3.

|                                | Series A Debentures  | Series B Debentures 
|------------------------------- | -------------------- | --------------------
|
|Date of issuance                | November 20, 2006    | April 29, 2008      
|Linkage                         | consumer price index | consumer price index
|Interest                        | 5.75%                | 6.6%                
|Maturity date                   | November, 2015       | January, 2016       
|Issuance                        | 250,000,000          | 57,978              
|Purchased in 2008               | 5,074,418            | 1,403               
|Balance as of December 31, 2008 | 244,925,582          | 68,995              

As
of December 31, 2008, Gadot had $0.1 million outstanding under its convertible debentures.
The debentures are linked to the Consumer Price Index in Israel, bear annual interest at
the rate of 6.5%, and are repayable in December 5, 2009. The debentures are
convertible into ordinary shares of Gadot.

As
of December 31, 2008, Gadot had $11.4 million outstanding under its other debentures.
These debentures are not convertible into shares and are repayable in five equal annual
installments on September 15 of each of the years 2008 through 2012. The outstanding
balance of the principal of the debentures bears annual interest at the rate of 5.3%. The
principal and interest of the debentures are linked to the Consumer Price Index in Israel
and the interest is payable in semi-annual installments on March 15 and
September 15 of each of the years 2006 through 2012.

25

---

---

# Note 10  Accounts
payable accrued expenses and others

|(a) | The
balance of accounts payable accrued expenses and others as of December 31,           2008
and 2007 is comprised as follows:
|--- | -------------------------------------------------------------------------------------------------------------------------------

|                 | As of December 31,
|---------------- | ------------------
|
|
|
|
|Short term:      |                   
|Deferred income  |                   
|Accrued expenses |                   
|Trade            |                   
|                 |                   
|Others           |                   
|                 |                   
|                 |                   
|                 |                   
|Long term:       |                   
|Others           |                   
|                 |                   
|                 |                   
|                 |                   

|(b) | Accrued
severance liabilities
|--- | -----------------------------

| | Israeli
labor laws and agreements require payment of severance pay upon dismissal of an employee
or upon termination of employment in certain other circumstances. Ampal severance pay
liability in Israel, which reflects the undiscounted amount of the liability as if it was
payable at each balance sheet date, is calculated based upon length of service and the
latest monthly salary (one months salary for each year worked).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys liability for severance pay pursuant to Israeli law is partly covered by
insurance policies. The accrued severance pay liability of $9.5 million, is included in
accounts payable, accrued expenses and other liabilities  others.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company expects that the payments relating to future benefits to its employees upon their
retirement at normal retirement age in the next 10 years will be immaterial. These
payments are determined based on recent salary rates and do not include amounts that
might be paid to employees that will cease working with the Company, before their normal
retirement age or amount paid to employees that their normal retirement age extends
beyond the year 2017.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 11  Minority
Interest, net

| | The
minority interest as of December 31, 2008, is mostly attributable to the Merhav Ampal
Energy LP.
| | ----------------------------------------------------------------------------------------------------

| | The
minority interest as of December 31, 2007, is mostly attributable to the public holding
of 34.52% of Gadots shares.
| | ------------------------------------------------------------------------------------------------------------------------

# Note 12 
Shareholders Equity

| | Set
forth below is our treasury stock as of December 31, 2008, 2007 and 2006:
| | -----------------------------------------------------------------------------

|                                                                                | Fiscal Year Ended December 31,
|------------------------------------------------------------------------------- | ------------------------------
|
|
|
|
|TREASURY STOCK:                                                                 |                               
|4% PREFERRED STOCK                                                              |                               
|Balance, beginning of year 3,350 shares                                         |                               
|Elimination of treasury stock 3,350 shares                                      |                               
|                                                                                |                               
|Balance, at the end of year                                                     |                               
|                                                                                |                               
|                                                                                |                               
|6-1/2% PREFERRED STOCK                                                          |                               
|Balance, beginning and end of year 122,536 shares                               |                               
|Elimination of treasury stock 122,536 shares                                    |                               
|                                                                                |                               
|Balance, at the end of year                                                     |                               
|                                                                                |                               
|                                                                                |                               
|CLASS A STOCK                                                                   |                               
|Balance, beginning of year - 5,574,789, 5,574,789 and 5,751,039 shares, at cost |                               
|Shares purchase 1,366,415                                                       |                               
|Issuance of 89,750 and 176,250 shares                                           |                               
|                                                                                |                               
|Balance, end of year - 6,851,454, 5,574,789 and 5,574,789 shares, at cost       |                               
|                                                                                |                               
|Balance end of year                                                             |                               
|                                                                                |                               

26

---

---

# Note 13  Stock
Options

On
February 15, 2000, the Stock Option Committee approved a new Incentive Plan (2000
Plan), under which the Company has reserved 4 million shares of Class A Stock,
permitting the granting of options to all employees, officers and directors. The 2000 Plan
was approved by the Board of Directors of Ampal (the Board) at the 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 plan remains in effect for a
period of ten years. As of December 31, 2008, 2,921,000 options under the 2000 Plan are
outstanding.

The
option term is for a period of ten years from the grant date for the options granted under
the 2000 Plan. If the options are not exercised and the shares not paid for by such date,
all interests and rights of any grantee shall expire. These options were granted for no
consideration.

The
options granted under the 2000 Plan (collectively, the Plans) may be either
incentive stock options, at an exercise price to be determined by the Stock Option
Compensation Committee (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 stock options granted
under the plans were granted either at market value or above. Under the Plans, 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. During 2008, no such compensation
instruments were granted by the Committee.

Under
each of the Plans, all granted but unvested options become immediately exercisable upon
the occurrence of a change in control of the Company.

The
weighted average grant date fair value of options granted during 2008, 2007 and 2006 was
0.477, 2.273 and 2.366, respectively.

On
December 8, 2008, Ampals Stock Option and Compensation Committee and its Board of
Directors approved the repricing of outstanding options to purchase, in the aggregate,
2,270,000 shares of Ampals Class A Stock, which were previously granted to ten of
the Companys current employees, executive officers and directors pursuant to
Ampals 2000 Incentive Plan. The outstanding options had been originally issued with
exercise prices ranging from $3.12 to $5.35 per share, which represented the then current
market prices of Class A Stock on the dates of the original grants. The repricing was
effected by canceling the outstanding options, and granting to each holder of cancelled
outstanding options a new option, with a 10 year term, to purchase the total number of
shares of Class A Stock underlying such cancelled outstanding options, at an exercise
price equal to $1.17 per share, the closing price of Class A Stock on NASDAQ on December
5, 2008, the most recent closing price prior to the approval by the Board of Directors and
the Compensation Committee. The repriced options maintain the vesting schedule of the
cancelled outstanding options.

27

---

---

The
following table summarizes the activity of both Plans for the years 2008, 2007 and 2006
respectively:

|                                 | Options
(in thousands) | Weighted-
Average
Exercise
Price
(U.S. Dollars) | Weighted-
Average
Remaining
Contractual
Term
(in years) | Aggregate
Intrinsic
Value
U.S. Dollars
in
(thousands)
|-------------------------------- | ---------------------- | ----------------------------------------------- | ------------------------------------------------------- | -----------------------------------------------------
|
|
|
|
|Outstanding at January 1, 2008   |                        |                                                 |                                                         | 2,434                                                
|Granted at fair value            |                        |                                                 |                                                         | 580                                                  
|Exercised                        |                        |                                                 |                                                         | (89                                                  
|Forfeited                        |                        |                                                 |                                                         | (4                                                   
|Expired                          |                        |                                                 |                                                         | -                                                    
|                                 |                        |                                                 |                                                         |                                                      
|                                 |                        |                                                
|Outstanding at December 31, 2008 |                        |                                                 |                                                         | 2,921                                                
|                                 |                        |                                                
|Exercisable at December 31, 2008 |                        |                                                 |                                                         | 1,815                                                
|* After repricing,               |                        |                                                

|                                 | Options
(in thousands) | Weighted-
Average
Exercise
Price
(U.S. Dollars) | Weighted-
Average
Remaining
Contractual
Term
(in years) | Aggregate
Intrinsic
Value
U.S. Dollars
in
(thousands)
|-------------------------------- | ---------------------- | ----------------------------------------------- | ------------------------------------------------------- | -----------------------------------------------------
|
|
|
|Outstanding at January 1, 2007   |                        |                                                 |                                                         | 2,164                                                
|Granted at fair value            |                        |                                                 |                                                         | 270                                                  
|Exercised                        |                        |                                                 |                                                         | -                                                    
|Forfeited                        |                        |                                                 |                                                         | -                                                    
|Expired                          |                        |                                                 |                                                         | -                                                    
|                                 |                        |                                                 |                                                         |                                                      
|                                 |                        |                                                
|Outstanding at December 31, 2007 |                        |                                                 |                                                         | 2,434                                                
|                                 |                        |                                                
|Exercisable at December 31, 2007 |                        |                                                 |                                                         | 1,433                                                

|                                 | Options
(in thousands) | Weighted-
Average
Exercise
Price
(U.S. Dollars) | Weighted-
Average
Remaining
Contractual
Term
(in years) | Aggregate
Intrinsic
Value
U.S. Dollars
in
(thousands)
|-------------------------------- | ---------------------- | ----------------------------------------------- | ------------------------------------------------------- | -----------------------------------------------------
|
|
|
|Outstanding at January 1, 2006   |                        |                                                 |                                                         | 2,024                                                
|Granted at fair value            |                        |                                                 |                                                         | 630                                                  
|Exercised                        |                        |                                                 |                                                         | (176                                                 
|Forfeited                        |                        |                                                 |                                                         | (284                                                 
|Expired                          |                        |                                                 |                                                         | (30                                                  
|                                 |                        |                                                 |                                                         |                                                      
|                                 |                        |                                                
|Outstanding at December 31, 2006 |                        |                                                 |                                                         | 2,164                                                
|                                 |                        |                                                
|Exercisable at December 31, 2006 |                        |                                                 |                                                         | 1,111                                                

# Valuation and Expenses
under 123R

The
fair value of each stock option is estimated on the date of grant using the Black-Scholes
option pricing model that uses the assumptions noted below. The company developed an
expected option term assumption based on exercise patterns of the company. Expected
volatility is based on the historical volatility of the Class A common stock. The
risk free rate is based on the U.S. Treasury yield curve for a term consistent with the
expected life of the award, in effect at the date of grant.

The
fair value of options granted during the years ended December 31, 2008, 2007 and 2006 were
estimated using the following weighted average assumptions: (1) expected life of options
of 5, 6 and 6 years, respectively; (2) dividend yield of 0%; (3) volatility of 44.06%,
35.64% and 41.11%, respectively; and (4) risk free interest of 1.86%, 4.30% and 4.42%,
respectively.

Total
stock-based compensation expense recognized under SFAS No. 123R, was approximately
$1,365,000 and $783,000 for the years 2008 and 2007, respectively. No share-based
compensation was capitalized in the consolidated financial statements.

28

---

---

The
total intrinsic value (market value on date of exercise less exercise price) of options
exercise during 2006 and 2008 was $260,000 and $12,000 respectively.

At
December 31, 2008, there was $2.39 million of total unrecognized, pre-tax compensation
cost related to non-vested stock options. This cost is expected to be recognized over a
weighted-average period of approximately four years. The Company settles employee stock
options exercises primarily with newly issued common shares and occasionally with treasury
shares.

# Note 14  Earnings
(Loss) Per Class A Share

Basic
net loss per share is computed by dividing net loss after deduction of preferred stock
dividends by the weighted-average number of common stock shares outstanding for the
period. In 2008, 2007 and 2006, all outstanding stock options and preferred shares have
been excluded from the calculation of the diluted loss per share because all such
securities are anti-dilutive for these periods presented. Also, participating 4%
Convertible Preferred Stock were not taken into account in the computation of the basic
EPS in the period in which it was outstanding since its shareholders did not have
contractual obligation to share in the losses of the Company. A reconciliation of the
numerator and denominator used in the calculation of basic and diluted net income per
share follows (in thousands, except per share amounts):

|                                               | Year Ended December 31,
|---------------------------------------------- | -----------------------
|
|
|
|
|Net loss from continuing operations            |                        
|                                               |                        
|Less: preferred stock dividend                 |                        
|                                               |                        
|Net loss from continuing operations            |                        
|                                               |                        
|Net income (loss) from discontinued operations |                        
|                                               |                        
|                                               |                        
|                                               |                        
|Weighted average class A shares outstanding    |                        
|                                               |                        
|Basic and diluted net income (loss) per share: |                        
|Loss from continuing operations                |                        
|Discontinued operations                        |                        
|                                               |                        
|Basic and diluted                              |                        
|                                               |                        

The
following table summarized securities that were not included in the calculations of
diluted earnings per class A shares for the years ended December 31, 2008, 2007 and 2006
because such shares are anti-dilutive.

|                       | Year ended December 31,
|---------------------- | -----------------------
|
|
|
|
|Options and Rights     |                        
|6-1/2% Preferred Stock |                        
|4% Preferred Stock     |                        
|Warrants               |                        
|Promissory note        |                        

29

---

---

# Note 15  Income
Taxes

|                                                                                           | Fiscal Year Ended December 31,
|------------------------------------------------------------------------------------------ | ------------------------------
|
|
|
|
|The components of income tax expense (benefit) are:                                        |                               
|Continuing operations                                                                      |                               
|Discontinued operations                                                                    |                               
|                                                                                           |                               
|                                                                                           |                               
|                                                                                           |                               
|The components of current and deferred income tax expense (benefit) are:                   |                               
|Current:                                                                                   |                               
|Federal                                                                                    |                               
|Foreign                                                                                    |                               
|Deferred:                                                                                  |                               
|State and local                                                                            |                               
|Federal                                                                                    |                               
|Foreign                                                                                    |                               
|                                                                                           |                               
|Total                                                                                      |                               
|                                                                                           |                               
|                                                                                           |                               
|The domestic and foreign components of income (loss) before income taxes and minority are: |                               
|                                                                                           |                               
|Domestic                                                                                   |                               
|Foreign                                                                                    |                               
|                                                                                           |                               
|Total                                                                                      |                               
|                                                                                           |                               
|                                                                                           |                               
|A reconciliation of income taxes between the statutory and effective tax is as follows:    |                               
|                                                                                           |                               
|Federal income tax (benefit) at 34%                                                        |                               
|Taxes on foreign Gain (Loss) below U.S. rate                                               |                               
|Change in unrecognized tax benefits (expense)                                              |                               
|Changes in valuation allowance                                                             |                               
|Other                                                                                      |                               
|                                                                                           |                               
|Total effective tax: 29.9%; 31.9% and 76.8%                                                |                               
|                                                                                           |                               

|                                                                      | As of December 31,
|--------------------------------------------------------------------- | ------------------
|
|
|
|
|Deferred tax assets:                                                  |                   
|The components of deferred tax assets and liabilities are as follows: |                   
|Net operating loss and capital loss carryforwards                     |                   
|Unrealized losses on investments                                      |                   
|Foreign tax credits carryforwards                                     |                   
|                                                                      |                   
|Total deferred assets                                                 |                   
|Valuation allowance                                                   |                   
|                                                                      |                   
|Net deferred tax assets                                               |                   
|                                                                      |                   
|                                                                      |                   
|Deferred tax liabilities:                                             |                   
|Tax on equity in earnings of affiliates                               |                   
|Unrealized gain from securities                                       |                   
|Depreciation and amortization                                         |                   
|                                                                      |                   
|Total deferred tax liability                                          |                   
|                                                                      |                   
|                                                                      |                   
|Net deferred tax assets                                               |                   
|                                                                      |                   

As
a result of the adoption by the Company of FIN 48, on January 1, 2007, the Company
recognized, as a cumulative effect of change in accounting principle, a $2 million
increase in its liability for unrecognized tax benefits, which was accounted for as a
decrease in the January 1, 2007 balance of retained earnings. Furthermore, the Company
recognized an increase in deferred tax assets of approximately $2.0 million, which was
accounted for as an increase in the January 1, 2007 balance of retained earnings. during
2008 the company released a FIN 48 liability at the amount of $2.0 million due the laps of
statute of limitations.

30

---

---

The
following table summarizes the activity related to the Companys unrecognized tax
benefit liability:

|                                                  | U.S. dollars in thousands
|------------------------------------------------- | -------------------------
|
|
|
|
|Balance at the beginning of the year              |                          
|Increases related to previous years tax positions |                          
|Expiration of the statute of limitations for the  |                          
|assessment of taxes                               |                          
|                                                  |                          
|Balance at the end of the year                    |                          

All
of the Companys unrecognized tax benefit liability would affect the Companys
effective tax rate if recognized. Because of the existence of net operating loss
carryforwards, the resultant unfavorable resolution of any of the Companys uncertain
tax positions would not result in the imposition of interest or penalties. Accordingly,
the Company did not record any interest or penalties related to the unrecognized tax
benefit liability. The Company does not expect its unrecognized tax benefit liability to
change significantly over the next 12 months.

A
summary of open tax years by major jurisdiction is presented below:

| |           |                  
| | --------- | -----------------
|
|
|
|
| | Years:    | Jurisdiction:    
| | 2005-2008 | Israel           
| | 2007-2008 | United States (1)

(1)
          Includes federal, state, and provincial (or similar local jurisdictions) tax
          positions.

As
of December 31, 2008, valuation allowance is provided against tax benefits on foreign net
operating loss carryforwards of $26.4 million.

As
of December 31, 2008, the Company has foreign tax credits of $5.9 million that will expire
in the years 2009 through 2014.

As
of December 31, 2008, the Company has U.S. Federal net operating loss carryforwards of
approximately $27.3 million that will expire in the years 2024 through 2028. The
utilization of net operating loss carryforwards may be subject to substantial annual
limitations if there has been a significant change in ownership. Such a
change in ownership, as described in Section 382 of the Internal Revenue Code,
may substantially limit the Companys utilization of the net operating loss
carryforwards.

# Note 16 
Discontinued operations

On
August 5, 2007 the Company completed the sale of Am-Hal Am-Hal was a wholly owned
subsidiary which owns and operates a chain of senior citizens facilities located in
Israel. Accordingly, Am-Hal has been reported as a discontinued operation for all periods
presented.

Summary
income statement and condensed balance sheet information for Am-Hal is set forth below.

Am-Hal

|                                                                | Six MonthsEnded June 30,2007 | Year EndedDecember 31,2006
|--------------------------------------------------------------- | ---------------------------- | --------------------------
|
|
|
|
|Real estate income                                              |                              |                           
|                                                                |                              |                           
|Pre-tax income (loss) from discontinued operations              |                              |                           
|Income tax expense                                              |                              |                           
|After -tax gain (loss) from discontinued operations             |                              |                           
|Minority interest                                               |                              |                           
|Income (loss) from discontinued operations, net of income taxes |                              |                           

31

---

---

# Note 17 
Investments in Affiliates

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

|                                                     | As of December 31,
|---------------------------------------------------- | ------------------
|
|
|
|
|Bay Heart Ltd.                                       |                   
|Carmel Containers Systems Ltd.                       |                   
|Chemtankers Management B.V.                          |                   
|Conmart Ltd.                                         |                   
|Global Wind Energy                                   |                   
|Hod Hasharon Sport Center (1992) Limited Partnership |                   
|Temco International Ltd.                             |                   
|Trinet Investment in High-Tech Ltd.                  |                   
|Trinet Venture Capital Ltd.                          |                   

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

|                  | Fiscal Year Ended December 31,
|----------------- | ------------------------------
|
|
|
|
|Revenues          |                               
|Gross profit      |                               
|Net income (Loss) |                               

|                                             | As of December 31,
|-------------------------------------------- | ------------------
|
|
|
|
|Property and equipment                       |                   
|Other assets                                 |                   
|                                             |                   
|Total assets                                 |                   
|                                             |                   
|                                             |                   
|Total liabilities, including bank borrowings |                   
|                                             |                   

# Note 18  Operating
Segments 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.

The
chemical segment consists of the investment in Gadot, an Israeli Company, which operate in
distribution and marketing of liquid chemicals for raw materials used in the chemical
industry.

The
energy segment consists of the investment in EMG, an Egyptian Joint Stock Company, which
holds the right to supply natural gas to Israel through a pipe line to be constructed from
Egypt to Israel and GWE, a joint venture that focus on the new development and acquisition
of controlling interests in renewable energy .

The
real estate rental segment consisted of rental property owned in Israel and the United
States leased to unrelated parties, and operations of Am-Hal Ltd.,The real estate owned by
the Company was sold in September 2006 and on August 5, 2007, the Company sold all of its
interest in Am-Hal (see note 3).

The
leisure-time segment consists of Kfar Saba, the Companys 51%-owned subsidiary
located in Israel. In June 2006, the Company sold all of its interest in Coral World
International Limited (see Note 3).

The
finance segment consists of all other activity which is not part of the above segments.

32

---

---

|                                           | Fiscal Year Ended December 31,
|------------------------------------------ | ------------------------------
|
|
|
|
|Revenues:                                  |                               
|Chemical income                            |                               
|Finance                                    |                               
|Real estate income                         |                               
|Leisure-time                               |                               
|Intercompany adjustments                   |                               
|                                           |                               
|                                           |                               
|Equity in earning of affiliates            |                               
|                                           |                               
|Total                                      |                               
|                                           |                               
|Equity in Earnings (losses) of Affiliates: |                               
|Finance                                    |                               
|Chemical income                            |                               
|Real estate                                |                               
|Leisure-time                               |                               
|Others                                     |                               
|                                           |                               
|Total                                      |                               
|                                           |                               
|Interest Income:                           |                               
|Finance                                    |                               
|                                           |                               
|Interest Expense:                          |                               
|Finance                                    |                               
|Chemical                                   |                               
|Leisure-time                               |                               
|Intercompany adjustments                   |                               
|                                           |                               
|Total                                      |                               
|                                           |                               
|Pretax Operating (Loss) Income:            |                               
|Finance                                    |                               
|Chemical income                            |                               
|Real estate                                |                               
|Leisure-time                               |                               
|                                           |                               
|                                           |                               
|Equity in earning of affiliates            |                               
|                                           |                               
|Total                                      |                               
|                                           |                               
|Income (Benefit) Tax Expense:              |                               
|Finance                                    |                               
|Chemical income                            |                               
|Real estate                                |                               
|Leisure-time                               |                               
|                                           |                               
|Total                                      |                               
|                                           |                               
|Net Income from continuing operation       |                               
|Finance                                    |                               
|Chemical income                            |                               
|Real estate                                |                               
|Leisure-time                               |                               
|Others                                     |                               
|                                           |                               
|                                           |                               
|Minority interest, net                     |                               
|                                           |                               
|Total                                      |                               
|                                           |                               
|Total Assets for year end:                 |                               
|Finance                                    |                               
|Energy                                     |                               
|Chemicals                                  |                               
|Real estate                                |                               
|Leisure-time                               |                               
|Intercompany adjustments                   |                               
|                                           |                               
|Total                                      |                               
|                                           |                               
|Investments in Affiliates for year end:    |                               
|Finance                                    |                               
|Chemical                                   |                               
|Real estate                                |                               
|Leisure-time                               |                               
|                                           |                               
|Total                                      |                               
|                                           |                               
|Capital Expenditures:                      |                               
|Chemicals                                  |                               
|Finance                                    |                               
|Real estate                                |                               
|Leisure-time                               |                               
|                                           |                               
|Total                                      |                               
|                                           |                               
|Depreciation and Amortization:             |                               
|Finance                                    |                               
|Chemical income                            |                               
|Real estate                                |                               
|Leisure-time                               |                               
|                                           |                               
|Total                                      |                               
|                                           |                               

33

---

---

Corporate
office expense is principally applicable to the financing operation and has been charged
to that segment above. Revenues and pretax operating gain above exclude equity in earnings
of affiliates.

# Note 19 
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
cash and cash equivalents, the carrying amount is a reasonable estimate of fair value (see
Note 1(o)).

|(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.

|(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) | Financial
Instruments
|--- | ---------------------

The
fair value of the financial instruments included in other assets, accounts payable, and
accrued expenses presented at a fair value.

|(e) | Commitments
|--- | -----------

Due
to the relatively short term of commitments discussed in Note 18", the contract
value is considered to be at fair value.

|(f) | Financial
Assets and Financial Liabilities
|--- | ------------------------------------------

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.
Capital notes in the amount of $96.4 million that were issued to IIF have no maturity
date, bear no interest and are not linked to any index. Assuming maturity dates of 5 and
10 years, the fair value of those capital notes for such dates will be $70 million and
$50.9 million, respectively.

|                                     | As of December 31,
|------------------------------------ | ------------------
|
|
|
|
|Financial assets:                    |                   
|                                     |                   
|Cash and cash equivalents            |                   
|Deposits, notes and loans receivable |                   
|Investments                          |                   
|                                     |                   
|                                     |                   
|                                     |                   
|Financial liabilities:               |                   
|                                     |                   
|Notes and loans payable              |                   
|Debentures outstanding               |                   
|                                     |                   
|                                     |                   
|                                     |                   

34

---

---

# Note 20 
Commitments and Contingencies

| | (a) | The
combined minimum annual lease payments on Ampals corporate offices in
               New York and in Israel and its subsidiary Country Club Kfar Saba Ltd. in
2008                were $0.8 million. The lease of the corporate office in New York
expires in                2009, the lease of the office in Herzelia Pituach expires in
2016 and the Kfar                Saba lease expires in 2038. In the years 2009-2013, the
combined annual lease                payments on those premises will be in an aggregate
amount of $3.0 million, and                thereafter, an amount totaling $6.8 million.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2008 the Company paid annual lease payments of $14.9 million In the years 2009-2013, the
combined annual lease payments on those premises will be in an aggregate amount of $53.2
million.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | As
of December 31, 2008, Gadot leases seven vessels, with an aggregate loading
               capability of approximately 87,000 tons. The lease period for four of the
               vessels is until 2011, out of which one vessel purchase option has been
declared                to be exercised during 2009. The lease period for additional
three of the                vessels shall expire during 2009 with an option to extend the
time-charter terms                for two additional years (1+1).An additional leased
vessel (eight in number) was                returned to owner during October 2008.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
aggregate lease fees for the eight leased vessels in 2008 amounted to $34 million. In
2009, the lease payments are expected to amount to approximately $24.8 million and are
expected to decrease to $9.9 million for the year 2010 and thereafter are expected to
decrease to $6.4 million.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Gadot
has contracted a shipyard for the construction of four additional vessels built with a
loading capability of 17,500 each, for a consideration of approximately $29 million per
vessel. These vessels will be delivered during 2010 and 2011.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | The
combined minimum annual lease payments of Gadots offices and other           land
used in its operations is expected to amount to approximately $16.5           million.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) | Gadot
leases a 17,000 square meter storage tank facility located in the           northern bank
of the Kishon port in Haifa from the port authority. The lease           expires in 2022.
Gadot also leases an additional 56,000 square meter area from           the port
authority located in the southern terminal of the Kishon port in Haifa           in
connection with its storage and loading services. This lease expires in 2014.
          Gadot also owns an additional 20,000 square meters area adjacent to the
northern           terminal, serving as its Israeli logistics facility and for its
analytical and           quality assurance laboratory. The lease payments for the land
utilized by the           northern and southern terminals in 2008 was approximately $3.2
million. These           lease fees are calculated according to the amount of space
utilized by Gadot and           by the amount and type of materials transported. Gadot
has provided the port           authority with bank guarantees in the amount of
approximately $1.9 million,           linked to the Israeli Consumer Price Index, in
order to secure payments under           these leases.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) | Gadot
grants senior employees that are not interested parties performance           bonuses in
addition to their monthly salary. These bonuses are calculated as a           percentage
of profits, ranging between 5% and 8%.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (f) | One
of Gadots subsidiaries is party to an agreement from October 2005 to
          receive consulting, management and operating services from a former minority
          shareholder for a period of 5 years, in consideration of approximately $62,400
          per month. The agreement expires at October 2009.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (g) | The
Company has issued guarantees on bank loans to its investees and           subsidiaries
totaling $67.4 million as follows:
| | --- | ------------------------------------------------------------------------------------------------------------------------------

| | (1) | The
Company provided a $8.1 million guarantee on indebtedness incurred by Bay
          Heart.
| | --- | ----------------------------------------------------------------------------------------------

| | (2) | The
Company provided a $1.1 million guarantee to Galha (1960) Ltd           (Galha),
for the payment of the Companys subsidiary of a final           judgment, if
entered against the Companys subsidiary. (See below)
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | $58.2
million guarantees of Gadot for outstanding loans.
| | --- | --------------------------------------------------------

| | (h) | The
Company made a commitment to invest $2.8 million in Star II (2000) L.P.
| | --- | ---------------------------------------------------------------------------

| | (i) | Legal
Proceedings:
| | --- | ------------------

| | (1) | On
January 1, 2002, Galha filed a suit against the Company and other parties,
          including directors of Paradise Industries Ltd. (Paradise)
appointed           by the Company, in the Tel Aviv District Court, in the amount of NIS
11,560,000           ($3 million). Galha claimed that the Company, which was a
shareholder of           Paradise, and another shareholder of Paradise, misused funds
that were received           by Paradise from an insurance company for the purpose of
reconstructing an           industrial building owned by Galha and used by Paradise which
burnt down.           Paradise is currently involved in liquidation proceedings. Ampal
issued a           guarantee in favor of Galha for the payment of an amount of up to NIS
4,172,000           ($1,085,000) if a final judgment against the Company will be given.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

35

---

---

| | (2) | On
May 26, 2003, the Company and the directors of Paradise appointed by the
          Company filed a third party claim against Arieh Israeli Insurance Company Ltd.
          in the Tel Aviv District Court claiming that, to the extent the court decides
          that the directors of Paradise appointed by the Company will have to pay any
          amounts to Galha, Arieh will pay such amounts on behalf of the directors in
          accordance with the Directors and Officers insurance policy that the Company
had           at that time with Arieh. Arieh filed a statement of defense and stated that
the           policy does not cover the claim. The dispute was submitted to mediation. In
the           mediation procedure the parties arrived to an agreement that was approved
as a           judgment of the Tel Aviv District Court on January 13, 2009. According to
the           judgment Ampal paid the Plaintiffs an amount of NIS 834,200
          ($219,411), Arieh paid an amount of $150,000 and a third defendant
          paid an amount of NIS 135,800 ($35,718).The judgment stated that claim was
          declined against all Defendants and the guarantee Ampal issued in favor of the
          Galha was cancelled.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Gadot
has received third party notices in a number of lawsuits regarding           pollution of
the Kishon River in Israel. These lawsuits have been filed by           various claimants
who were harmed by the polluted water of the river, including           soldiers from
various units in the Israeli Defense Forces who trained in the           river, fishermen
who fished in the river, the Haifa rowing club and industrial           companies that
use the river. Some of the lawsuits are claims for monetary           damages (some of
the claims are unlimited in amount; one is for approximately $6           million) and
some are for injunctions against further pollution of the river.           Gadot denies
liability in all these claims and has filed statements of defense           for each
claim.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Part
of Gadots storage tank facility is leased from the Haifa port           authority.
In 2001 the port authority requested that Gadot participate in an           offer to find
a consultant to examine ground contamination in the area           surrounding the
facility. Gadot has responded, denying the existence of ground           contamination
and, in any case, that it is the source of such contamination.           Gadot believes
that if there is contamination, its source is the contaminated           waters of the
Kishon River or the Mediterranean Sea.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

---

# BAY HEART LTD.

# FINANCIAL STATEMENTS
 CONSOLIDATED AND COMPANY

# AS OF DECEMBER 31, 2006



---

---

# BAY HEART LTD.

FINANCIAL STATEMENTS - CONSOLIDATED AND COMPANY
AS OF DECEMBER 31, 2006

# Contents

|                                                 | Page   
|------------------------------------------------ | -------
|
|Independent auditors' report                     | 1 - 2  
|                                                
|Financial statements:                           
|                                                
|Balance sheets - consolidated                    | 3      
|                                                
|Balance sheet - Company                          | 4      
|                                                
|Statements of operations - consolidated          | 5      
|                                                
|Statements of operations - Company               | 6      
|                                                
|Statement of changes in shareholders' deficiency | 7      
|                                                
|Statements of cash flows - consolidated          | 8 - 9  
|                                                
|Statements of cash flows - Company               | 10 - 11
|                                                
|Notes to the financial statements                | 12 - 45
|                                                 |        



---

---

INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF
BAY HEART LTD.

We have audited the accompanying
balance sheets of Bay Heart Ltd. (the Company) as of December 31, 2006 and
2005, and the consolidated balance sheets as of those dates, and the related statements of
operations, changes in shareholders deficiency and cash flows  of the Company
and on a consolidated basis  for each of the three years in the period ended
December 31, 2006. 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 the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial
position  of the Company and on a consolidated basis  as of December 31, 2006
and 2005, and the results of operations, changes in shareholders deficiency and cash
flows  of the Company and on a consolidated basis  for each of the three years
in the period ended December 31, 2006, in conformity with accounting principles generally
accepted in Israel.

Accounting principles generally
accepted in Israel differ in certain respects from accounting principles generally
accepted in the United States. With respect to these financial statements, the difference
in the application of the latter is described in Note 19.

As described in Note 2A, the
financial statements are presented in reported amounts, in conformity with Accounting
Standards of the Israel Accounting Standards Board.

1

---

---

The condensed consolidated financial
information in U.S. dollars presented in Note 18 to the financial statements, prepared at
the request of an investor, represents a translation of the Companys financial
statements in nominal values, as stated in Note 18A. In our opinion, such translation into
U.S. dollars was appropriately performed on the basis stated in Note 18A.

As described in Note 1C to the
financial statements regarding the Companys business condition, the Company has
ongoing losses, a working-capital deficit, shareholders deficiency and negative cash
flows from operating activities. As stated in that note, the continuance of the
Companys operations and its ability to satisfy its short-term liabilities is
contingent upon the attainment of financing from the shareholders and/or bank financing
arrangements.

Brightman Almagor & Co.
Certified Public Accountants
Member firm of Deloitte Touche Tohmatsu
Haifa, Israel, February 6, 2007.

2

---

---

BAY HEART LTD.
CONSOLIDATED BALANCE SHEETS(in thousand NIS)

|                                             |  | December 31,
|-------------------------------------------- |  | ------------
|
|
|
|
|Current assets                               |  |             
|Cash and cash equivalents                    |  |             
|Trade accounts receivable                    |  |             
|Other receivables and current assets         |  |             
|                                             |  |             
|                                             |  |             
|                                             |  |             
|                                             |  |             
|Investments, loans and long-term receivables |  |             
|                                             |  |             
|                                             |  |             
|Fixed assets, net                            |  |             
|                                             |  |             
|                                             |  |             
|Other assets, net                            |  |             
|                                             |  |             
|                                             |  |             
|                                             |  |             
|                                             |  |             
|Current liabilities                          |  |             
|Short-term bank borrowings                   |  |             
|Trade accounts payable                       |  |             
|Other payables and current liabilities       |  |             
|                                             |  |             
|                                             |  |             
|                                             |  |             
|                                             |  |             
|Long-term liabilities                        |  |             
|Bank loans                                   |  |             
|Due to interested parties                    |  |             
|Tenant deposits                              |  |             
|                                             |  |             
|                                             |  |             
|                                             |  |             
|                                             |  |             
|Commitments and contingent liabilities       |  |             
|                                             |  |             
|Shareholders' deficiency                     |  |             
|                                             |  |             
|                                             |  |             
|                                             |  |             
|                                             |  |             

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

|                        |                       |              
|----------------------- | --------------------- | -------------
|
|
|
|
|                        |                       |              
|Nitzan Ariel            | Uri Dori              | Anat Nursella
|Chief Executive Officer | Chairman of the Board | Controller   
|                        |                       |              

Approval date of the financial statements:  February 6, 2007

3

---

---

BAY HEART LTD.
BALANCE SHEETS - COMPANY(in thousand NIS)

|                                             |  | December 31,
|-------------------------------------------- |  | ------------
|
|
|
|
|Current assets                               |  |             
|Cash and cash equivalents                    |  |             
|Trade accounts receivable                    |  |             
|Other receivables and current assets         |  |             
|                                             |  |             
|                                             |  |             
|                                             |  |             
|                                             |  |             
|Investments, loans and long-term receivables |  |             
|                                             |  |             
|                                             |  |             
|Fixed assets, net                            |  |             
|                                             |  |             
|                                             |  |             
|Other assets                                 |  |             
|                                             |  |             
|                                             |  |             
|                                             |  |             
|                                             |  |             
|Current liabilities                          |  |             
|Short-term bank borrowings                   |  |             
|Trade accounts payable                       |  |             
|Other payables and current liabilities       |  |             
|                                             |  |             
|                                             |  |             
|                                             |  |             
|                                             |  |             
|Long-term liabilities                        |  |             
|Bank loans                                   |  |             
|Due to interested parties                    |  |             
|Tenant deposits                              |  |             
|Accrued severance pay, net                   |  |             
|                                             |  |             
|                                             |  |             
|                                             |  |             
|                                             |  |             
|Commitments and contingent liabilities       |  |             
|                                             |  |             
|Shareholders' deficiency                     |  |             
|                                             |  |             
|                                             |  |             
|                                             |  |             
|                                             |  |             

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

4

---

---

BAY HEART LTD.
STATEMENTS OF OPERATIONS - CONSOLIDATED(in thousand NIS)

|                                           |  | Year ended December 31,
|------------------------------------------ |  | -----------------------
|
|
|
|
|Revenues                                   |  |                        
|                                           |  |                        
|Operating expenses                         |  |                        
|                                           |  |                        
|                                           |  |                        
|Gross profit                               |  |                        
|                                           |  |                        
|General and administrative expenses        |  |                        
|                                           |  |                        
|                                           |  |                        
|Operating income (loss)                    |  |                        
|                                           |  |                        
|Financing expenses, net                    |  |                        
|                                           |  |                        
|                                           |  |                        
|Loss after financing expenses, net         |  |                        
|                                           |  |                        
|Other expenses, net                        |  |                        
|                                           |  |                        
|                                           |  |                        
|Loss for the year                          |  |                        
|                                           |  |                        
|                                           |  |                        
|Loss per share (in NIS)                    |  |                        
|                                           |  |                        
|Loss per share of NIS 1.00 par value       |  |                        
|                                           |  |                        
|                                           |  |                        
|Number of shares used in above computation |  |                        
|                                           |  |                        
|                                           |  |                        

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

5

---

---

BAY HEART LTD.
STATEMENTS OF OPERATIONS - COMPANY(in thousand NIS)

|                                           |  | Year ended December 31,
|------------------------------------------ |  | -----------------------
|
|
|
|
|Revenues                                   |  |                        
|                                           |  |                        
|Operating expenses                         |  |                        
|                                           |  |                        
|                                           |  |                        
|Gross profit                               |  |                        
|                                           |  |                        
|General and administrative expenses        |  |                        
|                                           |  |                        
|                                           |  |                        
|Operating income (loss)                    |  |                        
|                                           |  |                        
|Financing expenses, net                    |  |                        
|                                           |  |                        
|                                           |  |                        
|Loss after financing expenses, net         |  |                        
|                                           |  |                        
|Other expenses, net                        |  |                        
|                                           |  |                        
|                                           |  |                        
|Loss before share in losses of subsidiary  |  |                        
|                                           |  |                        
|Share in losses of subsidiary              |  |                        
|                                           |  |                        
|                                           |  |                        
|Loss for the year                          |  |                        
|                                           |  |                        
|                                           |  |                        
|Loss per share (in NIS)                    |  |                        
|                                           |  |                        
|Loss per share of NIS 1.00 par value       |  |                        
|                                           |  |                        
|                                           |  |                        
|Number of shares used in above computation |  |                        
|                                           |  |                        
|                                           |  |                        

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

6

---

---

BAY HEART LTD.
STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIENCY(in thousand NIS)

|                            | Share
capital | Deficit | Total
|--------------------------- | ------------- | ------- | -----
|
|
|
|
|Balance - January 1, 2004   |               |         |      
|                            |               |        
|Activity during 2004        |               |        
|(Reported amounts):         |               |        
|Loss for the year           |               |         |      
|                            |               |         |      
|                            |               |        
|Balance - December 31, 2004 |               |         |      
|                            |               |        
|Activity during 2005        |               |        
|(Reported amounts):         |               |        
|Loss for the year           |               |         |      
|                            |               |         |      
|                            |               |        
|Balance - December 31, 2005 |               |         |      
|                            |               |        
|Activity during 2006        |               |        
|(Reported amounts):         |               |        
|Loss for the year           |               |         |      
|                            |               |         |      
|                            |               |        
|Balance -December 31, 2006  |               |         |      
|                            |               |         |      
|                            |               |         |      

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

7

---

---

BAY HEART LTD.
STATEMENTS OF CASH FLOWS - CONSOLIDATED(in thousand NIS)

|                                                       | Year ended December 31,
|------------------------------------------------------ | -----------------------
|
|
|
|
|CASH FLOWS - OPERATING ACTIVITIES                      |                        
|Loss for the year                                      |                        
|Adjustments required to present cash flows from        |                        
|operating activities (Appendix A)                      |                        
|                                                       |                        
|Net cash used in operating activities                  |                        
|                                                       |                        
|                                                       |                        
|CASH FLOWS - INVESTING ACTIVITIES                      |                        
|Additions to fixed assets                              |                        
|Investments in long-term loan                          |                        
|Investments in other assets                            |                        
|                                                       |                        
|Net cash used in investing activities                  |                        
|                                                       |                        
|                                                       |                        
|CASH FLOWS - FINANCING ACTIVITIES                      |                        
|Receipt of long-term liabilities from interested       |                        
|parties                                                |                        
|Repayment of long-term bank loans                      |                        
|Short-term bank borrowings, net                        |                        
|                                                       |                        
|Net cash provided by financing activities              |                        
|                                                       |                        
|                                                       |                        
|Increase in cash and cash equivalents                  |                        
|                                                       |                        
|Cash and cash equivalents at the beginning of the year |                        
|                                                       |                        
|                                                       |                        
|Cash and cash equivalents at the end of the year       |                        
|                                                       |                        

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

8

---

---

BAY HEART LTD.
STATEMENTS OF CASH FLOWS - CONSOLIDATED(in thousand NIS)

|                                                                                      | Year ended December 31,
|------------------------------------------------------------------------------------- | -----------------------
|
|
|
|
|Appendix A:       Adjustment required to present cash flows from operating activities |                        
|                                                                                      |                        
|Income and expenses not involving cash flows:                                         |                        
|Depreciation and amortization                                                         |                        
|Adjustment (erosion) of long-term liabilities                                         |                        
|Provision for impairment of assets                                                    |                        
|Changes in accrued severance pay, net                                                 |                        
|                                                                                      |                        
|                                                                                      |                        
|                                                                                      |                        
|                                                                                      |                        
|Changes in assets and liabilities:                                                    |                        
|Decrease in trade accounts receivable                                                 |                        
|Decrease (increase) in other receivables and current assets                           |                        
|Increase (decrease) in trade accounts payable                                         |                        
|Increase (decrease) in other payables current liabilities                             |                        
|Increase (decrease) in tenant deposits                                                |                        
|                                                                                      |                        
|                                                                                      |                        
|                                                                                      |                        
|                                                                                      |                        
|                                                                                      |                        
|                                                                                      |                        
|                                                                                      |                        
|Appendix B:       Non-cash transactions                                               |                        
|                                                                                      |                        
|Conversion of long-term loans into short term loans                                   |                        
|                                                                                      |                        
|                                                                                      |                        

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

9

---

---

BAY HEART LTD.
STATEMENTS OF CASH FLOWS - COMPANY(in thousand NIS)

|                                                         | Year ended December 31,
|-------------------------------------------------------- | -----------------------
|
|
|
|
|CASH FLOWS - OPERATING ACTIVITIES                        |                        
|Loss for the year                                        |                        
|Adjustments required to present cash flows               |                        
|from operating activities (Appendix A)                   |                        
|                                                         |                        
|Net cash used in operating activities                    |                        
|                                                         |                        
|                                                         |                        
|CASH FLOWS - INVESTING ACTIVITIES                        |                        
|Additions to fixed assets                                |                        
|Investment in joint venture                              |                        
|Other assets                                             |                        
|                                                         |                        
|Net cash used in investing activities                    |                        
|                                                         |                        
|                                                         |                        
|CASH FLOWS - FINANCING ACTIVITIES                        |                        
|Receipt of long-term liabilities from interested parties |                        
|Repayment of long-term bank loans                        |                        
|Short-term bank borrowings, net                          |                        
|                                                         |                        
|Net cash provided by financing activities                |                        
|                                                         |                        
|                                                         |                        
|Increase in cash and cash equivalents                    |                        
|                                                         |                        
|Cash and cash equivalents at the beginning of the year   |                        
|                                                         |                        
|                                                         |                        
|Cash and cash equivalents at the end of the year         |                        
|                                                         |                        
|                                                         |                        

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

10

---

---

BAY HEART LTD.
STATEMENTS OF CASH FLOWS - COMPANY(in thousand NIS)

|                                                                                             | Year ended December 31,
|-------------------------------------------------------------------------------------------- | -----------------------
|
|
|
|
|Appendix A:       Adjustment required to present cash flows provided by operating activities |                        
|                                                                                             |                        
|Income and expenses not involving cash flows:                                                |                        
|Depreciation and amortization                                                                |                        
|Adjustment (erosion) of long-term liabilities                                                |                        
|Provision for impairment of assets                                                           |                        
|Erosion in respect of a capital note issued to the Subsidiary                                |                        
|Changes in accrued severance pay                                                             |                        
|Company's equity in losses of the Subsidiary                                                 |                        
|                                                                                             |                        
|                                                                                             |                        
|                                                                                             |                        
|                                                                                             |                        
|Changes in assets and liabilities:                                                           |                        
|Decrease (increase)  in trade accounts receivable                                            |                        
|Decrease (increase) in receivables and other current assets                                  |                        
|Increase (decrease) in trade accounts payable                                                |                        
|Increase (decrease) in payables and other current liabilities                                |                        
|Increase (decrease) in tenant deposits                                                       |                        
|                                                                                             |                        
|                                                                                             |                        
|                                                                                             |                        
|                                                                                             |                        
|                                                                                             |                        
|                                                                                             |                        
|Appendix B:       Non-cash transactions                                                      |                        
|                                                                                             |                        
|Conversion of long-term loans into short-term loans                                          |                        
|                                                                                             |                        

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

11

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 1 |  | General
|------ | - | -------

| | A. | Activity
| | -- | --------

| | Bay
Heart Ltd. is a private company which owns a shopping center (the Mall)
located in Haifa bay, known as Lev Hamifratz. The Subsidiary has been engaged
since its inception in the planning and construction of a commercial-center project near
the Mall (see Note 11B).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Definitions
| | -- | -----------

| |                                            |   |                                                                                                                                                                    
| | ------------------------------------------ | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|
|
| | The Company                                |  | Bay Heart Ltd.                                                                                                                                                     
| |                                           
| | The Subsidiary                             |  | Bay Heart Properties (1994) Ltd. (wholly owned).                                                                                                                   
| |                                           
| | Proportionally  Consolidated joint venture |  | a jointly controlled partnership, whose financial statements are proportionally consolidated in the Company's financial statements.                                
| |                                           
| | Interested party                           |  | as defined in the Israeli Securities Regulations (Preparation of Annual Financial Statements), 1993.                                                               
| |                                           
| | Related parties                            |  | as defined in Opinion No. 29 of the Institute of Certified Public Accountants in Israel.                                                                           
| |                                           
| | Controlling shareholder                    |  | as defined in the Israeli Securities Regulations (Disclosure of Transactions Between a Company and its Controlling Shareholders in the Financial Statements), 1996.
| |                                           
| | CPI                                        |  | the Israeli consumer-price index.                                                                                                                                  
| |                                            |   |                                                                                                                                                                    

| | C. | Companys
business condition
| | -- | ----------------------------

| | (1) | At
December 31, 2006 the Group had ongoing losses, a working capital deficit of
          NIS 27.6 million mainly due to short-term bank borrowings and the Company also
          had a shareholders deficiency of NIS 48.3 million. In addition, for the
          year ended December 31, 2006 the Group had losses in the amount of NIS 7.7
          million and negative cash flows from operations totaling NIS 3 million.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The
Companys shareholders provided guarantees totaling NIS 65 million for
          bank loans. In addition, during 2005 the management signed an agreement with
the           bank converting short-term credit into a long-term loan in the amount of
NIS 150           millions to be paid over a period of 15 years. According to terms of
agreement,           the long-term loan is to be paid in 60 quarterly installments of NIS
3.9 million           each starting April 2005.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
shareholders guarantee the quarterly payments to the bank up to NIS 65 million. In
addition, the loan under the agreement, the Companys land is security for the loan.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 1 |  | General (Cont.)
|------ | - | ---------------

| | C. | Companys
business condition (Cont.)
| | -- | ------------------------------------

| | (2) | (Cont.)
| | --- | -------

| | As
part of the negotiation, the bank has agreed to give the Company an additional credit
line in the amount of NIS 18.5 million to be used towards the renovation of the mall,
whereby the main expense would be due to the construction of the Assuta Hospital. The
credit line will be initially set up as short-term credit for the duration of the
renovation project. The Companys shareholders provided full guarantees to the bank
for that additional short-term credit.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Company
management is contemplating significant efficiency-improvement measures
          consisting primarily of achieving full occupancy of the mall while changing its
          tenant composition. Management believes that these steps, together with
          obtaining of financing sources and financing arrangement with the banks, may
          improve operating cash flows and enable the Company to fulfill its obligations.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
light of the above outline, the continuation of the Companys activities and the
fulfillment of its obligations are contingent upon the receipt of financing from its
shareholders in a manner facilitating the repayment of its short-term liabilities and/or
reaching financing agreements with its banks.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | During
December 2006, the rental contract, between the Company and Supersol           Ltd.
(party at interest) for renting an area of 3,400 square meters which yield
          annually income due to rental and managing fees of total 2.4 million dollars,
          ended. The Companys management plans to redivide the area and rent it to
          small shops in return of higher rental and managing fees. Till the financial
          statements approval date, the company hasnt found yet an alternative
          rentals for the area as mentioned above.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Starting
mid July, 2006 and continuing through mid August, 2006, the state of           Israel was
in a military conflict with the Hezbollah organization in Lebanon            a
conflict that included missile attacks on civilian populations in the           northern
region of Israel. The mall, located in the Haifa bay region, was           alternately
open and operating according to the instructions of the home front           command. The
military conflict affected the 3rd quarter operational           results of
2006.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Use
of estimates
| | -- | ----------------

| | The
preparation of the financial statements in accordance with generally accepted accounting
principles requires that management makes estimates and assumptions pertaining to
transactions and matters whose ultimate effect on the financial statements cannot be
precisely determined at the time of financial statement preparation. Although these
estimates are made on the basis of the best judgment, actual results may differ from
these estimates.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 2 |  | Significant Accounting Policies
|------ | - | -------------------------------

| | A. | Ceasing
the adjustment of financial statements and financial reporting in           reportedamounts
| | -- | ---------------------------------------------------------------------------------------------------

| | 1. | Definitions:
| | -- | ------------

| |                 |   |                                                                                                                                                                
| | --------------- | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|
|
| | Adjusted amount |  | a nominal, historical amount adjusted to the CPI of December 2003 in accordance with Opinion No. 36 of the Institute of Certified Public Accountants in Israel.
| |                 |   |                                                                                                                                                                
| | Reported amount |  | an adjusted amount plus nominal values added, and of net of any amounts deducted, subsequent to December 31, 2003.                                             
| |                 |   |                                                                                                                                                                

| | 2. | Accounting
Standard No. 12 (Ceasing the Adjustment of Financial                Statements)
went into effect on January 1, 2004, following which the                Company
discontinued, starting January 1, 2004, the adjustment of its financial
               statements based on the changes in the general purchasing power of the
Israeli                currency. Starting in 2004 the Groups financial statements
are prepared in                reported amounts, with the comparative figures
pertaining to periods                up to (and including) December 31, 2003 included in
adjusted                amounts.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
reported and/or adjusted amounts of non-monetary items reflect their cost in terms of
reported amounts and/or amounts adjusted to the changes in the consumer-price index (CPI)
until December 2003 while not necessarily reflecting these items market value or
value to the business.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Method
for determining the reported amounts in the annual financial statements           of 2005
and 2006.
| | -- | ----------------------------------------------------------------------------------------------------------

| | Balance
sheet:
| | --------------

| |  | Monetary
items (whose balance-sheet amount reflects current or realizable value at the
balance-sheet date) have been included at their nominal values at the financial
statements date.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Non-monetary
items have been included at their adjusted amount plus nominal amounts added
during the reported period and less amounts deducted during the reported period.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Investments
in subsidiaries have been included on the basis of these companiesadjusted
financial statements.
| | - | -------------------------------------------------------------------------------------------------------------

14

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 2 |  | Significant Accounting Policies (Cont.)
|------ | - | ---------------------------------------

| | A. | Ceasing
adjustment of financial statements and financial reporting in           reported amounts(Cont.)
| | -- | -------------------------------------------------------------------------------------------------------

| | 4. | Method
for determining the reported amounts in the annual financial statements                of
2005 and 2006 (Cont.)
| | -- | ----------------------------------------------------------------------------------------------------------------------

| | Statement
of operations:
| | ------------------------

| |  | Income
and expenses, including financing, have been included in nominal values.
| | - | -------------------------------------------------------------------------------

| |  | Income
and expenses stemming from non-monetary items (mainly depreciation) have been computed
concurrently with the computation of their corresponding balance-sheet amounts.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Principles
of consolidation
| | -- | ---------------------------

| | The
consolidated financial statements include full consolidation of the Subsidiary. Material
transactions between the Company and its Subsidiary as well as balance and intercompany
balance have been fully eliminated.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
consolidated data is based on the audited financial statements of the Subsidiary, which
has been fully consolidated following the adaptation of its accounting policies with
those of the Company.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Cash
equivalents
| | -- | ----------------

| | Cash
equivalents include unrestricted bank demand and time deposits with original maturity
dates not exceeding three months.
| | ----------------------------------------------------------------------------------------------------------------------------

| | D. | Allowance
for doubtful accounts
| | -- | -------------------------------

| | The
allowance is computed specifically in respect of amounts, the collection of which in
managements opinion is doubtful.
| | --------------------------------------------------------------------------------------------------------------------------

15

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 2 |  | Significant Accounting Policies (Cont.)
|------ | - | ---------------------------------------

| | E. | Fixed
assets
| | -- | ------------

| | Fixed
assets are stated at cost, net of accumulated depreciation and net of a provision for
impairment in value. Impairment has been computed on the basis of Israeli Accounting
Standard No. 15 (see Note 2G). Depreciation is computed by the straight-line method,
based on the estimated useful lives of the assets, at the following annual rates:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                | %   
| | ------------------------------ | ----
|
|
|
|
| | Commercial center- building    | 2-7 
| | Machinery and equipment        | 10  
| | Office furniture and equipment | 6-33
| |                                |     

| | F. | Other
assets
| | -- | ------------

| | Other
assets, which constitute costs incurred by the Company as part of its participation in
the construction of a railway terminal which is connected to its owned commercial center,
are stated at cost, net of accumulated amortization computed at an annual rate of 10% and
a provision for impairment in value. The latter is computed on the basis of Israel
Accounting Standard No. 15 (see Note 2G and Note 2G).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | G. | Provision
for impairment of assets
| | -- | ----------------------------------

| | Pursuant
to Accounting Standard No. 15 of the Israel Accounting Standards Board, the Company
examines the recoverable amount of its long-lived assets whenever there exists any
indication of their potential impairment. If an assets book value exceeds its
recoverable amount, which is established by the higher of the net selling price and its
value in use, the Company recognizes the loss from this impairment in asset value. An
impairment recognized in the past may be reversed only if a change occurs in the
estimates used in determining the recoverable amount from the date of last loss
recognition. The book value following that reversal may not exceed the value assigned to
that asset had this impairment loss not been recorded in prior years (see Notes 5 and 6).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | H. | Revenue
recognition
| | -- | -------------------

| | Service
revenues are recognized over the period of the service.
| | ---------------------------------------------------------------

16

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 2 |  | Significant Accounting Policies (Cont.)
|------ | - | ---------------------------------------

| | I. | Earnings
(loss) per share
| | -- | -------------------------

| | Earnings
(loss) per share are computed based on the weighted average number of shares outstanding
during the year.
| | ------------------------------------------------------------------------------------------------------------------

| | J. | Transactions
with a controlling party
| | -- | -------------------------------------

| | An
interest-bearing capital note issued to the Company by its Subsidiary has been accounted
for in accordance with the Israeli Securities Regulations (Disclosure of Transactions
Between a Company and its Controlling Shareholder), 1996.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | K. | Fair
value of financial instruments
| | -- | -----------------------------------

| | The
financial instruments of the Company and its Subsidiary mainly include non-derivative
assets and liabilities.
| | -----------------------------------------------------------------------------------------------------------------

| | Non-derivative
assets include: cash and cash equivalents, trade accounts receivable, receivables and
other current assets. Non-derivative liabilities include short-term bank borrowings,
trade accounts payable, payables and other current liabilities, long-term bank loans,
amounts due to interested parties and tenant deposits. Due to the nature of these
financial instruments, their fair value is usually identical or close to the value at
which they are presented in the financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | L. | Exchange
rate and linkage
| | -- | -------------------------

| | CPI
and the dollar exchange-rate data:
| | --------------------------------------

|             | NIS/$ | CPI (index "in respect of")
(1998 base year)
|------------ | ----- | --------------------------------------------
|
|December 31, |       |                                             
|2006         |       |                                             
|2005         |       |                                             
|             |       |                                             

|%                                                       | %
|------------------------------------------------------- | -
|
|
|
|
|Increase (decrease) during the year
ended December 31 - |  
|2006                                                    |  
|2005                                                    |  
|                                                        |  

17

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 2 |  | Significant Accounting Policies (Cont.)
|------ | - | ---------------------------------------

| | M. | Effect
of new accounting standards
| | -- | ----------------------------------

| | Accounting
Standard No. 22  Financial Instruments  Disclosure and Presentation:
| | ---------------------------------------------------------------------------------

| | In
July 2005, the Israel Accounting Standards Board (IASB) issued Accounting Standard No. 22
 Financial Instruments  Disclosure and Presentation (hereinafter
 the Standard). The Standard sets down the presentation provisions for
financial instruments and the fair disclosure required thereof in the financial
statements. The presentation provisions address the rules for the allocation and
classification of financial instruments into financial assets, financial liabilities or
equity instruments, the classification of interest, dividends, and losses and gains
related thereto, and the conditions that are required for the offset of financial assets
against financial liabilities. The Standard requires disclosure of information pertaining
to the factors that impact on the amount, timing, and certainty of the Companys
future cash flows related to financial instruments and the accounting policy implemented
in connection with such instruments. The Standard also requires disclosure of information
pertaining to the nature and scope of the use that the Company makes of financial
instruments, the business needs they serve, the risks connected thereto, and management
policy pertaining to controlling such risks. The Standard supersedes Opinion No. 48 the
Accounting Treatment of Option Warrants and Opinion No. 53 the Accounting
Treatment of Convertible Liabilities of the Institute of Certified Public
Accountants in Israel. The Standard applies to the financial statements for periods
commencing on or after January 1, 2006. Accounting Standard No. 22 requires prospective
application of its provisions. Accordingly, comparative amounts presented in the
financial statements of periods commencing on the effective date of the Standard will not
be restated.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the opinion of the Company, the effect of the new standard on the results of operations,
financial position, and cash flows of the Company will be immaterial.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accounting
Standard No. 24  Stock-Based Payment:
| | -------------------------------------------------

| | In
September 2005 the Israel Accounting Standards Board issued Accounting Standard No.
24 , Stock-Based Payment. The Standard requires the recognition in the
financial statements of stock-based-payment transactions, including those with employees
or other parties and which are to be settled in cash, other assets or equity
instruments. As a result, among other things, expenses pertaining to grants of
shares and options to employees are to be allocated over the grants vesting
periods based on each grants fair value at the grant date. The Standard establishes
measurement rules, and distinct requirements for transactions which are to
be settled by equity instruments, transactions which are to be settled by cash, and
transactions whose terms enable one of the parties to elect between settlement
in cash or by an equity instrument.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18

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---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 2 |  | Significant Accounting Policies (Cont.)
|------ | - | ---------------------------------------

| | M. | Effect
of new accounting standards (cont.)
| | -- | ------------------------------------------

| | Accounting
Standard No. 24  Stock-Based Payment (cont.):
| | ---------------------------------------------------------

| | The Standard
also describes various disclosure requirements as to the share-based-payment payments.
Standard No. 24 will go into effect for periods beginning January 1, 2006 or thereafter,
with earlier implementation recommended.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Standards guidance with respect to share-based payment to be settled by an equity
instrument are to be implemented in regard to any grant made subsequent to March 15, 2005
but not yet vested by January 1, 2006. Since this Standard will be implemented in regard
to periods commencing January 1, 2006, no expenses are allocated in the 2005 financial
statements in respect of grants made subsequent to March 15, 2005. Nevertheless, in the
2006 financial statements, the 2005 financial statements are to be restated to reflect
the expenses for that period.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
effect of the Standard on the Companys financial statements is not expected to be
material.
| | ------------------------------------------------------------------------------------------------

| | Accounting
Standard No. 21  Earnings per Share:
| | ------------------------------------------------

| | In
February 2006 the Israel Accounting Standards Board issued Accounting Standard No. 21,
Earnings per Share (the Standard). Upon the introduction of this
Standard, Opinion No. 55 of the Institute of Certified Public Accountants in Israel on
Earnings per Share will be superseded.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Standard establishes that an entity is to compute its basic earnings per share in regard
to income or loss attributable to ordinary shareholders of the reporting entity, and that
the entity shall compute its basic EPS with respect to income or loss from continuing
operations attributable to the ordinary shareholders of the reported entity, should such
be presented.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Basic
earnings per share is to be computed by dividing income or loss attributed to holders of
ordinary shares of the reporting entity (numerator), by the weighted average of the
outstanding ordinary shares (denominator) during the period.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
its computation of diluted earnings per share, the entity must adjust its income or loss
attributable to the ordinary shareholders of the reporting entity and the weighted
average of the outstanding shares for the effects of all the dilutive potential ordinary
shares.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with the Standards guidance, the Standard will apply to financial
statements for periods starting January 1, 2006 and thereafter. The Standard further
establishes that its guidance is to be applied retroactively in respect of comparative
earnings per share data relating to prior periods.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company believes that the effect of the Standard on its earnings (loss) per share is not
expected to be material.
| | ---------------------------------------------------------------------------------------------------------------------

19

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 2 |  | Significant Accounting Policies (Cont.)
|------ | - | ---------------------------------------

| | M. | Effect
of new accounting standards (cont.)
| | -- | ------------------------------------------

| | Standard
No. 25 Revenues:
| | --------------------------

| | In
February 2006 the Israel Accounting Standards Board published Accounting Standard No.25 (Revenues),
which establishes rules for the recognition, measurement and presentation of revenues
arising from the:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | sale
of goods; rendering of services; and use by others of entity assets yielding interest,
royalties and dividends. The standard states that an entity should measure its revenues
based on the fair value of the proceeds received and/or entitled to. Assets and
liabilities included in the balance sheet on December 31, 2005 in amounts different than
those recognized before this standards implementation will be adjusted on January
1, 2006 to the amounts recognized based on this standard, with the effect of this
adjustment recognized as a cumulative effect of an accounting change.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
believes that the effect of this new standard on the Companys financial position,
results of operations and cash flows is not expected to be material.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Standard
 No. 25 will  apply to  financial  statements  covering  periods  beginning
                     January 1, 2006 and onwards.
| | --------------------------------------------------------------------------------------------------------------------------------------

| | N. | Assets
rental contracts
| | -- | ------------------------

| | The
company classifies asset rental contracts either as a financial or operational lease
according to the requirements detailed in IAS Standard No. 17 (international standard).
According to the international standard, the lease will be classified as financial if it
actually transfers all included risks and benefits to the lessee. The lease will be
classified as operational if there is no actual transfer of all risks and benefits
included in ownership.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
international standard classifies the lease according to the financial nature of the
transaction. The standard presents a number of examples which can be used each on its
own, or as a combination, to indicate whether the lease is financial as follows:
transferring actual ownership of the asset to the lessee; giving the option of
acquisition to the lessee at an opportune cost; verifying that the time period of the
lease is consistent with the majority of the financial lifetime of the leased; verifying
that the present value of the cash flow is equal to the fair value of the leased;
verifying that the leased is unique in character such that only the lessee will be able
to use the leased without any substantial adjustments.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
company examined the rent transaction of an asset in the mall to Asutaaccording
to the nature of the transaction and the examples as described above. The company views
the financial nature of the Asuta transaction as a long term lease.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 2 |  | Significant Accounting Policies (Cont.)
|------ | - | ---------------------------------------

| | N. | Assets
rental contracts (cont.)
| | -- | --------------------------------

| | According
to the rental contract between the company and Asuta, the legal and proprietary ownership
of the rented does not transfer to Asuta. The time period of the rent, as written in the
contract, is fifteen years, with no option for extension, and does not constitute the
majority of the lifetime of the rented. The present value of the expected cash flow to be
received during the time period of the rented is not close to the fair value of the
rented. As a result of the multi-purpose construction of the rented, at the end of the
contractual time-period of the rented, the renter will be able to use it for other
purposes, and rent to alternative renters without any significant cost adjustments
compared to the fair value of the rented.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | According
to the nature of the transaction and the whole of the examples as described above, the
transaction was classified as an operational lease.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

|Note 3 |  | Additional Details Concerning Current Assets
|------ | - | --------------------------------------------

| |    |                                       | Consolidated | Company
| | -- | ------------------------------------- | ------------ | -------
|
|
|
|
| | A. | Trade accounts receivable             |              |        
| |    |                                       |              |        
| |    | Outstanding accounts                  |              |        
| |    | Post-dated checks receivable          |              |        
| |    |                                       |              |        
| |    |                                       |              |        
| |    | Less: allowance for doubtful accounts |              |        
| |    |                                       |              |        
| |    |                                       |              |        
| |    |                                       |              |        
| |    |                                       |              |        
| |    |                                       |              |        

21

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS
(in thousands of NIS)

|Note 3 |  | Additional Details Concerning Current Assets (cont.)
|------ | - | ----------------------------------------------------

| | B. | Other receivables and current assets
| | -- | ------------------------------------

| |  |                                      | Consolidated | Company
| |  | ------------------------------------ | ------------ | -------
|
|
|
|
| |  | Institutions                         |              |        
| |  | Prepaid expenses                     |              |        
| |  | Related parties                      |              |        
| |  | Deposit due to building permits      |              |        
| |  | Accounts receivable due to leasehold |              |        
| |  | investments                          |              |        
| |  | Other                                |              |        
| |  |                                      |              |        
| |  |                                      |              |        
| |  |                                      |              |        
| |  |                                      |              |        

|Note 4 |  | Investments, Long-Term Loans and Receivables
|------ | - | --------------------------------------------

| |                                      | Consolidated | Company
| | ------------------------------------ | ------------ | -------
|
|
|
|
| | Long-term loan - construction of     |              |        
| | commercial center\ cinema center (A) |              |        
| |                                      |              |        
| |                                      |              |        
| | Investment in the Subsidiary (*):    |              |        
| | Capital note (B)                     |              |        
| | Capital reserve (**)                 |              |        
| | Accumulated deficit                  |              |        
| |                                      |              |        
| |                                      |              |        
| |                                      |              |        
| |                                      |              |        
| |                                      |              |        
| |                                      |              |        

| | (*) | Investment
in shares of the Subsidiary in an amount less than NIS 1.00.
| | --- | -----------------------------------------------------------------------

| | (**) | In
respect of a transaction carried out between the Company and a controlled
          company.
| | ---- | -----------------------------------------------------------------------------------------------

| | A. | The
balance of the loan, which provided by the Company to the joint venture for
          constructing the commercial center\ cinema center (see Note 11B). The loan is
          unlinked and does not bear interest.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

22

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 4 |  | Investments, Long-Term Loans and Receivables (cont.)
|------ | - | ----------------------------------------------------

| | B. | This
loan was provided to the Subsidiary for acquiring land and constructing           the
commercial-center project.
| | -- | ---------------------------------------------------------------------------------------------------------------------

| | Starting
January 1, 1999 this loan was converted into a capital note. Starting January 1, 2002 it
was linked to the CPI and bearing interest of 5%. Pursuant to the Israel Securities
Regulations (Disclosure of Transactions Between a Company and Its Controlling Shareholder
in the Financial Statements), 1996, a capital reserve has been presented in shareholders deficiency
in respect of that capital note.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company will set the repayment date of the capital note by advance notice of fifteen
months.
| | ------------------------------------------------------------------------------------------------

| | C. | Information
pertaining to an investment in a joint venture
| | -- | ----------------------------------------------------------

| | The
following is summarized data concerning the joint venture whose financial statements have
been proportionately consolidated in these financial statements:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                       | December 31,
| | --------------------- | ------------
|
|
|
|
| | Current assets        |             
| |                       |             
| |                       |             
| | Non-current assets    |             
| |                       |             
| |                       |             
| | Current liabilities   |             
| |                       |             
| |                       |             
| | Long-term liabilities |             
| |                       |             

| |            | Year ended December 31,
| | ---------- | -----------------------
|
|
|
|
| | Revenues   |                        
| |            |                        
| |            |                        
| | Expenses   |                        
| |            |                        
| |            |                        
| | Net income |                        
| |            |                        

23

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 5 |  | Fixed Assets, Net
|------ | - | -----------------

| | A. | Composition
| | -- | -----------

| |                                   | Consolidated
| | --------------------------------- | ------------
|
|
|
|
| | Cost:                             |             
| | Balance - January 1, 2006         |             
| | Additions                         |             
| |                                   |             
| | Balance - December 31, 2006       |             
| |                                   |             
| |                                   |             
| | Accumulated depreciation:         |             
| | Balance January 1, 2006           |             
| | Depreciation expense              |             
| |                                   |             
| | Balance - December 31, 2006       |             
| |                                   |             
| |                                   |             
| | Less: Provision for impairment in |             
| | value of assets                   |             
| | Balance - January 1, 2006         |             
| | Depreciation                      |             
| |                                   |             
| | Balance - December 31, 2006       |             
| |                                   |             
| |                                   |             
| | Net book value:                   |             
| | December 31, 2006                 |             
| |                                   |             
| |                                   |             
| | December 31, 2005                 |             
| |                                   |             

| |                                   | Company
| | --------------------------------- | -------
|
|
|
|
| | Cost:                             |        
| | Balance - January 1, 2006         |        
| | Additions                         |        
| |                                   |        
| | Balance - December 31, 2006       |        
| |                                   |        
| |                                   |        
| | Accumulated depreciation:         |        
| | Balance - January 1, 2006         |        
| | Depreciation expense              |        
| |                                   |        
| | Balance - December 31, 2006       |        
| |                                   |        
| |                                   |        
| | Less: Provision for impairment in |        
| | value of assets                   |        
| | Balance - January 1, 2006         |        
| | Depreciation                      |        
| |                                   |        
| | Balance - December 31, 2006       |        
| |                                   |        
| |                                   |        
| | Net book value:                   |        
| | December 31, 2006                 |        
| |                                   |        
| | December 31, 2005                 |        
| |                                   |        
| |                                   |        

24

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 5 |  | Fixed Assets (Cont.)
|------ | - | --------------------

| | B. | Additional
details
| | -- | ------------------

| | (1) | The
Company has ownership rights to the land.
| | --- | ---------------------------------------------

| | (2) | The
investment in the construction of the commercial center includes Company           land
at a cost of NIS 6 million, and the Subsidiarys share in the land at           a
cost of NIS 8,452 thousand as well as planning and construction costs totaling
          NIS 2,992 thousand. The Subsidiarys land has not yet been registered in
          the name of the Subsidiary at the Land Registry Office due to various
procedures           not yet concluded by the seller. To secure the registration, a
second-ranking           mortgage was recorded on the land in favor of the Subsidiary.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Subsidiarys financing expenses up to December 31, 2000 have been capitalized to the
cost of the land.
| | ----------------------------------------------------------------------------------------------------------

| | (3) | Based
on the managements expectation of operations, they concluded that           the
fixed assets is presented at fair value, and there is no need to make an
          additional provision for the year 2006.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Based
on appraisers valuation made in January 2006, the net book values of the fixed
assets and other assets were written down by NIS 923 thousand at December 31, 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | As
for liens on assets  see Note 11.
| | --- | -------------------------------------

|Note 6 |  | Other Assets
|------ | - | ------------

| | A. | Composition
(Consolidated and Company)
| | -- | --------------------------------------

| |                                                    | Payment on account of a
railway terminal
| | -------------------------------------------------- | ----------------------------------------
|
|
|
|
| | Cost:                                              |                                         
| |                                                    |                                         
| | Balance - January 1, 2006                          |                                         
| | Additions                                          |                                         
| |                                                    |                                         
| | Balance - December 31, 2006                        |                                         
| |                                                    |                                         
| |                                                    |                                         
| | Accumulated amortization:                          |                                         
| | Balance - January 1, 2006                          |                                         
| | Current year's amortization                        |                                         
| |                                                    |                                         
| | Balance - December 31, 2006                        |                                         
| |                                                    |                                         
| |                                                    |                                         
| | Less: provision for impairment in value of assets: |                                         
| | Balance - January 1, 2006                          |                                         
| | Current year's amortization                        |                                         
| |                                                    |                                         
| | Balance - December 31, 2006                        |                                         
| | Net book value:                                    |                                         
| | December 31, 2006                                  |                                         
| |                                                    |                                         
| | December 31, 2005                                  |                                         
| |                                                    |                                         

25

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 6 |  | Other Assets (Cont.)
|------ | - | --------------------

| | B. | As
for the provision for impairment in value of assets  see Note 5B (3).
| | -- | -------------------------------------------------------------------------

| | C. | Additional
details
| | -- | ------------------

| | On
April 13, 1999 the Company signed an agreement with the Ports and Railroad Authority (PRA)
for the construction of a railway station to be financed by the Company. Upon its
completion, the station was transferred to the ownership of the PRA for no consideration.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
construction of the station near the Mall was designed to increase the number of visitors
there and hence promote sales. The station facilitates quick and easy access to the Mall
and to nearby sites.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
train stations cost will be amortized over the period of economic benefit, which,
in managements estimate, is expected to be 10 years.
| | --------------------------------------------------------------------------------------------------------------------------------------------

|Note 7 |  | Additional Details Concerning Current Liabilities
|------ | - | -------------------------------------------------

| | A. | Short-term
bank borrowings
| | -- | --------------------------

| |                           |  | Consolidated | Company
| | ------------------------- |  | ------------ | -------
|
|
|
|
|
| | Overdraft                 |  |              |        
| | Unlinked short-term loans |  |              |        
| |                           |  |             
| | Current maturities of     |  |             
| | long-term loans           |  |              |        
| |                           |  |              |        
| |                           |  |              |        
| |                           |  |              |        
| |                           |  |              |        

| | As
for an agreement with a bank regarding the conversion of short-term loans to a long-term
loan  see Note 16.
| | ---------------------------------------------------------------------------------------------------------------

| | B. | Trade
accounts payable (consolidated and Company)
| | -- | -------------------------------------------------

| |                         | December 31,
| | ----------------------- | ------------
|
|
|
|
| | Outstanding amounts (*) |             
| | Post-dated checks       |             
| |                         |             
| |                         |             
| |                         |             
| |                         |             

* Includes an amount of NIS 1,123
thousand due to interested parties as of December 31, 2005

26

---

---

# BAY HEART LTD. 
NOTES TO THE FINANCIAL
STATEMENTS

|Note 7 |  | Additional Details Concerning Current Liabilities (Cont.)
|------ | - | ---------------------------------------------------------

| | C. | Other
payables and current liabilities
| | -- | --------------------------------------

| |                          | Consolidated | Company
| | ------------------------ | ------------ | -------
|
|
|
|
|
|
| | Deferred income          |              |        
| | Wage-related liabilities |              |        
| | Institutions             |              |        
| | Interest payable         |              |        
| | Accrued legal claims     |              |        
| | Other (*)                |              |        
| |                          |              |        
| |                          |              |        
| |                          |              |        
| |                          |              |        

* Includes an amount of NIS 748  thousand due to interested parties as of December 31, 2006

|Note 8 |  | Long-Term Banks Loans
|------ | - | ---------------------

| | A. | Composition
| | -- | -----------

| |               |  | Consolidated | Company
| | ------------- |  | ------------ | -------
|
|
|
|
|
|
| | CPI-linked    |  |              |        
| | Less: current |  |             
| | maturities    |  |              |        
| |               |  |              |        
| |               |  |              |        
| |               |  |              |        
| |               |  |              |        

| | B. | Repayment
schedule at December 31, 2006
| | -- | ---------------------------------------

| |                                 | Consolidated | Company
| | ------------------------------- | ------------ | -------
|
|
|
|
| | First year - current maturities |              |        
| | Second year                     |              |        
| | Third year                      |              |        
| | Fourth year                     |              |        
| | Fifth year                      |              |        
| | Sixth year and thereafter       |              |        
| |                                 |              |        
| |                                 |              |        
| |                                 |              |        
| |                                 |              |        

| | C. | The
liabilities are secured by liens (see Note 11).
| | -- | ---------------------------------------------------

27

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---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 9 |  | Long-Term Liabilities to Interested Parties
|------ | - | -------------------------------------------

| | The
loans received from interested parties are linked to the CPI and bear no interest. The
repayment dates have not yet been established.
| | -----------------------------------------------------------------------------------------------------------------------------------------

|Note 10 |  | Accrued Severance Pay, Net (Consolidated and Company)
|------- | - | -----------------------------------------------------

| | A. | Composition
| | -- | -----------

| |                       | December 31,
| | --------------------- | ------------
|
|
|
|
| | Accrued severance pay |             
| | Less: amounts funded  |             
| |                       |             
| |                       |             
| |                       |             
| |                       |             

| | B. | Additional
details
| | -- | ------------------

| | The
Companys obligations for severance pay is covered by deposits with managersinsurance
policies and provident funds. The amounts accumulated at the insurance companies are not
under the Companys custody or management and, accordingly, not reflected in the
balance sheet. The deposited fund includes accrued earnings and may be withdrawn subject
to the provisions of the Severance Pay Law, 1963.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Note 11 |  | Commitments and Contingent Liabilities
|------- | - | --------------------------------------

| | A. | Liabilities
secured by liens
| | -- | ----------------------------

| | As
security for its bank loans the Company registered a fixed lien on its share capital,
goodwill, rights in land and rights to assets. In addition, it registered a floating lien
on all existing assets as well as present and future rights. As of December 31, 2006
these bank loans secured by those liens amounted to NIS 161,364 thousand (Company).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Commitments
| | -- | -----------

| | The
Subsidiary acquired a 50%-interest in land rights (by purchasing half of the shares of
the companies owning the land) in an area of 8,300 sq.m. of land adjacent to the Mall.
During 1997 the Subsidiary and the sellers entered into a joint-venture agreement to
plan, construct, lease and manage a lower-cost commercial center for leasing larger
commercial space, as well as a gas station.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
total of NIS 3.8 million had been accumulated by the balance-sheet date, in respect of
the project, including costs of a gas station, which had been constructed at a cost of
NIS 1.5 million and commenced operation during 2000.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

28

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 11 |  | Commitments and Contingent Liabilities (Cont.)
|------- | - | ----------------------------------------------

| | B. | Commitments
(cont.)
| | -- | -------------------

| | As
of December 31, 2006, the plans of constructing a shopping center are on hold.
Nevertheless, the Company is negotiating to establish the joint-venture as planned.
During 2005 a Memorandum of Understanding was signed between the Company and the Israeli
Theaters Ltd, a company witch operates cinemas is Israel.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Long-term
leases
| | -- | ----------------

| | The
minimum future, CPI-linked, rental revenues from all long-term leases exceeding one year
at December 31, 2006, follows:
| | ---------------------------------------------------------------------------------------------------------------------------

|                 | thousand NIS
|---------------- | ------------
|
|
|
|
|2007             |             
|2008             |             
|2009             |             
|2010             |             
|2011 and onwards |             
|                 |             
|Total            |             
|                 |             
|                 |             

|Note 12 |  | Share Capital
|------- | - | -------------

| | A. | Composition
| | -- | -----------

| |                        | December 31, 2005 and 2006
| | ---------------------- | --------------------------
|
|
|
|
| | Ordinary shares of NIS |                           
| | 1.00 par value each    |                           
| |                        |                           
| |                        |                           

| | B. | The
ordinary shares grant their holders the right to attend and vote in General
          Meetings, participate in distribution of earnings and, in the event of
          liquidation, participate in the distribution of excess assets.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

29

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 13 |  | Supplementary Information Concerning Income and Expenses
|------- | - | --------------------------------------------------------

| |     |                                                 | Consolidated | Company
| | --- | ----------------------------------------------- | ------------ | -------
|
|
|
|
|
| | A.  | Revenues (*)                                    |              |        
| |     |                                                 |              |        
| |     | Rental income                                   |              |        
| |     | Management fees                                 |              |        
| |     |                                                 |              |        
| |     |                                                 |              |        
| |     |                                                 |              |        
| |     |                                                 |              |        
| | (*) | Revenues from major lessees  see Note 16B (1). |              |        
| |     |                                                 |              |        
| | B.  | Operating expenses                              |              |        
| |     |                                                 |              |        
| |     | Depreciation and amortization                   |              |        
| |     | Salaries and social benefits                    |              |        
| |     | Cleaning and security                           |              |        
| |     | Electricity and water                           |              |        
| |     | Advertising                                     |              |        
| |     | Maintenance                                     |              |        
| |     | Other                                           |              |        
| |     |                                                 |              |        
| |     |                                                 |              |        
| |     |                                                 |              |        
| |     |                                                 |              |        
| | C.  | General and administrative expenses             |              |        
| |     |                                                 |              |        
| |     | Insurance                                       |              |        
| |     | Salaries and social benefits                    |              |        
| |     | Professional fees                               |              |        
| |     | Bad debt                                        |              |        
| |     | Municipal taxes                                 |              |        
| |     | Other                                           |              |        
| |     |                                                 |              |        
| |     |                                                 |              |        
| |     |                                                 |              |        
| |     |                                                 |              |        
| | D.  | Financing expenses, net                         |              |        
| |     |                                                 |              |        
| |     | Interest on long-term loans                     |              |        
| |     | Interest expenses (income) on                   |              |        
| |     | short-term loans and other,                     |              |        
| |     | net                                             |              |        
| |     |                                                 |              |        
| |     |                                                 |              |        
| |     |                                                 |              |        

| | E. | Other
expenses, net
| | -- | -------------------

| | Other
expenses of NIS 923 thousand (consolidated and Company) pertain to a provision for
impairment in the value of assets (see Note 5(b) (3)). In 2004 other expenses of NIS
9,411 thousand pertain to a provision for impairment in the value of assets.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

30

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 14 |  | Income Taxes (Consolidated and Company)
|------- | - | ---------------------------------------

| | A. | Effective
tax rate
| | -- | ------------------

| | The
difference between the theoretical tax computed by the ordinary rates and the provision
for income taxes follows:
| | ---------------------------------------------------------------------------------------------------------------------

| |                                    | Consolidated
| | ---------------------------------- | ------------
|
|
|
|
|
|
| | Pre- tax income (loss)             |             
| |                                    |             
| |                                    |             
| | Statutory tax rate                 |             
| |                                    |             
| |                                    |             
| | Tax computed at the statutory rate |             
| | Disallowed expenses and other      |             
| | differences, net                   |             
| | Losses and tax benefits in respect |             
| | of which no deferred taxes have    |             
| | been recorded                      |             
| |                                    |             
| | differences, net                   |             
| |                                    |             
| |                                    |             

| | B. | The
Company and the Subsidiary have received final tax assessments up to, and
          including, the 2002 tax-year.
| | -- | ---------------------------------------------------------------------------------------------------------------------

| | C. | At
December 31, 2006, the Company had carry-forward tax losses amounting to NIS           89
million.
| | -- | -----------------------------------------------------------------------------------------------------

| | D. | As
of December 31, 2006 the Company did not record a deferred-tax asset of
          approximately NIS 27.5 million since its realization is not expected.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | On
July 25, the Knesset passed an Amendment to the Income Tax Ordinance           (No. 147),
2005 which stipulated, among other things, that the corporate           tax rate is to be
gradually reduced to the following tax rates: 2006  31%,           2007  29%,
2008  27%, 2009  26% and 2010 and thereafter           25%.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

31

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 15 |  | Interested and Related Parties (Consolidated and Company)
|------- | - | ---------------------------------------------------------

| | A. | Balances
with related parties
| | -- | -----------------------------

| |                                                | December 31,
| | ---------------------------------------------- | ------------
|
|
|
|
| | Interested parties - trade accounts receivable |             
| |                                                |             
| |                                                |             
| | Interested parties - trade accounts payable    |             
| |                                                |             
| |                                                |             
| | Interested parties - expense payables          |             
| |                                                |             
| |                                                |             

| | As
for long-term liabilities to interested parties  see Note 9.
| | ----------------------------------------------------------------

| | B. | Benefits
granted to, and transactions with, interested parties:
| | -- | ---------------------------------------------------------------

| |    |                                          | Year ended December 31,
| | -- | ---------------------------------------- | -----------------------
|
|
|
|
| | 1. | Revenues:                                |                        
| |    | Rental and management fees (*)           |                        
| |    |                                          |                        
| |    |                                          |                        
| | 2. | Benefits to an interested party employed |                        
| |    | by the Company:                          |                        
| |    | Salary and fringe benefits               |                        
| |    |                                          |                        
| |    |                                          |                        
| | 3. | Investments in building (**)             |                        
| |    |                                          |                        

| | 4. | Pursuant
to the decision of the Companys board of directors, starting in           2002,
long-term loans due to interested parties are linked to the CPI and bear           no
interest. The interest rate on loans from interested parties in 2001 stood at
          5.2% above the CPI. It was also decided that  starting in 2002           management
fees would no longer be allocated to the interested parties.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (*)
          An area of 3,400 sq. m. is leased to Super-Sol Ltd. (an interested party).
| | ----------------------------------------------------------------------------------------

| | (**)          Construction
work made by a company related to an interest party.
| | -------------------------------------------------------------------------------

32

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 16 |  | Linkage Terms of Monetary Balances
|------- | - | ----------------------------------

| | A. | Consolidated
balance sheet
| | -- | --------------------------

| |                                        | Linked to
CPI | Unlinked | Total
| | -------------------------------------- | ------------- | -------- | -----
|
|
|
|
| | December 31, 2006                      |               |          |      
| | Current assets                         |               |         
| | Cash and cash equivalents              |               |          |      
| | Trade accounts receivable              |               |          |      
| | Receivables and other current assets   |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |         
| | Long-term loans receivable             |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |         
| | Current liabilities                    |               |         
| | Short-term bank borrowings             |               |          |      
| | Trade accounts payable                 |               |          |      
| | Payables and other current liabilities |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |         
| | Long-term liabilities                  |               |         
| | Bank loans                             |               |          |      
| | Due to interested parties              |               |          |      
| | Tenant deposits                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |         
| | December 31, 2005                      |               |         
| | Current assets                         |               |         
| | Cash and cash equivalents              |               |          |      
| | Trade accounts receivable              |               |          |      
| | Receivables and other current assets   |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |         
| | Long-term loans receivables            |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |         
| | Current liabilities                    |               |         
| | Short-term bank borrowings             |               |          |      
| | Trade accounts payable                 |               |          |      
| | Payables and other current liabilities |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |         
| | Long-term liabilities                  |               |         
| | Bank loans                             |               |          |      
| | Due to interested parties              |               |          |      
| | Tenant deposits                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      

33

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 16 |  | Linkage Terms of Monetary Balances (Cont.)
|------- | - | ------------------------------------------

| | B. | Company
balance sheet
| | -- | ---------------------

| |                                        | Linked to
CPI | Unlinked | Total
| | -------------------------------------- | ------------- | -------- | -----
|
|
|
|
| | December 31, 2006                      |               |          |      
| | Current assets                         |               |         
| | Cash and cash equivalents              |               |          |      
| | Trade accounts receivable              |               |          |      
| | Receivables and other current assets   |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |         
| | Long-term loans receivable             |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |         
| | Current liabilities                    |               |         
| | Short-term bank borrowings             |               |          |      
| | Trade accounts payable                 |               |          |      
| | Payables and other current liabilities |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |         
| | Long-term liabilities                  |               |         
| | Loans from banks                       |               |          |      
| | Due to interested parties              |               |          |      
| | Tenant deposits                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |         
| | December 31, 2005                      |               |         
| | Current Assets                         |               |         
| | Cash and cash equivalents              |               |          |      
| | Trade accounts receivable              |               |          |      
| | Receivables and other current assets   |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |         
| | Long-term loans receivable             |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |         
| | Current liabilities                    |               |         
| | Short-term bank borrowings             |               |          |      
| | Trade accounts payable                 |               |          |      
| | Payables and other current liabilities |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |         
| | Long-term liabilities                  |               |         
| | Loans from banks                       |               |          |      
| | Due to interested parties              |               |          |      
| | Tenant deposits                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      
| |                                        |               |          |      

34

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 17 |  | Condensed Financial Statements in Nominal Terms (Cont.)
|------- | - | -------------------------------------------------------

| | A. | Balance
sheets
| | -- | --------------

| |                                              | December 31,
| | -------------------------------------------- | ------------
|
|
|
|
| | Current assets                               |             
| | Cash and cash equivalents                    |             
| | Trade accounts receivable                    |             
| | Receivables and other current assets         |             
| |                                              |             
| |                                              |             
| |                                              |             
| |                                              |             
| | Investments, loans and long-term receivables |             
| |                                              |             
| |                                              |             
| | Fixed assets, net                            |             
| |                                              |             
| |                                              |             
| | Other assets                                 |             
| |                                              |             
| |                                              |             
| |                                              |             
| |                                              |             
| | Current liabilities                          |             
| | Short-term bank borrowings                   |             
| | Trade accounts payable                       |             
| | Payables and other current liabilities       |             
| |                                              |             
| |                                              |             
| |                                              |             
| |                                              |             
| | Long - term liabilities                      |             
| | Bank loans                                   |             
| | Due to interested parties                    |             
| | Tenant deposits                              |             
| |                                              |             
| |                                              |             
| |                                              |             
| |                                              |             
| | Shareholders' deficiency                     |             
| |                                              |             
| |                                              |             
| |                                              |             

35

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS(in thousands of NIS)

|Note 17 |  | Condensed Financial Statements in Nominal Terms (Cont.)
|------- | - | -------------------------------------------------------

| | B. | Statements
of operations
| | -- | ------------------------

| |                                      | Year ended December 31,
| | ------------------------------------ | -----------------------
|
|
|
|
| | Revenues                             |                        
| |                                      |                        
| | Operating expenses                   |                        
| |                                      |                        
| |                                      |                        
| | Gross profit                         |                        
| |                                      |                        
| | General and administrative expenses  |                        
| |                                      |                        
| |                                      |                        
| | Operating income                     |                        
| |                                      |                        
| | Financing expenses, net              |                        
| |                                      |                        
| |                                      |                        
| | Loss before losses of the subsidiary |                        
| |                                      |                        
| | Losses of the Subsidiary             |                        
| |                                      |                        
| |                                      |                        
| | Loss for the year                    |                        
| |                                      |                        

36

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 17 |  | Condensed Financial Statements in Nominal Terms
|------- | - | -----------------------------------------------

| | C. | Statements
of changes in shareholders deficiency
| | -- | -------------------------------------------------

| |                             | Share
capital | Accumulated
deficit | Total
| | --------------------------- | ------------- | ------------------- | -----
|
|
|
|
| | Balance - January 1, 2004   |               |                     |      
| |                             |               |                    
| | Loss for the year           |               |                     |      
| |                             |               |                     |      
| |                             |               |                    
| | Balance - January 1, 2005   |               |                     |      
| |                             |               |                    
| | Loss for the year           |               |                     |      
| |                             |               |                     |      
| |                             |               |                    
| | Balance - January 1, 2006   |               |                     |      
| |                             |               |                    
| | Loss for the year           |               |                     |      
| |                             |               |                     |      
| |                             |               |                    
| | Balance - December 31, 2006 |               |                     |      
| |                             |               |                     |      

|Note 18 |  | Condensed Consolidated Financial Information in U.S. Dollars
|------- | - | ------------------------------------------------------------

| | A. | Principles
of translation
| | -- | -------------------------

| | The
Companys statutory financial statements were originally prepared in adjusted NIS,
with its nominal NIS data (presented in Note 17) translated into US dollars, in
accordance with the guidelines received from the investor, as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (1) | Up
to, and including, December 31, 1992:
| | --- | ----------------------------------------

| | (a) | Balance
sheet
| | --- | -------------

| | Non-monetary
items were translated at the exchange rate in effect on the transaction date.
| | ------------------------------------------------------------------------------------------

| | All
other assets and liabilities were translated at the exchange rate in effect on the
balance-sheet date.
| | ----------------------------------------------------------------------------------------------------------

| | (b) | Statement
of operations
| | --- | -----------------------

| | Revenues
and expenses were translated at the representative exchange rate in effect on the
transaction date.
| | ------------------------------------------------------------------------------------------------------------

| | Differences
arising from translation were included in financing expenses, net.
| | ------------------------------------------------------------------------------

37

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 18 |  | Condensed Consolidated Financial Information in U.S. Dollars (Cont.)
|------- | - | --------------------------------------------------------------------

| | A. | Principles
of translation (Cont.)
| | -- | ---------------------------------

| | (2) | Commencing
January 1, 1993
| | --- | --------------------------

| | Commencing
January 1, 1993, the Companys financial data in nominal NIS was translated into
dollars based on Statement No. 52 (Foreign Currency Translation) of the US
Financial Accounting Standards Board. In this regard, in accordance with a pronouncement
issued by the Emerging Issues Task Force (EITF), effective January 1, 1993,
Israel was no longer considered to have a hyperinflationary economy and, accordingly,
effective January 1, 1993, the translation was performed as described below:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Opening
balances on January 1, 1993 were derived from the December 31, 1992 financial statements
in dollars (translated pursuant to the guidelines mentioned above), which were translated
back into NIS based on the representative exchange rate on that date and became the new,
nominal basis in NIS. At the end of all reported periods subsequent to January 1, 1993,
the nominal NIS financial data has been translated as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (a) | Balance
sheet
| | --- | -------------

| | Assets
and liabilities have been translated into dollars based on the representative exchange
rate in effect as of the respective balance sheet dates. Amounts relating to share
capital and receipts on account of shares have been translated into dollars based on the
representative exchange rate in effect as of the date of the transaction.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Statement
of operations
| | --- | -----------------------

| | Revenues
and expenses have been translated at average exchange rates during the respective
reporting periods.
| | -------------------------------------------------------------------------------------------------------------

| | (c) | Differences
arising from translation have been recorded as a separate component           of
shareholders deficiency.
| | --- | ----------------------------------------------------------------------------------------------------------------------

| | (3) | See
Note 2L for data relating to the representative exchange rate of the           dollar.
| | --- | ------------------------------------------------------------------------------------------

| | (4) | Dollar
amounts herein should not be construed, except where otherwise indicated           in the
financial statements, as a representation that NIS amounts actually           represent
or could be converted into dollars.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

38

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 18 |  | Condensed Consolidated Financial Information in U.S. Dollars (Cont.)
|------- | - | --------------------------------------------------------------------

| | A. | Principles
of translation (Cont.)
| | -- | ---------------------------------

| | (5) | NIS
amounts in this note are presented for comparative purposes only, and           represent
the opening balances on January 1, 1993 in NIS as per (2) above, after           giving
effect to the recording of all transactions since that date in nominal           NIS.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Condensed
consolidated balance sheets
| | -- | -------------------------------------

| |                                              | December 31, | December 31,
| | -------------------------------------------- | ------------ | ------------
|
|
|
|
| | Current assets                               |              |             
| | Cash and cash equivalents                    |              |             
| | Trade accounts receivable                    |              |             
| | Receivables and other current assets         |              |             
| |                                              |              |             
| |                                              |              |             
| |                                              |              |             
| |                                              |              |             
| | Investments, loans and long-term receivables |              |             
| |                                              |              |             
| |                                              |              |             
| | Fixed assets, net                            |              |             
| |                                              |              |             
| |                                              |              |             
| | Other assets                                 |              |             
| |                                              |              |             
| |                                              |              |             
| |                                              |              |             
| |                                              |              |             
| | Current liabilities                          |              |             
| | Short-term bank borrowings                   |              |             
| | Trade accounts payable                       |              |             
| | Payables and other current liabilities       |              |             
| |                                              |              |             
| |                                              |              |             
| |                                              |              |             
| |                                              |              |             
| | Long - term liabilities                      |              |             
| | Bank loans                                   |              |             
| | Due to interested parties                    |              |             
| | Tenant deposits                              |              |             
| |                                              |              |             
| |                                              |              |             
| |                                              |              |             
| |                                              |              |             
| | Shareholders' deficiency                     |              |             
| |                                              |              |             
| |                                              |              |             
| |                                              |              |             

39

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 18 |  | Condensed Consolidated Financial Information in U.S. Dollars (Cont.)
|------- | - | --------------------------------------------------------------------

| | C. | Condensed
consolidated statements of operations
| | -- | -----------------------------------------------

| |                                                | Year ended December 31, | Year ended December 31,
| | ---------------------------------------------- | ----------------------- | -----------------------
|
|
|
|
| | Revenues                                       |                         |                        
| |                                                |                         |                        
| |                                                |                         |                        
| | Less:                                          |                         |                        
| | Operating, general and administrative expenses |                         |                        
| | Depreciation and amortization                  |                         |                        
| |                                                |                         |                        
| |                                                |                         |                        
| |                                                |                         |                        
| |                                                |                         |                        
| | Operating income                               |                         |                        
| | Financing expenses, net                        |                         |                        
| |                                                |                         |                        
| |                                                |                         |                        
| | Loss before comprehensive income               |                         |                        
| |                                                |                         |                        
| | Other comprehensive income:                    |                         |                        
| | Translation adjustment                         |                         |                        
| |                                                |                         |                        
| |                                                |                         |                        
| | Comprehensive loss                             |                         |                        
| |                                                |                         |                        

40

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 18 |  | Condensed Consolidated Financial Information in U.S. Dollars (Cont.)
|------- | - | --------------------------------------------------------------------

| | D. | Condensed
statements of changes in shareholders deficiency
| | -- | -----------------------------------------------------------

| |                             | Share
capital | Cumulative
other
comprehensive
income | Accumulated
deficit | Total
| | --------------------------- | ------------- | ------------------------------------- | ------------------- | -----
|
|
|
|
| | Balance -January 1, 2004    |               |                                       |                     | 8,052
| | Loss for the year           |               |                                       |                     | -    
| |                             |               |                                       |                     |      
| | Balance - December 31, 2004 |               |                                       |                     | 8,052
| | Loss for the year           |               |                                       |                     | -    
| |                             |               |                                       |                     |      
| | Balance - December 31, 2005 |               |                                       |                     | 8,052
| | Loss for the year           |               |                                       |                     | -    
| |                             |               |                                       |                     |      
| | Balance - December 31, 2006 |               |                                       |                     | 8,052
| |                             |               |                                       |                     |      

| |                            | Share
capital | Cumulative
other
comprehensive
income | Accumulated
deficit | Total
| | -------------------------- | ------------- | ------------------------------------- | ------------------- | -----
|
|
|
|
| | Balance - January 1, 2004  |               |                                       |                     | 2,913
| | Translation adjustment     |               |                                       |                     | -    
| | Loss for the year          |               |                                       |                     | -    
| |                            |               |                                       |                     |      
| | Balance- December 31, 2004 |               |                                       |                     | 2,913
| | Translation adjustment     |               |                                       |                     | -    
| | Loss for the year          |               |                                       |                     | -    
| |                            |               |                                       |                     |      
| | Balance- December 31, 2005 |               |                                       |                     | 2,913
| | Translation adjustment     |               |                                       |                     | -    
| | Loss for the year          |               |                                       |                     | -    
| |                            |               |                                       |                     |      
| | Balance- December 31, 2006 |               |                                       |                     | 2,913
| |                            |               |                                       |                     |      
| |                            |               |                                       |                     |      

41

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 18 |  | Condensed Consolidated Financial Information in U.S. Dollars (Cont.)
|------- | - | --------------------------------------------------------------------

| | E. | Condensed
consolidated statements of cash flows
| | -- | -----------------------------------------------

| |                                                     | Year ended December 31, | Year ended December 31,
| | --------------------------------------------------- | ----------------------- | -----------------------
|
|
|
|
| | Cash Flows - Operating Activities                   |                         |                        
| |                                                     |                         |                        
| | Loss for the year                                   |                         |                        
| | Adjustments required to present cash flows from     |                         |                        
| | operating activities (Appendix A)                   |                         |                        
| |                                                     |                         |                        
| | Net cash used in operating activities               |                         |                        
| |                                                     |                         |                        
| |                                                     |                         |                        
| | Cash Flows - Investing Activities                   |                         |                        
| | Additions to fixed assets                           |                         |                        
| | Investment in long term loan                        |                         |                        
| | Other assets                                        |                         |                        
| |                                                     |                         |                        
| | Net cash used in investing activities               |                         |                        
| |                                                     |                         |                        
| |                                                     |                         |                        
| | Cash Flows - Financing Activities                   |                         |                        
| | Proceeds of long-term loans from interested parties |                         |                        
| | Repayment of long-term bank loans                   |                         |                        
| | Short-term bank borrowings, net                     |                         |                        
| |                                                     |                         |                        
| | Net cash provided by financing activities           |                         |                        
| |                                                     |                         |                        
| |                                                     |                         |                        
| | Effects of exchange rate changes                    |                         |                        
| |                                                     |                         |                        
| |                                                     |                         |                        
| | Increase in cash and cash equivalents               |                         |                        
| | Cash and cash equivalents at the beginning of year  |                         |                        
| |                                                     |                         |                        
| | Cash and cash equivalents at the end of year        |                         |                        
| |                                                     |                         |                        

42

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 18 |  | Condensed Consolidated Financial Information in U.S. Dollars (Cont.)
|------- | - | --------------------------------------------------------------------

| | Appendix A: |  | Adjustments required To Present Cash Flows from Operating Activities
| | ----------- | - | --------------------------------------------------------------------

| |                                                            | Year ended December 31, | Year ended December 31,
| | ---------------------------------------------------------- | ----------------------- | -----------------------
|
|
|
|
| | Income and expenses not involving cash flows:              |                         |                        
| |                                                            |                         |                        
| | Depreciation and amortization                              |                         |                        
| | Effect of exchange rates and linkage on    long-term loans |                         |                        
| | Increase (decrease) in accrued severance pay               |                         |                        
| |                                                            |                         |                        
| |                                                            |                         |                        
| |                                                            |                         |                        
| | Changes in assets and liabilities:                         |                         |                        
| | Decrease (increase) in trade receivables and               |                         |                        
| | other current assets                                       |                         |                        
| | Increase (decrease) in trade accounts payable and          |                         |                        
| | other current liabilities                                  |                         |                        
| | Increase (decrease) in tenants deposits                    |                         |                        
| |                                                            |                         |                        
| |                                                            |                         |                        
| |                                                            |                         |                        
| |                                                            |                         |                        
| |                                                            |                         |                        

| | Appendix B |  | Non-cash transactions
| | ---------- | - | ---------------------

| |                                                   |  |  |  |   |  | 
| | ------------------------------------------------- |  |  |  | - |  | 
|
|
|
|
| | Conversion of short-term loan into long-term loan |  |  |  | - |  | 
| |                                                   |  |  |  |   |  | 
| |                                                   |  |  |  |   |  | 

43

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 18 |  | Condensed Consolidated Financial Information in U.S. Dollars (Cont.)
|------- | - | --------------------------------------------------------------------

| | F. | Comparison
of shareholders deficiency
| | -- | --------------------------------------

| |                                               | December 31, | 
| | --------------------------------------------- | ------------ | 
|
|
|
|
| | Primary financial statements in adjusted NIS, |              | 
| | translated into dollars (1)                   |              | 
| |                                               |              | 
| |                                               |              | 
| | Financial information in U.S. dollars         |              | 
| |                                               |              | 

| |    |                                               | Year ended December 31,
| | -- | --------------------------------------------- | -----------------------
|
|
|
|
| | G. | Comparison of net income (loss)               |                        
| |    |                                               |                        
| |    | Primary financial statements in adjusted NIS, |                        
| |    | translated into dollars (1)                   |                        
| |    |                                               |                        
| |    | Financial information in U.S. dollars         |                        
| |    |                                               |                        
| |    |                                               |                        

| | (1) | Translated
into dollars using the representative exchange rate as of each           balance sheet
date.
| | --- | -------------------------------------------------------------------------------------------------------

44

---

---

BAY HEART LTD.
NOTES TO THE FINANCIAL STATEMENTS

|Note 19 |  | Material Difference Between Israeli GAAP and US GAAP
|------- | - | ----------------------------------------------------

| | The
Companys consolidated financial statements conform to accounting principles
generally accepted in Israel (Israeli GAAP), which differ in certain respects
from those generally accepted in the United States of America (US GAAP). With
respect to these financial statements, the difference between Israeli and US GAAP relates
to accounting for the effect of inflation.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with Israeli GAAP, the Companys consolidated financial statements
through December 31, 2003 are expressed in terms of a uniform monetary unit  the
inflation-adjusted new Israeli shekel  which follows an adjustment in respect of
the changes in the Israeli CPI. (see Note 2A). This inflation adjustment was required
under pronouncements of the Institute of Certified Public Accountants in Israel and
reflects the effect of changes in the general price level in the Israeli economy. Such
adjustment is not required under US GAAP.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with Israeli GAAP, the Companys liability for severance pay is presented
in net value, not including liability that is covered by the employees insurance
policies. In addition, the Company does not present the deposited funds as an asset in
the balance sheet.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with the US GAAP, the Companys liability for severance pay should be
presented in the amount of NIS 835 thousand and the employees deposited funds should be
acknowledged in the Companys financial statement as of December 31, 2006 as a asset
in the amount of NIS 835 thousand.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

45

---

---

CORAL WORLD INTERNATIONAL LTD.

Consolidated Financial Statements 
as of December 31, 2006

---

---



CORAL WORLD INTERNATIONAL LTD.

Consolidated financial statements 
as of December 31, 2006

Table of Contents

|                                                          |       
|--------------------------------------------------------- | ------
|                                                          | Page  
|                                                          |       
|                                                          |       
|Report of Independent Registered Public
  Accounting Firm | 2     
|                                                          |       
|Consolidated Financial Statements                         |       
|                                                          |       
|Balance
Sheets                                            | 3     
|                                                          |       
|Statements of
Income                                      | 4     
|                                                          |       
|Statements of Changes
in Shareholders Equity             | 5     
|                                                          |       
|Statements of Cash
Flows                                  | 6  7 
|                                                          |       
|Notes to the
Consolidated Financial
  Statements          | 8  25
|                                                          |       
|Appendix                                                  |       
|                                                          |       
|List of Subsidiaries
and Associated Companies             | 26    

---

---

---

---



REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

TO THE SHAREHOLDERS

OF CORAL WORLD INTERNATIONAL LTD.

We have audited the
accompanying consolidated balance sheets of Coral World International Ltd.
(the Company) as of December 31, 2006 and 2005, 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, 2006. These consolidated
financial statements are the responsibility of the Board of Directors and
management of the Company. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(PCAOB) (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by the Board of Directors and management of the Company, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the
financial statements referred to above present fairly, in all material
respects, the financial position of Coral World International Ltd. as of
December 31, 2006 and 2005, and the results of its operations, changes in
shareholders equity and changes in cash flows for each of the three years in
the period ended December 31, 2006, in conformity with accounting principles
generally accepted in the United States of America.

|                                   |                                       | 
|---------------------------------- | ------------------------------------- | 
|                                   | Fahn
  Kanne & Co.                    | 
|                                   | Certified
  Public Accountants (Isr.) | 
|                                   |                                       | 
|Tel-Aviv, Israel, March
  22, 2007 |                                      

- 2 -

---

---



CORAL WORLD INTERNATIONAL
LTD.

CONSOLIDATED BALANCE SHEETS

|                                                              |  |              |        |      |  |        | 
|------------------------------------------------------------- |  | ------------ | ------ | ---- |  | ------ | 
|                                                              |  | US Dollars   |       
|                                                              |  |              |       
|                                                              |  | December 31, |       
|(in
  thousands)                                              |  | 2006         |        | 2005 | 
|                                                              |  |              |        |      | 
|                                                              |  |              |        |      |  |        | 
|A S S E T
  S                                                 |  |              |        |      |  |        | 
|                                                              |  |              |        |      |  |        | 
|Current
  assets                                              |  |              |        |      |  |        | 
|Cash and cash equivalents (Note
2)                            |  |              | 7,432  |      |  | 8,742  | 
|                                                             
|Accounts receivable:                                          |  |              |        |      |  |        | 
|                                                             
|Trade (Note 3)                                                |  |              | 1,358  |      |  | 1,167  | 
|Other (Note 4)                                                |  |              | 4,034  |      |  | 994    | 
|Inventories                                                   |  |              | 1,880  |      |  | 1,867  | 
|                                                              |  |              |        |      |  |        | 
|Total current
  assets                                        |  |              | 14,704 |      |  | 12,770 | 
|                                                              |  |              |        |      |  |        | 
|                                                              |  |              |        |      |  |        | 
|                                                              |  |              |        |      |  |        | 
|Long-term
  investments and other debit balances              |  |              |        |      |  |        | 
|                                                             
|Long-term balance  related
party                             |  |              | -      |      |  | 914    | 
|Investments in affiliated company
(Note 5)                    |  |              | -      |      |  | 10,331 | 
|                                                             
|Funds in respect of employee rights
upon retirement (Note 11) |  |              | 1,092  |      |  | 901    | 
|                                                              |  |              |        |      |  |        | 
|Total
  long-term investments and other debit balances        |  |              | 1,092  |      |  | 12,146 | 
|                                                              |  |              |        |      |  |        | 
|                                                              |  |              |        |      |  |        | 
|Property
  and equipment, net (Note 6)                        |  |              | 52,007 |      |  | 15,065 | 
|                                                              |  |              |        |      |  |        | 
|                                                              |  |              |        |      |  |        | 
|Deferred
  income taxes (Note 7)                              |  |              | 341    |      |  | 472    | 
|                                                              |  |              |        |      |  |        | 
|                                                              |  |              |        |      |  |        | 
|Minority
  share of shareholders deficit of subsidiary        |  |              | 998    |      |  | 497    | 
|                                                              |  |              |        |      |  |        | 
|                                                              |  |              |        |      |  |        | 
|                                                              |  |              |        |      |  |        | 
|Total
  assets                                                |  |              | 69,142 |      |  | 40,950 | 
|                                                              |  |              |        |      |  |        | 

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

- 3 -

---

---



CORAL WORLD INTERNATIONAL LTD.

CONSOLIDATED BALANCE SHEETS

|                                                          |    |                                                                                                 |         |      |   |        |   |   | 
|--------------------------------------------------------- | -- | ----------------------------------------------------------------------------------------------- | ------- | ---- | - | ------ | - | - | 
|                                                          |    | US Dollars                                                                                      |        
|                                                         
|                                                          |    | December 31,                                                                                    |        
|(in
  thousands)                                          |    | 2006                                                                                            |         | 2005 |  
|                                                          |    |                                                                                                 |         |      |  
|                                                          |    |                                                                                                 |         |      |  
|LIABILITIES
  AND SHAREHOLDERS EQUITY                    |    |                                                                                                 |         |      |   |        |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Current
  liabilities                                     |    |                                                                                                 |         |      |   |        |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Credit from banking institutions (Note
8)                 |    |                                                                                                 | 10,395  |      |   | 5,714  |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Accounts payable and other
accruals:                      |    |                                                                                                 |         |      |   |        |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Trade                                                     |    |                                                                                                 | 2,104   |      |   | 1,134  |  
|Other (Note 9)                                            |    |                                                                                                 | 2,026   |      |   | 2,308  |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Total
  current liabilities                               |    |                                                                                                 | 14,525  |      |   | 9,156  |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Long-term
  liabilities                                   |    |                                                                                                 |         |      |   |        |  
|Long-term loans (Note 10)                                 |    |                                                                                                 | 39,497  |      |   | 1,093  |  
|Deferred taxes (Note 7)                                   |    |                                                                                                 | 836     |      |   | -      |  
|Liability for employee rights upon
retirement (Note 11)   |    |                                                                                                 | 1,675   |      |   | 1,413  |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|                                                          |    |                                                                                                 | 42,008  |      |   | 2,506  |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Contingent
  liabilities, commitments and liens (Note 12) |    |                                                                                                 |         |      |   |        |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Minority
  interests                                      |    |                                                                                                 | 2,766   |      |   | 2,424  |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Total
  long-term liabilities                             |    |                                                                                                 | 59,299  |      |   | 14,086 |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Shareholders
  equity (Note 13)                          |    |                                                                                                 |         |      |   |        |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|                                                          | A. | Management shares, $2 par
  value; authorized 5,000 shares; issued and outstanding 2,500 shares |         |      | 5 |        |   | 5 | 
|                                                          |    |                                                                                                 |         |      |   |        |   |   | 
|                                                          | B. | Management shares, $2 par
  value; authorized 5,000 shares; issued and outstanding 2,500 shares |         |      | 5 |        |   | 5 | 
|                                                          |    |                                                                                                 |         |      |   |        |   |   | 
|                                                          | C. | Preference shares, $2 par
  value; authorized 1,000 shares; issued and outstanding 1,000 shares |         |      | 2 |        |   | 2 | 
|                                                          |    |                                                                                                 |         |      |   |        |   |   | 
|Cost of company shares held
  by subsidiary               |    |                                                                                                 | (21,000 | )    |   | -      |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Additional paid-in capital                                |    |                                                                                                 | 17,550  |      |   | 17,550 |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Retained earnings                                         |    |                                                                                                 | 14,374  |      |   | 10,444 |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Accumulated other
  comprehensive loss                    |    |                                                                                                 | (1,093  | )    |   | (1,142 | )
|                                                          |    |                                                                                                 |         |      |   |        |  
|Total
  shareholders equity                              |    |                                                                                                 | 9,843   |      |   | 26,864 |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Total
  liabilities and shareholders equity              |    |                                                                                                 | 69,142  |      |   | 40,950 |  
|                                                          |    |                                                                                                 |         |      |   |        |  

| |                       |  |             | 
| | --------------------- |  | ----------- | 
| |                       |  |             | 
| | Benjamin
Kahn         |  | Benzi
Dolev | 
| | Member
  of the Board |  | CFO         | 

Date: March 22, 2007

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

-
3 -

---

---



CORAL WORLD INTERNATIONAL
LTD.

CONSOLIDATED STATEMENTS OF INCOME

|                                                 |  |                         |         |      |  |         |   |  |         |  
|------------------------------------------------ |  | ----------------------- | ------- | ---- |  | ------- | - |  | ------- | -
|                                                 |  | US dollars              |        
|                                                 |  |                         |        
|                                                 |  | Year ended December 31, |        
|(in
  thousands, except share data)              |  | 2006                    |         | 2005 |  | 2004    |  
|                                                 |  |                         |         |      |  |         |  
|                                                 |  |                         |         |      |  |         |  
|Admission fees                                   |  |                         | 17,378  |      |  | 15,475  |   |  | 14,597  |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Sales in shops and
  cafeterias                  |  |                         | 11,109  |      |  | 9,793   |   |  | 8,841   |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Commissions and others                           |  |                         | 604     |      |  | 523     |   |  | 425     |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|                                                 |  |                         | 29,091  |      |  | 25,791  |   |  | 23,863  |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Cost of sales (Note 14)                          |  |                         | (13,753 | )    |  | (13,045 | ) |  | (12,663 | )
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Gross profit                                     |  |                         | 15,338  |      |  | 12,746  |   |  | 11,200  |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Selling expenses (Note 15)                       |  |                         | (2,284  | )    |  | (2,139  | ) |  | (2,443  | )
|                                                 |  |                         |         |      |  |         |   |  |         |  
|General and administrative
  expenses (Note 16)  |  |                         | (6,900  | )    |  | (5,730  | ) |  | (6,817  | )
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Other expense, net (Note
  17)                   |  |                         | (287    | )    |  | (728    | ) |  | (28     | )
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Operating income                                 |  |                         | 5,867   |      |  | 4,149   |   |  | 1,912   |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Financing income
  (expenses), net               |  |                         | 147     |      |  | (865    | ) |  | (32     | )
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Income before taxes on
income                    |  |                         | 6,014   |      |  | 3,284   |   |  | 1,880   |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Taxes on income (Note 18)                        |  |                         | (1,677  | )    |  | (1,533  | ) |  | (78     | )
|Losses from affiliated
  company                 |  |                         | -       |      |  | (14     | ) |  | (451    | )
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Minority interest, net                           |  |                         | (407    | )    |  | (55     | ) |  | 108     |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Net income                                       |  |                         | 3,930   |      |  | 1,682   |   |  | 1,459   |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Earnings per share                               |  |                         | 655     |      |  | 280     |   |  | 243     |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Weighted average number of
  shares outstanding: |  |                         | 6,000   |      |  | 6,000   |   |  | 6,000   |  
|                                                 |  |                         |         |      |  |         |   |  |         |  

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

- 4 -

---

---



CORAL WORLD INTERNATIONAL LTD.

STATEMENTS OF
CHANGES IN SHAREHOLDERS EQUITY

|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|------------------------------------------------------------------------------ |  | ----------------------------- | -- | ------------------------------ |  | ------------------------------------------ |  | ------------------- | ------ | ------------------------------------------------- |  | ------ |  |  | ------- | ---- |  | ------- | -
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|                                                                               |  | Number &
  amount of
  shares |    | Additional
  paid-in
  capital |  | Accumulated
  other
  comprehensive
  loss |  | Retained
  earnings |        | Cost of
  company
  shares held by
  a subsidiary |  | Total  | 
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        | 
|US dollars (in thousands)                                                      |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Balance at January 1, 2004                                                     |  |                               | 12 |                                |  | 17,550                                     |  |                     | (1,019 | )                                                 |  | 7,303  |  |  | -       |      |  | 23,846  |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Changes during 2004:                                                           |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|                                                                              
|Net income                                                                     |  |                               | -  |                                |  | -                                          |  |                     | -      |                                                   |  | 1,459  |  |  | -       |      |  | 1,459   |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Translation of financial statements of
  subsidiaries and affiliated companies |  |                               | -  |                                |  | -                                          |  |                     | 413    |                                                   |  | -      |  |  | -       |      |  | 413     |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Total comprehensive income                                                     |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  | 1,872   |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Balance at December 31, 2004                                                   |  |                               | 12 |                                |  | 17,550                                     |  |                     | (606   | )                                                 |  | 8,762  |  |  | -       |      |  | 25,718  |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Changes during 2005:                                                           |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Net income                                                                     |  |                               | -  |                                |  | -                                          |  |                     | -      |                                                   |  | 1,682  |  |  | -       |      |  | 1,682   |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Translation of financial statements of
  subsidiaries and affiliated companies |  |                               | -  |                                |  | -                                          |  |                     | (536   | )                                                 |  | -      |  |  | -       |      |  | (536    | )
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Total comprehensive income                                                     |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  | 1,146   |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Balance at December 31, 2005                                                   |  |                               | 12 |                                |  | 17,550                                     |  |                     | (1,142 | )                                                 |  | 10,444 |  |  | -       |      |  | 26,864  |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Changes during 2006:                                                           |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Net income                                                                     |  |                               | -  |                                |  | -                                          |  |                     | -      |                                                   |  | 3,930  |  |  | -       |      |  | 3,930   |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Translation of financial statements of
  subsidiaries and affiliated companies |  |                               | -  |                                |  | -                                          |  |                     | 49     |                                                   |  | -      |  |  | -       |      |  | 49      |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Total comprehensive income                                                     |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  | 3,979   |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Cost of company shares held by subsidiary                                      |  |                               | -  |                                |  | -                                          |  |                     | -      |                                                   |  | -      |  |  | (21,000 | )(*) |  | (21,000 | )
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Balance at December 31, 2006                                                   |  |                               | 12 |                                |  | 17,550                                     |  |                     | (1,093 | )                                                 |  | 14,374 |  |  | (21,000 | )    |  | 9,843   |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  

(*)
     See Note 1B.

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

- 5 -

---

---



CORAL WORLD INTERNATIONAL LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                             |  |                           |         |   |  |        |   |  |        |  
|---------------------------------------------------------------------------- |  | ------------------------- | ------- | - |  | ------ | - |  | ------ | -
|                                                                             |  | US dollars                |        
|                                                                             |  |                           |        
|                                                                             |  | Year ended
  December 31, |        
|(in thousands)                                                               |  |                           | 2006    |   |  | 2005   |   |  | 2004   |  
|                                                                             |  |                           |         |   |  |        |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Cash flows from operating
activities:                                        |  |                           |         |   |  |        |   |  |        |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Net income for the year                                                      |  |                           | 3,930   |   |  | 1,682  |   |  | 1,459  |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Adjustments required to reflect cash flows
  from operations:                |  |                           |         |   |  |        |   |  |        |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Depreciation and amortization                                                |  |                           | 2,849   |   |  | 2,799  |   |  | 4,075  |  
|Increase in liability for employee rights
  upon retirement                  |  |                           | 136     |   |  | 303    |   |  | 484    |  
|Deferred taxes                                                               |  |                           | 836     |   |  | 221    |   |  | (618   | )
|Loss from affiliated company                                                 |  |                           | -       |   |  | 14     |   |  | 451    |  
|Capital loss (gain) on sale of property and
  equipment, net                 |  |                           | (11     | ) |  | 1      |   |  | 28     |  
|Minority interest, net                                                       |  |                           | 407     |   |  | 55     |   |  | (108   | )
|Exchange differences of long-term loan                                       |  |                           | (1,060  | ) |  | (57    | ) |  | 223    |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Decrease (increase) in accounts
receivable:                                  |  |                           |         |   |  |        |   |  |        |  
|Trade                                                                        |  |                           | (98     | ) |  | (98    | ) |  | 191    |  
|Other                                                                        |  |                           | (574    | ) |  | (225   | ) |  | (205   | )
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Decrease (increase) in inventories                                           |  |                           | 56      |   |  | 348    |   |  | (297   | )
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Increase (decrease) in accounts payable and
  other accruals:                |  |                           |         |   |  |        |   |  |        |  
|Trade                                                                        |  |                           | 709     |   |  | 246    |   |  | (186   | )
|Other                                                                        |  |                           | (518    | ) |  | 428    |   |  | (290   | )
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Net cash flows provided by operating
  activities                            |  |                           | 6,662   |   |  | 5,717  |   |  | 5,207  |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Cash flows from investing
activities:                                        |  |                           |         |   |  |        |   |  |        |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Purchase of property and equipment                                           |  |                           | (11,345 | ) |  | (801   | ) |  | (536   | )
|Investment in projects                                                       |  |                           | -       |   |  | -      |   |  | (180   | )
|Loans to affiliated companies                                                |  |                           | 144     |   |  | (5,391 | ) |  | (1,579 | )
|Proceeds from sale of property and
  equipment                               |  |                           | 33      |   |  | 6      |   |  | 47     |  
|Decrease (increase) in funds in respect of
  employee rights upon retirement |  |                           | (110    | ) |  | 138    |   |  | (546   | )
|Acquisition of subsidiary (Appendix A)                                       |  |                           | 1,168   |   |  | -      |   |  | -      |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Net cash flows used in investing
activities                                  |  |                           | (10,110 | ) |  | (6,048 | ) |  | (2,794 | )
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Cash flows from financing
activities:                                        |  |                           |         |   |  |        |   |  |        |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Credit and short-term loans from banking
  institutions, net                 |  |                           | 7,722   |   |  | (524   | ) |  | (16    | )
|Receipt of long-term credit from banking
  institutions                      |  |                           | 20,303  |   |  | -      |   |  | -      |  
|Repayment of long-term credit from banking
  institutions                    |  |                           | (5,333  | ) |  | (1,347 | ) |  | (1,329 | )
|Cost of company shares held by subsidiary                                    |  |                           | (21,000 | ) |  | -      |   |  | -      |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Net cash flows provided by (used in)
  financing activities                  |  |                           | 1,692   |   |  | (1,871 | ) |  | (1,345 | )
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Effect of exchange rate changes on cash and
  cash equivalents               |  |                           | 446     |   |  | (160   | ) |  | 57     |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Increase in cash and cash equivalents                                        |  |                           | (1,310  | ) |  | (2,362 | ) |  | 1,125  |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Balance of cash and cash equivalents -
  beginning of the year               |  |                           | 8,742   |   |  | 11,104 |   |  | 9,979  |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Balance of cash and cash equivalents - end
  of the year                     |  |                           | 7,432   |   |  | 8,742  |   |  | 11,104 |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  

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

- 6 -

---

---



CORAL WORLD INTERNATIONAL LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS (cont.)

Appendix A: Acquisition of subsidiary

|                                                             |  |                           |         |      |  |      |  |  |   | 
|------------------------------------------------------------ |  | ------------------------- | ------- | ---- |  | ---- |  |  | - | 
|                                                             |  | US dollars                |        
|                                                             |  |                           |        
|                                                             |  | Year ended
  December 31, |        
|(in thousands)                                               |  | 2006                      |         | 2005 |  | 2004 | 
|                                                             |  |                           |         |      |  |      | 
|                                                             |  |                           |         |      |  |      |  |  |   | 
|Working
  capital (excluding cash and cash equivalents, net) |  |                           | (2,233  | )    |  | -    |  |  | - | 
|Property and
  equipment, net                                |  |                           | (27,384 | )    |  | -    |  |  | - | 
|Investment
  in an affiliated company                        |  |                           | 11,998  |      |  | -    |  |  | - | 
|Long-term
  bank loans                                       |  |                           | 19,285  |      |  | -    |  |  | - | 
|Minority
  interest                                          |  |                           | (498    | )    |  | -    |  |  | - | 
|                                                             |  |                           |         |      |  |      |  |  |   | 
|                                                             |  |                           | 1,168   |      |  | -    |  |  | - | 
|                                                             |  |                           |         |      |  |      |  |  |   | 

Supplementary disclosure of cash flow
information

|               |  |                           |       |      |  |      |  |  |     | 
|-------------- |  | ------------------------- | ----- | ---- |  | ---- |  |  | --- | 
|               |  | US dollars                |      
|               |  |                           |      
|               |  | Year ended
  December 31, |      
|(in thousands) |  | 2006                      |       | 2005 |  | 2004 | 
|               |  |                           |       |      |  |      | 
|               |  |                           |       |      |  |      |  |  |     | 
|Interest       |  |                           | 1,756 |      |  | 312  |  |  | 419 | 
|               |  |                           |       |      |  |      |  |  |     | 
|               |  |                           |       |      |  |      |  |  |     | 
|Income taxes   |  |                           | 1,967 |      |  | 120  |  |  | 586 | 
|               |  |                           |       |      |  |      |  |  |     | 

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

- 7 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS

|           |                                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---------- | ------------------------------- | ------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES
|           |                                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           | A.                              | General
|           |                                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                 | 1.      | Coral World
  International Ltd. (hereinafter  CWI) was incorporated on December 3,
  1987 under the laws of the Island of Guernsey, Channel Islands, for purposes
  of owning and operating marine parks in various locations. Until
  May 2006, CWI was owned 50% by Ampal-American Israel Corporation and 50%
  by Marine Parks Holding Ltd. During May 2006, the subsidiary Red Sea
  Underwater Observatory Ltd. (hereunder: RSUO), paid an amount of
  NIS 94,500 thousand (US$ 21 million) to Ampal-American Israel
  Corporation in respect of its shares.                                                                                                                                                                                                                                                                                                                             
|           |                                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                 |         | In 2005, the
  subsidiary held 40% of the shares in Palma Aquarium Holdings B.V.
  (hereinafter: Palma) during the third quarter of 2006 purchased an
  additional 15% of Palma in an amount of 852 thousand. Since that date, the
  financial statements of Palma are consolidated with those of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                 |         | As used in
  these financial statements, the term Company refers to Coral World
  International Ltd. and its subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                 |         | A list of
  the Companys investees can be found in the Appendix at the end of these
  financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                 | 2.      | Functional currency                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                 |         | The
  accompanying financial statements have been prepared in US dollars (dollars
  or $). Substantially all of the revenues of CWIs subsidiaries are
  received, and substantially all of their operating costs are incurred, in
  local currencies. The functional currency of CWI is the US dollar and the
  functional currencies of its subsidiaries are the local currencies in which
  each such entity operates. The financial statements of the subsidiaries are
  translated into US dollars in accordance with the principles set forth in
  Statement of Financial Accounting Standards (FAS) No. 52 of the
  Financial Accounting Standards Board of the United States (FASB). Assets
  and liabilities are translated from the local currencies to dollars at
  year-end exchange rates. Income and expense items are translated at average
  exchange rates during the year.
|           |                                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                 |         | Gains or
  losses resulting from translation are included under the caption accumulated
  other comprehensive loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| |  |  |                                                         |  |                           |       |      |  |       |  |  |       | 
| |  |  | ------------------------------------------------------- |  | ------------------------- | ----- | ---- |  | ----- |  |  | ----- | 
| |  |  |                                                         |  |                           |       |      |  |       |  |  |       | 
| |  |  |                                                         |  | Year ended
  December 31, |      
| |  |  |                                                         |  | 2006                      |       | 2005 |  | 2004  | 
| |  |  |                                                         |  |                           |       |      |  |       | 
|
| |  |  | Exchange rates of certain currencies to the
  US dollar |  |                           |       |      |  |       |  |  |       | 
| |  |  |                                                         |  |                           |       |      |  |       |  |  |       | 
| |  |  | -   New Israeli shekel                                  |  |                           | 0.237 |      |  | 0.217 |  |  | 0.232 | 
| |  |  |                                                         |  |                           |       |      |  |       |  |  |       | 
| |  |  | -   Australian dollar                                   |  |                           | 0.790 |      |  | 0.734 |  |  | 0.779 | 
| |  |  |                                                         |  |                           |       |      |  |       |  |  |       | 
| |  |  | -   Euro                                                |  |                           | 1.317 |      |  | 1.183 |  |  | 1.364 | 

| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 3. | Accounting principles                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |    | The
  consolidated financial statements were prepared in accordance with accounting
  principles generally accepted in the United States (US GAAP).                                                                                                                                                                                                                                                                             
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | 4. | Use of estimates in the preparation of financial statements                                                                                                                                                                                                                                                                                                                                                                     
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |    | The preparation of financial statements in conformity with US GAAP
  requires management to make estimates and assumptions that affect the
  reported amounts of assets and liabilities and the disclosure of contingent
  assets and liabilities at the date of the financial statements, and the
  reported amounts of revenues and expenses during the reporting periods.
  Actual results could differ from those estimates.

- 8 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (cont.)

|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|---------- | --------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           | B.                                      | Principles of consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                         | The
  consolidated financial statements include the accounts of the Company and its
  subsidiaries. In these financial statements, the term subsidiary refers to
  a company in which the Company exerts control of more than 50% and the
  financial statements of which are consolidated with those of the Company.
  Significant intercompany transactions and balances were eliminated in the
  consolidation; profits from intercompany sales, not yet realized outside the
  Group, were also eliminated.                                                                                                                                                                                                                                 
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           | C.                                      | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           |                                         | The Company
  considers all highly liquid investments to be cash equivalents. These include
  short-term (up to three month) bank deposits that are not restricted as to
  withdrawal or use, and short-term debentures, with original periods to
  maturity of not more than three months.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           | D.                                      | Concentration of credit risks  allowance for doubtful accounts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           |                                         | Most of the
  Companys revenues are earned in Israel, Australia and Hawaii, and derive
  from a large number of customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           |                                         | In general,
  the exposure to the concentration of credit risks relating to trade
  receivables is limited, due to the relatively large number of customers and
  their wide geographic distribution.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           |                                         | The
  allowance for doubtful debts is calculated specifically for each debt, the
  collection of which is considered by management to be doubtful.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           | E.                                      | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           |                                         | Inventories
  are mainly jewelry, souvenirs and other goods, and are stated at the lower of
  cost or market. Cost is determined on the first-in first-out basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           | F.                                      | Investment in affiliated company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           |                                         | Investments in companies in which the Company has
  significant influence (ownership interest of between 20% and 50%) but less
  than a controlling interest, which are not subsidiaries, are accounted for by
  the equity method. Revenues from intercompany sales, not yet realized outside
  of the Company, were eliminated.                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           | G.                                      | Property and equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           |                                         | Property and
  equipment are stated at cost, net of related investment grants. The assets
  are depreciated by the straight-line method, on the basis of their estimated
  useful life.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           |                                         | The
  Companys property and equipment are reviewed for impairment in accordance
  with Statement of Financial Accounting Standards No. 144 Accounting for
  the Impairment or Disposal of Long-Lived Assets (SFAS No. 144)
  whenever events or changes in circumstances indicate that the carrying amount
  of an asset may not be recoverable. Recoverability of assets to be held and
  used is measured by a comparison of the carrying amount of an asset to the
  future undiscounted cash flows expected to be generated by the assets. If
  such assets are considered to be impaired, the impairment to be recognized is
  measured by the amount by which the carrying amount of the assets exceeds the
  fair value of the assets.

- 9 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (cont.)

|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                          | 
|---------- | --------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | 
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES (cont.) |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                          | 
|           | H.                                      | Deferred income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                         
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                          | 
|           |                                         | Deferred
  income taxes are determined utilizing the asset and liability method based on
  the estimated future tax effects of differences between the financial
  accounting and the tax bases of assets and liabilities under the applicable
  tax law. Deferred tax balances are computed using the tax rates expected to
  be in effect at the time when these differences reverse. Valuation allowances
  in respect of the deferred tax assets are provided if, based upon the weight
  of available evidence, it is more likely than not that all or a portion of
  the deferred income tax assets will not be realized. |                                                                                                                         
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                          | 
|           |                                         | As stated in
  Note 18D, the Israeli subsidiary has been granted approved enterprise
  status and, accordingly, upon distribution of dividends by this subsidiary to
  the Company, such dividends may be subject to tax. The Company does not
  intend on causing dividend distribution from this subsidiary. Accordingly, no
  additional tax has been taken into account in respect of such dividends.                                                                                                                                                                                                                     |                                                                                                                         
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                          | 
|           |                                         | Taxes which
  would apply in the event of disposal of investments in subsidiaries (all
  foreign subsidiaries) have not been taken into account in computing the
  deferred taxes, as it is the Companys policy to continue holding these
  investments, not to realize them.                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                         
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                          | 
|           | I.                                      | Revenue recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                          | 
|           |                                         | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Revenue from
  admission fees is recognized upon entrance of visitors to sites managed by
  the Companys subsidiaries. 
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                          | 
|           |                                         | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Revenue from
  sales of merchandise is recognized when merchandise is supplied to the
  customer.                       
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                          | 
|           |                                         | 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Revenue from
  commissions is recognized upon sale of the attraction in respect of which
  the commission is received.
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                          | 
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                          | 
|           | J.                                      | Advertising expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                         
|           |                                         | Advertising
  expenses are charged to income as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                         
|           | K.                                      | Foreign currency transactions and balances                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                         
|           |                                         | Balances
  denominated in, or linked to, foreign currency are stated on the basis of the
  exchange rates prevailing at the balance sheet date. For foreign currency
  transactions included in the statement of income, the exchange rates at transaction
  dates are used. Transaction gains or loses arising from changes in the
  exchange rates used in the translation of such balances are carried to
  financial income or expenses.                                                                                                                                                                                   
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                         
|           | L.                                      | Earnings per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                         
|           |                                         | Basic
  earnings per share are computed by dividing net income by the weighted
  average number of all management and preferred shares outstanding during the
  year.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                         
|           |                                         | Diluted
  earnings per share are not presented, since the Company has no potential
  shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                         
|           | M.                                      | Reclassifications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                         
|           |                                         | Certain
  comparative figures have been reclassified to conform to the current year
  presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

- 10 -

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---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (cont.)

|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|---------- | --------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|           | N.                                      | Comprehensive
  income (loss)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|           |                                         | Comprehensive income
  (loss), presented in shareholders equity, includes, in addition to net
  income (loss), translation adjustments of financial statements of
  subsidiaries and affiliated companies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|           | O.                                      | Recently issued accounting pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                         | FAS 155 Accounting for Certain Hybrid Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                         | In February 2006, the FASB issued FAS 155, Accounting for certain Hybrid Financial Instruments,
  an amendment of FASB statements No. 133 and 140. This statement permits fair
  value measurement for any hybrid financial instrument that contains an
  embedded derivative that otherwise would require bifurcation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|           |                                         | This statement shall be effective for all
  financial instruments acquired or issued, or subject to remeasurement (new
  basis) after the beginning of an entitys first fiscal year that begins after
  September 15, 2006. Earlier adoption is permitted as of the beginning of an
  entitys fiscal year, provided that no interim period financial statements
  have been issued for the financial year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                         | The Company does not expect the adoption of this
  Statement to have a material impact on its financial position and results of
  operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                         | FAS 156 Accounting for Servicing of Financial Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                         | In March 2006, the FASB issued FAS No. 156,
  Accounting for Servicing of Financial
  Assets (FAS 156). The statement amends FAS No. 140, Accounting for Transfers and Servicing of Financial
  Assets and Extinguishments of Liabilities, with respect to the
  accounting for separately recognized servicing assets and servicing
  liabilities. Consistent with FAS No. 140, FAS 156 requires companies to
  recognize a servicing asset or servicing liability each time it undertakes an
  obligation to service a financial asset by entering into a service contract.
  However, the Statement permits a company to choose either the amortized cost
  method or fair value measurement method for each class of separately
  recognized servicing assets. The Statement is effective as of the beginning
  of a companys first fiscal year after September 15, 2006. Earlier adoption
  is permitted as of the beginning of an entitys fiscal year, provided the
  entity has not yet issued financial statements, including interim financial
  statements. The Company plans to adopt FAS 156 at the beginning of 2007 and
  does not expect the adoption of this Statement to have a material impact on
  its financial position and results of operations.
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                         | FIN 48 Accounting for
  Uncertainty in Income Taxesan interpretation of
  FASB Statement No. 109                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                         | In July 2006, the
  FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB
  Statement No. 109 (FIN 48), which clarifies the accounting
  for uncertainty in tax positions. This Interpretation requires that the
  Company recognizes in its financial statements the impact of a tax position,
  if that position will more likely than not be sustained upon examination,
  based on the technical merits of the position. The provisions of FIN 48
  are effective as of the beginning of the 2007 calendar year, with the cumulative
  effect of the change in accounting principle recorded as an adjustment to
  opening retained earnings.
The Company does not expect the adoption of this Statement to have a
  material impact on its financial position and results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                     

- 11 -

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---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)

|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------------- | ----------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE
  1     | SIGNIFICANT
  ACCOUNTING POLICIES (cont.)
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              | O.                                        | Recently
  issued accounting pronouncements (cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              |                                           | FAS 157
  Fair Value Measurements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              |                                           | In September 2006, the FASB
  issued FAS No. 157, Fair Value
  Measurements. This statement clarifies the definition of fair
  value, establishes a framework for measuring fair value, and expands the
  disclosures on fair value measurements. FAS No. 157 is effective for fiscal
  years beginning after November 15, 2007. The Company has not determined the
  impact, if any, the adoption of this statement will have on its financial
  position and results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              |                                           | FAS 158
  Employers Accounting for Defined Benefit Pension and Other Postretirement
  Plansan amendment of FAS Statements No. 87, 88, 106 and 132(R)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              |                                           | In September 2006, the FASB
  issued FAS No. 158, Employers Accounting
  for Defined Benefit Pension and Other Postretirement Plansan amendment of
  FAS Statements No. 87, 88, 106 and 132(R). FAS No. 158 requires
  the recognition of the funded status of a defined benefit plan in the
  statement of financial position, requires that changes in the funded status
  be recognized through comprehensive income, changes the measurement date for
  defined benefit plan assets and obligations to the entitys fiscal year end
  and expands disclosures. The recognitions and disclosures under FAS No. 158
  are required as of the end of the fiscal year ending after June 15, 2007, for
  non-public entities. A non-public entity is also required to certain
  disclosures in the notes to the financial statements for a fiscal year ending
  after December 15, 2006, but before June 16, 2007. The new measurement date
  is effective for fiscal years ending after December 15, 2008. The Company is
  in the process of evaluating the impact of FAS No. 158 on its financial
  position and results of operations.
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              |                                           | FAS 159
  The Fair Value Option for Financial Assets and Financial Liabilities -
  Including an amendment of FASB Statement No. 115 (SFAS No. 159)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              |                                           | In February 2007, the FASB
  issued SFAS No. 159, The Fair Value Option for Financial Assets and
  Financial Liabilities - Including an amendment of FASB Statement No. 115
  (SFAS No. 159). This pronouncement permits all entities to choose to elect,
  at specified election dates, to measure eligible financial instruments at
  fair value. An entity shall report unrealized gains and losses on items for
  which the fair value option has been elected in earnings at each subsequent
  reporting date, and recognize upfront costs and fees related to those items
  in earnings as incurred and not deferred. SFAS No. 159 applies to fiscal
  years beginning after November 15, 2007, with early adoption permitted for an
  entity that has also elected to apply the provisions of SFAS No. 157. An
  entity is prohibited from retrospectively applying SFAS No. 159, unless it
  chooses early adoption. The company is currently assessing the impact of SFAS
  No. 159 on its consolidated financial position and results of operations.                                                                           
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|NOTE
  2     | CASH AND
  CASH EQUIVALENTS              
|              |                                          
|              | Composition:                             

| |                   |  |                |       |      |  |       | 
| | ----------------- |  | -------------- | ----- | ---- |  | ----- | 
| |                   |  | US dollars     |      
| |                   |  |                |      
| |                   |  | December
  31, |      
| | (in thousands)    |  | 2006           |       | 2005 | 
| |                   |  |                |       |      |  |       | 
| |                   |  |                |       |      |  |       | 
| | NIS               |  |                | 109   |      |  | 251   | 
| | US dollar         |  |                | 3,696 |      |  | 4,019 | 
| | Australian dollar |  |                | 1,494 |      |  | 1,858 | 
| | Euro              |  |                | 2,133 |      |  | 2,614 | 
| |                   |  |                |       |      |  |       | 
| |                   |  |                | 7,432 |      |  | 8,742 | 
| |                   |  |                |       |      |  |       | 

- 12 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)

|              |                            
|------------- | ---------------------------
|NOTE
  3     | TRADE
  ACCOUNTS RECEIVABLE
|              |                            
|              | Composition:               

| |                                       |  |                |       |      |  |       |  
| | ------------------------------------- |  | -------------- | ----- | ---- |  | ----- | -
| |                                       |  | US dollars     |      
| |                                       |  |                |      
| |                                       |  | December
  31, |      
| | (in thousands)                        |  | 2006           |       | 2005 | 
| |                                       |  |                |       |      |  |       |  
| |                                       |  |                |       |      |  |       |  
| | Open accounts                         |  |                | 682   |      |  | 540   |  
| | Credit card companies                 |  |                | 619   |      |  | 555   |  
| | Post-dated checks                     |  |                | 89    |      |  | 102   |  
| |                                       |  |                |       |      |  |       |  
| |                                       |  |                | 1,390 |      |  | 1,197 |  
|
| | Less  allowance for
  doubtful debts |  |                | (32   | )    |  | (30   | )
| |                                       |  |                |       |      |  |       |  
| |                                       |  |                | 1,358 |      |  | 1,167 |  
| |                                       |  |                |       |      |  |       |  

|              |                            
|------------- | ---------------------------
|NOTE
  4     | OTHER
  ACCOUNTS RECEIVABLE

| |                                                |  |                |       |      |  |     | 
| | ---------------------------------------------- |  | -------------- | ----- | ---- |  | --- | 
| |                                                |  | US dollars     |      
| |                                                |  |                |      
| |                                                |  | December
  31, |      
| | (in thousands)                                 |  | 2006           |       | 2005 | 
| |                                                |  |                |       |      | 
| |                                                |  |                |       |      |  |     | 
| | Employees                                      |  |                | 118   |      |  | 151 | 
| | Institutions                                   |  |                | 2,614 |      |  | 46  | 
| | Prepaid expenses                               |  |                | 698   |      |  | 459 | 
| | Deferred taxes                                 |  |                | 35    |      |  | 30  | 
| | Loan to minority in
  consolidated company (*) |  |                | 100   |      |  | -   | 
| | Others                                         |  |                | 469   |      |  | 308 | 
| |                                                |  |                |       |      |  |     | 
| |                                                |  |                | 4,034 |      |  | 994 | 
| |                                                |  |                |       |      |  |     | 

|              |                                    |                                                                                                                                                                                                                                                                        
|------------- | ---------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              | (*)                                | Represents an amount
  denominated in US dollars bearing interest at a rate of 6.63% per annum. The
  loan maturity is during fiscal year 2007.                                                                                                                        
|              |                                    |                                                                                                                                                                                                                                                                        
|NOTE
  5     | INVESTMENT
  IN AFFILIATED COMPANY
|              |                                    |                                                                                                                                                                                                                                                                        
|              | A.                                 | Palma
  Aquarium Holding B.V. (Palma)                                                                                                                                                                                                                                  
|              |                                    |                                                                                                                                                                                                                                                                        
|              |                                    | In 2005, the subsidiary
  held 40% of the shares in Palma and during the third quarter of 2006
  purchased an additional 15% of Palma in an amount of 852 thousand. Since
  that date, the financial statements of Palma are consolidated with those of
  the Company.
|              |                                    |                                                                                                                                                                                                                                                                        
|              |                                    | The balance of the
  investment in Palma as of December 31, 2005 was US$ 10,331 thousand, of which
  US$ 10,744 thousand is in respect of a loan granted to Palma in stages, from
  2002 to 2005.                                                                      
|              |                                    |                                                                                                                                                                                                                                                                        
|              |                                    | Summary financial
  information of Palma:                                                                                                                                                                                                                              

| |                        |  |                |   |      |  |        | 
| | ---------------------- |  | -------------- | - | ---- |  | ------ | 
| |                        |  | US dollars     |  
| |                        |  |                |  
| |                        |  | December
  31, |  
| | (in thousands)         |  | 2006           |   | 2005 | 
| |                        |  |                |   |      | 
| |                        |  |                |   |      |  |        | 
| | Current assets         |  |                | - |      |  | 4,811  | 
| | Property and equipment |  |                | - |      |  | 17,030 | 
| | Other assets           |  |                | - |      |  | 3,450  | 
| |                        |  |                |   |      |  |        | 
| | Total assets           |  |                | - |      |  | 25,298 | 
| |                        |  |                |   |      |  |        | 
| |                        |  |                |   |      |  |        | 
| | Total liabilities      |  |                | - |      |  | 26,328 | 
| |                        |  |                |   |      |  |        | 

| |    |                                                                               
| | -- | ------------------------------------------------------------------------------
| | B. | See Note 17 regarding an
  affiliated company held by the Company in the past.

- 13 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)

|              |                               |             
|------------- | ----------------------------- | ------------
|NOTE
  6     | PROPERTY
  AND EQUIPMENT, NET
|              |                               |             
|              | A.                            | Composition:

| |                                            |  |                |         |      |  |         |  
| | ------------------------------------------ |  | -------------- | ------- | ---- |  | ------- | -
| |                                            |  | US dollars     |        
| |                                            |  |                |        
| |                                            |  | December
  31, |        
| | (in thousands)                             |  | 2006           |         | 2005 | 
| |                                            |  |                |         |      | 
| |                                            |  |                |         |      |  |         |  
| | Buildings &
  installations                |  |                | 77,475  |      |  | 37,669  |  
| | Machinery, equipment and
  sailing vessels |  |                | 3,278   |      |  | 3,181   |  
| | Office equipment &
  furniture             |  |                | 1,870   |      |  | 1,678   |  
| | Motor vehicles                             |  |                | 213     |      |  | 207     |  
| |                                            |  |                |         |      |  |         |  
| |                                            |  |                | 82,836  |      |  | 42,735  |  
|
| | Less  accumulated
  depreciation          |  |                | (30,829 | )    |  | (27,670 | )
| |                                            |  |                |         |      |  |         |  
| |                                            |  |                | 52,007  | (*)  |  | 15,065  |  
| |                                            |  |                |         |      |  |         |  

| |    |                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                        
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | In the years ended December
  31, 2006, 2005 and 2004, depreciation expenses were US$ 2,849 thousand,
  US$ 2,799 thousand and US$ 3,052 thousand, respectively, and additional
  equipment was purchased in amounts of US$ 11,298 thousand, US$ 801 thousand and
  US$ 536 thousand, respectively.
| |    |                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                        
| |    | (*)                                                                                                                                                                                                                                                                                                 | In respect of property and
  equipment of a subsidiary acquired during 2006, see Consolidated Statements
  of Cash Flows  Appendix A.                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                        
| | B. | Leased
  lands                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                        
| |    | 1.                                                                                                                                                                                                                                                                                                  | The Eilat park is located
  on land leased by Red Sea Underwater Observatory Ltd. (RSUO), under an
  agreement with the Israel Lands Administration, for a period of 49 years,
  from October 20, 1974 until October 19, 2023, with an option for an
  additional 49 years.                            
| |    |                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                     | Under another lease
  agreement with the Israel Lands Administration, RSUO leased a plot in the
  Eilat Tourist Center for a 49 year period, from May 5, 1991 until May 4,
  2040, with an option for another 49 year period. RSUO erected a store on the
  plot, covering an area of 24 square meters.
| |    |                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                        
| |    | 2.                                                                                                                                                                                                                                                                                                  | The marine park in Perth,
  Australia is located on a parcel of land leased from the Australian
  Government for a 21-year period, beginning in 1987, with an option for an
  additional 21-year period.                                                                                               
| |    |                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                     | Exercise of the option has
  been approved by the Companys board of directors and is currently in the
  process of being implemented.                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                        
| | C. | Depreciation
  rates                                                                                                                                                                                                                                                                               

| |                                                         |         
| | ------------------------------------------------------- | --------
| |                                                         | %       
| |                                                         |         
| | Buildings and installations                             | 4       
| |                                                         |         
| | Machinery, equipment and
  sailing vessels (mainly 10%) | 6
   20
| |                                                         |         
| | Office equipment and
  furniture (mainly 20%)           | 5
   33
| |                                                         |         
| | Motor vehicles                                          | 15      

| |    |                      
| | -- | ---------------------
| | D. | Liens  See Note 12B.

- 14 -

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---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)

|              |                         |                         
|------------- | ----------------------- | ------------------------
|NOTE
  7     | DEFERRED
  INCOME TAXES
|              |                         |                         
|              | A.                      | Deferred
  income taxes:

| |                                                                                                   |  |                |        |      |  |        |  
| | ------------------------------------------------------------------------------------------------- |  | -------------- | ------ | ---- |  | ------ | -
| |                                                                                                   |  | US dollars     |       
| |                                                                                                   |  |                |       
| |                                                                                                   |  | December
  31, |       
| | (in thousands)                                                                                    |  | 2006           |        | 2005 | 
| |                                                                                                   |  |                |        |      | 
| |                                                                                                   |  |                |        |      |  |        |  
| | Short-term deferred tax
  assets  net:                                                           |  |                |        |      |  |        |  
| |                                                                                                   |  |                |        |      |  |        |  
| | Provisions for employee related
obligations                                                       |  |                | 35     |      |  | 30     |  
| | Other                                                                                             |  |                | -      |      |  | -      |  
| |                                                                                                   |  |                |        |      |  |        |  
| |                                                                                                   |  |                | 35     |      |  | 30     |  
| |                                                                                                   |  |                |        |      |  |        |  
| |                                                                                                   |  |                |        |      |  |        |  
| | Valuation allowance  in respect of carryforward
losses and deductions
  that may not be utilized |  |                | -      |      |  | -      |  
| |                                                                                                   |  |                |        |      |  |        |  
| |                                                                                                   |  |                | 35     |      |  | 30     |  
| |                                                                                                   |  |                |        |      |  |        |  
| |                                                                                                   |  |                |        |      |  |        |  
| |                                                                                                   |  |                |        |      |  |        |  
| | Long-term deferred tax assets (liabilities) 
net:                                                |  |                |        |      |  |        |  
|
| | Property, plant and
equipment                                                                     |  |                | (1,076 | )    |  | (2,435 | )
| | Provisions for employee related
obligations                                                       |  |                | 156    |      |  | 139    |  
| | Timing difference for long-term and
carryforward losses and deductions                            |  |                | 196    |      |  | 2,558  |  
| | In respect of tax losses of an
approved enterprise carried forward                              |  |                | 229    |      |  | 210    |  
| |                                                                                                   |  |                |        |      |  |        |  
| |                                                                                                   |  |                | (495   | )    |  | 472    |  
| | Valuation allowance  in respect of carryforward
losses and deductions
  that may not be utilized |  |                | -      |      |  | -      |  
| |                                                                                                   |  |                |        |      |  |        |  
| |                                                                                                   |  |                | (495   | )    |  | 472    |  
| |                                                                                                   |  |                |        |      |  |        |  
| |                                                                                                   |  |                | (460   | )    |  | 502    |  
| |                                                                                                   |  |                |        |      |  |        |  

| |    |                                             
| | -- | --------------------------------------------
| | B. | Presented
  in the balance sheet as follows:

| |                       |  |                |      |      |  |     | 
| | --------------------- |  | -------------- | ---- | ---- |  | --- | 
| |                       |  | US dollars     |     
| |                       |  |                |     
| |                       |  | December
  31, |     
| | (in thousands)        |  | 2006           |      | 2005 | 
| |                       |  |                |      |      | 
| |                       |  |                |      |      |  |     | 
| | Current assets        |  |                | 35   |      |  | 30  | 
| | Long-term assets      |  |                | 341  |      |  | 472 | 
| | Long-term liabilities |  |                | (836 | )    |  | -   | 
| |                       |  |                |      |      |  |     | 
| |                       |  |                | (460 | )    |  | 502 | 
| |                       |  |                |      |      |  |     | 

| |    |                                                                                                    
| | -- | ---------------------------------------------------------------------------------------------------
| | C. | Carryforward
  tax losses                                                                          
| |    |                                                                                                    
| |    | Carryforward tax losses of
  an Israeli subsidiary as of December 31, 2006 amount to US$ 2 million.

- 15 -

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---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)

|              |                                    |             
|------------- | ---------------------------------- | ------------
|NOTE
  8     | CREDIT
  FROM BANKING INSTITUTIONS
|              |                                    |             
|              | A.                                 | Composition:

| |                                         |  |                       |  |                |        |      |  |       | 
| | --------------------------------------- |  | --------------------- |  | -------------- | ------ | ---- |  | ----- | 
| |                                         |  |                       |  | US dollars     |       
| |                                         |  |                       |  |                |       
| |                                         |  | Interest
  rate as of |  | December
  31, |       
| | (in thousands)                          |  | 2006                  |  | 2006           |        | 2005 | 
| |                                         |  |                       |  |                |        |      | 
| |                                         |  | %                     |  |                |        |      |  |       | 
| | Bank credit  unlinked                  |  | 5.25                  |  |                | 1,397  |      |  | 566   | 
| | Short-term loans  unlinked             |  | 6.5                   |  |                | 71     |      |  | 109   | 
| | Short-term loans  dollar
  linked      |  | 5.8                   |  |                | 7,000  |      |  | -     | 
| | Current maturities of
  long-term loans |  |                       |  |                | 1,927  |      |  | 5,039 | 
| |                                         |  |                       |  |                |        |      |  |       | 
| |                                         |  |                       |  |                | 10,395 |      |  | 5,714 | 
| |                                         |  |                       |  |                |        |      |  |       | 

|              |                                         |                                                                                                                                
|------------- | --------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------
|              | B.                                      | Lines of
  credit                                                                                                              
|              |                                         |                                                                                                                                
|              |                                         | Unutilized short-term
  credit lines of the Company and its subsidiaries as of December 31, 2006,
  totaled US$ 3,023 thousand.
|              |                                         |                                                                                                                                
|              | C.                                      | Liens 
  see Note 12B.                                                                                                        
|              |                                         |                                                                                                                                
|NOTE
  9     | ACCOUNTS
  PAYABLE AND ACCRUALS  OTHER
|              |                                         |                                                                                                                                
|              | Composition:                           

| |                                                 |  |                |       |      |  |       | 
| | ----------------------------------------------- |  | -------------- | ----- | ---- |  | ----- | 
| |                                                 |  | US dollars     |      
| |                                                 |  |                |      
| |                                                 |  | December
  31, |      
| | (in thousands)                                  |  | 2006           |       | 2005 | 
| |                                                 |  |                |       |      | 
| |                                                 |  |                |       |      |  |       | 
| | Advances from customers                         |  |                | 107   |      |  | 59    | 
| | Employees and institutions
  in respect thereof |  |                | 947   |      |  | 671   | 
| | Institutions                                    |  |                | 284   |      |  | 1,118 | 
| | Accrued expenses                                |  |                | 529   |      |  | 193   | 
| | Others                                          |  |                | 159   |      |  | 267   | 
| |                                                 |  |                |       |      |  |       | 
| |                                                 |  |                | 2,026 |      |  | 2,308 | 
| |                                                 |  |                |       |      |  |       | 

|              |                   |             
|------------- | ----------------- | ------------
|NOTE
  10    | LONG-TERM
  LOANS
|              |                   |             
|              | A.                | Composition:

| |                                                 |  |                       |  |                |        |      |  |        |  
| | ----------------------------------------------- |  | --------------------- |  | -------------- | ------ | ---- |  | ------ | -
| |                                                 |  |                       |  | US dollars     |       
| |                                                 |  |                       |  |                |       
| |                                                 |  | Interest
  rate as of |  | December
  31, |       
| | (in thousands)                                  |  | 2006                  |  | 2006           |        | 2005 | 
| |                                                 |  |                       |  |                |        |      | 
| |                                                 |  | %                     |  |                |        |      |  |        |  
| |                                                 |  |                       |  |                |        |      |  |        |  
| | Banks                                          |  |                       |  |                |        |      |  |        |  
| |                                                 |  |                       |  |                |        |      |  |        |  
| | Euro
                 (1)                       |  | Euribor+1.75          |  |                | 17,748 |      |  | 239    |  
| | US dollar
       (2)                            |  | Libor+1.6             |  |                | 5,933  |      |  | 4,800  |  
| | US dollar
       (3)                            |  | Libor+2.25            |  |                | 10,000 |      |  | -      |  
| | Australian dollar                               |  | 7.65                  |  |                | 575    |      |  | 773    |  
| |                                                 |  |                       |  |                |        |      |  |        |  
| | Shareholders of
  consolidated companies  Euro |  | Libor+1.875           |  |                | 7,168  |      |  | 320    |  
| |                                                 |  |                       |  |                |        |      |  |        |  
| |                                                 |  |                       |  |                | 41,424 |      |  | 6,132  |  
| |                                                 |  |                       |  |                |        |      |  |        |  
| | Less:current maturities                         |  |                       |  |                | (1,927 | )    |  | (5,039 | )
| |                                                 |  |                       |  |                |        |      |  |        |  
| |                                                 |  |                       |  |                | 39,497 |      |  | 1,093  |  
| |                                                 |  |                       |  |                |        |      |  |        |  

- 16 -

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---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (cont.)

|            |                        
|----------- | -----------------------
|NOTE 10    | LONG-TERM LOANS (cont.)

| |    |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | ------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A. | (cont.)
| |    |        
| |    | 1.      | A Euro loan
  in an amount of  13,464 thousand, repayable in 39 equal quarterly
  installments commencing in March 2008, and one quote of 20% of the total on
  the date of expiration. In connection with this loan, a subsidiary undertook
  the following conventions: - Debt service cover ratio (RCSD):1.25 during the entire period of
  operations.                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | 2.      | A dollar loan
  in an amount of US$6,000 thousand, payable in equal monthly installments
  commencing in November 2006. The Credit Agreement requires the subsidiary to comply with certain
  financial conditions, including (a) Debt Service Coverage Ratio of not
  less than 3.0 to one; (b) Adjusted Equity of not less than $6,000,000 as of
  December 31, 2006 and $7,000,000 as of December 31, 2007 and thereafter; (c)
  Net Cash Reserve of not less than $1,000,000. As of December 31, 2006, the
  Company has complied with the financial covenants contained in the Credit
  Agreement. An ALTA-insured first mortgage and a first lien on all leases,
  rents, other income, and tangible property are pledged as collateral under
  the terms of this Agreement.
| |    |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | 3.      | A dollar loan in an amount of US$10,000 thousand, repayable in four
  equal annual installments commencing in September 2007. In connection with
  this loan, the subsidiary undertook that during the initial loan utilization
  period, its total tangible shareholders equity (as defined below) would not
  fall below NIS 100 million (US$23.7 million) and that it would not fall below
  25% of the Companys consolidated balance sheet, as presented in the
  Companys consolidated financial statements.                                                                                                                                                                                                                                                              
| |    |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |         | The term tangible shareholders equity is defined as its paid-in
  capital, plus retained earnings, plus capital notes and various capital
  reserves, plus the balance of shareholder loans to the Company and/or loans
  granted to the Company on behalf of shareholders (including loans taken by
  the Company from the bank against deposits made by shareholders or anyone on
  behalf of the shareholders), less the balance of loans granted to
  shareholders, less the value of intangible assets such as goodwill, patents,
  etc., less investments in the Company.                                                                                                                                                                                                
| |    |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |         | The subsidiary undertook that during the initial utilization period
  of the loan, it will be in possession of a shareholders loan in an amount of
  US$6 million that was placed/will be placed at the disposal of the Company,
  including funds deriving from interest and linkage on these loans. For
  purposes of this item, a loan taken by the Company against deposits made in
  Union Bank by shareholders or parties on their behalf will be considered as a
  shareholders loan.                                                                                                                                                                                                                                                                                      
| |    |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |         | As of the date of the financial statements, the subsidiary was in
  compliance with the aforementioned undertaking.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| |    |                
| | -- | ---------------
| | B. | Maturity dates:

| |                                   |  |            |                     | 
| | --------------------------------- |  | ---------- | ------------------- | 
| |                                   |  | US dollars |                    
| |                                   |  |            |                    
| |                                   |  |            | December 31,
  2006 | 
| |                                   |  |            |                     | 
|
| | First year 
  current maturities |  |            | 1,927               | 
| | Second year                       |  |            | 4,270               | 
| | Third year                        |  |            | 4,354               | 
| | Fourth year
  and thereafter      |  |            | 23,705              | 
| |                                   |  |            |                     | 
| |                                   |  |            | 34,256              | 
|
| | No repayment
  date has been set  |  |            | 7,168               | 
| |                                   |  |            |                     | 
| |                                   |  |            | 41,424              | 
| |                                   |  |            |                     | 

| |    |                      
| | -- | ---------------------
| | C. | Liens  see Note 12B.

- 17 -

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---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(cont.)

|            |                                               
|----------- | ----------------------------------------------
|NOTE 11    | LIABILITY FOR EMPLOYEE RIGHTS UPON RETIREMENTS

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A. | Israeli
  labor laws generally require payment of severance pay upon dismissal of an
  employee or upon termination by the employee of employment in certain other
  circumstances. The severance pay liability of the Company to their employees,
  which reflects the undiscounted amount of the liability, is based upon the
  number of years of service and the latest monthly salary (one months salary
  for each year worked), and is partly funded by insurance policies and by
  regular deposits with recognized severance pay funds.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | The Company
  may make withdrawals from the amounts funded only for the purpose of paying
  severance pay.                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | Consolidated
  subsidiaries in Australia deposit 8% of their employees salaries into
  recognized pension funds. This is the minimum required by Australian law.                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | B. | The
  liability for employee severance pay includes, as of December 31, 2006,
  an amount of US$ 569 thousand, which represents the liability to a former
  employee.                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | This debt is
  being paid-off in fixed monthly installments and is expected to be totally
  repaid through 2017.                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | C. | Retirement plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | On
  January 1, 2003, the Hawaiian subsidiary adopted a 401(k) retirement
  savings plan for all eligible employees who satisfy age and length of service
  requirements. Eligible employees may make annual contributions limited to the
  total amount deductible under applicable provisions of the Internal Revenue
  Code.                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | On
  January 1, 2005, the Hawaiian subsidiaries amended the 401(k) retirement
  savings plan to include a Cash or Deferred Profit Sharing Plan as authorized
  under the Internal Revenue Code. Employer contributions to this plan amounted
  to US$ 36,306 and US$ 34,597 for 2006 and 2005, respectively.                                                                                                                                                                                                                                     

|            |                                              
|----------- | ---------------------------------------------
|NOTE 12    | CONTINGENT LIABILITIES, COMMITMENTS AND LIENS

| |    |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A. | Commitments
| |    |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | 1.          | Agreement with the Israel Nature Reserve Authority                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |             | RSUO entered
  into an agreement with the Israel Nature Reserve Authority (hereafter: the
  Authority) on February 26, 1973, whereby the RSUO received sole rights
  to build a tourist site in the Eilat Nature Reserve and the right of first
  refusal should the Authority grant permission to set up another underwater
  observatory in the Red Sea. The agreement has been amended several times, in
  light of RSUOs requests to expand the park and to add additional
  attractions. The last such amendment was on December 1, 1992.                                                      
| |    |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |             | RSUOs
  agreement with the Authority is subject to the lease agreement between the
  Company and the Israel Lands Administration regarding the area in which the
  site is located (see Note 6B).                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |             | Under the
  agreement, RSUO undertook to implement reasonable steps to ensure that
  nothing would be done at the site that would cause damage to or be of a
  nuisance to the public. RSUO is responsible for any third party damage
  inflicted in the area of the site and for any damage or injury caused to the
  Authority, any of its employees or agents at the site or at any other place
  as a result of performance of RSUOs work at the site or resulting from the
  operation of the site, if the damages were caused by RSUO, its employees or
  agents or by any visitors to the site.

- 18 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(cont.)

|            |                                                      
|----------- | -----------------------------------------------------
|NOTE 12    | CONTINGENT LIABILITIES, COMMITMENTS AND LIENS (cont.)

| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| | -- | ------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | A. | Commitments (cont.)
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | 1.                  | Agreement with the Israel Nature Reserve Authority (cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                     | Under the
  agreement, RSUO has to operate a site in the Eilat park seven days a week.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                     | The
  agreement is unlimited in time and leaves no room for the Authority to
  initiate any changes in the consideration RSUO is required to pay for its
  license under the agreement. Should RSUO wish to add certain activity to its
  activities in the Eilat park, it will have to obtain permission to do so from
  the Authority.                                                                                                                                                                                                                                
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                     | In
  consideration for the license under the agreement, RSUO pays the Authority,
  as of the balance sheet date, the following:                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                     | a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 5.0% of the
  price of net admission revenue to the Eilat park.                                                                                     
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| |    |                     | b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 2.5% of the
  receipts from restaurants and souvenir sales.                                                                                         
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| |    |                     | c.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 4% of the
  receipts from cruises.                                                                                                                  
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| |    |                     | d.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | US$ 25,000
  per annum as participation in the expenses of the Authority to employ a marine
  biologist engaged in the field of nature conservation.
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| |    | 2.                  | Agreements to sell attractions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| |    |                     | A subsidiary
  entered into agreements to set up attraction counters (hereinafter  usage
  rights agreements). Under the usage rights agreements, the subsidiary rents
  space in which it will set up an attraction counter in the lobby of a hotel
  or a shopping mall, at which it will sell tickets to the Eilat Park and to
  other attractions in and around Eilat. The rental fee is computed as a percentage
  of sales, a flat fee, or some combination of the two methods. The subsidiary
  receives a commission on the sale of tickets to attractions.
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| | B. | Liens              
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| |    | 1.                  | A floating
  charge in an unlimited amount was registered by RSUO on all of its assets and
  on all income from the mortgaged assets, in favor of the State of Israel, to
  secure the repayment of investment grants received under the terms of the
  Israeli Law for the Encouragement of Capital Investment  1959.                                                                                                                                                                                                                                                 
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| |    | 2.                  | A specific
  charge was registered on all RSUOs property rights in the Oceanarium
  project within the underwater observatory in Eilat, block 40032, part of
  parcel 2, lot a, in favor of the First International Bank of Israel.                                                                                                                                                                                                                                                                                                                                
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| |    | 3.                  | A floating
  charge was registered on all the assets of Maui Ocean Center, Inc. (MOC), on
  the income from all the mortgaged assets and on all the subsidiarys rights
  under agreements and insurance policies, in favor of Bank of Hawaii, in
  respect of a loan granted by the bank to MOC. As of December 31, 2006,
  the balance of the loan secured by this charge was $ 5,933 thousand.                                                                                                                                                                       
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| |    | 4.                  | A fixed
  charge, unlimited in amount, was registered on all the equipment, documents,
  securities and intangible property rights of the Australian subsidiaries and
  a floating charge, unlimited in amount on all the assets of those companies,
  in favor of a bank, to secure the repayment of loans from that bank. As of
  December 31, 2006, the balance of the loans secured by these charges was
  $ 554 thousand.                                                                                                                                          

- 19 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (cont.)

|            |                                                      
|----------- | -----------------------------------------------------
|NOTE 12    | CONTINGENT LIABILITIES, COMMITMENTS AND LIENS (cont.)

|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- | -------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            | C.                   | Contingent liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                      | Investment grant                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                      | Certain of
  RSUOs installations have received approved enterprise status under the Law
  for the Encouragement of Capital Investment  1959. Should RSUO not be able
  to prove that the investments it made were carried out in accordance with the
  terms of the approved plans, the Israel Investment Center is entitled to demand
  repayment of the investment grants received, plus interest and linkage
  differentials from the date the grants were received. Furthermore, RSUO will
  have to repay any tax benefits it received (accelerated depreciation and
  lower tax rates). As of the date of the preparation of the financial
  statements, RSUO has not received all the final permits from the Investment
  Center. In the opinion of RSUO management, RSUO is in compliance with the
  stipulated terms.
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|NOTE 13    | SHAREHOLDERS EQUITY
|            |                     
|            | A.                   | The A and
  B management shares are the only voting shares and hold equal voting
  rights. The holders of a majority of the A management shares elect one-half
  of the Board and the holders of a majority of the B management shares elect
  the other half. The C Preference Shares have no rights except to receive
  dividends, if declared.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            | B.                   | See Note 1A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|            |              
|----------- | -------------
|NOTE 14    | COST OF SALES

| |                                                  |  |                         |        |      |  |        |  |  |        | 
| | ------------------------------------------------ |  | ----------------------- | ------ | ---- |  | ------ |  |  | ------ | 
| |                                                  |  | US dollars              |       
| |                                                  |  |                         |       
| |                                                  |  | Year ended December 31, |       
| | (in
  thousands)                                 |  | 2006                    |        | 2005 |  | 2004   | 
| |                                                  |  |                         |        |      |  |        |  |  |        | 
| |                                                  |  |                         |        |      |  |        |  |  |        | 
| | Payroll and
  related expenses                   |  |                         | 4,435  |      |  | 3,780  |  |  | 3,800  | 
| | Depreciation
  and amortization                  |  |                         | 2,464  |      |  | 2,393  |  |  | 2,644  | 
| | Consumption
  of inventory                       |  |                         | 4,317  |      |  | 4,113  |  |  | 3,354  | 
| | Royalties to
  the Nature Reserves Authority (*) |  |                         | 262    |      |  | 220    |  |  | 233    | 
| | Others                                           |  |                         | 2,275  |      |  | 2,539  |  |  | 2,632  | 
| |                                                  |  |                         |        |      |  |        |  |  |        | 
| |                                                  |  |                         | 13,753 |      |  | 13,045 |  |  | 12,663 | 
| |                                                  |  |                         |        |      |  |        |  |  |        | 

| |     |                 
| | --- | ----------------
| | (*) | See Note
  12A1.

|            |                 
|----------- | ----------------
|NOTE 15    | SELLING EXPENSES

| |                                |  |                         |       |      |  |       |  |  |       | 
| | ------------------------------ |  | ----------------------- | ----- | ---- |  | ----- |  |  | ----- | 
| |                                |  | US dollars              |      
| |                                |  |                         |      
| |                                |  | Year ended December 31, |      
| | (in
  thousands)               |  | 2006                    |       | 2005 |  | 2004  | 
| |                                |  |                         |       |      |  |       |  |  |       | 
| |                                |  |                         |       |      |  |       |  |  |       | 
| | Advertising                    |  |                         | 1,112 |      |  | 1,091 |  |  | 1,391 | 
| | Payroll and
  related expenses |  |                         | 674   |      |  | 626   |  |  | 641   | 
| | Others                         |  |                         | 498   |      |  | 422   |  |  | 411   | 
| |                                |  |                         |       |      |  |       |  |  |       | 
| |                                |  |                         | 2,284 |      |  | 2,139 |  |  | 2,443 | 
| |                                |  |                         |       |      |  |       |  |  |       | 

- 20 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (cont.)

|            |                                    
|----------- | -----------------------------------
|NOTE 16    | GENERAL AND ADMINISTRATIVE EXPENSES

| |                                 |  |                         |       |      |  |       |  |  |       | 
| | ------------------------------- |  | ----------------------- | ----- | ---- |  | ----- |  |  | ----- | 
| |                                 |  | US dollars             
| |                                
| |                                 |  | Year ended December 31,
| | (in
  thousands)                |  | 2006                    |       | 2005 |  | 2004  | 
| |                                
| |                                
| | Payroll and
  related expenses  |  |                         | 3,324 |      |  | 3,256 |  |  | 3,085 | 
| | Depreciation
  and amortization |  |                         | 399   |      |  | 406   |  |  | 1,458 | 
| | Others                          |  |                         | 3,177 |      |  | 2,068 |  |  | 2,274 | 
| |                                 |  |                         |       |      |  |       |  |  |       | 
| |                                 |  |                         | 6,900 |      |  | 5,730 |  |  | 6,817 | 
| |                                 |  |                         |       |      |  |       |  |  |       | 

|            |                    
|----------- | -------------------
|NOTE 17    | OTHER EXPENSES, NET

| |                                                                 |  |                         |      |      |  |      |   |  |     |  
| | --------------------------------------------------------------- |  | ----------------------- | ---- | ---- |  | ---- | - |  | --- | -
| |                                                                 |  | US dollars             
| |                                                                
| |                                                                 |  | Year ended December 31,
| | (in
  thousands)                                                |  | 2006                    |      | 2005 |  | 2004 |  
| |                                                                
| |                                                                
| | Gain on sale
  of fixed assets                                  |  |                         | 15   |      |  | 1    |   |  | 18  |  
| | Loss from
  disposal of investment in an affiliated company (*) |  |                         | -    |      |  | (145 | ) |  | (46 | )
| | Severance pay to a former
  employee (see Note 11B)             |  |                         | -    |      |  | (584 | ) |  | -   |  
| | Expenses for prior years                                        |  |                         | (302 | )    |  | -    |   |  | -   |  
| |                                                                 |  |                         |      |      |  |      |   |  |     |  
| |                                                                 |  |                         | (287 | )    |  | (728 | ) |  | (28 | )
| |                                                                 |  |                         |      |      |  |      |   |  |     |  

| |     |                                                                                                                                                                                                                
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (*) | In 1999,
  RSUO, together with others, established a company named Amazing World Ltd.
  (hereinafter  Amazing), which set up a tourist attraction in Eliat. RSUO
  held 33% of the share capital of Amazing.
| |     |                                                                                                                                                                                                                
| |     | During 2004,
  Amazing was liquidated. In 2005 and 2004, RSUO paid amounts of US$ 145
  thousand and US$ 46 thousand, respectively, in excess of its investment in
  Amazing.                                  
| |     |                                                                                                                                                                                                                
| |     | As at
  December 31, 2005, RSUO does not have any liabilities or guarantees in
  respect to Amazing.                                                                                                           

|            |                
|----------- | ---------------
|NOTE 18    | TAXES ON INCOME

| |    |             
| | -- | ------------
| | A. | Composition:

| |                  |  |                         |        |      |  |        |   |  |      |  
| | ---------------- |  | ----------------------- | ------ | ---- |  | ------ | - |  | ---- | -
| |                  |  | US dollars             
| |                 
| |                  |  | Year ended December 31,
| | (in
  thousands) |  | 2006                    |        | 2005 |  | 2004   |  
| |                 
| |                 
| | Current
  taxes  |  |                         | (961   | )    |  | (1,182 | ) |  | (619 | )
| | Deferred
  taxes |  |                         | (836   | )    |  | (221   | ) |  | 762  |  
| | Previous
  years |  |                         | 120    |      |  | (130   | ) |  | (221 | )
| |                  |  |                         |        |      |  |        |   |  |      |  
| |                  |  |                         | (1,677 | )    |  | (1,533 | ) |  | (78  | )
| |                  |  |                         |        |      |  |        |   |  |      |  

- 21 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (cont.)

|            |                        
|----------- | -----------------------
|NOTE 18    | TAXES ON INCOME (cont.)

| |    |                                                                                                                                                                                 
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | B. | Reconciliation
  of income tax presented in the financial statements to the theoretical tax
  computed at the average tax rate in the countries in which the Company
  operates:

| |                                                                                      |  |                         |       |      |  |       |   |  |        |  
| | ------------------------------------------------------------------------------------ |  | ----------------------- | ----- | ---- |  | ----- | - |  | ------ | -
| |                                                                                      |  | US dollars             
| |                                                                                     
| |                                                                                      |  | Year ended December 31,
| | (in
  thousands)                                                                     |  | 2006                    |       | 2005 |  | 2004  |  
| |                                                                                     
| |                                                                                     
| | Income
  before taxes on income                                                      |  |                         | 6,014 |      |  | 3,284 |   |  | 1,880  |  
|
| | Average tax
  rate                                                                   |  |                         | 0     | %    |  | 0     | % |  | 0      | %
| |                                                                                      |  |                         |       |      |  |       |   |  |        |  
| | Taxes on
  income at statutory tax rates                                             |  |                         | -     |      |  | -     |   |  | -      |  
|
| | Amounts in
  respect of which no deferred taxes were recorded                        |  |                         | -     |      |  | (139  | ) |  | (1,150 | )
| | Capitalized
  income                                                                 |  |                         | (106  | )    |  | 397   |   |  | 204    |  
| | Benefit
  granted in respect of Eilat residency                                      |  |                         | -     |      |  | (77   | ) |  | (83    | )
| | Income from
  approved enterprise                                                  |  |                         | -     |      |  | -     |   |  | -      |  
| | Capital gain                                                                         |  |                         | 5     |      |  | 51    |   |  | (6     | )
| | Non-deductible
  expenses                                                            |  |                         | 111   |      |  | 40    |   |  | 12     |  
| | Taxes in
  respect of prior years                                                    |  |                         | (120  | )    |  | 130   |   |  | 221    |  
| | Tax rate
  differentials                                                             |  |                         | 2,061 |      |  | 1,117 |   |  | 905    |  
| | Other
  differentials including those in respect of the Israeli Inflationary Tax Law |  |                         | (274  | )    |  | 14    |   |  | (25    | )
| |                                                                                      |  |                         |       |      |  |       |   |  |        |  
| |                                                                                      |  |                         | 1,677 |      |  | 1,533 |   |  | 78     |  
| |                                                                                      |  |                         |       |      |  |       |   |  |        |  

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                        |              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------
| | C. | Tax assessments                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | RSUO has
  received tax assessments that are considered final, for the years up to and
  including the 2002 tax year. The other subsidiaries have not been assessed
  since incorporation.                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | D. | The
  provision in RSUOs balance sheet was computed based on the fact that some of
  RSUOs installations were recognized as approved enterprises and are
  entitled to reduced tax rates and accelerated depreciation for stipulated
  periods of time, in accordance with the Israeli Law for the Encouragement of
  Capital Investments  1959. The following is a tabulation of the benefits
  granted under the approved plan:
|
| |    | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                     | Approved plan

| |                                           |  |                   |  |                                         |  |                     
| | ----------------------------------------- |  | ----------------- |  | --------------------------------------- |  | --------------------
| | Date of permit 
  (including 
  addendum) |  | Benefits 
  track |  | Status                                  |  | First
  benefit year
| |                                          
| |                                          
| | 20.9.95                                   |  | Grants            |  | Final
  implementation report submitted |  | Not yet begun       

| |    |                                                                                                                                                                                                                                                                         
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | Accelerated depreciation                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                         
| |    | RSUO was
  entitled to accelerated depreciation in respect of buildings and equipment of
  approved enterprises at rates of 400% and 200% of the ordinary depreciation
  rates on these assets, respectively, for the first five years of the
  operation of the assets.
| |    |                                                                                                                                                                                                                                                                         
| | 3. | Reduced tax rates                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                         
| |    | RSUO was
  liable for corporate tax at a rate of 10% (instead of 35%) on the taxable
  income attributable to the approved enterprises under the grants track for
  the entire benefits period, subject to the percentage of RSUO held by foreign
  investors.        

- 22 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (cont.)

|            |                                                 
|----------- | ------------------------------------------------
|NOTE 19    | TRANSACTIONS WITH RELATED AND INTERESTED PARTIES

| |    |         
| | -- | --------
| | A. | Balances

| |                                     |  |              |  |      |  |  | 
| | ----------------------------------- |  | ------------ |  | ---- |  |  | 
| |                                     |  | US dollars  
| |                                    
| |                                     |  | December 31,
| | (in
  thousands)                    |  | 2006         |  | 2005 | 
| |                                    
| |                                    
| | Long-term balance
   related party |  | -            |  | 914  | 

| |    |             
| | -- | ------------
| | B. | Transactions

| |                                                |  |                         |  |      |  |      |  |  |  | 
| | ---------------------------------------------- |  | ----------------------- |  | ---- |  | ---- |  |  |  | 
| |                                                |  | US dollars             
| |                                               
| |                                                |  | Year ended December 31,
| | (in
  thousands)                               |  | 2006                    |  | 2005 |  | 2004 | 
| |                                               
| |                                               
| | Participation
  of related parties in expenses |  | -                       |  | 128  |  | 138  | 

|            |                                                       
|----------- | ------------------------------------------------------
|NOTE 20    | ADDITIONAL INFORMATION REGARDING FINANCIAL INSTRUMENTS

| |    |                                                                                                                                                                                                                                                                                      
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A. | The Company
  has financial assets which include, inter alia, cash and cash equivalents and
  accounts receivable and other debit balances, and financial liabilities which
  include, inter alia, short and long-term credit from banking institutions and
  other accounts payable.
| |    |                                                                                                                                                                                                                                                                                      
| |    | The fair
  value of the financial instruments included in the financial statements of
  the Company does not materially differ from their value as presented in the
  financial statements.                                                                                          
| |    |                                                                                                                                                                                                                                                                                      
| | B. | The interest
  risk is the risk involved in changes in interest rates and the effect of such
  changes on the financial instruments presented as part of the short and
  long-term liabilities. See Notes 8 and 10.                                                                  
| |    |                                                                                                                                                                                                                                                                                      
| | C. | The Company
  operates internationally, which gives rise to exposure to risks from changes
  in foreign exchange rates in relation to the functional currencies of the
  applicable subsidiaries.                                                                                    

- 23 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (cont.)

|           |             
|---------- | ------------
|NOTE 21   | SEGMENT DATA

Geographic segments:

|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|---------------------------------- |  | ---------------------------- | ------ | -------------- |  | ------ | - | --------- | ------ | ------ |  | ----------- |  | ----- | --- | - |  | ------ | - |  | ------ | 
|                                   |  | US dollars                   |       
|                                  
|(in
  thousands)                   |  | Year ended December 31, 2006 |       
|                                  
|                                   |  | Israel                       |        | Netherlands(*) |  | U.S.A. |   | Australia |        | Others |  | Adjustments |  | Total |    
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |    
|Revenues                           |  |                              | 9,543  |                |  | -      |   |           | 13,623 |        |  | 5,925       |  |       | 400 |   |  | (400   | ) |  | 29,091 | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|Operating
  income                 |  |                              | 764    |                |  | 101    |   |           | 3,893  |        |  | 802         |  |       | 307 |   |  | -      |   |  | 5,867  | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|Financing
  income (expenses), net |  |                              | (80    | )              |  | (285   | ) |           | 345    |        |  | 172         |  |       | (5  | ) |  | -      |   |  | 147    | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|Net income
  (loss)                |  |                              | 695    |                |  | (184   | ) |           | 2,738  |        |  | 789         |  |       | 303 |   |  | (411   | ) |  | 3,930  | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|Short-term
  liabilities           |  |                              | 10,356 |                |  | 2,342  |   |           | 526    |        |  | 730         |  |       | 777 |   |  | (2,285 | ) |  | 12,446 | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|Long-term
  liabilities            |  |                              | 11,675 |                |  | 31,249 |   |           | 8,726  |        |  | 575         |  |       | 760 |   |  | (9,050 | ) |  | 43,935 | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|Capital
  investments              |  |                              | 289    |                |  | 10,389 |   |           | 371    |        |  | 296         |  |       | -   |   |  | -      |   |  | 11,345 | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|Depreciation
  and amortization    |  |                              | 464    |                |  | -      |   |           | 1,773  |        |  | 612         |  |       | -   |   |  | -      |   |  | 2,849  | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 

|    |                                                            
|--- | -----------------------------------------------------------
|(*) | Including
  Palma Aquarium Holding B.V. See Notes 5 and 18.

|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|---------------------------------- |  | ---------------------------- | ----- | ----------- |  | ------ | - | --------- | ------ | ------ |  | ----------- |  | ----- | ----- | - |  | ------ | - |  | ------ | -
|                                   |  | US dollars                   |      
|                                  
|(in
  thousands)                   |  | Year ended December 31, 2005 |      
|                                  
|                                   |  | Israel                       |       | Netherlands |  | U.S.A. |   | Australia |        | Others |  | Adjustments |  | Total |      
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |      
|Revenues                           |  |                              | 8,777 |             |  | -      |   |           | 12,304 |        |  | 4,710       |  |       | 400   |   |  | (400   | ) |  | 25,791 |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Operating
  income (loss)          |  |                              | 600   |             |  | (193   | ) |           | 3,077  |        |  | 503         |  |       | 162   |   |  | -      |   |  | 4,149  |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Financing
  income (expenses), net |  |                              | (9    | )           |  | (50    | ) |           | (900   | )      |  | 127         |  |       | (33   | ) |  | -      |   |  | (865   | )
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Net income
  (loss)                |  |                              | (213  | )           |  | (243   | ) |           | 1,726  |        |  | 352         |  |       | 124   |   |  | (64    | ) |  | 1,682  |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Short-term
  liabilities           |  |                              | 2,996 |             |  | 510    |   |           | 514    |        |  | 788         |  |       | 1,415 |   |  | (2,106 | ) |  | 4,117  |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Long-term
  liabilities            |  |                              | 1,652 |             |  | 320    |   |           | 7,264  |        |  | 773         |  |       | -     |   |  | (2,464 | ) |  | 7,545  |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Capital
  investments              |  |                              | 246   |             |  | -      |   |           | 352    |        |  | 203         |  |       | -     |   |  | -      |   |  | 801    |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Depreciation
  and amortization    |  |                              | 456   |             |  | -      |   |           | 1,745  |        |  | 598         |  |       | -     |   |  | -      |   |  | 2,799  |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  

- 24 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (cont.)

|           |                     
|---------- | --------------------
|NOTE 21   | SEGMENT DATA (cont.)

Geographic segments (cont.):

|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|---------------------------------- |  | ---------------------------- | ----- | ----------- |  | ------ | - | --------- | ------ | ------ |  | ----------- |  | ----- | ----- | - |  | ------ | - |  | ------ | -
|                                   |  | US dollars                   |      
|                                  
|(in
  thousands)                   |  | Year ended December 31, 2004 |      
|                                  
|                                   |  | Israel                       |       | Netherlands |  | U.S.A. |   | Australia |        | Others |  | Adjustments |  | Total |      
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |      
|Revenues                           |  |                              | 8,119 |             |  | -      |   |           | 11,049 |        |  | 4,695       |  |       | 400   |   |  | (400   | ) |  | 23,863 |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Operating
  income (loss)          |  |                              | 438   |             |  | (924   | ) |           | 2,209  |        |  | 298         |  |       | (109  | ) |  | -      |   |  | 1,912  |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Financing
  income (expenses), net |  |                              | (74   | )           |  | (30    | ) |           | 30     |        |  | 35          |  |       | 7     |   |  | -      |   |  | (32    | )
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Net income
  (loss)                |  |                              | (95   | )           |  | (954   | ) |           | 2,611  |        |  | 390         |  |       | (103  | ) |  | (387   | ) |  | 1,462  |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Short-term
  liabilities           |  |                              | 3,506 |             |  | 24     |   |           | 466    |        |  | 706         |  |       | 1,438 |   |  | (1,936 | ) |  | 4,204  |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Long-term
  liabilities            |  |                              | 2,231 |             |  | 356    |   |           | 7,909  |        |  | 1,116       |  |       | -     |   |  | (2,509 | ) |  | 9,103  |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Capital
  investments              |  |                              | 259   |             |  | 180    |   |           | 106    |        |  | 171         |  |       | -     |   |  | -      |   |  | 716    |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Depreciation
  and amortization    |  |                              | 614   |             |  | 892    |   |           | 1,941  |        |  | 628         |  |       | -     |   |  | -      |   |  | 4,075  |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  

Assets serving the segments:

|                 |  |              |        |      |  |        |   |  |        |  
|---------------- |  | ------------ | ------ | ---- |  | ------ | - |  | ------ | -
|                 |  | US dollars   |       
|                
|                 |  | December 31, |       
|(in
  thousands) |  | 2006         |        | 2005 |  | 2004   |  
|                
|                
|Israel           |  |              | 8,375  |      |  | 15,364 |   |  | 14,441 |  
|U.S.A.           |  |              | 20,700 |      |  | 21,291 |   |  | 22,982 |  
|Australia        |  |              | 6,997  |      |  | 7,038  |   |  | 7,272  |  
|Netherlands      |  |              | 42,992 |      |  | 83     |   |  | 144    |  
|Adjustments      |  |              | (9,922 | )    |  | (2,826 | ) |  | (3,714 | )
|                 |  |              |        |      |  |        |   |  |        |  
|                 |  |              | 69,142 |      |  | 40,950 |   |  | 41,125 |  
|                 |  |              |        |      |  |        |   |  |        |  

- 25 -

---

---



CORAL WORLD INTERNATIONAL LTD.

Appendix to
the Financial Statements

List of
Investee

|                                            |  |                                    |        |      |  |        | 
|------------------------------------------- |  | ---------------------------------- | ------ | ---- |  | ------ | 
|                                            |  | Percentage
  Control and ownership |       
|                                           
|List of
  Investee Companies                |  | 2006                               |        | 2005 | 
|                                           
|                                            |  | %                                  |        | %    | 
|                                            |  |                                    |        |      | 
|Subsidiary companies                        |  |                                    |        |      |  |        | 
|                                            |  |                                    |        |      |  |        | 
|Red Sea
  Underwater Observatory Ltd.       |  |                                    | 86.152 |      |  | 86.152 | 
|                                            |  |                                    |        |      |  |        | 
|Maui Ocean Center Inc.                      |  |                                    | 100    |      |  | 100    | 
|                                            |  |                                    |        |      |  |        | 
|Coral World Australia Pty Ltd.              |  |                                    | 100    |      |  | 100    | 
|                                            |  |                                    |        |      |  |        | 
|Coral World Australia Management Pty Ltd.   |  |                                    | 100    |      |  | 100    | 
|                                            |  |                                    |        |      |  |        | 
|Coral World Management Ltd.                 |  |                                    | 100    |      |  | 100    | 
|                                            |  |                                    |        |      |  |        | 
|Attractions Reservoir Ltd.                  |  |                                    | 100    |      |  | 100    | 
|                                            |  |                                    |        |      |  |        | 
|Vista Historica B.V.                        |  |                                    | 75     |      |  | 75     | 
|                                            |  |                                    |        |      |  |        | 
|Palma Aquarium Holdings B.V.                |  |                                    | 55     |      |  | 40     | 
|                                            |  |                                    |        |      |  |        | 
|Palma the Mallorca Aquarium S.A.            |  |                                    | 100    |      |  | 100    | 
|                                            |  |                                    |        |      |  |        | 
|Coral World
  Bahamas Hotels (1984) Limited |  |                                    | 100    |      |  | 100    | 
|                                            |  |                                    |        |      |  |        | 
|Red Sea
  Marineland Holding (1973) Ltd.    |  |                                    | 42.85  |      |  | 42.85  | 
|                                            |  |                                    |        |      |  |        | 
|Red Sea Underwater Observatory Ltd.         |  |                                    | 13.848 |      |  | 13.848 | 

---

---

- 26 -

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---

# INDEPENDENT
AUDITORS REPORT TO THE SHAREHOLDERS OF BAY HEART LTD.

We have audited the accompanying balance
sheets of Bay Heart Ltd. (the Company) as of December 31, 2008 and 2007, and
the consolidated balance sheets as of those dates, and the related statements of
operations, changes in shareholders deficiency and cash flows  of the Company
and on a consolidated basis  for each of the two years in the period ended December
31, 2008. 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 the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.

In our opinion, except for the
omission of disclosures demanded by International Financial Reporting Standard 7
Financial Instruments : disclosures the financial statements referred to above
present fairly, in all material respects, the financial position  of the Company and
on a consolidated basis  as of December 31, 2008 and 2007, and the results of
operations, changes in shareholders deficiency and cash flows  of the Company
and on a consolidated basis  for each of the two years in the period ended December
31, 2008, in conformity with accounting principles generally accepted in Israel.

Accounting principles generally
accepted in Israel differ in certain respects from accounting principles generally
accepted in the United States. With respect to these financial statements, the difference
in the application of the latter is described in Note 21.

As described in Note 2A, the
financial statements are presented in reported amounts, in conformity with Accounting
Standards of the Israel Accounting Standards Board.

The condensed consolidated financial
information in U.S. dollars presented in Note 20 to the financial statements, prepared at
the request of an investor, represents a translation of the Companys financial
statements in nominal values, as stated in Note 20A. In our opinion, such translation into
U.S. dollars was appropriately performed on the basis stated in Note 20A.

We draw your attention to Note 1C to
the financial statements regarding the Companys business condition, the Company has
ongoing losses, a working-capital deficit and shareholders deficiency. As stated in that
note, the continuance of the Companys operations and its ability to satisfy its
short-term liabilities is contingent upon the attainment of financing from the
shareholders and/or bank financing arrangements.

We draw your attention to Note 22 to
the financial statements with respect to the restatement in accounting policy.

# Brightman Almagor Zohar
& Co.Certified Public
Accountants

Member firm of Deloitte
Touche Tohmatsu

Haifa, Israel, January
28, 2009.



---

---

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders of

# CARMEL CONTAINER
SYSTEMS LTD.

We
have audited the accompanying consolidated balance sheets of Carmel Container Systems Ltd.
(the Company) and its subsidiaries as of December 31, 2006 and 2005, and the
related consolidated statements of operations, changes in shareholders equity and
cash flows  for each of the three years in the period ended December 31, 2006. 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 a certain subsidiary, whose assets constitute
approximately 10% of total consolidated assets as of December 31, 2005 and whose revenues
constitute approximately 10% and 9% of total consolidated revenues for the years ended
December 31, 2005 and 2004, respectively. The financial statements of this subsidiary
were audited by other auditors, whose reports have been furnished to us, and our opinion,
insofar as it relates to amounts included for this subsidiary, is based on the reports of
the other auditors.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit of the companys
internal control over financial reporting. Our audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits and
the reports of other auditors provide a reasonable basis for our opinion.

In
our opinion, based on our audits and the reports of other auditors, the consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of December 31,
2006 and 2005, and the consolidated results of their operations, changes in
shareholders equity and cash flows for each of the three years in the period ended
December 31, 2006, in conformity with Israel generally accepted accounting principles,
which differ in certain respects from those followed in the United States, as described in
Note 22 to the consolidated financial statements.

As
described in Note 2, the financial statements referred to above are presented in reported
amounts, in conformity with Accounting Standards of the Israel Accounting Standards Board.

|               |                                 
|-------------- | --------------------------------
|
|
|
|
|Haifa, Israel, | KOST FORER GABBAY & KASIERER    
|March 5, 2007  | A Member of Ernst & Young Global



---

---

To the Board of directors ofChemship B.V.Maarssen

AUDITORS REPORT

INTRODUCTION

We have audited the financial
statements for consolidation purposes 2008 of Chemship B.V., Maarssen, which comprise the
balance sheet as at 31 December, 2008 and 2007, the profit and loss account, the statement
of changes in equity and the statement of cash flows for each of the two years in the
period ended December 31, 2008 and the notes.

MANAGEMENTS
RESPONSIBILITY

Management is responsible for the
preparation and fair presentation of the financial statements in question in accordance
with accounting principles generally accepted in the Netherlands. This responsibility
includes: designing, implementing and maintaining internal control relevant to the
preparation and fair presentation of the financial statements in question that are free
from material misstatement, whether due to fraud or error; selecting and applying
appropriate accounting policies; and making accounting estimates that are reasonable in
the circumstances.

AUDITORS
RESPONSIBILITY

Our responsibility is to express an
opinion on the financial statements in question based on our audit. We conducted our audit
in accordance with Dutch law and the audit standards generally accepted by the Public
Company Accounting Oversight Board (United States of America). This law and the
regulations requires that we plan and perform the audit to obtain reasonable assurance
whether the financial statements in question are free from material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements in question. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates
made by management, as well as evaluating the overall presentation of the financial
statements in question.

We believe that the audit evidence we
have obtained is sufficient and appropriate to provide a basis for our audit opinion.

OPINION

In our opinion, the financial
statements in question give a true and fair view of the financial position of Chemship
B.V. as at 31 December, 2008 and 2007 and of its results, statement of changes in
equity and statement of cash flows for each of the two years in the period ended December
31, 2008 in accordance with accounting principles generally accepted in the Netherlands.

Rotterdam, 12 February
2009

MAZARS PAARDEKOOPER HOFFMAN ACCOUNTANTS N.V.Rivium Promenade 200  P.O. box 23123  3001 KC Rotterdam
Tel: +31 (0)10 27 71 304/214 - Fax: +31 (0)10 43 66 045 - mpha.rotterdam@mazars.nlMazars Paardekooper Hoffman Accountants N.V.With its registered office in Rotterdam (KvK Rotterdam nr. 24402415).



---

---

To the Board of directors ofFinLog B.V.Pernis

AUDITORS REPORT

INTRODUCTION

We have audited the financial
statements for consolidation purposes 2008 of FinLog B.V., Pernis, which comprise the
balance sheet as at 31 December, 2008 and 2007, the profit and loss account, the statement
of changes in equity and the statement of cash flows for each of the two years in the
period ended December 31, 2008 and the notes.

MANAGEMENTS
RESPONSIBILITY

Management is responsible for the
preparation and fair presentation of the financial statements in question in accordance
with accounting principles generally accepted in the Netherlands. This responsibility
includes: designing, implementing and maintaining internal control relevant to the
preparation and fair presentation of the financial statements in question that are free
from material misstatement, whether due to fraud or error; selecting and applying
appropriate accounting policies; and making accounting estimates that are reasonable in
the circumstances.

AUDITORS
RESPONSIBILITY

Our responsibility is to express an
opinion on the financial statements in question based on our audit. We conducted our audit
in accordance with Dutch law and the audit standards generally accepted by the Public
Company Accounting Oversight Board (United States of America). This law and the
regulations requires that we plan and perform the audit to obtain reasonable assurance
whether the financial statements in question are free from material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements in question. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates
made by management, as well as evaluating the overall presentation of the financial
statements in question.

We believe that the audit evidence we
have obtained is sufficient and appropriate to provide a basis for our audit opinion.

OPINION

In our opinion, the financial
statements in question give a true and fair view of the financial position of FinLog B.V.
as at 31 December, 2008 and 2007 and of its results, statement of changes in equity
and statement of cash flows for each of the two years in the period ended December 31,
2008 in accordance with accounting principles generally accepted in the Netherlands.

Rotterdam, 20 February
2009

MAZARS PAARDEKOOPER HOFFMAN ACCOUNTANTS N.V.Rivium Promenade 200  P.O. box 23123  3001 KC Rotterdam
Tel: +31 (0)10 27 71 304/214 - Fax: +31 (0)10 43 66 045 - mpha.rotterdam@mazars.nlMazars Paardekooper Hoffman Accountants N.V.With its registered office in Rotterdam (KvK Rotterdam nr. 24402415).



---

---

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRMTo the shareholders of

# Hod Hasharon Sport
Center Limited

We have audited the balance sheets of
Hod Hasharon Sport Center Limited (the Company) as of December 31, 2007
and 2006 and the related statements of operations, changes in shareholders equity
and cash flows for each of the three years in the period ended December 31, 2007.
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 standards of the Public Company Accounting Oversight Board (United States of America)
and with auditing standards generally accepted in Israel, 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 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.

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, 2007 and 2006 and the results of
operations, changes in shareholders equity and cash flows for each of the three
years in the period ended December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America.

Somekh ChaikinCertified Public Accountants (Isr)Tel Aviv, IsraelFebruary 26, 2008



---

---

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRMTo the shareholders of

# Hod Hasharon Sport
Center (1992) Limited Partnership

We have audited the balance sheets of
Hod Hasharon Sport Center (1992) Limited Partnership (the Company) as of
December 31, 2007 and 2006 and the related statements of operations, changes in
shareholders equity and cash flows for each of the three years in the period ended
December 31, 2007. 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 standards of the Public Company Accounting Oversight Board (United States of America)
and with auditing standards generally accepted in Israel, 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 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.

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, 2007 and 2006 and the results of
operations, changes in shareholders equity and cash flows for each of the three
years in the period ended December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America.

Somekh ChaikinCertified Public Accountants (Isr)Tel Aviv, IsraelFebruary 26, 2008



---

---