---

---

UNITED STATESSECURITIES
  AND EXCHANGE COMMISSION 
  Washington, D.C. 20549

---

FORM 10-K
  FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
  OF THE SECURITIES EXCHANGE ACT OF 1934

---



(Mark One)

|x                                                 | ANNUAL REPORT PURSUANT
      TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|------------------------------------------------- | ------------------------------------------------------------------------------------------
|                                                  |                                                                                           
|For the
      fiscal year ended December 31, 2003

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
      Incorporation or Organization)             | (I.R.S. Employer
      Identification No.)
|                                                                                       |                                           
|                                                                                       |                                           
|111 Arlozorov Street, Tel Aviv, Israel
       (Address of Principal Executive Offices) | 62098
      (Zip Code)                    



Registrants
  telephone number, including area code (866) 447-8636
  Securities registered pursuant to Section 12(b) of the Act:  None

Securities
  registered pursuant to Section 12(g) of the Act:
  Class A Stock, par value $1.00 per share
  4% Cumulative Convertible Preferred Stock, par value $5.00 per share
  6 1/2% Cumulative Convertible Preferred Stock, par value $5.00 per share
  (Titles of Classes)

---

Indicate
  by check mark whether the registrant: (1) has filed all reports required
  to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
  during the preceding 12 months (or for such shorter period that the registrant
  was required to file such reports), and (2) has been subject to such filing
  requirements for the past 90 days. Yes   x   No
  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  
  x.

Indicate
  by check mark whether the registrant is an accelerated filer (as defined in
  Exchange Act Rule 12b-2). Yes  o  No
  x

The
  aggregate market value of the registrants voting stock held by non 
  affiliates of the registrant on June 30, 2003, the last business day of the
  registrants most recently completed second fiscal quarter was $22,630,620
  based upon the closing market price of such stock on that date. As of March
  9, 2004, the number of shares outstanding of the registrants Class A
  Stock, its only authorized and outstanding common stock, is 19,808,855.



---

---



ANNUAL REPORT
  ON FORM 10-K
  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
  OF AMPAL-AMERICAN ISRAEL CORPORATION

PART I

ITEM 1.   BUSINESS

| | As
      used in this report (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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | For
      industry segment financial information and financial information about foreign
      and domestic operations, see Note 15 to the Companys consolidated
      financial statements included elsewhere in this Report. The companies described
      below under  Telecommunication, Energy, High
      Technology and Capital Markets and Other Holdings are
      included in the Finance segment. The companies described under Real
      Estate are included in the Real Estate segment. The companies described
      under Leisure-Time are included in the Leisure-Time segment.                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 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. An important objective of Ampal is to seek
      investments in companies that operate in Israel initially and then expand
      abroad. 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 on the following sectors: Telecommunications, Real Estate
      and Project Development, Leisure Time and High Technology. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Listed
      below by industry segment are all of the substantial investee companies
      in which the Company had ownership interests during the fiscal year ended
      December 31, 2003, the principal business of each and the percentage of
      equity owned, directly or indirectly, by Ampal. The table below also indicates
      whether the investees securities are listed on the New York Stock
      Exchange (NYSE), NASDAQ National Market (Nasdaq),
      American Stock Exchange (AMEX), Tel Aviv Stock Exchange (TASE)
      or the Canadian Venture Exchange (CDNX). Further information
      with respect to the more significant investee companies is provided after
      the following table. For additional information concerning the investee
      companies, previously provided annual reports on Forms 10-K of Ampal are
      incorporated by reference herein.

1

---

---

|Industry Segment                                        | Principal Business                                   | Percentage
      as of
      December 31, 2003(1)
|------------------------------------------------------- | ---------------------------------------------------- | -------------------------------------------------
|                                                        |                                                      |                                                  
|**Telecommunication**                                   |                                                      |                                                  
|MIRS
      Communications Ltd.                          | Wireless
      Communications Service Provider       |                                                  
|                                                       
|**Real
      Estate**                                  
|Am-Hal
      Ltd.                                       | Chain of
      Senior Citizen Facilities             |                                                  
|Ampal
      (Israel) Ltd.                               | Holding Company
      and Real Estate                |                                                  
|Bay
      Heart Limited                                 | Shopping
      Mall Owner/Lessor                     |                                                  
|Ophir
      Holdings Ltd. ("Ophir Holdings")            | Holding Company                                      |                                                  
|Industrial
      Buildings Corporation Ltd. (TASE)      | Industrial
      Real Estate                         |                                                  
|Lysh
      The Coastal High-way Ltd.                    | Commercial
      Real Estate                         |                                                  
|Meimadim
      Investments Ltd.                         | Commercial
      Real Estate                         |                                                  
|New
      Horizons (1993) Ltd.                          | Commercial
      Real Estate                         |                                                  
|Shmey-Bar
      Group                                   | Commercial
      Real Estate                         |                                                  
|                                                       
|**Leisure-Time**                                       
|Coral
      World International Limited                 | Underwater
      Observatories and Marine Parks      |                                                  
|Country
      Club Kfar Saba Limited                    | Country Club
      Facility                          |                                                  
|Hod
      Hasharon Sport Center (1992)                 
|Limited
      Partnership                               | Country Club
      Facility                          |                                                  
|                                                       
|**High-Technology
      and Communications**           
|Babylon
      Ltd.                                      | Translation
      Software for the Internet          |                                                  
|Bridgewave
      Communications, Inc.                   | Broadband
      Wireless Technology                  |                                                  
|Clalcom
      Ltd.                                      | Communications                                       |                                                  
|Courses
      Investment in Technology Ltd.             | Venture Capital
      Fund                           |                                                  
|CUTe
      Ltd.                                         | Designs Intellectual
      Property Rights           |                                                  
|Enbaya
      Ltd.                                       | 3D Browser/Publisher                                 |                                                  
|Identify
      Solutions Ltd.                           | Defect-Detecting
      Software                      |                                                  
|Modem
      Art Ltd.                                    | Fabless Semiconductor
      Company                  |                                                  
|Netformx
      Ltd                                      | Network Design
      Tools                           |                                                  
|Oblicore
      Ltd.                                     | Service Performance
      Tracking Software          |                                                  
|Ophirtech
      Ltd. ("Ophirtech")                      | Holding Company                                      |                                                  
|Cerel
      Ceramic Technologies Ltd.                   | Electrophoretic
      Deposition                     |                                                  
|Expand
      Networks Ltd.                              | Internet
      Data Compression                      |                                                  
|Mainsoft
      Corporation Ltd.                         | UNIX Tools                                           |                                                  
|Praxell,
      Inc.                                     | Prepaid Charge
      Card Software                   |                                                  
|Romidot
      Ltd.                                      | Optical Checking
      Instruments                   |                                                  
|StoreAge
      Networking Technologies Ltd.             | Data Storage
      Software                          |                                                  
|Viola
      Networks                                    | Computer
      Network Software                      |                                                  
|Peptor
      Ltd.                                       | Pharmaceutical
      Products                        |                                                  
|PowerDsine
      Ltd.                                   | Telecommunications
      Components                  |                                                  
|ShellCase
      Ltd. (CDNX:SSD)                         | Packaging
      Process for Semiconductor Chips      |                                                  
|Shiron
      Satellite Communications (1996) Ltd.       | Satellite
      Modems and Fast Internet Access      |                                                  
|Smart
      Link Ltd.                                   | Software-Based
      Communications Products         |                                                  
|Star
      Management of Investments No. II (2000) L.P. | Venture Capital
      Fund                           |                                                  
|VisionCare
      Ophthalmic Technologies                | Advanced
      Optical Products                      |                                                  
|XACCT
      Technologies Ltd.                           | TCP/IP Network
      Software                        |                                                  
|Xpert
      Integrated Systems Ltd.                     | Software
      and Systems Integrator                |                                                  
|                                                        | Specializing
    in Systems Security                 |                                                  
|**Energy**                                             
|Granite
      Hacarmel Investments Ltd. (TASE)          | Distribution
      of Refined Petroleum Products     |                                                  
|                                                       
|**Capital
      Markets and Other Holdings**           
|Ampal
      Development (Israel) Ltd.                   | Holding Company                                      |                                                  
|Ampal
      Industries (Israel) Ltd.                    | Holding Company                                      |                                                  
|Carmel
      Container Systems Limited                 
|(AMEX:KML)                                              | Packaging
      Materials and Carton Production      |                                                  
|Epsilon
      Investment House Ltd.                     | Portfolio
      Management and Underwriting Services |                                                  
|Renaissance
      Investment Company Ltd                | Portfolio
      Management and Underwriting Services |                                                  
|                                                        |                                                      |                                                  

2

---

---

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

(2)
         As of December 31, 2003, Ophirtech held
  the following percentage interests:

| | Cerel Ceramic
      Technologies Ltd.       | 15.5 |  | 
| | ------------------------------------------- | ---- |  | 
| | Expand Networks
      Ltd.                  | 9.3  |  | 
| | Mainsoft
      Corporation Ltd.             | 1.9  |  | 
| | Netformx
      Ltd.                         | 5.5  |  | 
| | Romidot Ltd.                                | N/A  |  | 
| | StoreAge
      Networking Technologies Ltd. | 10.9 |  | 
| | Viola Networks                              | 16.0 |  | 

| |     |                                                                                                                                                                                     
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | The Companys percentage
      interest in the above-referenced companies set forth in the chart reflects
      the Companys 42.5% ownership of Ophirtech plus any direct holdings.
| |     |                                                                                                                                                                                     
| | (3) | As of December
      31, 2003, Ophir Holdings held the following percentage interests:                                                                                              

| |                                                      
| | -----------------------------------------------------
| | Courses Investment
      in Technology Ltd.          
| | Industrial
      Buildings Corporation Ltd.          
| | Lysh The
      Coastal High-way Ltd.                 
| | Meimadim
      Investments Ltd.                      
| | New Horizons
      (1993) Ltd.                       
| | Shmey-Bar
      (I.A.) 1993, Ltd., Shmey-Bar (T.H.)  
| | 1993 Ltd.
      and Shmey-Bar Real Estate (1993) Ltd.
| |                                                      

| |  | The Companys percentage
      interest in the above-referenced companies set forth in the chart reflects
      the Companys 42.5% ownership of Ophir Holdings plus any direct holdings.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Significant
  Developments Since the Fiscal Year Ended December 31, 2003

In
  February 2004, the Company completed a private sale of its remaining holdings
  in Granite Hacarmel Investments Ltd. to a group of institutional and other investors.
  The sale of 14,158,891 shares at a price of approximately $1.42 (6.30 NIS) per
  share resulted in total proceeds to Ampal of approximately $20.1 million.

In
  December 2003, the Company entered into an agreement for the sale of all of
  its holdings in XAACT Technologies Ltd. (XAACT) to Amdocs Limited,
  which agreed to acquire all of the issued and outstanding shares of XACCT. On
  February 19, 2004, Ampal received approximately $3.8 million (partially in cash
  and partially in shares of Amdocs Limited) for its holdings in XACCT.

In
  February 2004, the Company entered into an agreement to invest EUR 4.5 million
  (approximately US $5.6 million) in Telecom Partners, a newly formed entity that
  will serve as a platform for investments in the telecommunication industry predominately
  outside of Israel. Ampals investment consists of a EUR 4 million convertible
  debenture, which converts into a one third partnership interest in the partnership,
  and a EUR 500,000 loan. The convertible debenture is converted according to
  the Companys discretion. Telecom Partners currently holds investments
  in PSINet Europe B.V. and Grapes Communications N.V./S.A., two European telecom
  service providers.

3

---

---

In
  2004, Ophir Holdings (a 42.5% owned affiliate of the Company) sold 4,315,036
  shares of Industrial Buildings Corporation Ltd. (Industrial Buildings)
  for the amount of approximately $4.6 million. As of December 31, 2003, Ophir
  Holdings owned an 11.7% interest in Industrial Buildings.

On
  January 4, 2004, the Company loaned $0.3 million to ShellCase Ltd. (ShellCase),
  the principal business of which is the packaging process of semiconductor chips.

Ampal
  currently leases an office at 555 Madison Avenue in New York City from Rodney
  Company N.V., Inc. The lease period is seven years commencing on October 15,
  2002. The annual rent for this lease is $114,968. On March 31, 2004, the Company
  intends to close this office. The office space has been subleased.

Telecommunications

MIRS
  COMMUNICATIONS LTD. (MIRS)

MIRS
  is a wireless communications service provider and represents the largest investment
  in Ampals history. Ampal beneficially owns a 25% interest in MIRS. Ampal
  purchased its interest in MIRS from Motorola Israel for $110 million. Ampal
  currently holds its interest in MIRS through a limited partnership, of which
  Ampal owns a 75.1% interest and acts as general partner. MIRS is currently owned
  one-third by the limited partnership and two-thirds by Motorola Israel. MIRS
  operates a fully integrated wireless voice and data communication services,
  digital and analog public-shared two-way radio systems. The wireless communication
  network is based on iDEN(TM) integrated wireless communication technology,
  a unique radio technology developed by Motorola, and provides an integrated
  service platform of cellular, two-way radio and wireless data services. These
  services are targeted primarily to commercial customers.

The
  main goal of MIRS is to provide cellular service to the commercial, governmental,
  public and private sectors according to quality standards set by Motorola, in
  order to give a full and satisfying solution to all wireless communications
  needs. MIRS has over 260,000 subscribers mainly in the commercial, governmental,
  municipal, security and military sectors. MIRS has strongly positioned itself
  in the commercial sector, announcing an aggressive pricing strategy, resulting
  in an increase in its customer base. MIRS holds a more than 20% market share
  of the Israeli cellular commercial sector.

On
  February 5, 2001, MIRS was granted a full general operator license by the Israeli
  Ministry of Communications for portable radio and telephone services through
  its cellular system. This license is similar to the three existing cellular
  licenses previously granted to other Israeli operators. As part of the license,
  MIRS will be required to pay royalties to the Government of Israel and be subject
  to certain quality of service measurements to comply with industry standards.
  In connection with the issuance of the license, MIRS was obligated to make a
  preliminary payment to the Israeli Ministry of Communications in the amount
  of NIS 17,600,000 ($3.8 million) plus accrued interest. In addition, during
  the ten year period beginning July 1, 2001, MIRS will make quarterly payments
  to the Israeli Ministry of Communications in an amount equal to 1.3% of its
  income which is subject to royalties.

Real Estate

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

4

---

---

AM-HAL
  LTD. (AM-HAL)

Am-Hal
  is a wholly-owned subsidiary of the Company, develops and operates luxury retirement
  centers for senior citizens.

In
  March 1992, the first center was opened in Rishon LeZion, a city located approximately
  10 miles south of Tel-Aviv. This center, of about 120,000 square feet, includes
  149 self-contained apartments, a 74-bed nursing care ward, a 21-bed assisted-living
  ward, a swimming pool, a health care center and other recreational facilities.
  The nursing care ward is leased to a non-affiliated health care provider until
  2006.

In
  June 2000, the second center was opened in Hod Hasharon, a city located approximately
  7 miles north of Tel Aviv. This center, which is approximately 250,000 square
  feet, includes 235 self-contained apartments, a 33-bed nursing care ward and
  a 22-bed assisted-living ward.

INDUSTRIAL
  BUILDINGS

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

Ampals
  ownership interest in Industrial Buildings is held through its interest in Ophir
  Holdings. As of December 31, 2003, Ophir Holdings owned a 11.7% interest
  in Industrial Buildings.

Ophir
  Holdings interest in Industrial Buildings is subject to foreclosure in
  the event of a default by any of the investors under the bank credit agreements
  entered into in connection with the original acquisition of Industrial Buildings
  from the Government of Israel in 1993. Any amounts distributed as a dividend
  by Industrial Buildings are required to be applied first to pay then-due borrowings.
  For a discussion of Ophir Holdings recent sale of certain shares of Industrial
  Buildings, please see Significant Developments Since the Fiscal Year Ended
  December 31, 2003 above.

AMPAL
  (ISRAEL) LTD. (AMPAL (ISRAEL))

Ampal
  (Israel), a wholly-owned subsidiary of Ampal, owns an approximately 40,000 square
  foot commercial property located in Tel Aviv which houses its principal offices.
  Total rental income in 2003 was $0.3 million. Ampal (Israel) also acts as a
  holding company for other investments discussed elsewhere in this Report.

OPHIR
  HOLDINGS

Ophir
  Holdings is a holding company that owns interests in real estate companies and
  is owned 42.5% by the Company. The Company and Polar Investments, which owns
  57.5% of Ophir Holdings, are parties to a shareholders agreement regarding
  joint voting, directorships and rights of first refusal with respect to Ophir
  Holdings.

Ophir
  Holdings owns two acres of land in an industrial park in Netanya, Israel together
  with an unrelated party. These parties entered into a joint venture agreement
  regarding the site on which they developed a 326,000 square foot building (including
  parking) for both industrial and commercial use. Ophir Holdings has a 70% interest
  in the property and joint venture. Ophir Holdings lease revenues from
  the building were $1.6 and $1.7 million in 2003 and 2002, respectively.

5

---

---

Ophir
  Holdings owns a 22.2% interest in the Shmey-Bar group of companies (Shmey-Bar).
  Shmey-Bar acquired 2.3 million square feet of real estate properties from Hamashbir
  Hamerkazi, Ltd. (Hamashbir Hamerkazi) for $27.7 million. In the
  same transaction, Shmey-Bar received an option to acquire, for $26.3 million,
  an additional 700,000 square feet of real estate properties from Hamashbir Hamerkazi.
  These properties are situated in various locations in Israel. Ophir Holdings
  interest in Shmey-Bar was acquired with an investment accompanied by a $5.7
  million shareholders loan.

Ophir
  Holdings owns a 50% equity interest in Lysh The Coastal High-way Ltd.
  (Lysh). Lysh has a 50% holding in Beit Herut-Lysh Development Company
  Ltd. (BHL), which is constructing a 180,000 square foot commercial
  project for rental near Moshav Beit Herut on land owned by the Israeli Land
  Authority. The project, consisting of approximately 100,000 square feet, has
  been completed at a construction cost of $18 million, including the cost of
  the land. Ophir Holdings owns a 25% direct interest in BHL (its share
  in the project being 12.5%).

Ophir
  Holdings has also undertaken to provide guarantees in an amount equivalent to
  25% of the construction costs. As of December 31, 2003, BHL had taken out bank
  loans of approximately $14.2 million, by drawing on a credit line extended by
  a financial institution in connection with the project.

Ophir
  Holdings owns a 10% interest in a joint venture which had agreed to purchase
  4.4 million square feet of land near Haifa for approximately $15 million, on
  which the parties intend to develop a commercial real estate project for rent.
  Ophir Holdings has obligated itself to invest up to $1.5 million in the first
  stage of this project and its share of development costs is estimated to be
  as much as $17 million.

During
  2003, Ophir Holdings recognized a gain on the sale of six properties for a total
  amount of $7.5 million.

BAY
  HEART LIMITED (BAY HEART)

Bay
  Heart was established in 1987 to develop and lease a shopping mall (the Mall)
  in the Haifa Bay area. Haifa is the third largest city in Israel. The Mall,
  which opened in May 1991, is a modern three-story facility with approximately
  280,000 square feet of rentable space. The Mall is located at the intersection
  of two major roads and provides a large mix of retail and entertainment facilities
  including seven movie theaters. Approximately 37,500 square feet of the Mall
  are occupied by Supersol Ltd., one of the two largest Israeli supermarket chains,
  and the parent of a co-investor in Bay Heart. The total cost of the Mall was
  approximately $53 million, which was financed principally with debt instruments.
  See Item 7. Managements Discussion and Analysis of Financial Condition
  and Results of Operations  Liquidity and Capital Resources for additional
  information regarding the debt financing of Bay Heart. A train station on the
  west side of the Mall was completed on September 2001. A transportation complex,
  in conjunction with a subsidiary of Egged Bus Corporation, was opened in January
  2002. The Company owns 37% of Bay Heart. Bay Heart is negotiating a financial
  structuring and renovation of the Mall.

6

---

---

Leisure-Time

CORAL
  WORLD INTERNATIONAL LIMITED (CORAL WORLD)

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

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

Coral
  Worlds parks hosted approximately 948,000 visitors during 2003. Coral
  World has approximately 250 full-time equivalent positions as of December 31,
  2003.

Coral
  World has entered into a joint development project for a new marine park in
  Palma de Majorca. Coral World has also entered into a joint venture called Vista
  Historica, which participated in a tender for the development of a multimedia
  attraction near the ancient city of Pompeii and which is in the process of developing
  a new Vista Historica attraction in the cities of Prague and Istanbul.

COUNTRY
  CLUB KFAR SABA LIMITED (KFAR SABA)

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

The
  Club, which has a capacity of 2,000 member families, had approximately 1,900
  member families for the 2003 season. The Company owns 51% of Kfar Saba.

HOD
  HASHARON SPORT CENTER (1992) LIMITED PARTNERSHIP (HOD HASHARON)

7

---

---

High Technology

IDENTIFY
  SOLUTIONS LTD. (IDENTIFY)

Identify
  (formally Mutek Ltd.), develops and markets the AppSight solution suite based
  on Identifys Black Box technology that captures, communicates and identifies
  the root cause of failures in applications. AppSight is used throughout the
  application life cycle to increase application reliability and availability
  and reduce application deployment and support costs.

As
  of December 31, 2003, the Company had invested $3.7 million in Identify, and
  had written off $2.4 million of its investment. As of December 31, 2003, the
  Company holds a 2.4% equity interest in Identify.

MODEM
  ART LTD. (MODEM-ART)

Modem-Art
  Ltd. is a privately held fabless semi-conductor company specializing in developing
  system-on-a-chip solutions for wideband and broadband communications systems
  focusing on baseband processes for 3G terminals/headsets.

As
  of December 31, 2003, the Company had invested $2.0 million in Modem-Art and
  had written off $1.0 million of its investment during 2002. As of December 31,
  2003, the Company holds 4.5% equity interest in Modem-Art.

NETFORMX,
  LTD. (NETFORMX)

Netformx
  develops and markets the award winning CANE(R) family of network design, analysis
  and simulation tools. Netformxs strategy is to help its customers design
  and maintain sophisticated computer networks. Using CANE, network and system
  integrators and network managers design, simulate and analyze efficient, reliable
  networks quickly and easily. CANE is designed to resolve network chaos and manage
  the accelerating pace of network change while reducing network equipment, consulting
  and staff costs.

As
  of December 31, 2003, the Company had a 19.6% equity interest in Netformx, directly
  and indirectly through Ophir Holdings. As of December 31, 2003, the Company
  had written off all of its investment in Netformx.

OPHIRTECH

Ophirtech,
  the Companys 42.5%-owned affiliate, has invested in various companies
  in the high -technology sector. During 2003, Ophirtech invested $0.7 million
  in start-up companies and made provisions for impairment of the value of its
  start-up investments in the amount of $0.3 million. At December 31, 2003, the
  book value of Ophirtechs start - up investments was $8.3 million.

Included
  among Ophirtechs investments are the following four companies:

8

---

---

CEREL
  CERAMIC TECHNOLOGIES LTD. (CEREL)

Cerel
  is using its proprietary Electrophoretic Deposition (EPD) process
  to develop production technology and design tools for Functional Electronic
  Packages.

EPD
  is a method for deposition of electrically charged solid particles held in a
  liquid suspension under the influence of an applied electric field.EPD can be
  used to deposit laminated and graded microstructures on shaped or patterned
  substrates.

As
  of December 31, 2003, Ophirtech had invested $0.9 million in Cerel for a 15.5%
  equity interest.

EXPAND
  NETWORKS LTD. (EXPAND)

Expand
  specializes in bandwidth expansion products for enterprises and Internet service
  providers. These products are based on Expands revolutionary combination
  of the hardware and software technology, Adaptive Acceleration.

As
  of December 31, 2003, Ophirtech had written off $1.3 million of its $3.2 million
  investment in Expand. Ophirtechs equity interest in Expand is 9.3% as
  of December 31, 2003.

STOREAGE
  NETWORKING TECHNOLOGIES LTD. (STOREAGE)

StoreAge
  is an innovative developer and provider of enterprise storage management solutions
  that centralize and simplify storage network administration. StoreAge network-based
  solutions provide a uniform, SAN-wide method for provisioning storage, ensuring
  business continuity, enabling cost-effective disaster recovery, and centrally
  managing cross-platform, multi-vendor storage environments.

StoreAge
  offers worldwide sales, service and support, with principal offices in Irvine,
  CA and Nesher, Israel, and is privately held company spun-off from IIS, Intelligent
  Information Systems. As of December 31, 2003, Ophirtech had invested $3.0 million
  in StoreAge for a 10.9% equity interest.

VIOLA
  NETWORKS LTD. (VIOLA)

Viola,
  (formerly Omegon Networks Ltd.), develops performance assurance software solutions
  for real-time multi-media applications (voice, video, data) running over converged
  IP networks.

As
  of December 31, 2003, Ophirtech had invested $3.2 million in Viola and had written
  off $1.9 million of its investment. In August 2003, Ophirtech lent Viola $0.2
  million for which Viola issued a convertible note to Ophirtech. The note has
  not been converted as of December 31, 2003. Ophirtechs equity interest
  in Viola is 16.0% as of December 31, 2003.

POWERDSINE
  LTD. (POWERDSINE)

PowerDsine
  develops and sells Power over Ethernet (PoE) technology, which allows power
  to be transmitted over the same network cable as data.

The
  company first developed the Power over Ethernet technology in 1998 and delivered
  its solutions through communications giants such as Avaya, 3Com, Nortel, Siemens
  and Ericsson, as well as marketing its own PowerDsine midspan solutions to Power
  over Ethernet- enable legacy networks.

9

---

---

As
  of December 31, 2003, the Companys total investment in PowerDsine was
  $6 million and its equity interest was 8.1%.

SHELLCASE

ShellCase
  has developed a proprietary, patented wafer level chip size packaging  (CSP)
  technology for silicon devices using a wafer-level process. Hand-held electronics,
  wireless communication products, image sensors for digital cameras for cellular
  phones and medical disposables are just part of the growing list of applications
  that benefit from the unique properties of ShellCasess technology. ShellCase
  was publicly traded on the Toronto Stock Exchange (TSX) in 2003.
  In 2004, a majority of the shareholders of ShellCase approved the delisting
  of the company from the TSX.

During
  February 2003, ShellCase concluded an internal private placement of $13 million
  in which ShellCase has, in return issued Preferred C Shares. Out of the total
  amount raised, $8.5 million was new money and $4.5 million was a conversion
  of convertible debentures and the accrued interest into Preferred C Shares.
  As of December 31, 2003, the Companys investment of $6.4 million in ShellCase
  represented a 13.8% equity interest. As of December 31, 2003, the Company had
  written off $2.4 million of its investment in ShellCase.

SHIRON
  SATELLITE COMMUNICATIONS (1996) LTD. (SHIRON)

Shiron
  is engaged in the development, manufacturing and marketing of a satellite communication
  product known as InterSKY(TM). Shiron provides easily deployable two-way, always-on
  broadband satellite communications to corporate businesses, Internet service
  providers and small office/home office in places where broadband infrastructure
  is insufficient or does not currently exist.

As
  of December 31, 2003, the Company had invested $2.1 million in Shiron and had
  made a $0.1 million loan to Shiron, and had written off $1.8 million of its
  investment in Shiron. As of December 31, 2003, the Companys equity interest
  in Shiron is  9.8%.

SMART
  LINK LTD. (SMART LINK)

Smart
  Link is a developer and supplier of software-based communications products that
  provide internet access and communication to the residential markets. Its proprietary
  technology enables customers to replace traditional hardware-based communications
  products with high-quality, user friendly software-based solutions that are
  less costly. Products include software and chips that are easily integrated
  into personal computers and information appliances. As of December 31, 2003,
  the Company had invested $2.9 million in Smart Link, constituting a 13.6% equity
  interest in Smart Link.

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

As
  of December 31, 2003, the Company had invested $2.2 million in Star, a venture
  capital fund that focuses on investments in communications, Internet infrastructure,
  enterprise software, industrial technologies and medical devices, for a 10%
  interest in Star. The Company has committed to invest an additional $2.8 million
  in Star. The Company has written off $0.6 million of its investment in Star
  during 2002.

10

---

---

XACCT
  TECHNOLOGIES LTD. (XACCT)

XACCT
  provides a network data management platform for global communications service
  providers such as network backbone providers, mobile operators, cable operators,
  and managed services providers. XACCTs carrier-class Network-to-Business
  (N2B) platform helps make service providers profitable by harnessing network
  information to create new value-based services and lower operational costs.
  XACCT offers the industrys first and only platform that enables real-time
  data capture and enhancement; seamless integration with any business or operations
  application; and instantaneous, flow-through service provisioning.

As
  of December 31, 2003, the Companys total investment in XACCT was $3.8
  million and its equity interest was 16.9%. In December 2003, the Company entered
  into an agreement for the sale of all of its holdings in XAACT to Amdocs Limited,
  which agreed to acquire all of the issued and outstanding shares of XACCT. On
  February 19, 2004, Ampal received approximately $3.8 million (partially in cash
  and partially in shares of Amdocs Limited) for its holdings in XACCT.

XPERT
  INTEGRATED SYSTEMS LTD. (XPERT)

Xpert
  is a leading international developer and provider of business continuity, security
  and infrastructure solutions. Xpert has over 400 customers from leading financial,
  telecommunications, industry, technology and governmental organizations. Xpert,
  whose headquarters are in Israel, has additional offices in Madrid and Barcelona.

As
  of December 31, 2003, the Company had invested $2.75 million in Xpert, and its
  equity interest is 12.7%.

Energy

GRANITE HACARMEL
  INVESTMENTS LTD. (GRANITE)

Granite
  is one of Israels largest holding companies. Granite was established in
  1981 and went public on the Tel Aviv Stock Exchange in 1992.

Granite
  owns and controls the following major companies: Sonol Israel Ltd. (Sonol),
  Tambour Ltd. (Tambour) and Supergas Israel Gas Distribution Company
  Ltd. (Supergas) which are all well recognized as national brand
  names with national marketing and distribution networks in Israel. In addition,
  Granite owns Granite Hacarmel Holdings which is engaged in real estate, Allied
  Oils & Chemicals which produces lubricants and greases and Granite Hacarmel
  Development Holding, which deals with other activities within Granite. Through
  its subsidiaries, Granite markets and distributes refined petroleum products,
  liquefied petroleum gas, chemicals, paints, lubricants, greases and related
  products, as well as water purification and desalination, oil and gas exploration,
  real estate investments, and tourism projects.

During
  2003, Ampal sold 13,821,450 shares of Granite at a price of $1.40 (6 NIS) per
  share resulting in total proceeds of approximately $19.5 million. In February
  2004, Ampal sold its remaining holdings in Granite for approximately $20.1 million.
  See Significant Developments Since the Fiscal Year Ended December 31,
  2003 above.

11

---

---

Capital Markets And Other
  Holdings

AMPAL
  DEVELOPMENT (ISRAEL) LTD. (AMPAL DEVELOPMENT)

Ampal
  Development, a wholly owned subsidiary of the Company, issued debentures which
  are publicly traded on the TASE. An aggregate of approximately $3.9 million
  of these debentures were outstanding as of December 31, 2003. Ampal Development
  has deposited funds with Bank Hapoalim sufficient to pay all principal and interest
  on these debentures.

AMPAL
  INDUSTRIES (ISRAEL) LTD. (AMPAL INDUSTRIES)

Ampal
  Industries, a wholly-owned subsidiary of Ampal, holds interests in various investee
  companies described in the high-technology section in this Report. Ampal Industries
  also has a portfolio of marketable securities which are valued at approximately
  $43.9 million at December 31, 2003.

CARMEL
  CONTAINERS SYSTEMS LIMITED (CARMEL)

Carmel
  (KML) is one of the leading Israeli companies in designing, manufacturing and
  marketing carton boards and packaging products. Carmel and its subsidiaries
  manufacture a varied line of products, including corrugated shipping containers,
  moisture-resistant packaging, consumer packaging, triple-wall packaging and
  wooden pallets and boxes.

The
  Company entered into an agreement in January 2003 pursuant to which Ampal and
  its subsidiary, Ampal Enterprises Ltd. (Ampal Enterprises), will
  sell their shareholdings in Carmel. Ampal will sell in this transaction 18,000
  ordinary shares of Carmel and Ampal Enterprises will sell another 504,000 ordinary
  shares of Carmel, at a price per share of $6.75 for an aggregate purchase price
  of $3,523,500.

The
  consummation of the aforementioned transaction is contingent upon certain conditions,
  including the consummation of a merger transaction between Carmel and Best Carton
  Ltd. (Best) pursuant to which all shares of Best will be purchased
  by Carmel in consideration of shares of Carmel which will be issued to Bests
  shareholders, and the authorizations required by law for the aforementioned
  transaction.

In
  June 2003, the Company announced that its agreement to sell its holdings in
  Carmel had been cancelled because the Israeli Antitrust Authority objected to
  the merger between Carmel and Best.

The
  Companys equity interest in Carmel is 21.5%. As of December 31, 2003,
  the Company marks its investment to market value at $3.5 per share, for a total
  of $1.8 million, and recorded loss from impairment in the amount of $2.1 million.

EPSILON
  INVESTMENT HOUSE LTD. (EPSILON) AND RENAISSANCE INVESTMENT 
  COMPANY LTD. (RENAISSANCE)

The
  Company had invested $1.5 million for 20% of Epsilon and its affiliate, Renaissance
  as of December 31, 2003. Epsilon is an investment bank which provides portfolio
  management services and Renaissance provides underwriting services in Israel
  through its subsidiaries.

12

---

---

EMPLOYEES

As
  of December 31, 2003, Ampal had two employees, Ampal Industries (Israel) Ltd.
  had 15 employees, Am-Hal Ltd. (a wholly owned subsidiary of Ampal) had 175 employees
  and Country Club Kfar Saba Ltd. (owned 51% by the Company) had 112 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. Since September 2000, there have
  been increased hostilities between the Israeli government and Palestinian groups.
  It is possible that the situation may deteriorate further and may impact the
  value of Ampal and its investee companies. See -Economic and Financial
  Developments below and Item 7. Managements Discussion and
  Analysis of Financial Condition and Results of Operations for further
  discussion of the possible impact of this situation 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.

Economic and Financial
  Developments

In
  2003, unemployment in Israel increased to 10.7%. The rate of unemployment in
  2002 averaged 10.4% as compared to 9.3% in 2001. This increase resulted mainly
  from the Hi-Tech crisis which brought about a wave of layoffs in this industry.

The
  deflation rate in 2003 was 1.9% compared to an inflation rate of 6.5% in 2002.

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.

13

---

---

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.
  For  2003, Israeli companies were taxed on their income at a rate
  of 36%.

On
  July 24, 2002, the Israeli Parliament enacted legislation (tax reform
  legislation) approving a tax reform bill based on a ministerial committee
  report published in June 2002. This legislation, which introduces fundamental
  changes in certain areas, generally became effective on January 1, 2003, although
  alterations in certain taxation areas will be introduced over a number of years
  and certain provisions will come into effect on other specified dates.

The
  tax reform legislation focuses, inter alia, a transition from a primarily territorial
  based tax system to a personal based tax system of Israeli tax residents (which
  mainly applies on the Companys Israeli subsidiaries) had been introduced.
  Consequently, Israeli tax residents would be taxed on their worldwide income;

A
  tax treaty between Israel and the United States became effective on January
  1, 1995. This treaty has not substantially changed the tax position of the Company
  in the United States or in Israel.

Ampal
  had income from interest, rent and dividends resulting from its investments
  in Israel. Under Israeli law, Ampal has been required to file reports with the
  Israeli tax authorities with respect to such income. In addition, as noted below,
  Ampal is subject to a withholding tax on dividends received from Israeli companies
  at a rate of either 25%, 15% or 12.5%, depending on the percentage ownership
  of the investment and the type of income generated by that company (as opposed
  to dividends payable to Israeli companies which are exempt from tax or subject
  to a tax rate of 25%, when stem from income generated out of Israel, or for
  the dividends paid by an approved enterprise to either residents or non-residents,
  the tax on which is withheld at a rate of 15%). Under an arrangement with the
  Israeli tax authorities, such income has been taxed based on principles generally
  applied in Israel to income of non-residents. Ampal has filed reports with the
  Israeli tax authorities through 2001 and has tax assessments which considered
  to be final through tax year 1998 (which final assessments are, under Israeli
  law, subject to reconsideration by the tax authorities only in certain limited
  circumstances, including fraud). Based on the tax returns filed by Ampal through
  1998, it has not been required to make any additional tax payments in excess
  of the withholding on its dividends. In addition, under Ampals arrangement
  with the Israeli tax authorities, the aggregate taxes paid by Ampal in Israel
  and in the United States on interest, rent and dividend income derived from
  Israeli sources has not exceeded the taxation which would have been payable
  by Ampal in the United States had such interest, rent and dividend income been
  derived by Ampal from United States sources. There can be no assurance that
  this arrangement will continue in the future. This arrangement does not apply
  to taxation of Ampals Israeli subsidiaries.

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

14

---

---

Under
  Israeli law, a tax is payable on capital gains of residents and non-residents
  of Israel. With regard to non-residents, this tax applies to gains on sales
  of assets either located in Israel or which represent a right to assets located
  in Israel (including gains arising from the sale of shares of stock in companies
  resident in Israel, and rights in non-resident entities that mainly represent
  ownership and rights to assets located in Israel, with regard to such assets).
  Since January 1, 1994, the portion of the gain attributable to inflation prior
  to that date is taxable at a rate of 10%, while the portion since that date
  is exempt from tax. Non-residents of Israel are exempt from the 10% tax on the
  inflationary gain derived from the sale of shares in companies that are considered
  Israeli residents if they choose to compute the inflationary portion of the
  gain based on the change in the rate of exchange between Israeli currency and
  the foreign currency in which the shares were purchased from the date the shares
  were purchased until the date the shares were sold. The remainder of the profit
  (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 purchased 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
  36% (for corporations), whereas the portion of the gain attributed to the period
  after January 1, 2003 shall be taxed at the preferential rate of 25%.

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

Individuals
  and companies in Israel pay VAT at a rate of 18% of the price of assets sold
  and services rendered (according to a Temporary Order issued by the state of
  Israel the VAT rate was increased from 17% to 18% for the period commencing
  on June 15, 2002 and ending on December 31, 2003. This period was extended by
  an additional two months and was terminated on February 29, 2004. The Company
  can deduct VAT paid on goods and services acquired for the purpose of the business.
  Nir, a subsidiary of Ampal is considered a Financial Institute under the VAT
  Law, and as such is subject to wage and profit tax rather than VAT.

United States Taxation
  of Ampal

Ampal
  and its United States subsidiaries (in the following tax discussion, generally
  Ampal U.S.) are subject to United States taxation on their consolidated
  taxable income from foreign and domestic 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 share of subpart F income
  earned by certain foreign corporations controlled by Ampal U.S. and (iii) Ampal
  U.S.s share of income earned by certain electing passive foreign
  investment companies of which Ampal U.S. is a stockholder. Subpart F income
  includes dividends, interest and certain rents and capital gains. Since 1993,
  the maximum rate applicable to domestic corporations is 35%.

15

---

---

Ampal
  U.S. is entitled to claim as a credit against its United States income tax liability
  all or a portion of income taxes, or of taxes imposed in lieu of income taxes,
  paid to foreign countries. If Ampal U.S. receives dividends from a foreign corporation
  in which it owns 10% or more of the voting stock, in determining total foreign
  income taxes paid by Ampal U.S. for purposes of the foreign tax credit Ampal
  U.S. is treated as having paid the same proportion of the foreign corporations
  post-1986 foreign income taxes as the amount of such dividends bears to the
  foreign corporations post-1986 undistributed earnings. Certain of Ampals
  non-U.S. subsidiaries have elected to be treated as partnerships for U.S. tax
  purposes. As a result, the income of these subsidiaries is subject to U.S. taxation,
  as it is earned.

In
  general, the total foreign tax credit that Ampal U.S. may claim is limited to
  the proportion of Ampal U.S.s United States income taxes that its foreign
  source taxable income bears to its taxable income from all sources, foreign
  and domestic. The Internal Revenue Code of 1986, as amended (the Code),
  also limits the ability of Ampal U.S. to offset its United States tax liability
  with foreign tax credits by subjecting various types of income to separate limitations.
  Source of income and deduction rules may further limit the use of foreign taxes
  as an offset against United States tax liability. As a result of the operation
  of these rules, Ampal U.S. may choose to take a deduction for foreign taxes
  in lieu of the foreign tax credit.

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

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 on Form 10-K) 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, and in the global business and
  economic conditions in the different sectors and markets where the Companys
  portfolio companies operate.

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.

ITEM 2. PROPERTY

Ampals
  corporate headquarters in Israel, which is owned by the Company, is located
  at 111 Arlozorov Street in Tel Aviv.

16

---

---

Ampal
  currently leases an office at 555 Madison Avenue in New York City from Rodney
  Company N.V., Inc. The lease period is seven years commencing on October 15,
  2002. The annual rent for this lease is $114,968. As discussed earlier in this
  Report, on March 31, 2004, the Company intends to close this office. The office
  space has been subleased.

Kfar
  Saba, which operates a country club in the town of Kfar Saba, occupies a 7-1/4
  acre lot which will be leased for five consecutive ten-year periods, at the
  end of which the land returns to the lessor. The lease expires on July 14, 2038,
  and lease payments in 2003 totaled $177,670.

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

17

---

---

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 8,974,401 ($1.9 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 4,000,000 ($913,450) if a final judgment against the Company
  will be given. At this stage, the Company cannot estimate the impact this claim
  will have on it.

In
  May 2002, the Israeli Income Tax Authority issued an assessment to Ampal (Israel)
  Ltd., the Companys wholly-owned subsidiary, for payment of approximately
  NIS 34 million ($7,655,933) for the tax years 1997-2000. Ampal (Israel) filed
  an appeal regarding this assessment. In October, 2003, Ampal and the Israeli
  Income Tax Authority signed a settlement agreement pursuant to which Ampal paid
  the sum of NIS 6 million ($1,351,047) as a final payment for the tax years 1997-2000.
  The reserve previously established to cover the Companys estimated exposure
  has been adjusted accordingly.

As
  discussed elsewhere in this Report, in February 2004, the Company sold all of
  its remaining holdings of Granite. For a description of the legal proceedings
  relating to Granite, please refer to Item 3 of the Companys annual report
  on Form 10-K for the fiscal year ended December 31, 2002.

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

None.

PART II

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

PRICE RANGE
  OF CLASS A STOCK

Ampals
  Class A Stock is listed on Nasdaq 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 2003 and 2002, as reported by Nasdaq 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.

18

---

---

|               |  
|-------------- | -
|              
|**2003:**      |  
|Fourth Quarter |  
|Third Quarter  |  
|Second Quarter |  
|First Quarter  |  
|              
|**2002:**     
|Fourth Quarter | $
|Third Quarter  |  
|Second Quarter |  
|First Quarter  |  

As of March
  9, 2004, there were approximately 811 record holders of Class A Stock.

VOTING RIGHTS

Unless
  dividends on any outstanding preferred stock are in arrears for three successive
  years, as discussed below, the holders of Class A Stock are entitled to one
  vote per share on all matters voted upon. Notwithstanding the above, if dividends
  on any outstanding series of preferred stock are in arrears for three successive
  years, the holders of all outstanding series of preferred stock as to which
  dividends are in arrears shall have the exclusive right to vote for the election
  of directors until all cumulative dividend arrearages are paid. The shares of
  Class A Stock do not have cumulative voting rights 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
  (the Board).

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.

Dividends
  on all classes of Ampals shares of preferred stock are payable as a percentage
  of par value. The holders of Ampals presently authorized and issued 4%
  Preferred Stock and 6 1/2% Preferred Stock (each having a $5.00 par value) are
  entitled to receive cumulative dividends at the rates of 4% and 6 1/2% per annum,
  respectively, payable out of surplus or net earnings of Ampal before any dividends
  are paid on the Class A Stock. If Ampal fails to pay such dividend to the preferred
  stockholders in any calendar year, such deficiency must be paid in full, without
  interest, before any dividends may be paid on the Class A Stock. If, after the
  payment of all cumulative dividends on the preferred stock and a non-cumulative
  4% dividend on the Class A Stock, there remains any surplus, any dividends declared
  are to be participated in by the holders of 4% Preferred Stock and Class A Stock,
  pro rata. On December 10, 2003, Ampal announced that its Board had declared
  cash dividends on its classes of preferred stock ($0.325 per share on its 6
  1/2% classes of preferred stock and $0.20 per share on its 4% Preferred Stock).

19

---

---

RECENT SALES
  OF UNREGISTERED SECURITIES

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

Pursuant
  to a Letter Agreement, dated as of January 31, 2001, between Ampal (Israel)
  Ltd., a wholly-owned subsidiary of Ampal, and Coaching Ltd., Ampal (Israel)
  Ltd. transferred 1,500 shares of Class A Stock to Coaching Ltd. on March 1,
  2001 (having a market value of $9,420) as partial compensation for services
  rendered to the Company.

The
  transfer to each of Zionism 2000 and Coaching Ltd. of the aforementioned shares
  was exempt from registration under the Securities Act of 1933, as amended, by
  reason of Regulation S under such Act because the transactions were consummated
  outside the United States.

ITEM 6.  SELECTED
  FINANCIAL DATA

|2003                                               | 2002 | 2001    | 2000 | 1999
|-------------------------------------------------- | ---- | ------- | ---- | ----
|
|
|                                                   |     
|Revenues                                           | $    | 51,814  |      | $   
|Net income
      (loss) from continuing operations |      | 8,847   |      | $   
|Earnings
      (loss) per Class A share:          
|Basic
      EPS                                    | $    | 0.42    |      | $   
|Diluted
      EPS                                  | $    | 0.40    |      | $   
|                                                   |      |         |      |     
|Total assets                                       | $    | 354,367 |      | $   
|                                                  
|Notes and
      loans and debentures              
|Payable                                            |      | 138,334 |      |     
|                                                   |      |         |      |     

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

|Fiscal
      Year Ended December 31,             | 2003 | 2002  | **2001** | 2000 | 1999   
|------------------------------------------------ | ---- | ----- | -------- | ---- | -------
|
|
|                                                 |     
|Gain (Loss)
      from continued operations      | $    | 8,847 |          | $    | (44,047
|(Loss) from
      discontinued operations        |      | --    |          | $    | --     
|(Loss) per
      Class A share from discontinued
|operations:                                     
|Basic
      EPS                                  | $    | --    |          | $    | --     
|Diluted
      EPS                                | $    | --    |          | $    | --     

| |     |                                                                                                                                                      
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Computation is based
      on net income (loss) after deduction of preferred stock dividends of $213,
      $218, $227, $234, and $284, respectively.

20

---

---

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. Our principal focus is on businesses
  located in the State of Israel or that are Israel-related. In utilizing our
  core competencies and financial resources, our investment portfolio primarily
  focuses on a broad cross-section of Israeli companies engaged in various market
  segments including Energy, Industry, Real Estate and Project Development, Telecommunications
  and High-Technology.

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. To further our strategic objectives
  and support our key business initiatives, we seek investments in companies that
  operate in Israel initially and then expand abroad. 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.

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.

The
  majority of recently published economic indicators show an increase in economic
  activity both in Israel and abroad. Specifically, the increase in economic activity
  emanating from abroad is affecting Israels financial markets. The combined
  state of the economy index rose by 0.6% in the fourth quarter of 2003, after
  falling consistently since the end of the year 2000. Private consumption rose
  considerably during the second half of 2003 when it expanded by an annualized
  rate of 7.8% compared with the first half of the year according to Central Bureau
  of Statistics estimates. This trend appears to have largely resulted from consumers
  increased sense of security from the increase in economic activity. We believe
  that these increases in economic activity, together with the strategic moves
  we have taken to properly value and enhance our portfolio, will assist the company
  in reaching its real valuation.

The
  results of investee companies which are greater than 50%-owned are included
  in the consolidated financial spatements. 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 periodically
  in order to determine whether to maintain the current carrying value or to write
  off some or all of the investment. For more information as to how we make these
  determinations, see Critical Accounting Policies.

21

---

---

For
  those subsidiaries and affiliates whose functional currency is considered to
  be the New Israeli Shekel (NIS), assets and liabilities are translated
  at the rate of exchange at the end of the reporting period and revenues and
  expenses are translated at the average rates of exchange during the reporting
  period. Translation differences of those foreign companies financial statements
  are included in the cumulative translation adjustment account (reflected in
  accumulated other comprehensive loss) of shareholders equity. Should the
  NIS be devalued against the U.S. dollar, cumulative translation adjustments
  are likely to result in a reduction in shareholders equity. As of December
  31, 2003, the effect on shareholders equity was a decrease of approximately
  $20.6 million. Upon 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 accounting principles generally accepted in the United States 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 Annual Report for the fiscal year ended December 31, 2003 for a summary
  of all of Ampals significant accounting policies.

Portfolio
  Investments

The
  Company accounts for a number of its investments, including many of its investments
  in the high-technology and communications industries, on the basis of the cost
  method. Application of this method requires the Company to periodically review
  these investments in order to determine whether to maintain the current carrying
  value or to write off 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.

22

---

---

Investment
  in MIRS

MIRS
  is our largest investment and is being accounted for at cost (our equity interest
  is 25%). The cost method is applied due to preference features we have been
  granted in our investment in preferred shares in MIRS. Revenues from guaranteed
  payments from Motorola are recognized as income. We perform annual tests for
  impairment regarding our investment in MIRS. Our assessment, based on a valuation
  of our investment in MIRS as of December 31, 2003, resulted in no impairment
  charge. The valuation was calculated according to the discounted cash flow method,
  taking into account the preferences to which we are entitled from Motorola under
  the MIRS purchase agreement.

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, and marketable securities classified as available-for-sale
  that are carried at fair value with unrealized gains and losses included in
  the component of accumulated other comprehensive loss in stockholders
  equity. If according to managements assessment it is determined that a
  decline in the fair value of any of the investments is other than temporary,
  an impairment loss is recorded and included in the consolidated statements of
  income as loss from impairment of investments.

Long-
  lived assets

On
  January 1, 2002, Ampal adopted FAS 144, Accounting for the Impairment
  or Disposal of Long- Lived Assets. FAS 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. We also do not provide for taxes on
  undistributed earnings of our foreign subsidiaries totaling $43.6 million in
  2003, as it is our intention to reinvest undistributed earnings indefinitely
  outside the United States. If the earnings were not considered permanently reinvested,
  approximately $15.3 million of deferred income taxes would have been provided
  in 2003.

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.

23

---

---

RECENTLY ISSUED ACCOUNTING
  PRONOUNCEMENTS

In
  January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
  of Variable Interest Entities (FIN 46). Under FIN 46, entities are separated
  into two categories populations: (1) those for which voting interests are used
  to determine consolidation (this is the most common classification situation)
  and (2) those for which variable interests are used to determine consolidation.
  FIN 46 explains how to identify  Variable Interest Entities (VIEs)
  and how to determine consolidation. FIN 46 explains how to identify Variable
  Interest Entities (VIEs) and how to determine when a public company
  business enterprise should include the assets, liabilities, non-controlling
  interests, and results of activities of a VIE in its consolidated financial
  statements.

Since
  issuing FIN 46, the FASB has proposed various amendments to the interpretation
  and has deferred its effective dates. Most recently, in December 2003, the FASB
  issued a revised version of FIN 46 (FIN 46-R), which also provides for a partial
  deferral of FIN 46. This partial deferral established the effective dates for
  the application of public entities to apply FIN 46 and FIN 46-R based on the
  nature of the VIE variable interest entity and the date upon which the public
  company became involved with the VIE variable interest entity. In general, the
  deferral provides that (i) for VIEs variable interest entities created before
  February 1, 2003, a public company entity must apply FIN 46-R at the end of
  the first interim or annual period ending after March 15, 2004, and may be required
  to apply FIN 46 at the end of the first interim or annual period ending after
  December 15, 2003, if the VIE variable interest entity is a special purpose  entity
  and (ii) for VIEs variable interest entities created after January 31, 2003,
  a public company must apply FIN 46 at the end of the first interim or annual
  period ending after December 15, 2003, as previously required, and then apply
  FIN 46-R at the end of the first interim or annual reporting period ending after
  March 15, 2004.

The
  Company currently has no variable interests in any VIE. Accordingly, while there
  can be no assurance that the Company will not have variable interests in one
  or more VIEs in the future, the Company believes that the adoption of FIN 46
  and FIN 46-R will not have material impact on our financial position, results
  of operations and cash flows.

In
  December 2003, the FASB issued SFAS No. 132, Employers Disclosures
  about Pensions and Other Postretirement Benefits, an amendment of SFAS
  No.s 87, 88 and 106, and a revision of SFAS No. 132. SFAS No. 132 revises
  employers disclosures about pension plans and other post-retirement benefit
  plans. It does not change the measurement or recognition of those plans. The
  new rules require additional disclosures about the assets, obligations, cash
  flows, and net periodic benefit cost of defined benefit pension plans and other
  post-retirement benefit plans.

Part
  of the new disclosure provisions of SFAS No. 132 are effective for the 2003
  calendar year-end financial statements, but have no impact on the Companys
  financial statements. The remainder of this statement, which has a later effective
  date, is currently being evaluated by the Company.

24

---

---

RESULTS OF
  OPERATIONS

Fiscal
  year ended December 31, 2003 compared to fiscal year ended December 31, 2002:

The
  Company recorded a consolidated net income of $8.8 million for the fiscal year
  ended December 31, 2003, as compared to $44.0 million loss for the same period
  in 2002. The increase in net income is primarily attributable to the higher
  realized and unrealized gain on investments in marketable securities, less losses
  from impairments of investments and higher income from equity in 2003, as compared
  to 2002. These were partial offset by higher translation losses.

Equity
  in earnings of affiliates increased to $2.5 million for the fiscal year ended
  December 31, 2003 as compared to a loss of $3.3 million for the fiscal year
  ended in 2002. The increase in 2003 is primarily attributable to a $3.7 million
  gain recorded by Ophir Holdings as a result of the sale of its real estate assets.
  The gain was offset by a $1.7 million loss in Granite, which was recorded in
  the first quarter of 2003. In 2002, the loss was primarily attributable to decreased
  earnings of Ophirtech, which recorded higher losses from impairment of investments
  in 2002.

The
  increase in real estate income and expenses in 2003 as compared to 2002 is primarily
  attributable to the increase in tenant occupancy rate in Am-Hal Ltd.

In
  the fiscal year ended December 31, 2003, Ampal recorded $29.8 million of realized
  and unrealized gain on investments, which attributable to the Companys
  investment in shares of Granite ($20.7 million), Blue Square Israel Ltd. (Blue
  Square) ($2.6 million), Alvarion ($1.4 million), and mutual funds and
  other securities ($5.1 million).

During
  2003, the Company reduced its holding interest in Granite from 20.4% to 10.5%
  as a result of a sale of 9.9%. Consequently, the Companys investment in
  Granite, which was previously accounted for by the equity method, was accounted
  for as an investment in a trading marketable security. The remaining 10.5% interest
  in Granite was sold in February, 2004 (see Item 1. Significant Developments
  since the Fiscal Year ended December 31, 2003). In the same period in
  2002, the Company recorded $20.4 million of realized and unrealized losses on
  investments which consisted of $3.3 million of realized and unrealized losses
  on investments classified as trading securities and $17.1 million of unrealized
  losses other than temporary decline in value of investments in the available-for-sale
  securities. The realized and unrealized losses on trading securities recorded
  in 2002 were primarily attributable to the Companys investment in shares
  of Bank Leumi LeIsrael B.M. (Leumi) ($2.0 million) mutual
  funds and other securities ($1.3 million). The unrealized losses other than
  temporary decline in value of the Companys investments in the available-for-sales
  securities in 2002 were primarily attributable to the investment in shares of
  Blue Square ($12.8 million), a publicly traded company on the Tel Aviv and New
  York Stock Exchanges. The Company also wrote down its investments in shares
  of Sonic Foundry Inc. (Sonic) ($1.8 million), Alvarion ($2.0 million)
  and Compugen Ltd. (Compugen) ($0.5 million). At December 31, 2003
  and December 31, 2002, the aggregate fair value of trading securities and available
  for sale securities amounted to approximately $64.7 million and $18.6 million,
  respectively.

Other
  income realized by the Company is principally composed of guaranteed payments
  from Motorola equal to $ 7.1 million for the years ended December 31,
  2003 and 2002.

The
  Company recorded lower interest expense in the fiscal year ended December 31,
  2003, as compared to the same period in 2002, primarily as a result of lower
  interest rates.

25

---

---

In
  the fiscal year ended December 31, 2003, the Company recorded $13.1 million
  in losses from the impairment of its investments and loans in the following
  companies: XACCT ($9.0 million), Carmel ($2.0 million), Identify ($1.3 million),
  Cute Ltd. ($0.2 million), and real estate in Migdal Haemek ($0.6 million). During
  the fiscal year ended December 31, 2002, the Company recorded a $15.1 million
  loss from the impairment of its investments and loans in certain companies.
  A substantial portion of these losses resulted from the worldwide decline in
  technology markets, which affected both sales and the ability of companies to
  raise additional capital. Companies at the start-up stage, as are a number of
  the Companys portfolio companies, were particularly affected by the weakness
  in the private capital markets as these companies depend on additional rounds
  of investments for operating funds. See Critical Accounting Policies
  for a discussion of the factors affecting the Companys decision to write-off
  its investments accounted for under the cost method.

The
  lower effective income tax rate in 2003 as compared to 2002, is primarily attributable
  to the availability of certain tax benefits, which were not available in previous
  years. The higher effective tax rate in 2002 is attributable to the unrealized
  losses on investments which has an income statement effect but no tax effect.

Our
  management currently believes that inflation has not had a material impact on
  our operations.

SELECTED QUARTERLY FINANCIAL
  DATA

|                                           | First
      Quarter | Second
      Quarter | Third
      Quarter | Fourth
      Quarter | Total 
|------------------------------------------ | ------------------- | -------------------- | ------------------- | -------------------- | ------
|
|
|                                           |                    
|Fiscal Year
      Ended December 31, 2003  |                     |                      |                     |                      |       
|Revenues(1)                                | $                   | 4,934                |                     | $                    | 30,993
|Net interest
      expense                 |                     | (2,082               | )                   |                      | (1,285
|Net income
      (loss)                    |                     | (2,167               | )                   |                      | 10,231
|Basic EPS:                                 |                     |                      |                     |                      |       
|Earnings
      (Loss) per Class A share(2) |                     | (0.11                | )                   |                      | 0.52  
|Diluted EPS:                              
|Earnings
      (Loss) per Class A share    |                     | (0.11                | )                   |                      | 0.47  

|                                          | First
      Quarter | Second
      Quarter | Third
      Quarter | Fourth
      Quarter | Total 
|----------------------------------------- | ------------------- | -------------------- | ------------------- | -------------------- | ------
|
|
|                                          |                    
|Fiscal
      Year Ended December 31, 2002 |                     |                      |                     |                      |       
|Revenues(1)                               | $                   | 5,532                |                     | $                    | 5,235 
|Net interest
      expense                |                     | (2,188               | )                   |                      | (1,376
|Net (loss)                                |                     | (6,175               | )                   |                      | (9,158
|Basic EPS:                               
|(Loss)
      per Class A share(2)         |                     | (0.32                | )                   |                      | (0.47 
|Diluted EPS:                             
|(Loss)
      per Class A share            |                     | (0.32                | )                   |                      | (0.47 

(1) Reclassified
  to conform with year-end presentation.(2) After
  deduction of dividends on the 4% and 6 1/2% preferred stock in 2003 and 2002
  of $213 and $218, respectively.

26

---

---

Fiscal
  year ended December 31, 2002 compared to fiscal year ended December 31, 2001:

The
  Company recorded a consolidated net loss of $44.0 million for the fiscal year
  ended December 31, 2002, as compared to $7.0 million for the same period in
  2001. The increase in net loss is primarily attributable to the higher unrealized
  losses on investments in marketable securities, higher loss from impairment
  of investments and loans and significantly lower gains from the sale of real
  estate rental property in 2002, as compared to 2001, the absence of the gains
  from the sale of investments in 2002, and higher provision for income taxes.
  These decreases were partially offset by lower interest expense.

Equity
  in earnings of affiliates decreased to a loss of $3.3 million for the fiscal
  year ended December 31, 2002, as compared to a loss of $2.2 million for the
  year ended December 31, 2001. The decrease is primarily attributable to the
  decreased earnings of Ophirtech, the Companys 42.5% - owned affiliate,
  which recorded higher losses from impairment of investments in 2002, and from
  the 37% owned Bay Heart, which recorded higher losses in 2002 as a result of
  decreased rental revenues and increased security expenses consistent with the
  political/security situation in Israel. Bay Hearts decreased rental revenue
  was due to lower than average rental rates on its properties caused in part
  by the recession in Israel which affected the real estate sector and by the
  surplus of mall properties in the Haifa area and from the 20.4% owned Granite,
  which recorded losses in 2002 as a result from impairment of investments.

On
  March 28, 2001, the Company concluded the sale of its interest in a building
  located at 800 Second Avenue, New York, New York (800 Second Avenue)
  for $33.0 million and recorded a pre-tax gain of approximately $8.0 million
  ($4.3 million net of taxes). No comparable real estate sales occurred during
  the fiscal year ended December 31, 2002.

On
  May 2, 2001, the Company sold its real estate rental property located in Bnei
  Brak, Israel (Bnei Brak) and recorded a pre-tax gain of
  approximately $2.1 million ($1.6 million net of taxes).

During
  December 2002, Ophir Holdings signed agreements to sell four of its properties
  for the aggregate amount of $5.9 million (net income $4.2 million). Gain was
  recognized during the first quarter of 2003.

On
  December 22, 2002, the Company recorded a $0.7 million pretax gain on the sale
  of real estate rental property.

In
  the fiscal year ended December 31, 2002, Ampal recorded $20.4 million of
  realized and unrealized losses on investments, which consisted of $3.3 million
  of realized and unrealized losses on investments classified as trading securities
  and $17.1 million of unrealized losses other than temporary decline in value
  of investments in the available-for-sale securities. In the same period in 2001,
  the Company recorded $1.7 million of realized and unrealized losses on investments
  which consisted of $3.3 million of unrealized losses on investments and $1.6
  million of realized gains from sale of investments. The realized and unrealized
  losses on trading securities recorded in 2002 were primarily attributable to
  the Companys investment in shares of Bank Leumi LeIsrael B.M. (Leumi)
  ($2.0 million) mutual funds and other securities ($1.3 million). The unrealized
  losses other than temporary decline in value of the Companys investments
  in the available-for-sales securities in 2002 were primarily attributable to
  the investment in shares of Blue Square Israel Ltd (Blue Square)
  ($12.8 million), a publicly traded company on the Tel Aviv and New York Stock
  Exchanges. In June 1999, the Company invested $ 24 million to purchase 1,500,000
  shares of Blue Square, representing 3.9% of Blue Square, at $ 16 per share.
  As of December 31, 2002 the investment in Blue Square had a market value of
  $ 11.2 million. Primarily due to the length of the time and extent to which
  the market value has been less than cost, such decline has been accounted for
  as other than temporary. The Company also wrote down its investments in shares
  of Sonic Foundry Inc. (Sonic) ($1.8 million), Alvarion ($2.0 million)
  and Compugen Ltd. (Compugen) ($0.5 million). At December 31, 2002
  and December 31, 2001, the aggregate fair value of trading securities amounted
  to approximately $5.2 million and $9.9 million, respectively.

27

---

---

Other
  income realized by the Company is principally composed of guaranteed payments
  from Motorola equal to $ 7.1 million for the years ended December 31,
  2002 and 2001.

The
  Company recorded lower interest expense in the fiscal year ended December 31,
  2002, as compared to the same period in 2001, primarily as a result of lower
  interest rates.

The
  decrease in real estate income and expenses in 2002 as compared to 2001 is primarily
  attributable to the sale of 800 Second Avenue in New York City.

In
  the fiscal year ended December 31, 2002, the Company recorded $15.1 million
  in losses from the impairment of its investments and loans in the following
  companies: Bay Heart ($2.9 million), Bridgewave Communications, Inc. (Bridgewave)
  ($2.8 million), ShellCase ($2.3 million), Oblicore Ltd. ($2.2 million), Modem
  Art ($1.0 million), Carmel ($0.9 million), Star Management of Investments No.
  II (2000) L.P. ($0.6 million), Camelot Information Technologies Ltd. (Camelot)
  ($0.5 million), Netformx Ltd. ($0.5 million), Enbaya Inc. ($0.5 million), Shiron
  Satellite Communications (1996) Ltd. (Shiron) ($0.4 million), VisionCare
  Opthalmic Technologies Ltd. (VisionCare) ($0.3 million),  Tulip
  Ltd. ($0.1 million), and Babylon Ltd. ($0.1 million). During the fiscal year
  ended December 31, 2001, the Company recorded a $13.1 million loss from the
  impairment of its investments. A substantial portion of these losses resulted
  from the worldwide slump in technology markets which affected both sales and
  the ability of companies to raise additional capital. Companies at the start-up
  stage, as are a number of the Companys portfolio companies, were particularly
  affected by the weakness in the private capital markets as these companies depend
  on additional rounds of investment for operating funds. See -Critical
  Accounting Policies for a discussion of the factors affecting the Companys
  decision to write-off its investments accounted for under the cost method.

The
  increase in the effective income tax rate in 2002, as compared to 2001, is primarily
  attributable to the unrealized losses on investments for which no tax benefits
  are currently available.

28

---

---

LIQUIDITY AND CAPITAL
  RESOURCES

Cash
  Flows

On
  December 31, 2003, cash and cash equivalents were $4.6 million, as compared
  with $1.6 million at December 31, 2002. The increase in cash and cash equivalents
  is primarily attributable to the net proceeds from tradable securities.

The
  Companys sources of cash include cash, cash equivalents and marketable
  securities which amount to $69.3 million in 2003 as compared to $20.2 million
  in 2002. The Company also has sources of cash from operations, cash from 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, dividends on preferred
  stock 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 to further utilize these sources of cash. To
  the extent that the Company intends to rely on the sale of marketable securities
  in order to satisfy its cash needs, it is subject to the risk of a shortfall
  in the amount of proceeds from any such sale as compared with the anticipated
  sale proceeds due to a decline in the market price of those securities. In the
  event of a decline in the market price of its marketable securities, the Company
  may need to draw upon its 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, the shares of MIRS owned by
  the Company have already been pledged as security for specific loans provided
  to the Company for the purchase of these shares and would therefore be unavailable
  if the Company wished to pledge them in order to provide an additional source
  of cash.

Cash
  flows from operating activities

Net
  cash used in operating activities totaled approximately $12.4 million for the
  fiscal year ended December 31, 2003, as compared to approximately $3.3 million
  provided for the same period in 2002. The increase is primarily attributable
  to (i) the $15.0 million net investment in tradable securities ($39.4 million
  proceeds offset by $54.4 million invested) as compared to $1.0 million in 2002,
  (ii) the $5.6 million dividends received from affiliates as compared to $0.7
  million in 2002 (iii) the $6.9 million increase in other assets as compared
  to a $1.2 million decrease in other assets in 2002, and (iv) the increase in
  other accounts payable of $8.8 million as compared to $5.0 million in 2002.

Cash
  flows from investing activities

Net
  cash provided by investing activities totaled approximately $16.5 million for
  the fiscal year ended December 31, 2003, as compared to cash used approximately
  $0.7 million for the same period in 2002. The increase is primarily attributable
  to the $19.5 million proceeds from the sale of Granite, to higher deposits granted
  in 2003 compared to 2002, and lower deposits collected in 2003 compared to 2002.

Cash
  flows from financing activities

Net
  cash used in financing activities was approximately $1.6 million at December
  31, 2003, as compared to approximately $7.3 million at December 31, 2002. The
  decrease in the cash used in 2003 is attributable to the pay down of existing
  debentures ($19.3 million and $2.2 million in 2003 and 2002 respectively), and
  to notes and loans payable received ($19.9 million and $5.6 million in 2003
  and 2002, respectively.

29

---

---

Investments

On
  December 31, 2003, the aggregate fair value of trading and available-for-sale
  securities was approximately $64.7 million, as compared to $18.6 million at
  December 31, 2002. The increase in 2003 is attributable the purchase of tradable
  securities (mostly debentures) and to the increase in market value of marketable
  securities.

In
  2003, the Company made the following investments:

| | 1. | An additional investment
      of $ 0.9 million in ShellCase, a developer of chip  size packing technology
      for semiconductors using wafer  level process. The company holds an
      approximate 13.8% equity interest in ShellCase.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                             
| | 2. | An additional investment
      of $ 0.3 million in Star Management of Investment No. II (2000) L.P., a
      venture capital fund which focuses on investment in communication, Internet,
      software and medical devices.               
| |    |                                                                                                                                                                                                                                             
| | 3. | An investment of $0.2
      million in Fimi Opportunity Fund, L.P.                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                             
| | 4. | A loan of $0.1 million
      to Shiron Satellite Communications (1996) Ltd., a developer and manufacturer
      of two-way satellite communications products.                                                                               
| |    |                                                                                                                                                                                                                                             
| | 5. | A loan to NetFormx of
      $0.2 million, a developer of network design tools.                                                                                                                                                              
| |    |                                                                                                                                                                                                                                             
| | 6. | A loan to Bay Heart
      of $0.1 million, a shopping mall.                                                                                                                                                                                 

Debt

In
  connection with its investment in MIRS, the Company has two long-term loans
  from Bank Hapoalim Ltd. (Hapoalim) and Bank Leumi Le-Israel Ltd.
  (Leumi) in the outstanding amount of $37.2 million and $34.9 million,
  respectively, as of December 31, 2003. The Company is responsible for 75% of
  these loans. Both loans are due on March 31, 2008 and bear interest at a rate
  of LIBOR plus 0.8%. Other than as described in this paragraph, the loans are
  non-recourse to the Company and are secured by the Companys shares in
  MIRS. The principal payments are due as follows:  10% on March 31,
  2004, 15% on March 31, 2005 and 25% on each of the following dates - March 31,
  2006, 2007 and 2008. Interest will be paid annually on March 31 of each year
  from March 31, 2002 until and including March 31, 2008. These loans are subject
  to the compliance by MIRS with covenants regarding its operations and financial
  results. In March 2002, some of the covenants in the loan from Leumi were amended
  to reflect changes in MIRS business. In connection with these amendments,
  the Company agreed that Leumi will have recourse to the Company for an additional
  $0.5 million beginning in 2006 with respect to the Companys repayment
  obligations under the loan.

As
  of December 31, 2003, the Company had $3.9 million in outstanding debentures
  with interest rates of 7.5%. These debentures, which mature in 2005, are secured
  by $4.0 million in cash held in a secured account.

30

---

---

The
  Company financed a portion of the development of Am-Hal, a wholly-owned subsidiary
  which develops and operates luxury retirement centers for senior citizens, through
  bank loans from Hapoalim and others. At December 31, 2003 and December 31, 2002,
  the amounts outstanding under these loans were $9.2 million and $12.7 million,
  respectively. The loans are dollar linked, mature in up to one year, and have
  interest rates of LIBOR plus 1.0%. The Company generally repays these loans
  with the proceeds received from deposits and other payments from the apartments
  in Am-Hal facilities. The loans are secured by a lien on Am-Hals properties.
  The Company also issued guarantees in the amount of $ 4.6 million in favor of
  clients of Am-Hal in order to secure their deposits.

The
  Company also finances its general operations and other financial commitments
  through bank loans from Bank Hapoalim. The long-term loans in the amount of
  $32.8 million mature through 2005-2011.

The
  weighted average interest rates and the balances of these short-term borrowings
  at December 31, 2003 and December 31, 2002 were 3.6% on $27.5 million and 3.3%
  on $39.8 million, respectively.

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

|                   |  |  |  |  | 
|------------------ |  |  |  |  | 
|(1) see note 17(d) |  |  |  |  | 
|(2) see note 17(a) |  |  |  |  | 
|                   |  |  |  |  | 

As
  of December 31, 2003, the Company had issued guarantees on certain outstanding
  loans to its investees and subsidiaries in the aggregate principal amount of
  $12.3 million. This includes:

| |  | $0.5 million guarantee
      to Leumi with respect to the MIRS loan as described above.                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | $6.3 million guarantee
      on indebtedness incurred by Bay Heart ($3.7 million of which is recorded
      as a liability in the Companys financial statements at December 31,
      2003) in connection with the development of its property. Bay Heart recorded  losses
      in 2003 as a result of decreased rental revenues. 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.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | $4.6 million guarantee
      to Am- Hal tenants as described above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | $0.9 million guarantee
      to Galha 1960 Ltd as described in Item 3 of this Report.                                                                                                                                                                                                                                                                                                                                                                                                                                                           

31

---

---

In
  each of 2003 and 2002, Ampal paid dividends in the amount of $0.20 and $0.325
  per share on its 4% and 6 1⁄2% Cumulative Convertible Preferred Stocks, respectively.
  Total dividends paid in each year amounted to approximately $0.2 million.

Off-Balance Sheet Arrangements

Other
  than the foreign currency contract 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. 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.

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 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, 2003, and are sensitive
  to the above market risks.

During
  the fiscal year ended December 31, 2003, 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, 2002.

Interest Rate Risks

At
  December 31, 2003, the Company had financial assets totaling $15.8 million and
  financial liabilities totaling $138.3 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, 2003, the Company had fixed rate financial assets of $8.7 million
  and variable rate financial assets of $7.1 million. A ten percent decrease in
  interest rates would increase the unrealized fair value of the fixed rate debt
  by approximately $0.1 million financial assets by approximately $0.1 million.

At
  December 31, 2003, the Company had fixed rate debt of $14.6 million and variable
  rate debt of $123.7 million. A  ten percent decrease in interest rates
  would decrease the unrealized fair value of the financial assets in the form
  of the fixed rate debt by approximately $0.1 million.

32

---

---

The
  net decrease in earnings for the next year resulting from a ten percent interest
  rate increase would be approximately $0.3 million, holding other variables constant.

Exchange Rate Sensitivity
  Analysis

The
  Companys exchange rate exposure on its financial instruments results from
  its investments and ongoing operations in Israel. During 2003, the Company entered
  into various foreign exchange forward purchase contracts to partially hedge
  this exposure. At December 31, 2003, the Company had open foreign exchange forward
  purchase contracts in the amount of $6 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 $1.9 million, and regarding the statements
  of income loss a ten percent devaluation of the foreign currency would be reflected
  in a net decrease in earnings and would be $3.7 million.

Equity Price Risk

The
  Companys investments at December 31, 2003, included marketable securities
  which are recorded at fair value of $64.7 million, including a net unrealized
  gain of $14.1 million. Those securities have exposure to price risk. The estimated
  potential loss in fair value resulting from a hypothetical ten percent decrease
  in prices quoted on stock exchanges is approximately $6.5 million.

33

---

---

ITEM 8 
  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT
  AUDITORS

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

We have audited
  the accompanying consolidated balance sheets of Ampal-American Israel Corporation
  and subsidiaries (the Company) as of December 31, 2003 and 2002,
  and the related consolidated statements of income (loss), cash flows, changes
  in shareholders equity, and comprehensive income (loss) for each of the
  years ended on those dates. These financial statements are the responsibility
  of the Companys Board of Directors and management. Our responsibility
  is to express an opinion on these financial statements based on our audits.

We did not audit
  the financial statements of certain subsidiaries, whose assets included in consolidation
  constitute approximately 20.1 % and 22.6% of total consolidated assets as of
  December 31, 2003 and 2002, respectively, and whose revenues included in consolidation
  constitute approximately 14.5% and 45.1% for each of the years ended on those
  dates, respectively. Also we did not audit the financial statements of certain
  affiliated companies, the companys interest in which as reflected in the
  balance sheets as of December 31, 2003 and 2002 is $12,007,672 and $40,647,929,
  respectively, and the companys share in excess of losses over profits
  of which is a net amount of $1,030,738 and $901,958, for each of the years ended
  on those dates, respectively. The financial statements of those subsidiaries
  and affiliated companies were audited by other independent auditors whose reports
  thereon have been furnished to us and our opinion expressed herein, insofar
  as it relates to the amounts included for those companies, is based solely on
  the reports of  the other independent auditors. The financial statements
  of Ampal-American Israel Corporation and subsidiaries for the year ended December
  31, 2001, were audited by other independent accountants who have ceased operations.
  Those independent accountants expressed an unqualified opinion on those financial
  statements in their report dated March 27, 2002.

We conducted our
  audits in accordance with auditing standards generally accepted in the United
  States of America and in Israel, including those prescribed by the Israeli Auditor
  (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 management, as well as evaluating the overall
  financial statement presentation. We believe that our audits and the reports
  of other independent auditors provide a reasonable basis for our opinion.

In our opinion,
  based on our audits and the reports of other independent auditors, the financial
  statements referred to above present fairly, in all material respects, the financial
  position of Ampal-American Israel Corporation and subsidiaries as of December
  31, 2003 and 2002, and the results of their operations and their cash flows
  for each of the years ended on those dates, in conformity with accounting principles
  generally accepted in the United States of America.

Tel Aviv, Israel                                                                      
  March 24, 2004

| | /s/ KESSELMAN &
      KESSELMAN CPAs ( ISR)A member of
| | ------------------------------------------------------
| | PricewaterhouseCoopers
      International Limited    

34

---

---

THE
  FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
  LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.

REPORT OF INDEPENDENT
  PUBLIC ACCOUNTANTS

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

We have audited the accompanying
  consolidated balance sheets of Ampal-American Israel Corporation and subsidiaries
  (the Company) as of December 31, 2001 and 2000, and the related
  consolidated statements of (loss) income, cash flows, changes in shareholders
  equity, and comprehensive (loss) income for each of the three years in the period
  ended December 31, 2001. These financial statements are the responsibility of
  the Companys management. Our responsibility is to express an opinion on
  these financial statements based on our audits. We did not audit the financial
  statements of certain consolidated subsidiaries, which statements reflect total
  assets and total revenues of 16% and 18%, respectively, in 2001, 15% and 15%,
  respectively, in 2000, total revenues of 25% in 1999, of the related consolidated
  totals. Also, we did not audit the financial statements of certain affiliated
  companies, the investments in which are reflected in the accompanying financial
  statements using the equity method of accounting. The Companys equity
  in net (losses) earnings of these affiliated companies represents ($ 2,083,000),
  $10,730,000 and $15,727,000, of consolidated net (loss) income for the years
  ended December 31, 2001, 2000 and 1999, respectively. The statements of these
  subsidiaries and affiliated companies were audited by other auditors whose reports
  have been furnished to us and our opinion, insofar as it relates to the amounts
  included for those entities, is based solely on the reports of other auditors.

We conducted our audits in
  accordance with auditing standards generally accepted in the United States.
  Those standards require that we plan and perform the audit to obtain reasonable
  assurance about whether the financial statements are free of material misstatement.
  An audit includes examining, on a test basis, evidence supporting the amounts
  and disclosures in the financial statements. An audit also includes assessing
  the accounting principles used and significant estimates made by management,
  as well as evaluating the overall financial statement presentation. We believe
  that our audits and the reports of other auditors provide a reasonable basis
  for our opinion.

In our opinion, based on
  our audits and the reports of other auditors, the financial statements referred
  to above present fairly, in all material respects, the financial position of
  Ampal-American Israel Corporation and subsidiaries as of December 31, 2001 and
  2000, and the results of their operations and their cash flows for each of the
  three years in the period ended December 31, 2001, in conformity with accounting
  principles generally accepted in the United States.

|New York,
      New York |  | Arthur  Andersen
        LLP
|------------------------ |  | ----------------------------
|March 27, 2002           |  |                             

35

---

---

THE
  FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY LUBOSHITZ KASIERER,
  THE ISRAELI AFFILIATED FIRM OF ARTHUR ANDERSEN LLP THAT HAS NOT BEEN REISSUED.

REPORT OF INDEPENDENT
  PUBLIC ACCOUNTANTS

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

We have audited the accompanying
  consolidated balance sheet of Ampal-American Israel Corporation and subsidiaries
  (the Company) as of December 31, 2001, and the related consolidated
  statements of (loss) income, cash flows, changes in shareholders equity,
  and comprehensive (loss) income for the year ended December 31, 2001. These
  financial statements are the responsibility of the Companys management.
  Our responsibility is to express an opinion on these financial statements based
  on our audits. We did not audit the financial statements of certain consolidated
  subsidiaries, which statements reflect total assets and total revenues of 16%
  and 18%, respectively, in 2001, of the related consolidated totals. Also, we
  did not audit the financial statements of certain affiliated companies, the
  investments in which are reflected in the accompanying financial statements
  using the equity method of accounting. The Companys equity in net losses
  of these affiliated companies represents $ 2,083,000, of consolidated net loss
  for the year ended December 31, 2001.The statements of these subsidiaries and
  affiliated companies were audited by other auditors whose reports have been
  furnished to us and our opinion, insofar as it relates to the amounts included
  for those entities, is based solely on the reports of other auditors.

We conducted our audits in
  accordance with auditing standards generally accepted in the United States.
  Those standards require that we plan and perform the audit to obtain reasonable
  assurance about whether the financial statements are free of material misstatement.
  An audit includes examining, on a test basis, evidence supporting the amounts
  and disclosures in the financial statements. An audit also includes assessing
  the accounting principles used and significant estimates made by management,
  as well as evaluating the overall financial statement presentation. We believe
  that our audits and the reports of other auditors provide a reasonable basis
  for our opinion.

In our opinion, based on
  our audits and the reports of other auditors, the financial statements referred
  to above present fairly, in all material respects, the financial position of
  Ampal-American Israel Corporation and subsidiaries as of December 31, 2001,
  and the results of their operations and their cash flows for the year ended
  December 31, 2001, in conformity with accounting principles generally accepted
  in the United States.

|Tel Aviv       |  | Luboshitz
        Kasierer
|-------------- |  | --------------------------
|March 27, 2002 |  | Arthur  Andersen          

36

---

---

AMPAL-AMERICAN
  ISRAEL CORPORATION AND SUBSIDIARIESCONSOLIDATED
  STATEMENTS OF INCOME (LOSS)

|                                                          | Fiscal Year
      Ended December 31,
|--------------------------------------------------------- | ------------------------------------
|
|
|
|
|                                                          |                                     
|**REVENUES:**                                             |                                     
|Equity in
      earnings (losses) of affiliates (Note 13) | $                                   
|Interest:                                                
|Related
      parties                                     |                                     
|Others                                                    |                                     
|Real estate
      income                                  |                                     
|Realized
      and unrealized gains on                    |                                     
|investments
      (Notes 2 and 4)                         |                                     
|Gain on sale
      of real estate rental                 
|property
      (Note 2 )                                  |                                     
|                                                          |                                     
|Other (note
      14)                                     |                                     
|                                                          |                                     
|Total
      revenues                                      |                                     
|                                                          |                                     
|**EXPENSES:**                                             |                                     
|Interest:                                                 |                                     
|Related
      parties                                     |                                     
|Others                                                    |                                     
|Real estate
      expenses                                |                                     
|Realized
      and unrealized losses on                  
|investments
      (Notes 2 and 4)                         |                                     
|Loss from
      impairment of investments & real estate  
|(Note 2)                                                  |                                     
|Minority
      interests                                  |                                     
|Translation
      (gain) loss                             |                                     
|Other (mainly
      general and administrative)           |                                     
|                                                          |                                     
|Total
      expenses                                      |                                     
|                                                          |                                     
|Income (loss)
      before income taxes (tax benefits)    |                                     
|Provision
      for income taxes (tax benefits) (Note 12) |                                     
|                                                          |                                     
|**NET
      (LOSS) INCOME**                               |                                     
|                                                          |                                     
|Basic EPS:
      (Note 11)                                |                                     
|Earnings
      (loss) per Class A share                   | $                                   
|                                                          |                                     
|                                                          |                                     
|Shares used       in calculation (in thousands)           |                                     
|                                                          |                                     
|Diluted EPS:                                              |                                     
|Earnings
      (loss) per Class A Share                   | $                                   
|                                                          |                                     
|                                                          |                                     
|Shares
      used in calculation (in thousands)           |                                     
|                                                          |                                     

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

37

---

---

AMPAL-AMERICAN
  ISRAEL CORPORATION AND SUBSIDIARIES
  CONSOLIDATED BALANCE SHEETS

|                                                                     | Assets As
      At
|-------------------------------------------------------------------- | ------------------
|
|
|Cash and
      cash equivalents                                      |                   
|                                                                     |                   
|                                                                     |                   
|Deposits,
      notes and loans receivable (Note 3)                  |                   
|                                                                     |                   
|Investments
      (Notes 2, 4 and 13):                               |                   
|Marketable
      securities                                          |                   
|Other investments                                                    |                   
|                                                                     |                   
|Total
      investments                                              |                   
|                                                                     |                   
|Real estate
      property, less accumulated depreciation of $10,666 |                   
|and $9,166                                                           |                   
|                                                                     |                   
|                                                                     |                   
|Other assets
      (Note 5)                                          |                   
|                                                                     |                   
|                                                                     |                   
|TOTAL
      ASSETS                                                   |                   
|                                                                     |                   

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

38

---

---

AMPAL-AMERICAN
  ISRAEL CORPORATION AND SUBSIDIARIES
  CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                              | Liabilities
      and Shareholders
      Equity As At
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------
|
|
|**LIABILITIES**                                                                                                                                                               |                                                       
|                                                                                                                                                                              |                                                       
|Notes and
      loans payable (Note 6)                                                                                                                                        |                                                       
|Debentures
      (Note 7)                                                                                                                                                     |                                                       
|Accounts
      payable, accrued expenses and others (Note 8)                                                                                                                  |                                                       
|                                                                                                                                                                              |                                                       
|Total
      liabilities                                                                                                                                                       |                                                       
|                                                                                                                                                                              |                                                       
|                                                                                                                                                                              |                                                       
|Commitments
      and Contingencies (note 17)                                                                                                                                 |                                                       
|                                                                                                                                                                              |                                                       
|**SHAREHOLDERS
      EQUITY** (Note 9)                                                                                                                                       |                                                       
|                                                                                                                                                                              |                                                       
|4% Cumulative
      Convertible Preferred Stock, $5 par value; authorized 189,287 shares; issued
      131,952 and 139,391 shares; outstanding 128,602 and 136,041 Shares     |                                                       
|                                                                                                                                                                              |                                                       
|6-1/2% Cumulative
      Convertible Preferred Stock, $5 par value; authorized 988,055 shares; issued
      697,380 and 706,450 shares; outstanding 574,844 and 583,914 shares |                                                       
|                                                                                                                                                                              |                                                       
|Class A Stock
      $1 par value; authorized 60,000,000 shares; issued 25,567,210 and 25,502,805
      shares; outstanding 19,735,546 and 19,671,141 shares.                  |                                                       
|                                                                                                                                                                              |                                                       
|Additional
      paid-in capital.                                                                                                                                             |                                                       
|                                                                                                                                                                              |                                                       
|Retained
      earnings                                                                                                                                                       |                                                       
|                                                                                                                                                                              |                                                       
|Treasury
      stock, at cost                                                                                                                                                 |                                                       
|                                                                                                                                                                              |                                                       
|Accumulated
      other comprehensive loss                                                                                                                                    |                                                       
|                                                                                                                                                                              |                                                       
|Total
      shareholders equity                                                                                                                                              |                                                       
|                                                                                                                                                                              |                                                       
|TOTAL
      LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                              |                                                       
|                                                                                                                                                                              |                                                       

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

39

---

---

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 operating activities:             
|Equity
      in (earnings) losses of affiliates           |                                     
|Realized
      and unrealized (gains) losses on          
|investments                                               |                                     
|Gain on sale
      of real estate rental property         |                                     
|Depreciation
      expense                                |                                     
|Amortization
      expense (income)                       |                                     
|Impairment
      of investments                           |                                     
|Minority
      interests                                  |                                     
|Translation
      (gain) loss                             |                                     
|(Increase)
      decrease in other assets                 |                                     
|Increase
      in accounts payable, accrued expenses     
|and
      other                                           |                                     
|Investments
      made in trading securities              |                                     
|Proceeds
      from sale of trading securities            |                                     
|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        |                                     
|Investments
      made in:                               
|Available-for-sale
      securities                       |                                     
|                                                          |                                     
|Affiliates
      and others                               |                                     
|Proceeds
      from sale of investments:                 
|Available-for-sale
      securities                       |                                     
|Affiliate
      Company                                   |                                     
|Others                                                    |                                     
|Return
      of capital by partnership                    |                                     
|Capital
      improvements                                |                                     
|Acquisition
      of minority interest                    |                                     
|Proceeds
      from sale of real estate property, net     |                                     
|                                                          |                                     
|Net
      cash provided by (used in) investing activities |                                     
|                                                          |                                     

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

40

---

---

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

|                                                           | Fiscal
      Year Ended December 31,
|---------------------------------------------------------- | ------------------------------------
|
|
|
|
|                                                           |                                     
|Cash
      flows from financing activities:                |                                     
|Notes and
      loans payable received                     | $                                   
|Notes and
      loans payable repaid:                     
|Related
      parties                                      |                                     
|Others                                                     |                                     
|Proceeds
      from exercise of stock options              |                                     
|Debentures
      repaid                                    |                                     
|Contribution
      to partnership by minority interests    |                                     
|Dividends
      paid on preferred stock                    |                                     
|                                                           |                                     
|Net cash
      used in financing activities                |                                     
|                                                           |                                     
|                                                          
|Effect of
      exchange rate changes on cash and         
|cash
      equivalents                                     |                                     
|                                                           |                                     
|Net increase
      (decrease) 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:                                                 
|Related
      parties                                      |                                     
|Others                                                     |                                     
|                                                           |                                     
|Total
      interest paid                                  | $                                   
|                                                           |                                     
|                                                           |                                     
|Income
      taxes paid                                    | $                                   
|                                                           |                                     
|                                                           |                                     
|Supplemental
      Disclosure of None cash Investing and   |                                     
|Financing
      Activities:                               
|Issuance
      of treasury stock for charity               |                                     
|                                                           |                                     
|Investments
      in investees                             |                                     
|                                                           |                                     

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

41

---

---

AMPAL-AMERICAN
  ISRAEL CORPORATION AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

|                                                       | Fiscal Year Ended December 31,
|------------------------------------------------------ | ------------------------------
|
|
|4% PREFERRED
      STOCK                               |                               
|Balance,
      beginning of year                       | $                             
|Conversion
      of 7,439, 6,835 and 10,175 shares    
|into Class
      A Stock                               |                               
|                                                       |                               
|Balance,
      end of year                             | $                             
|                                                       |                               
|                                                      
|6-1/2% PREFERRED
      STOCK                          
|Balance,
      beginning of year                       | $                             
|Conversion
      of 9,070, 20,230 and 19,134 shares   
|                                                       |                               
|into
      Class A Stock                               |                               
|                                                       |                               
|Balance,
      end of year                             | $                             
|                                                       |                               
|                                                      
|CLASS A STOCK                                         
|Balance,
      beginning of year                       | $                             
|Issuance
      of shares upon conversion of           
|Preferred
      Stock                                  |                               
|                                                       |                               
|Balance,
      end of year                             | $                             
|                                                       |                               
|                                                      
|ADDITIONAL
      PAID-IN CAPITAL                      
|Balance,
      beginning of year                       | $                             
|Conversion
      of Preferred Stock                    |                               
|Issuance
      of additional shares                    |                               
|Exercise
      of stock options, including tax benefit |                               
|                                                       |                               
|Balance,
      end of year                             | $                             
|                                                       |                               
|                                                      
|RETAINED
      EARNINGS                               
|Balance,
      beginning of year                       | $                             
|                                                       |                               
|Net (loss)
      income                                |                               
|Dividends:                                            
|4%
      Preferred Stock - $0.20 per share             |                               
|6-1/2%
      Preferred Stock - $0.325 per share        |                               
|                                                       |                               
|Balance,
      end of year                             | $                             
|                                                       |                               

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

42

---

---

AMPAL-AMERICAN
  ISRAEL CORPORATION AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

|                                                       | Fiscal Year Ended December 31,
|------------------------------------------------------ | ------------------------------
|
|
|TREASURY
      STOCK                                   |                               
|4%
      PREFERRED STOCK                              
|Balance,
      beginning and end of year               | $                             
|                                                       |                               
|                                                      
|6-1/2%
      PREFERRED STOCK                          
|Balance,
      beginning and end of year               | $                             
|                                                       |                               
|                                                      
|CLASS
      A STOCK                                   
|Balance,
      beginning of year  5,831,664,          | $                             
|6,160,664
      and 6,168,164 shares, at cost         
|                                                       |                               
|Issuance
      of 329,000, and 7,500 shares            |                               
|                                                       |                               
|Balance,
      end of year  5,831,664, 5,831,664     
|and 6,160,664
      shares, at cost                    |                               
|                                                       |                               
|                                                       |                               
|Balance,
      end of year                             | $                             
|                                                       |                               
|                                                      
|ACCUMULATED
      OTHER COMPREHENSIVE                 
|LOSS                                                  
|Cumulative
      translation adjustments:             
|Balance,
      beginning of year                       | $                             
|Foreign
      currency translation adjustments         |                               
|                                                       |                               
|Balance,
      end of year                             |                               
|                                                       |                               
|                                                      
|Unrealized
      gain (loss) on marketable securities:
|Balance,
      beginning of year                       |                               
|Unrealized
      (loss) gain, net                      |                               
|Sale
      of available-for-sale securities            |                               
|                                                       |                               
|Balance,
      end of year                             |                               
|                                                       |                               
|                                                       |                               
|Balance,
      end of year                             | $                             
|                                                       |                               

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

43

---

---

AMPAL-AMERICAN
  ISRAEL CORPORATION AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

|                                                           | Fiscal year
      ended December 31,
|---------------------------------------------------------- | ------------------------------------
|
|
|Net (loss)
      income                                    |                                     
|                                                           |                                     
|                                                           |                                     
|Other comprehensive
      (loss) income, net of tax:       |                                     
|Foreign
      currency translation adjustments             |                                     
|Unrealized
      (loss) gain on securities                 |                                     
|                                                           |                                     
|Other
      comprehensive (loss) income                    |                                     
|                                                           |                                     
|                                                           |                                     
|Comprehensive
      (loss) income                          |                                     
|                                                           |                                     
|                                                           |                                     
|Related tax
      (expense) benefit of other comprehensive |                                     
|(loss) income:                                             |                                     
|Foreign
      currency translation adjustments             |                                     
|Unrealized
      gain on securities                        |                                     

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

44

---

---

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

Note 1 -- Summary
  of Significant Accounting Policies(a)          
  General

| | (1) | 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.                                 
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                
| | (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 15.
| |     |                                                                                                                                                                                                                

| | (3) | The preparation of financial
      statements in conformity with generally accepted accounting  principles
      requires management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities, disclosure of contingent assets and liabilities
      at the date of the financial statements and the reported amounts of revenues
      and expenses during the reporting period. Actual results could differ from
      those estimates.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(b)          
  Consolidation

The
  consolidated financial statements include the accounts of Ampal and its subsidiaries.
  Inter-company transactions and balances are eliminated in consolidation.

(c)          
  Translation of Foreign Currencies

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

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

(d)          
  Foreign Exchange Forward Contracts

The
  Companys derivative financial instruments consist of foreign currency
  forward exchange 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.

At
  December 31, 2003, the open foreign exchange forward contracts totaled $6.0
  million.

45

---

---

(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. The Company reduces the carrying value of its investment
  in an affiliate if an impairment in value of that investment is deemed to be
  other than temporary.

(ii)         
  Investments in Marketable Securities

Marketable
  equity securities, other than equity securities accounted for by the equity
  method, are reported at fair value. For those securities, which are classified
  as trading securities, realized and unrealized gains and losses are reported
  in the statements of income (loss). Unrealized gains and losses 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
  loss. Declines in value determined to be other than temporary on available-for-sale
  securities are included in the statement of income (loss).

(iii)      
  Cost Basis Investments

Equity
  investments of less than 20% in non-publicly traded companies are carried at
  cost. Changes in the value of these investments are not recognized unless an
  impairment in value is deemed to be other than temporary. The investment in
  MIRS communications Ltd. (MIRS) in preferred shares with preference
  features in the amount of $ 110 million which exceeds 20% of ownership,
  is presented at cost. At December 31, 2003, and December 31, 2002, the carrying
  value of the cost basis investments was $136.4 million and $145 million, respectively.

(f)          
  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 performs on going credit evaluation of its receivables allowance for
  doubtful accounts.

(g)         
  Real  Estate Property

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

Real-estate
  property of a subsidiary, which existed at the time of the subsidiarys
  acquisition by the Company, are included at their fair value as that date.

The
  Company adopted in 2002 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.

46

---

---

(h)          
  Income Taxes

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

Deferred
  income taxes are not provided on undistributed earnings of foreign subsidiaries
  adjusted for translation effect totaling approximately $43.6 million (2002 -
  $30.1 million), since such earnings are currently expected to be permanently
  reinvested outside the United States. If the earnings were not considered permanently
  invested, approximately $15.3 million (2002 - $10.1 million) of deferred income
  taxes would have been provided. Valuation allowance is provided for deferred
  tax assets when it is more likely than not that all or a portion of the deferred  tax
  assets will not be realized.

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.

(i)           
  Revenue Recognition

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. Guaranteed payments from Motorola are recorded
  in the statement of income (loss) over the guaranteed period. Revenue from amortization
  of tenant deposits is calculated at a fixed periodic rate based on the specific
  terms in the occupancy agreement signed with the tenants.

(j)           
  Cash Equivalents

Cash
  equivalents are short-term, highly liquid investments that have original maturities
  of three months or less and that are readily convertible to cash.

(k)          
  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), for all periods
  presented. As to data used in the per share computation see Note 11.

(l)           
  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) and net unrealized gains or losses on investments
  held as available for sale and foreign currency translation adjustments, which
  are presented net of income taxes.

47

---

---

(m)         
  Employee Stock Based Compensation

The
  Company accounts for all employee stock options plans under APB Opinion No.
  25, under which no compensation costs were incurred in the years ended December
  31, 2003, 2002 and 2001. If compensation cost for the options under the plans
  in effect been determined in accordance with SFAS No. 123, the Companys
  net income (loss) and EPS would have been reduced as follows:

|                                  |  | Fiscal
      Year Ended December 31,
|--------------------------------- |  | ------------------------------------
|
|
|Basic
      EPS:                  |  |                                     
|                                  |  |                                     
|**Net
      income (loss):**      |  | As reported(1)                      
|                                  | 
|Less  stock
      based          | 
|compensation
      expense        | 
|Determined
      under fair value | 
|Method                            |  |                                     
|                                  |  |                                     
|                                  |  |                                     
|                                  |  | Pro forma                           
|                                  |  |                                     
|                                  |  |                                     
|                                  |  | As reported                         
|                                  |  | Pro forma                           

|                                  |  | Fiscal
      Year Ended December 31,
|--------------------------------- |  | ------------------------------------
|
|
|Diluted EPS:                      |  |                                     
|                                  |  |                                     
|**Net
      income (loss):**      |  | As reported                         
|                                  |  |                                     
|                                  | 
|Less  stock
      based          | 
|compensation
      expense        | 
|Determined
      under fair value | 
|Method                            |  |                                     
|                                  |  |                                     
|                                  |  |                                     
|                                  |  | Pro forma                           
|                                  |  |                                     
|                                  |  |                                     
|                                  |  |                                     
|                                  |  | As reported                         
|                                  |  | Pro forma                           

| | (1) After
      deduction of accrued Preferred Stock Dividend of $213 and $218 and $227
      respectively.                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                    
| | (2) In 2002
      and 2001, the conversion of the 4% and 6-1/2% Preferred Stock was excluded
      from the diluted EPS calculation due to the antidilutive effect.
| |                                                                                                                                                                    

Under
  SFAS No. 123, the fair value of each option is estimated on the date of grant
  using the Black Scholes option-pricing model with the following weighted average
  assumptions for 2003, 2002 and 2001, respectively: (1) expected life of options
  of 5 years;  (2) dividend yield of 0%; (3) volatility ranging from
  57% to 71%; and (4) risk-free interest rate ranging from 1.75% to 6.68%.

(n)          
  Treasury stock

These
  shares are presented as a reduction of shareholders equity at their cost
  to the Company.

48

---

---

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

| | (1) FIN 46 and FIN 46-R
| | -----------------------

In
  January 2003, the FASB issued FASB Interpretation No. 46. Consolidation
  of Variable Interest Entities (FIN 46). Under FIN 46, entities are separated
  into two categories populations: (1) those for which voting interests are used
  to determine consolidation (this is the most common classification situation)
  and (2) those for which variable interests are used to determine consolidation.
  FIN 46 explains how to identify Variable Interest Entities (VIE)
  and how to determine when a public company business enterprise should include
  the assets, liabilities, non-controlling interests, and results of activities
  of a VIE in its consolidated financial statements.

Since
  issuing FIN 46, the FASB has proposed various amendments to the interpretation
  and has deferred its effective dates. Most recently, in December 2003, the FASB
  issued a revised version of FIN 46 (FIN 46-R), which also provides for a partial
  deferral of FIN 46. This partial deferral established the effective dates for
  the application of public entities to apply FIN 46 and FIN 46-R based on the
  nature of the VIE variable interest entity and the date upon which the public
  company became involved with the VIE variable interest entity. In general, the
  deferral provides the (i) for VIEs variable interest entities created before
  February 1, 2003, a public company entity must apply FIN 46-R at the end of
  the first interim or annual period ending after March 15, 2004, and may be required
  to apply FIN 46 at the end of the first interim or annual period ending after
  December 15, 2003, if the VIE variable interest entity is a special purpose
  entity, and (ii) for VIEs variable interest entities created after January 31,
  2003, a public company must apply FIN 46 at the end of the first interim or
  annual period ending after December 15, 2003, as previously required, and then
  apply FIN 46-R at the end of the first interim or annual reporting period ending
  after March 15, 2004.

The
  Company currently has no variable interests in any VIE. Accordingly, while there
  can be no assurance that we will not have variable interests in one or more
  VIEs in the future, the Company believes that the adoption of FIN 46 and FIN
  46-R will not have a material impact on our financial position, results of operations
  and cash flows.

| | (2) SFAS 132-R
| | --------------

In
  December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers
  Disclosures about Pensions and Other Postretirement Benefits an amendment of
  FASB Statements No. 87, 88 and 106, and a revision of FASB Statement No. 132
  (FAS 132 (revised 2003)). This statement revises employers
  disclosures about pension plans and other post-retirement benefit plans. It
  does not change the measurement or recognition of those plans. The new rules
  require additional disclosures about the assets, obligations, cash flows, and
  net periodic benefit cost of defined benefit pension plans and other post-retirement
  benefit plans.

Part
  of the new disclosures provisions is effective for the 2003 calendar year-end
  financial statements, but have no impact on the Companys financial statements.
  The remaining provisions of this statement, which have a later effective date,
  are currently being evaluated by the Company.

(p)         
  Reclassifications

Certain
  comparative figures have been reclassified to conform to the current year presentation.

49

---

---

Note 2 -- Acquisitions
  and Dispositions

(a)         
  In 2003, the Company made investments aggregating $ 1.8 million, as follows:

| | 1. | An additional investment
      of $ 0.9 million in ShellCase Ltd., a developer of chip  size packing
      technology for semiconductors using wafer  level process. The company
      holds an approximate 13.84% equity interest in ShellCase Ltd.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                       
| | 2. | An additional investment
      of $ 0.3 million in Star Management of Investment No. II (2000) L.P., a
      venture capital fund which focuses on investment in communication, Internet,
      software and medical devices.                         
| |    |                                                                                                                                                                                                                                                       
| | 3. | An investment of $0.2
      million in Fimi Opportunity Fund, L.P.                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                       
| | 4. | A loan of $0.1 million
      to Shiron Satellite Communications (1996) Ltd., a developer and manufacturer
      of two-way satellite communications products.                                                                                         
| |    |                                                                                                                                                                                                                                                       
| | 5. | A loan to Netformx Ltd.
      of $0.2 million, a developer of network design tools.                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                       
| | 6. | A loan to Bay Heart
      Ltd. of $0.1 million, a shopping mall.                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                       

|(b) | During 2003, the Company,
      which previously held a 20.4% interest in Granite, sold 9.9% of its holding
      for $19.5 million. Consequently, the Companys investment in Granite,
      which was previously accounted for by the equity method, was accounted for
      as an investment in a trading marketable security.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                  
|(c) | In 2003, the Company
      recorded loss from impairment of investments of $ 13.1 million as follows:                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                  

| | 1. | XACCT Technologies Ltd. 
      (XACCT) ($9.0 million investment).
| | -- | -------------------------------------------------------------------
| | 2. | Carmel Container Ltd.
      ($2.0 million)                         
| | 3. | Identify Solution Ltd.
      ($1.3 million investment).            
| | 4. | Cute Ltd. ($0.2 million
      loan).                               
| | 5. | Real estate in Migdal
      Haemek ($0.6 million).                 

(d)         
  In 2002, the Company made investments aggregating $3 million, as follows:

| | 1. | An additional investment
      of $1.3 million in ShellCase Ltd., a developer of chip  size packing
      technology for semiconductors using wafer  level process.                    
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                          
| | 2. | An additional investment
      of $0.7 million in PowerDsine Ltd. (total equity interest of 8.1%), a leading
      developer of power supply devices for the telecommunications industry.
| |    |                                                                                                                                                                                          
| | 3. | A loan to CUTe Ltd of
      $0.2 million (total equity interest of 20%), a developer of bandwidth efficient
      techniques for the delivery of digital media over wireless networks.   
| |    |                                                                                                                                                                                          
| | 4. | A loan to Camelot Information
      Technologies Ltd. of $0.5 million, a developer of security solution for
      organizations.                                                         
| |    |                                                                                                                                                                                          
| | 5. | An additional investment
      of $0.3 million in other investees.                                                                                                                       
| |    |                                                                                                                                                                                          

|(e) | On December 2002, the
      Company recorded a $0.7 million pretax gain on the sale of real estate rental
      property.
|--- | -------------------------------------------------------------------------------------------------------------------------

50

---

---

|(f) | In 2002, the Company
      recorded loss from impairment of investments of $ 15.1 million as follows:
|--- | -----------------------------------------------------------------------------------------------------
|    |                                                                                                      

| | 1.     
      Bridgewave Communication Inc. ($ 2.8 million investment).             
| | ------------------------------------------------------------------------------------
| | 2.     
      Shiron Satellite Communication (1996) Ltd. ($ 0.4 million investment).
| | 3.     
      Enbaya Ltd. ($ 0.5 million investment).                               
| | 4.     
      Modem Art Ltd. ($ 1.0 million investment).                            
| | 5.     
      Oblicore Ltd. ($ 2.2 million investment).                             

| | 6.  | Star
      Management of Investment ($ 0.6 million investment).          
| | --- | -------------------------------------------------------------------------
| | 7.  | VisionCare
      Ophthalmic Technologies Ltd. ($ 0.3 million investment).
| | 8.  | ShellCase
      Ltd. ($ 2.3 million investment).                         
| | 9.  | Carmel
      Container Systems Limited ($ 0.9 million investment).       
| | 10. | Bay
      Heart Limited ($ 2 million investment and $ 0.9 million loan). 
| | 11. | Netformx
      Ltd. ($ 0.5 million loan).                                
| | 12. | Camelot
      Information Technologies Ltd. ($ 0.5 million loan).        
| | 13. | $0.2
      million in other investment.                                  

In 2001, the Company made investments aggregating $14 million, as follows:

| | 1. | An additional investment
      of $5 million in XACCT, a provider of business infrastructure software for
      the next-generation public network.                                                                                                                                                                                                                                                            
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                
| | 2. | An additional investment
      of $1.5 million (including $0.4 million conversion of loans) in Enbaya Ltd.,
      a developer of a 3-D browser that enables fast viewing, compression and
      steaming of 3-D models.                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                
| | 3. | An additional investment
      of $1.7 million (includes the conversion of a $0.5 million loan) in ShellCase,
      a developer of chip-size packaging technology for semiconductors using a
      wafer-level process.                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                
| | 4. | An additional investments
      of an aggregate of $0.9 million in CUTe Ltd. (CUTe), a developer
      of bandwidth efficient techniques for the delivery of digital media over
      wireless networks.                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                
| | 5. | An additional investment
      of $0.6 million in the share of Breezecom Ltd. (NASDAQ:BRZE),
      a developer of wireless local area network products, and $0.6 million in
      the share of Floware Wireless Systems Ltd. (NASDAQ:FLRE), a
      developer of broadband wireless transmission solution. These two companies
      merged during 2001 to create a company called Alvarion (NASDAQ: ALVR).
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                
| | 6. | An additional investment
      of $0.6 million in Star Management of Investment No. II (2000) L.P., a venture
      capital fund which focuses in investment in communications, Internet, software
      and medical devices.                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                
| | 7. | An additional investment
      of $0.5 million in PowerDsine Ltd., a leading developer of power supply
      devices for the telecommunications industry.                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                
| | 8. | A loan to Netformx Ltd.
      of $1.5 million, a developer of network design tools.                                                                                                                                                                                                                                                                                                                            

51

---

---

| |     |                                                                                                                                                          
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | 9.  | A loan to Camelot Information
      Technologies Ltd., of $0.5 million, a developer of security solution for
      organizations.                        
| |     |                                                                                                                                                          
| | 10. | A loan to Shiron Satellite
      Communications (1996) Ltd. of $0.3 million,  a developer and marketer
      of two-way satellite communication products.
| |     |                                                                                                                                                          

|(g)
|---
|   

| | 1. | During March 2001, the
      Company sold its interest in an office building   located
      at 800 Second Avenue, New York, New York, to Second 800 LLC, for $33
      million and recorded a pre tax gain of approximately $8 million
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                        

| | 2. | During May 2001, the
      Company sold its interest in an office building in Bnei Brak for $3.1 million
      and recorded a pre tax gain of $2.1 million. 
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                             
| | 3. | During December 2001,
      the Company sold its interest in the Amethyst fund in Korea for $0.9 million
      and recorded a pre tax loss of  $0.2 million.
| |    |                                                                                                                                                             

| | During 2001, the Company
      received $0.4 million as management fees from Amethyset and reimbursed Cavallo
      Capital (a related party) for $0.1 million of expenses.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(h)           In
  2001, the Company recorded loss from impairment of investments of $13 million
  as  follows:

| | 1. | Netformx Ltd. ($1.6
      million investment and $1 million  loan).                            
| | -- | -----------------------------------------------------------------------------------------------
| |    |                                                                                                
| | 2. | RealM Technologies Ltd.
      ($1.3 million).                                                  
| |    |                                                                                                
| | 3. | mPrest Technologies
      Ltd. ($0.8 million).                                                 
| |    |                                                                                                
| | 4. | Shiron Satellite Communications
      (1996) Ltd. ($1.4 million).                              
| |    |                                                                                                
| | 5. | Enbaya Ltd. ($1.4 million).                                                                    
| |    |                                                                                                
| | 6. | Camelot Information
      Technologies Ltd. ($4.5 million investment and $0.5 million of loan).
| |    |                                                                                                
| | 7. | Babylon Ltd. ($0.3 million).                                                                   
| |    |                                                                                                
| | 8. | ElephantX Dot Com LLC
      ($ 0.2 million).                                                   

Note 3 -- Deposits, Notes
  and Loans Receivable

Deposits,
  notes and loans receivable earn interest at varying rates depending upon their
  linkage provisions. Deposits have maturities of up to 2 years (see Note 7) and
  notes and loans receivable have maturities of up to 5 years. At December 31,
  2003 and 2002, deposits, notes and loans receivable from related parties were
  $0.7 million for both years, and such balances with others were $11.6 million
  and $10.3 million, respectively. The allowance for doubtful notes receivable
  for 2003 and 2002 was $ 3.9 million and $ 3.6 million respectively.

Note 4 -- Investments
  in Marketable Securities

The
  Company classifies investments in marketable securities as trading securities
  or available-for-sale securities. As of December 31, 2003, the Company had no
  marketable securities classified as available-for-sale securities. The remaining
  unrealized gains on marketable securities included in the other comprehensive
  income (loss) as of December 31, 2003, relates to available-for-sale securities
  held by an affiliated company.

52

---

---

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

| | As of December 31, 2003
      included in the balance of investments in trading securities unrealized
      gains of $14.1 million (December 31, 2002  unrealized losses of $10.2
      million).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                   
| | (b)          
      Available-For-Sale Securities                                                                                                                                                 

The
  cost and market values of available-for-sale securities at December 31, 2002
  are as follows:

|December 31, 2002 | Cost                             | Other
      than
      temporarilydecline | UnrealizedGains (Losses) | MarketValue
|----------------- | -------------------------------- | ----------------------------------------- | ------------------------ | -----------
|                  | **(Dollars
      in thousands)**
|Equity Securities | $                                | 32,243                                    |                          | $          
|                  |                                  |                                           |                          |            

Note 5  Other Assets

The
  balance of Other Assets as of December 31, 2003 is composed of the
  following: $21.9 million with respect to deferred taxes, $9.4 million with respect
  to income receivable and prepaid expenses, $2.1 million with respect to accounts
  receivable trade, $2.9 million with respect to leasehold improvements
  and $0.9 receivable amounts from others.

Note 6 -- Notes and Loans
  Payable

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

The
  Company has two long-term loans from Bank Hapoalim Ltd. (Hapoalim)
  and Bank Leumi LeIsrael Ltd. (Leumi)in the amount of $37.2
  million and $34.9 million as of December 31, 2003, (in connection with its investment
  in shares of MIRS. Both loans are due on March 31, 2008 and bear interest at
  a rate of LIBOR plus 0.8%. Other than as described below, the loans are non-recourse
  to the Company and are secured by the Companys shares in MIRS. The principal
  payments are due as follows:  10% on March 31, 2004, 15% on March
  31, 2005 and 25% on each of the following dates - March 31, 2006, 2007 and 2008.
  Interest is to be paid annually on March 31 of each year from March 31, 2001
  until and including March 31, 2008.

These
  loans are subject to the compliance by MIRS with covenants regarding its operations
  and financial results. In March 2002, some of the covenants in the Leumi loan
  were amended to reflect changes in MIRS business. In connection with these
  amendments, the Company agreed that Leumi will have recourse to the Company
  for another $0.5 million beginning in 2006 in relation to the Companys
  repayment obligations under the loan.

The
  Company also finances its general operations and other financial commitments
  through bank loans with Hapoalim. The long-term loans in the amount of $32.8
  million mature through 2005-2011.

Other
  long term borrowings in the amount of $2.1 million mature through 2004-2009.
  The borrowings are linked to the C.P.I and bare an annual interest of 5.7%.

The
  weighted average interest rates on the balances of short-term borrowings at
  year-end are as follows:  3.6% on $27.5 million and 3.3% on $39.8
  million in 2003 and 2002, respectively.

53

---

---

Note 7 -- Debentures

Debentures
  outstanding at December 31 consist of:

|                                                      | As of December
      31,
|----------------------------------------------------- | ------------------------
|
|
|Ampal:                                                |                         
|Fifteen Year
      11% Discount Debenture,            |                         
|Ampal Development
      (Israel) Ltd.:                |                         
|Series with
      interest rate of 7.5% , linked      |                         
|to the Consumer
      Price Index in Israel           |                         
|maturing
      2005, secured by pledge on assets      |                         
|of
      $ 4.0 million and $5.6 million, respectively |                         
|                                                      |                         
|                                                      |                         
|Less: Unamortized
      discounts                     |                         
|                                                      |                         
|Total                                                 |                         
|                                                      |                         

Ampal Development
  (Israel) Ltd., a wholly  owned subsidiary of the Company, issued debentures
  which are publicly traded on the Tel Aviv Stock Exchange (TASE). Ampal Development
  has deposited funds with Bank Hapoalim sufficient to pay all principal and interest
  on these debentures.

Maturities
  (including required obligations) for the two years ending December 31 would
  be:

|2004 | $       
      1,894
|---- | --------------------
|2005 | 1,985               
|     |                     
|     | $        3,879      
|     |                     

Note 8 -- Accounts payable
  accrued expenses and others

|(a) | The balance of Accounts
      payable, accrued and others as of December 31, 2003 is composed of
      the following: $50.6 million in respect of deposits from tenants of retirement
      centers for senior citizens (2002 - $48.7 million), $26.4 million with respect
      to deferred tax liability (2002 - $18.4 million), $ 10.0 million in respect
      of minority interest (2002 - $6.7 million), $1.5 million with respect to
      accrued interest (2002 - $2.5 million) and $3.7 million in respect of excess
      of share in losses of  an affiliated company over the investment
      therein (2002 - $3.7 million) and $8.8 payable amounts to others (2002 -
      $ 6.7 million).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(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 $ 0.7 million, net of deposits
      made to insurance policies of $ 0.3 million, is included in accounts payable,
      accrued expenses and other liabilities.                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Severance pay expenses
      were approximately $134, $ (84) and $(96) in 2003, 2002, and 2001, respectively.                                                                                                                                                                                                                                                                                                                                                               

54

---

---

Note 9 -- Shareholders
  Equity

Capital
  Stock

The
  4% and 6-1/2% preferred shares are convertible into 5 and 3 shares of Class
  A Stock, respectively. At December 31, 2003, a total of 3,763,642 shares of
  Class A Stock are reserved for issuance upon the conversion of the Preferred
  Stock and the exercise of 1,396,100 options.

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

| | (i)           
      up to 4% on Class A Stock, then                 
| | ---------------------------------------------------------------------
| |                                                                      
| | (ii)          
      on 4% Preferred Stock and Class A Stock ratably.

Preferred
  shares are non-voting, unless dividends are in arrears for three successive
  years. At December 31, 2003, there are no dividend in arrears.

Retained
  Earnings

At
  December 31, 2003, the Company had $76.1 million of retained earnings. Of such
  retained earnings $0.7 million was received from an affiliate of the Company
  and $49.3 million was received from certain subsidiaries of the Company. Such
  amounts are not available to the Company for payment of dividends pursuant to
  certain Israeli requirements that dividends may only be paid on the basis of
  shekel-denominated and not dollar-denominated retained earnings.

55

---

---

Note 10 --
  Stock Options

In
  March 1998, the Board approved a Long-Term Incentive Plan (1998 Plan)
  permitting the granting of options to all employees, officers, directors and
  consultants of the Company and its subsidiaries to purchase up to an aggregate
  of 400,000 shares of Class A Stock. The 1998 plan was approved by the majority
  of the Companys shareholders at the June 19, 1998, annual meeting of shareholders.
  The plan remains in effect for a period of ten years. As of December 31, 2003,
  119,100 options of the 1998 Plan are outstanding.

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, 2003, 1,277,000 options of the 2000 Plan are outstanding.

The
  options granted under the 1998 Plan and 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 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 plants were granted either at market value or above.

Under
  each of the Plans, all granted but unvested options become immediately exercisable
  upon the occurrence of a change in control of the Company. On April 25, 2002,
  the controlling shareholder of the Company, Rebar Financial Corp. sold all of
  its stock in the Company to Y.M. Noy Investments Ltd. Accordingly, all options
  granted under the Plans were immediately exercisable.

As
  of December 31, 2003, 3,003,900 options under both plans are available for future
  grant.

Transactions
  under both Plans were as follows:

|                                                     | Fiscal Year
      Ended
      December 31, 2003
|---------------------------------------------------- | -----------------------------------------------
|
|
|Outstanding
      at beginning of year               |                                                
|Granted                                              |                                                
|Forfeited/Expired                                    |                                                
|                                                     |                                                
|Outstanding
      at end of year                     |                                                
|                                                     |                                                
|                                                     |                                                
|Exercisable
      at end of year                     |                                                
|                                                     |                                                
|                                                     |                                                
|Weighted
      average fair value of options granted |                                                
|                                                     |                                                

56

---

---

|                                                     | Fiscal Year
      Ended
      December 31, 2002
|---------------------------------------------------- | -----------------------------------------------
|
|
|Outstanding
      at beginning of year               |                                                
|Granted                                              |                                                
|Exercised                                            |                                                
|Forfeited/Expired                                    |                                                
|                                                     |                                                
|Outstanding
      at end of year                     |                                                
|                                                     |                                                
|                                                     |                                                
|Exercisable
      at end of year                     |                                                
|                                                     |                                                
|                                                     |                                                
|Weighted
      average fair value of options granted |                                                
|                                                     |                                                

|                                                     | Fiscal Year
      Ended
      December 31, 2001
|---------------------------------------------------- | -----------------------------------------------
|
|
|Outstanding
      at beginning of year               |                                                
|Granted                                              |                                                
|Forfeited/Expired                                    |                                                
|                                                     |                                                
|Outstanding
      at end of year                     |                                                
|                                                     |                                                
|                                                     |                                                
|Exercisable
      at end of year                     |                                                
|                                                     |                                                
|                                                     |                                                
|Weighted
      average fair value of options granted |                                                
|                                                     |                                                

Note 10 -- Stock
Options  Continued

The
  1,396,100 options outstanding as of December 31, 2003 have exercise prices between
  $3.12 and $8 with a weighted average exercise price of $3.46 and a weighted
  average remaining contractual life of 8.2 years. Of these 1,396,000 options,
  500,000 are exercisable as of December 31, 2003; their weighted average exercise
  price is $3.83.

57

---

---

Note 11 
  Earnings (Loss) Per Class A Share

In
  accordance with SFAS No. 128 Earnings Per Share, net earnings per
  share of Class A Stock (basic EPS) were computed by dividing net
  earnings by the weighted average number of shares of Class A Stock outstanding
  and with the addition of Class A Stock resulting from the assumed conversion
  of 4% Preferred Stocks. Diluted earnings amounts per share of Class A Stock
  were computed by reflecting potential dilution from the conversion of the 61⁄2%
  Preferred Stocks into Class A Stock and the exercise of stock options using
  the treasury stock method. SFAS No. 128 requires the presentation of both basic
  EPS and diluted EPS on the face of the income statement.

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

|                                               | Fiscal Year
      Ended December 31, 2003
|---------------------------------------------- | -----------------------------------------
|
|
|Basic and
      diluted EPS:                   |                                          
|Net
      income attributable to Class A Stock |                                          
|                                               |                                          
|Diluted EPS:                                   |                                          
|Net
      income attributable to Class A Stock |                                          
|                                               |                                          

|                                               | Fiscal Year
      Ended December 31, 2002
|---------------------------------------------- | -----------------------------------------
|
|
|Basic and
      diluted EPS(2):                |                                          
|Net
      (loss) attributable to Class A Stock |                                          
|                                               |                                          

|                                               | Fiscal Year
      Ended December 31, 2001
|---------------------------------------------- | -----------------------------------------
|
|
|Basic and
      diluted EPS(2):                |                                          
|Net
      (loss) attributable to Class A Stock |                                          
|                                               |                                          

|(1) | After deduction of Preferred
      Stock dividends of $213, $218 and $227 in 2003, 2002 and 2001, respectively.                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                      
|(2) | In 2002 and 2001, the
      effect of the conversion of the 4% and 61⁄2% Preferred Stocks was excluded
      from the basic and diluted EPS calculation due to its antidilutive effect.
|    |                                                                                                                                                                                      

|(3) | Options to purchase
      2,852,000 and 2,815,000 shares of common stock were outstanding as of December
      31, 2002 and 2001, respectively, and they were not included in the computation
      of diluted EPS because of their anti-dilutive effect.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

58

---

---

Note 12 -- Income Taxes

|                                                        | Year Ended
      December 31,
|------------------------------------------------------- | -----------------------------
|
|
|The components
      of current and deferred income tax |                              
|expense
      (benefit) are:                           
|Current:                                               
|State
      and local                                   | $                            
|                                                        |                              
|Federal                                                 |                              
|Foreign                                                 |                              
|                                                       
|Deferred:                                              
|State
      and local                                   |                              
|                                                        |                              
|Federal                                                 |                              
|                                                        |                              
|Foreign                                                 |                              
|                                                        |                              
|Total                                                   | $                            
|                                                        |                              
|                                                       
|                                                       
|The domestic
      and foreign components of           
|income
      (loss) before income                      
|taxes
      are:                                       
|                                                        |                              
|Domestic                                                | $                            
|Foreign                                                 |                              
|                                                        |                              
|Total                                                   | $                            
|                                                        |                              
|                                                       
|A reconciliation
      of income taxes between the     
|statutory
      and effective tax is as follows:       
|                                                        |                              
|Federal income
      tax (benefit) at 34%, 34% and 35%  | $                            
|Taxes on
      foreign income (below) U.S. rate,       
|net
      of tax credits                                |                              
|                                                       
|State and
      local taxes                            
|net
      of federal effect                             |                              
|Changes in
      valuation allowance                    |                              
|Other                                                   |                              
|                                                        |                              
|Total
      effective tax: 3%, (4%),and 39%             | $                            
|                                                        |                              

59

---

---

The components of deferred tax assets and liabilities are as follows:

|                                                        | December 31
|------------------------------------------------------- | -----------
|
|                                                        |            
|                                                       
|Deferred
      tax assets:                             
|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           |            
|Goodwill                                                |            
|Deferred
      income                                   |            
|Unrealized
      gains (losses) on trading securities   |            
|Other                                                   |            
|                                                        |            
|Total deferred
      tax liability                      |            
|                                                        |            
|                                                        |            
|Net deferred
      tax liability                        | $          
|                                                        |            

Valuation allowance is provided
  against tax benefits on foreign net operating loss carryforwards of $ 6.0 million
  and $6.6 million, realized and unrealized loss of investment in securities of
  $ 4.8 million and $6.3 million and of loss from impairment of investment of
  $ 7.1 million and $ 4.7 million, as of December 31, 2003 and 2002, respectively.

As of December 31, 2003,
  the Company has U.S. federal net operating loss carryforwards of approximately
  $18.9 million that will expire in the years 2020 through 2023 and a capital
  loss carry forwards of $5 million that will expire in 2008. 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.

60

---

---

Note 13 --
  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
      Limited (a)                             |                         
|Carmel Containers
      Systems Limited                 |                         
|Coral World
      International Limited                 |                         
|CUTe Ltd                                                |                         
|Epsilon Investment
      House Ltd.                     |                         
|Granite Hacarmel
      Investments Limited ("Granite")* |                         
|Hod Hasharon
      Sport Center (1992) Limited         
|Partnership                                             |                         
|Ophir Holdings                                          |                         
|Ophirtech
      Ltd.                                    |                         
|Renaissance
      Investment Company Ltd.               |                         
|Trinet Investment
      in High-Tech Ltd.               |                         
|Trinet Venture
      Capital Ltd.(b) (c)                |                         

*See note 2 (b)

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 | $                 
|                                                   |                   

The carrying value
  of the Companys investment in shares of Carmel Containers at December
  31, 2003, amounted to $1.8 million and had a market value of $1.8 million. The
  impairment in Carmel was recorded due to a significant gap, for a period of
  over 12 months, between the carrying value and the share market value on December
  31, 2003 on the American Stock Exchange (AMEX).

61

---

---

Note 14 
  Other Income.

Other
  revenues for each of the years ended December 31, 2003, 2002 and 2001 include
  accrual of guaranteed payments from Motorola relating to the investment in MIRS
  of $ 7.1 million.

Note 15 --
  Segment Information

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

|                                                     | Fiscal
      Year Ended December 31,
|---------------------------------------------------- | ------------------------------------
|
|
|**Revenues:**                                        |                                     
|Finance                                              | $                                   
|Real estate
      income                             |                                     
|Leisure-time*                                        |                                     
|Intercompany
      adjustments                       |                                     
|                                                     |                                     
|Total                                                |                                     
|                                                     |                                     
|
|**Equity
      in Earnings (losses) of Affiliates:** |                                     
|Finance                                              |                                     
|Real estate
      rental                             |                                     
|Leisure-time*                                        |                                     
|                                                     |                                     
|Total                                                |                                     
|                                                     |                                     
|
|**Interest
      Income:**                           |                                     
|Finance                                              |                                     
|Real estate
      rental                             |                                     
|Intercompany
      adjustments                       |                                     
|                                                     |                                     
|Total                                                |                                     
|                                                     |                                     
|                                                    
|**Interest
      Expense:**                         
|Finance                                              | $                                   
|Real estate
      rental                             |                                     
|Leisure-time*                                        |                                     
|Intercompany
      adjustments                       |                                     
|                                                     |                                     
|Total                                                |                                     
|                                                     |                                     
|                                                    
|**Pretax
      Operating (Loss) Income:**           
|Finance                                              | $                                   
|Real estate
      rental                             |                                     
|Leisure-time*                                        |                                     
|                                                     |                                     
|Total                                                |                                     
|                                                     |                                     

62

---

---

|                                                  | Fiscal
      Year Ended December 31,
|------------------------------------------------- | ------------------------------------
|
|
|**Income
      Tax (Benefit) Expense:**           |                                     
|Finance                                           | $                                   
|Real estate
      rental                          |                                     
|Leisure-time*                                     |                                     
|                                                  |                                     
|Total                                             |                                     
|                                                  |                                     
|                                                 
|**Total
      Assets for year end:**             
|Finance                                           | $                                   
|Real estate
      rental                          |                                     
|Leisure-time*                                     |                                     
|Intercompany
      adjustments                    |                                     
|                                                  |                                     
|Total                                             |                                     
|                                                  |                                     
|                                                 
|**Investments
      in Affiliates for year end:**
|Finance                                           | $                                   
|Real estate
      rental                          |                                     
|Leisure-time*                                     |                                     
|                                                  |                                     
|Total                                             | $                                   
|                                                  |                                     
|                                                 
|**Capital
      Expenditures:**                  
|Finance                                           | $                                   
|Real estate
      rental                          |                                     
|Leisure-time*                                     |                                     
|                                                  |                                     
|Total                                             |                                     
|                                                  |                                     
|                                                 
|**Depreciation
      and Amortization:**         
|Finance                                           |                                     
|Real estate
      rental                          |                                     
|Leisure-time*                                     |                                     
|                                                  |                                     
|Total                                             |                                     
|                                                  |                                     

Corporate
  office expense is principally applicable to the financing operation and has
  been charged to that segment above. Revenues and pretax operating (loss) income
  above exclude equity in (losses) earnings of affiliates and minority interests.
  Investment in affiliates and equity in earnings of affiliates only includes
  the investment and equity in earnings of those affiliates whose operations are
  represented by the Companys segments.

The
  real estate rental segment consists of rental property owned in Israel and the
  United States leased to unrelated parties, and operations of Am-Hal Ltd., a
  wholly-owned subsidiary which owns and operates a chain of senior citizens facilities
  located in Israel.

*The
  leisure-time segment consists of Coral World International Limited (marine parks
  located around the world - mainly in Israel) and Country Club Kfar Saba, the
  Companys 51%-owned subsidiary located in Israel.

Note 16 --
  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:

63

---

---

(a)          
  Cash and Cash Equivalents

For
  cash and cash equivalents, the carrying amount is a reasonable estimate of fair
  value (seeNote 1(j)).

(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 17, 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.

|                                           | As
      of December 31,    
|------------------------------------------ | ----------------------------
|
|
|                                           | (Dollars
      in thousands)
|Financial
      assets:                    |                             
|                                           |                             
|Cash and
      cash equivalents            | $                           
|Deposits,
      notes and loans receivable |                             
|Investments                                |                             
|                                           |                             
|                                           | $                           
|                                           |                             
|                                          
|Financial
      liabilities:              
|                                           |                             
|Notes and
      loans payable              | $                           
|Debentures
      outstanding               |                             
|                                           |                             
|                                           | $                           
|                                           |                             

Note 17-- Commitments
  and Contingencies

(a)           The
  combined minimum annual lease payments on Ampals and its subsidiaries
  in 2003 were $ 0.3 million. In the years 2004-2008, the combined annual
  lease payments on those premises, without giving effect to future escalations,
  will be in an aggregate amount of $ 1.5 million, and thereafter, an
  amount totaling $5.9 million. The lease of the corporate offices expires
  in 2009 and the Kfar Saba lease expires in 2037. See Significant Developments
  Since the Fiscal Year Ended December 31, 2003 in Item 1 of this Report.

64

---

---

(b)           AM-Hal
  provided a lien to Bank Hapoalim on AM- Hal properties in Rishon  Le Zion
  and Hod Hasharon to guarantee a loan of $7.4 million.

(c)            The
  Company has issued guarantees on bank loans to its investees and subsidiaries
  totaling $12.3 million as follows:

| | (1) | The Company provided
      a $4.6 million guarantee to AM  Hal  tenants.                                                                                                                   
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                             
| | (2) | The Company provided
      a $6.3 million guarantee on indebtedness incurred by Bay Heart.                                                                                                  
| |     |                                                                                                                                                                                             
| | (3) | The Company provided
      a $0.5 million guarantee to Leumi with respect to the MIRS loan beginning
      in 2006 with respect to the Companys repayment obligation under the
      loan. 
| |     |                                                                                                                                                                                             
| | (4) | The Company provided
      a $0.9 million guarantee to Galha (1960) Ltd, for the payment of the Companys
      subsidiary of a final judgment, if entered against the Companys subsidiary.

(d)          
  The Company made a commitment to invest $2.8 million in Star II (2000 L.P.).

(e)           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 8.9million($1.9 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 4.0 million ($0.9 million) if a final judgment against the Company will
  be given. At this stage, the Company cannot estimate the impact this claim will
  have on it.

(f)            Legal
  claims arising in the normal course of business have been filed against subsidiaries
  and affiliates of the Company. Based upon the opinions of legal counsel, the
  Companys management believes that all provisions made are sufficient.

Note 18 
  Subsequent Events

In
  February 2004, the Company completed a private sale of its remaining holdings
  in Granite Hacarmel Investments Ltd. to a group of institutional and other investors.
  The sale of 14,158,891 shares at a price of approximately $1.42 (6.30 NIS) per
  share resulted in total proceeds to Ampal of approximately $20.1 million.

In
  December 2003, the Company entered into an agreement for the sale of all of
  its holdings in XAACT to Amdocs Limited, which agreed to acquire all of the
  issued and outstanding shares of XACCT. On February 19, 2004, Ampal received
  approximately $3.8 million (partially in cash and partially in shares of Amdocs
  Limited) for its holdings in XACCT.

In
  February 2004, the Company entered into an agreement to invest EUR 4.5 million
  (approximately US $5.6 million) in Telecom Partners, a newly formed entity that
  will serve as a platform for investments in the telecommunication industry,
  predominately outside of Israel. Ampals investment consists of a EUR 4
  million convertible debenture, which converts into a one third partnership interest
  in the partnership, and a EUR 500,000 loan. Telecom Partners currently holds
  investments in PSINet Europe B.V. and Grapes Communications N.V./S.A., two European
  telecom service providers.

65

---

---

In
  2004, Ophir Holdings (a 42.5% owned affiliate of the Company) sold 4,315,036 shares
  of Industrial Buildings for the amount of approximately $4.6 million. As of
  December 31, 2003, Ophir Holdings owned an 11.7% interest in Industrial Buildings.

On
  January 4, 2004, the Company loaned $0.3 million to ShellCase, the principal
  business of which is the packaging process of semiconductor chips.

Ampal
  currently leases an office at 555 Madison Avenue in New York City from Rodney
  Company N.V., Inc. The lease period is seven years commencing on October 15,
  2002. The annual rent for this lease is $114,968. As discussed earlier in this
  Report, on March 31, 2004, the Company intends to close this office. The office
  space has been subleased.

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.

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.

66

---

---

PART III

ITEM 10.  DIRECTORS
  AND EXECUTIVE OFFICERS OF THE REGISTRANT

MANAGEMENT

The
  following table sets forth certain information regarding Ampals directors
  and executive officers as of March 9, 2004:

|                                |                                                                     
|------------------------------- | --------------------------------------------------------------------
|**Name**                        | **Position**                                                        
|                                |                                                                     
|Yosef A.
      Maiman           | Chairman
      of the Board of Directors and Director               
|Jack Bigio
      (1)            | President,
      Chief Executive Officer and Director               
|Leo Malamud
      (1)           | Director                                                            
|Michael Arnon
      (2)(3)      | Director                                                            
|Dr. Joseph
      Yerushalmi (1) | Director                                                            
|Yehuda Karni
      (1)(2)(3)    | Director                                                            
|Eitan Haber
      (2)(3)        | Director                                                            
|Menahem Morag
      (2)(3)(4)   | Director                                                            
|Shlomo Shalev                   | Senior Vice
      President-Investments                             
|Dafna Sharir                    | Senior Vice
      President-Investments                             
|Irit Eluz                       | CFO, Vice
      President - Finance and Treasurer                   
|Yoram Firon                     | Vice President-Investments
      and Corporate Affairs and Secretary
|Amit Mansur
      (5)           | Vice President-Investments                                          
|Giora Bar-Nir                   | Controller                                                          
|Alla Kanter
      (6)           | Vice President-Accounting                                           

_________________

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. Arnon is the Chairman of the
      Audit Committee of the Board.                  
| |     |                                                                                                                                                                                                                                   
| | (3) | Member of the Stock
      Option and Compensation Committee of the Board.                                                                                                                                                         
| |     |                                                                                                                                                                                                                                   
| | (4) | Mr. Morag was appointed
      a Director of the Board on January 27, 2004.                                                                                                                                                        
| |     |                                                                                                                                                                                                                                   
| | (5) | Mr. Mansur was appointed
      Vice President-Investments of Ampal on March 24, 2003                                                                                                                                              
| |     |                                                                                                                                                                                                                                   
| | (6) | As of March 31, 2004
      Alla Kanter will no longer serve as Vice President-Accounting of the Company.
      However, she will continue to serve the Company on a consulting basis.                                             

In
  2003, the Board met two times and acted 7times by written consent; the Executive
  Committee did not conduct meetings but acted by written consent three times;
  and the Audit Committee met 9 times and acted by written consent one time. The
  Stock Option and Compensation Committee met one time and acted by written consent
  one time. All directors attended more than 75% of the aggregate of (1) the total
  number of Board meetings held during the period in 2003 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 2003 (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.

67

---

---

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, 58, has been the Chairman of the Board of Ampal since April 25, 2002.
  Mr. Maiman has been President and Chief Executive Officer of Merhav M.N.F. Ltd.
  (Merhav), one of the largest international project development companies
  based in Israel, since its founding in 1975. Mr. Maiman is also the Chairman
  of the Board of Directors of Channel Ten, a commercial television station in
  Israel, a director of Eltek, Ltd. (Eltek), a developer and manufacturer
  of printed circuit boards, a member of the Board of Directors of the Middle
  East Task Force of the New York Council on Foreign Relations and Honorary Consul
  to Israel from Peru. Mr. Maiman is also 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.

JACK
  BIGIO, 38 has been the President and Chief Executive Officer of Ampal since
  April 25, 2002, and a director of Ampal since March 6, 2002. From 1998 until
  April 2002, Mr. Bigio held various officer positions at Merhav, most recently
  as the Senior Vice President - Operations and Finance. Mr. Bigio is also a director
  of Eltek.

LEO
  MALAMUD, 52, has been a director of Ampal since March 6, 2002. Since 1996, Mr.
  Malamud was the Senior Vice President of Merhav. Mr. Malamud is also a director
  of Eltek.

MICHAEL
  ARNON, 78, was Chairman of the Board of Directors of Ampal from November 1990
  until July 1994, when he retired. Mr. Arnon has been a director of Ampal since
  1986. From July 1986 until November 1990, Mr. Arnon was President and Chief
  Executive Officer of Ampal.

Dr.
  JOSEPH YERUSHALMI, 66, has been Senior Vice President - Head of Energy and Infrastructure
  Projects of Merhav since 1995. He has been a director of Ampal since August
  16, 2002.

YEHUDA
  KARNI, 75, was a senior partner in the law firm of Firon Karni Sarov & Firon,
  from 1961 until his retirement in 2000. He has been a director of Ampal since
  August 16, 2002.

EITAN
  HABER, 64, was the Head of Bureau for the former Prime Minister of Israel, Yitzhak
  Rabin, from July 1993 until November 1995. Since 1996, Mr. Haber has been the
  President and Chief Executive Officer of Geopol Ltd., which represents the Korean
  conglomerate Samsung in Israel and the Middle East; Kavim Ltd., a production
  and project development company; and Adar Real Estate Ltd., a real estate company.
  Mr. Haber is also a member of various non-profit organizations. He has been
  a director of Ampal since August 16, 2002.

MENAHEM
  MORAG, 53, 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. Since, 2003, Mr. Morag has been the Head of the Council
  of the Pensioners Association of the Israeli Prime Ministers office in
  Tel Aviv.

SHLOMO
  SHALEV, 42, has been Senior Vice President - Investments since May 2002. From
  August 1997 through April 2002, Mr. Shalev was Vice President in Ampal Industries
  (Israel) Ltd, a wholly owned subsidiary of the Company. From August 1994 through
  July 1997, Mr. Shalev was the Israeli Consul for Economic Affairs in the northwest
  region of the Unites States.

DAFNA
  SHARIR, 35, has been Senior Vice President - Investments since May 2002. From
  March 1999 through April 2002, Ms. Sharir was a Director of Mergers and Acquisitions
  of Amdocs Limited. From July 1998 through February 1999, Ms. Sharir was an international
  tax consultant at Kost Forer & Gabay, a member of Ernst & Young International.

68

---

---

IRIT
  ELUZ, 37, has been the Chief Financial Officer and Vice President - Finance
  and Treasurer since May 2002. From January 2000 through April 2002, Ms. Eluz
  was the Associate Chief Financial Officer of Merhav. From June 1995 through
  December 1999, Ms. Eluz was the Chief Financial Officer of Kamor Group.

YORAM  FIRON,
  35, has been Secretary and Vice President - Investments and Corporate Affairs
  since May 2002. During the preceding five years, Mr. Firon was a Vice President
  of Merhav and a partner in the law firm of Firon Karni Sarov & Firon.

AMIT
  MANSUR, 34, has been Vice President  Investments since March 2003. From
  September 2000 through December 2002, Mr. Mansur served at Alrov Group as Strategy
  & Business Development Manager. From February 1997 through September 2000,
  Mr. Mansur was a projects manager at the Financial Advisory Services of KPMG
  Somekh Chaikin.

GIORA
  BAR-NIR, 47, has been the Controller since March 2002. During the preceding
  five years, Mr. Bar-Nir was the Controller of the Israeli subsidiaries of Ampal.

ALLA
  KANTER, 46, has been Vice President-Accounting since September 1995. Ms. Kanter
  was the Controller from August 1990 until March 2002.

AUDIT COMMITTEE

The
  Company has an Audit Committee of the Board consisting of Messrs. Arnon, Karni,
  Haber and Morag, 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. The Board has determined
  that Mr. Morag is 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.

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.

69

---

---

ITEM 11. 
  EXECUTIVE COMPENSATION

Summary Compensation
  Table

The
  table below presents information regarding remuneration paid for services to
  Ampal and its subsidiaries by the executive officers named below during the
  three fiscal years ended December 31, 2003, 2002 and 2001.

|                                        |  |      |  |  |         |  |  |         |  | Annual
      Compensation |        |  | 
|--------------------------------------- |  | ---- |  |  | ------- |  |  | ------- |  | ------------------------- | ------ |  | 
|
|
|Yosef A.
      Maiman(1)(9)             |  |      |  |  |         |  |  |         |  |                           |        |  | 
|Chairman
      of the Board             |  | 2003 |  |  | 506,849 |  |  | 155,953 |  |                           | 25,570 |  | 
|                                        |  | 2002 |  |  | 324,376 |  |  | -       |  |                           | 15,765 |  | 
|                                        |  |      |  |  |         |  |  |         |  |                           |        |  | 
|Jack Bigio
      (2)(9)                 |  | 2003 |  |  | 257,547 |  |  | 106,189 |  |                           | 71,777 |  | 
|President
      and CEO                 |  | 2002 |  |  | 280,130 |  |  |         |  |                           | 43,498 |  | 
|                                        |  |      |  |  |         |  |  |         |  |                           |        |  | 
|Dafna Sharir
      (4)(9)               |  | 2003 |  |  | 211,557 |  |  | 64,052  |  |                           | 45,031 |  | 
|Senior Vice
      President Investments |  | 2002 |  |  | 116,192 |  |  |         |  |                           | 25,726 |  | 
|                                        |  |      |  |  |         |  |  |         |  |                           |        |  | 
|Irit Eluz
      (4)(9)                  |  | 2003 |  |  | 183,959 |  |  | 55,698  |  |                           | 39,631 |  | 
|CFO
       Vice President Finance and  |  | 2002 |  |  | 100,993 |  |  |         |  |                           | 21,959 |  | 
|Treasurer                              
|                                        |  |      |  |  |         |  |  |         |  |                           |        |  | 
|Shlomo Shalev
      (3)                 |  | 2003 |  |  | 167,093 |  |  | 34,254  |  |                           | 33,048 |  | 
|Senior Vice
      President Investment  |  | 2002 |  |  | 149,225 |  |  | 63,240  |  |                           | 27,815 |  | 
|                                        |  | 2001 |  |  | 143,093 |  |  | 61,406  |  |                           | 17,408 |  | 

___________________

|(1) | Mr. Maiman
      has been employed by Ampal since April 25, 2002 as Chairman of the Board.
      Mr. Maiman is entitled to receive a base salary of $483,000 (payable in
      NIS) per annum (plus benefits).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                               
|(2) | Mr. Bigio has been employed
      by Ampal since April 25, 2002 as President and CEO. Mr. Bigio is entitled
      to receive a base salary of $250,000 (payable in NIS) per annum (plus benefits).            
|    |                                                                                                                                                                                                               

| | (3) | Mr. Shalev was appointed
      Senior Vice President of Investment since May 21, 2002.                                                                                                                     
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                            
| | (4) | Has been employed by
      Ampal since April 25, 2002.                                                                                                                                                     
| |     |                                                                                                                                                                                                            
| | (5) | Expired on February
      20, 2003.                                                                                                                                                                        
| |     |                                                                                                                                                                                                            
| | (6) | Consists of amounts
      reimbursed for the payment of taxes.                                                                                                                                             
| |     |                                                                                                                                                                                                            
| | (7) | Represents the number
      of shares of Class A Stock underlying options granted to the named executive
      officers.                                                                                   
| |     |                                                                                                                                                                                                            
| | (8) | 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 phone.
| |     |                                                                                                                                                                                                            
| | (9) | In terms of change in
      control entitled to 6 months salary.                                                                                                                                           

70

---

---

| | Fiscal
      Year-End Option Values      |                     
| | ---------------------------------------- | --------------------
| |                                          |                     
| | Number of Securities
      Underlying    | Unrealized Value of 
| | Unexercised Options
      at Fiscal Year | In-the-Money Options
| | Ended December 31,
      2003            |                     

|                      | 
|--------------------- | 
|
|Yosef A.
      Maiman | 
|Jack Bigio            | 
|Dafna Sharir          | 
|Irit Eluz             | 
|Shlomo Shalev         | 

Option Grants
  In Last Fiscal Year

No
  stock options to purchase our Class A Stock were granted to our named executive
  officers during fiscal year ended December 31, 2003.

Other Benefits

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

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

|Years
      of Service        | Vested
      Percentage
|----------------------------- | -----------------------
|less than
      2 years       |                        
|2 but less
      than 3 years |                        
|3 but less
      than 4 years |                        
|4 but less
      than 5 years |                        
|5 but less
      than 6 years |                        
|6 or more
      years         |                        

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

Ampal
  maintains a savings plan (the Savings Plan) for its eligible employees
  pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended
  (the Code). Eligible employees are all employees of Ampal except
  non-resident aliens, night-shift employees and employees represented by a collective
  bargaining unit. Participation by employees in the Savings Plan is voluntary.
  Participating employees may direct that a specific percentage of their annual
  compensation (up to 15%) be contributed to a self-directed 401(k) savings account.
  The amount which any employee could contribute to his or her 401(k)savings account
  in 2003 was limited under the Code to $11,000. Effective January 1, 1996, the
  Savings Plan was amended so that Ampal matches 50% of each employees contribution
  up to a maximum of 3% of the employees compensation. Employees who were
  eligible to participate in the Savings Plan as of December 31, 1995, are 100%
  vested at all times in the account balances maintained in their 401(k) savings
  account. Employees who became eligible to participate in the Savings Plan on
  or after January 1, 1996, become vested in amounts contributed by Ampal depending
  on the number of years of service, as provided in the following table:

71

---

---

|Years
      of Service        | Vested
      Percentage
|----------------------------- | -----------------------
|Less than
      2 years       |                        
|2 but less
      than 3 years |                        
|3 but less
      than 4 years |                        
|4 but less
      than 5 years |                        
|5 but less
      than 6 years |                        
|6 or more
      years         |                        

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

Compensation
  of Directors

Directors
  of Ampal (other than Mr. Maiman and Mr. Bigio) received $750 per Board meeting
  attended until December 31, 2003. Thereafter, directors of Ampal shall receive
  $1,500 per Board meeting attended. The Chairman of the Board receives $2,000.
  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.

The
  following table sets forth certain information regarding stock options granted
  to purchase our Class A Stock to our directors during the three fiscal years
  ended December 2003, 2002 and 2001.

| |                                 |  |   | 
| | ------------------------------- |  | - | 
|
|
| | Yosef A.
      Maiman (3)       |  | - | 
| | Jack Bigio
      (5)            |  | - | 
| | Leo Malamud
      (5)           |  | - | 
| | Dr. Joseph
      Yerushalmi (4) |  | - | 
| | Eitan Haber
      (4)           |  | - | 
| | Michael Arnon                   |  | - | 
| | Yehuda Karni
      (4)          |  | - | 
| | Daniel Steinmetz
      (1)      |  | - | 
| | Raz Steinmetz
      (1)         |  | - | 
| | Yaacov Elinav
      (1)         |  | - | 
| | Kenneth L.
      Henderson (1)  |  | - | 
| | Hillel Peled
      (2)          |  | - | 
| | Avi A. Vigder
      (1)         |  | - | 
| | Eliyahu Wagner
      (2)        |  | - | 
| | Benzion Benbassat
      (1)     |  | - | 

(1) Resigned April 25, 2002.
  (2) Did not stand for re-election at the Annual Meeting of Shareholders held
  on August 16, 2002.
  (3) Since April 25, 2002.
  (4) Since August 16, 2002.(5) Since March 6,
  2002.

72

---

---

Stock Option Plan

In
  March 1998, the Board approved a Long-Term Incentive Plan (1998
  Plan) permitting the granting of options to all employees, officers,
  directors and consultants of the Company and its subsidiaries to purchase up
  to an aggregate of 400,000 shares of Class A Stock. The 1998 Plan was approved
  by a majority of the Companys shareholders at the June 19, 1998 annual
  meeting of shareholders. The 1998 Plan remains in effect for a period of ten
  years. As of December 31, 2003, 119,100 options of the 1998 Plan are outstanding.

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 at a meeting
  held on March 27, 2000 and was approved by a majority of the Companys
  shareholders at the June 29, 2000 annual meeting of shareholders. The 2000 Plan
  remains in effect for a period of ten years. As of December 31, 2003, 1,277,000
  options of the 2000 Plan are outstanding.

The
  options granted under the 1998 Plan and the 2000 Plan (collectively, the Plans)
  may be either incentive stock options, at an exercise price to be determined
  by the Stock Option and 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 Committee may also grant, at its discretion, restricted
  stock, dividend equivalent awards, which entitle the recipient
  to receive dividends in the form of Class A Stock, cash or a combination of
  both and stock appreciation rights, which permit the recipient to
  receive an amount in the form of Class A Stock, cash or a combination of both,
  equal to the number of shares of Class A Stock with respect to which the rights
  are exercised multiplied by the excess of the fair market value of the Class
  A Stock on the exercise date over the exercise price. The options granted under
  the Plans were granted either at market value or above.

Under
  each of the Plans, all granted but unvested options become immediately exercisable
  upon the occurrence of a change in control of the Company. On February 26, 2002,
  the controlling shareholder of the Company, Rebar Financial Corp., sold all
  of its stock in the Company to Y.M. Noy Investments Ltd. Accordingly, all options
  granted but unvested under the Plans were immediately exercisable.

The
  Company accounts for all plans under APB Opinion No. 25, under which no compensation
  costs were incurred in the years ended December 31, 2001, 2002 and 2003. If
  compensation cost for the options under the above Plans had been determined
  in accordance with SFAS No. 123, the Companys net income (loss) and EPS
  would have been.

COMPENSATION
  COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The
  Stock Option and Compensation Committee functions as both the compensation and
  stock option committee of Ampal. The members of this Committee include Mr. Michael
  Arnon, Mr. Yehuda Karni and Mr. Eitan Haber. Mr. Arnon was formerly President
  and Chief Executive Officer of Ampal from July 1986 until November 1990 and
  the Chairman of the Board from November 1990 until July 1994 (see, Item 10 of
  this Report).

73

---

---

|                                                                                                                         | 
|------------------------------------------------------------------------------------------------------------------------ | 
|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, 2003.

PRINCIPAL
  SHAREHOLDERS OF AMPAL

The
  following table sets forth information as of March 9, 2004, as to the holders
  known to Ampal who beneficially own more than 5% of the Class A Stock, the only
  outstanding series of voting securities of Ampal. For purposes of computation
  of the percentage ownership of Class A Stock held by such stockholders set forth
  in the table, conversion of any 4% Cumulative Convertible Preferred Stock (the
  4% Preferred Stock) and 6 1/2% Cumulative Convertible Preferred
  Stock (the 6 1/2% Preferred Stock) owned by such beneficial owner
  has been assumed, without increasing the number of shares of Class A Stock outstanding
  by amounts arising from possible conversions of convertible securities held
  by shareholders other than such beneficial owner. As of March 9, 2004, there
  were 19,808,855 (not including treasury shares) shares of Class A Stock of Ampal
  outstanding. In addition, as of March 9, 2004, there were 552,116 non-voting
  shares of 6 1/2% Preferred Stock outstanding (each convertible into 3 shares
  of Class A Stock outstanding and 127,577non-voting shares of 4% Preferred Stock
  outstanding (each convertible into 5 shares of Class A Stock).

74

---

---

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
| | ----------------------------------------------------------------------------------------------------------------- | -------------------- | --------------------------------------------------------------------- | ----------------------------------------------------------------
| |                                                                                                                   |                      |                                                                       |                                                                 
| | Y.M Noy Investments
      Ltd., of 33 
      Havazelet Hasharon St.,
      Herzliya, Israel                       |                      | Class
      A Stock                                                   |                                                                 
| |                                                                                                                   |                      |                                                                       |                                                                 
| | Yosef A.
      Maiman
      Y.M Noy Investments Ltd., of 33
      Havazelet Hasharon St., 
      Herzliya, Israel |                      | Class A
      Stock                                                   |                                                                 
| |                                                                                                                   |                      |                                                                       |                                                                 
| | Ohad Maiman
      Y.M Noy Investments Ltd., of 33 
      Havazelet Hasharon St.,
      Herzliya, Israel           |                      | Class A
      Stock                                                   |                                                                 
| |                                                                                                                   |                      |                                                                       |                                                                 
| | Noa Maiman
      Y.M Noy Investments Ltd., of 33 
      Havazelet Hasharon St., 
      Herzliya, Israel           |                      | Class A
      Stock                                                   |                                                                 

_______________

| | (1) | Consists
      of 11,750,132 shares of Class A Stock held directly by Y.M. Noy Investments
      Ltd. Yosef A. Maiman  owns 100% of the economic shares and one-third
      of the voting shares of Y.M. Noy Investments Ltd.. In addition, Mr. Maiman
      holds an option to acquire the remaining two-thirds of the voting shares
      of Y.M. Noy Investments Ltd. (which are currently owned by Ohad Maiman and
      Noa Maiman, the son and daughter, respectively, of Mr. Maiman).
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (2) | Includes
      93,750 shares of Class A Stock underlying options which are currently exercisable
      by Mr. Maiman.                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

75

---

---

Security
  Ownership of Management

| | The following table
      sets forth information as of March 9, 2004 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:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Number of
      Shares and 
      Nature of Beneficial
      Ownership
        of Class A Stock | Percent of
      Outstanding
      Shares of
      Class A Stock
|----------------------------------------------------------------------------------------------- | ----------------------------------------------------------------
|                                                                                                |                                                                 
|Yosef Maiman                                                                                    | 11,843,882                                                      
|Jack Bigio                                                                                      | 56,250                                                          
|Dafna Sharir                                                                                    | 33,750                                                          
|Shlomo Shalev                                                                                   | 33,750                                                          
|Irit Eluz                                                                                       | 29,438                                                          
|Leo Malamud                                                                                     | 56,250                                                          
|Dr. Josef
      Yerushalmi                                                                      | 37,500                                                          
|Eitan Haber                                                                                     | 5,625                                                           
|Yehuda Karni                                                                                    | 5,625                                                           
|Michael Arnon                                                                                   | 20,625                                                          
|All Directors
      and Executive Officers as a Group                                           | 12,122,695                                                      

____________

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

| | (1) | Attributable
      to 11,750,132 shares of Class A Stock held directly by Y.M. Noy Investments
      Ltd. See Security Ownership of Certain Beneficial Owners.  In
      addition, this represents 93,750 shares underlying options for Yosef Maiman
      which are presently exercisable.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                              

|(2) | Represents
      shares underlying options which are presently exercisable or exercisable
      in 60 days..
|--- | ------------------------------------------------------------------------------------------------------------

ITEM 13. CERTAIN
  RELATIONSHIPS AND RELATED TRANSACTIONS

The
  Audit Committee of Ampal has the duty and responsibility of approving all transactions
  between Ampal, on the one hand, and any officer, director, or affiliate thereof,
  on the other hand, or in which any officer, director or affiliate has a material
  interest. Under the rules promulgated by Nasdaq, the Audit Committee must review
  and approve all transactions between Ampal on the one hand and any officer,
  director or principal shareholder of Ampal on the other hand. The Audit Committee
  considers and evaluates potential related party transactions from time to time,
  including co-investment opportunities and other types of transactions. The Audit
  Committee has the authority to engage independent legal, financial and other
  advisors.

76

---

---

ITEM 14.  PRINCIPAL
  ACCOUNTANT FEES AND SERVICES.

AUDIT
  FEES.  The fees of Kesselman & Kesselman (Kesselman) fees
  for professional services rendered for the audit of the Companys annual
  financial statements for the fiscal years ended December 31, 2003 and December
  31, 2002 and reviewing the financial statements included in the Companys
  quarterly reports on Form 10-Q were $223,000 and $150,000, respectively. Fees
  billed to the Company by Arthur Andersen LLP (Andersen) for reviewing
  the financial statements included in the Companys quarterly report for
  the fiscal quarter ended March 31, 2002 amounted to $37,000.

TAX
  FEES.  Kesselmans tax fees for the fiscal years ended December 31,
  2003, were $103,600. No tax fees were billed for services rendered by Andersen
  for the fiscal year ended December 31, 2002.

ALL
  OTHER FEES - Kesselmans fees for other services for the fiscal year ended
  December 31, 2003, were $49,200 respectively. No other services fees were billed
  for services rendered by Andersen for the fiscal year ended December 31, 2002.

All
  of the services provided by our principal accounting firm described above under
  the captions Audit Fees, Tax Fees and All Other
  Fees were approved by our 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.

77

---

---

PART IV

ITEM 15. EXHIBITS, FINANCIAL
  STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

|                                                                                                                                                              | Page
      Reference
|------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------
|                                                                                                                                                              |                     
|(1)   Financial
      Statements and Supplementary Data                                                                                                       |                     
|                                                                                                                                                              |                     
|Ampal-American
      Israel Corporation and Subsidiaries                                                                                                      |                     
|                                                                                                                                                              |                     
|Report
      of Independent Auditors                                                                                                                          | 34-36               
|Consolidated
      Statements of Income for the years ended December 31, 2003,                  2002
      and 2001 .                                         | 37                  
|                                                                                                                                                              |                     
|Consolidated
      Balance Sheets as at December 31, 2003 and 2002                                                                                            | 38-39               
|                                                                                                                                                              |                     
|Consolidated
      Statements of Cash Flows for the years ended December 31, 2003,                 2002
      and 2001                                        | 40-41               
|Consolidated
      Statements of Changes in Shareholders' Equity for the years ended                   December 31,
      2003, 2002 and 2001                 | 42-43               
|Consolidated
      Statements of Comprehensive Income for the years ended                 December
      31, 2003,  2002 and 2001                             | 44                  
|Notes
      to Consolidated Financial Statements                                                                                                              | 45-66               
|Supplementary
      Data:                                                                                                                                    
|Selected
      quarterly financial data for the years ended December 31, 2003 and 2002                                                                        | 26                  
|                                                                                                                                                              |                     
|(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, 2003
|                                                                                                                                                             

|**Representative
      Rates of Exchange
      Between the U.S. Dollar and the New Israeli Shekel 
        For the Three Years Ended December 31, 2003**
|--------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                        
|The
      following table shows the amount of New Israeli Shekels equivalent to one
      U.S. Dollar on the dates indicated:                           

|                   | 2003  | 2002  | 2001 
|------------------ | ----- | ----- | -----
|March
      31     | 4.687 | 4.668 | 4.192
|June 30            | 4.312 | 4.769 | 4.165
|September
      30 | 4.441 | 4.871 | 4.355
|December
      31  | 4.379 | 4.737 | 4.416

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (ii)  Consolidated
      financial statements filed pursuant to Rule 3-09 of Regulation S-X                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | The Company has determined
      that Granite was a significant subsidiary for the year ended
      December 31, 2003. Granite is a foreign business and audited financial statements
      are in the process of being prepared for fiscal 2003. The Company intends
      to file, unless otherwise  not required, an amended
      10-K/A on or prior to the due date of June 30, 2004, which will include, as an
      exhibit, the audited, stand-alone, financial statements of Granite as required
      by Reg. S-X 3-09(b)(2).

78

---

---

Ophir Holdings Ltd.

Report
  of Certified Public Accountants
        Consolidated Balance Sheets as at December
  31, 2003 and 2002.
        Consolidated Statements of Income for the
  years ended December 31, 2003, 2002 and 2001..
        Consolidated Statements of Changes in Shareholders'
  Equity for the years ended December 31, 2003, 2002 and 2001
        Consolidated Statements of Cash Flows for
  the years ended December 31, 2003, 2002 and 2001
        Notes to Financial Statements

OphirTech Ltd.
        Report of Certified Public Accountants
        Balance Sheets as at December 31, 2003 and
  2002
        Statements of Income for the years ended
  December 31, 2003, 2002 and 2001
        Statements of Changes in Shareholders' Equity
  for the years ended December 31, 2003, 2002 and 2001
        Statements of Cash Flows for the years ended
  December 31, 2003, 2002 and 2001
        Notes to Financial Statements

|Trinet
      Venture Capital Ltd.
|---------------------------------
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                 

| | AM-HAL Ltd.                                               
| | ----------------------------------------------------------
| | Bay Heart Ltd.                                            
| | Carmel Container Systems
      Ltd.                       
| | Coral World International
      Limited                   
| | Country Club Kfar
      Saba Limited                      
| | Epsilon Investment
      House Ltd.                       
| | Granite Hacarmel Investments
      Limited.               
| | Hod Hasharon Sport
      Center Ltd.                      
| | Hod Hasharon Sport
      Center (1992) Limited Partnership
| | Renaissance Investment
      Co. Ltd.                     
| | Shmey-Bar Real Estate
      1993 Ltd.                     
| | Shmey-Bar (I.A.) 1993
      Ltd.                          
| | Shmey-Bar (T.H.) 1993
      Ltd.                          
| | Trinet Investment
      in High-Tech Ltd.                 

79

---

---

|                                                                                                 
|-------------------------------------------------------------------------------------------------
|(3)
      Exhibits Required by Item 601 of Regulation S-K                                        
|                                                                                                 
|**Exhibit
      2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession**
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|**Exhibit
      3 - Articles of Incorporation and By-Laws**                                      
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|**Exhibit
      4 - Instruments Defining the Rights of Security Holders, Including Indentures**  
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|**Exhibit
      10 - Material Contracts**                                                        
|                                                                                                 
|                                                                                                 

80

---

---

|                                                          |      |                                                                                                                                                                                                                                                                                                       
|--------------------------------------------------------- | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                          | 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 1998
      Long-Term Incentive Plan (filed as Exhibit A to the Company's Proxy Statement
      for the 1998 Annual Meeting of Shareholders).*                                                                                                                                           
|                                                          | 10g. | The Company's 2000
      Incentive Plan (filed as an exhibit to the Company's Proxy Statement for
      the 2000 Annual Meeting of Shareholders).*                                                                                                                                                    
|                                                          | 10h. | Amendment to the Company's
      1998 Long Term Incentive Plan adopted by the Board of Directors on February
      14, 2002.* (Filed as Exhibit 10h to the report on Form 10K. Filed on March
      27, 2003)                                                                                         
|                                                          | 10i  | 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 10K. Filed on March 27, 2003).                                                                                                        
|                                                         
|**Exhibit
      11 - Computation of Earnings Per Share** 
|                                                          |      |                                                                                                                                                                                                                                                                                                       
|**Exhibit
      12 - Statement re Computation of Ratios**
|                                                          |      |                                                                                                                                                                                                                                                                                                       
|**Exhibit
      21 - List of Subsidiaries**              
|                                                          |      |                                                                                                                                                                                                                                                                                                       
|**Exhibit
      23 - Consents of Auditors:**             

|   |     |                                                        
|-- | --- | -------------------------------------------------------
|23 | .1  | AM-HAL
      Ltd.                                      
|23 | .2  | Ampal-American
      Israel Corporation                
|23 | .3  | Bay Heart,
      Ltd.                                  
|23 | .4  | Carmel Container
      Systems Ltd.                    
|23 | .5  | Coral World
      International Ltd.                   
|23 | .6  | Country Club
      Kfar Saba Limited                   
|23 | .7  | Epsilon Investment
      House Ltd.                    
|23 | .8  | Granite Hacarmel
      Investment Limited              
|23 | .9  | Hod Hasharon
      Sport Center Ltd.                   
|23 | .10 | Hod Hasharon
      Sport Center (1992) Ltd. Partnership
|23 | .11 | Ophir
      Holdings Ltd.                              
|23 | .12 | Ophirtech
       Ltd.                                  
|23 | .13 | Renaissance
      Investment Co. Ltd.                  
|23 | .14 | Shmey-Bar
      Real Estate 1993 Ltd.                  
|23 | .15 | Shmey-Bar
      (T.H.) 1993 Ltd.                       
|23 | .16 | Shmey-Bar
      (I.A.) 1993 Ltd.                       
|23 | .17 | Trinet Investment
      in High-Tech Ltd.              
|23 | .18 | Trinet Venture
      Capital Ltd.                      

81

---

---

|                                                               |  |                                                                                                                                                                                 
|-------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                               |  | **Exhibit
      31.1 - Certification of Jack Bigio 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
      - Certification of Jack Bigio and Irit Eluz pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
|                                                               |  |                                                                                                                                                                                 
|* Management
      contract, compensatory plan or arrangement.
|                                                               |  |                                                                                                                                                                                 
|Reports
      on Form 8-K                                     
|                                                               |  |                                                                                                                                                                                 
|                                                               |  | No
      reports on Form 8-K were filed during the quarter ended at December 31,
      2003.                                                                                    

82

---

---

|**OPHIR
      HOLDINGS LTD.** 
|------------------------------
|(An
      Israeli Corporation)
|2003 ANNUAL REPORT            







---

---

|**OPHIR
      HOLDINGS LTD.**
|-----------------------------
|2003 ANNUAL REPORT           



TABLE OF CONTENTS

| | **Page**                                            | 
| | --------------------------------------------------- | 
| | **REPORT
      OF INDEPENDENT AUDITORS**            | 
| | **FINANCIAL
      STATEMENTS - CONSOLIDATED - IN**  | 
| | **ADJUSTED
      NEW ISRAELI SHEKELS (NIS):**       | 
| | Balance
      sheets                                | 
| | Statements
      of income (Losses)                 | 
| | Statements
      of changes in shareholders equity | 
| | Statements
      of cash flows                      | 
| | Notes
      to financial statements                 | 
| |                                                     | 

|
|
|
|
|
|

---

---

**REPORT
  OF INDEPENDENT AUDITORS**

To the shareholders of **OPHIR HOLDINGS LTD.**

We have audited the consolidated
financial statements of Ophir Holdings Ltd. and its subsidiaries (the
Company): balance sheets as of December 31, 2003 and 2002 and the related
statements of income, changes in shareholders equity and cash flows for each of the
three years in the period ended December 31, 2003. 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 auditing standards generally accepted in Israel and in the United States of America,
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 and the reports of the other independent auditors provide a reasonable
basis for our opinion.

In our opinion, based upon our
audits, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2003 and
2002 and the results of operations, changes in shareholders equity and cash flows of
the Company for each of the three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in Israel.

As explained in note 1b, the
financial statements referred to above are presented in values adjusted for the changes in
the general purchasing power of Israeli currency, in accordance with pronouncements of the
Institute of Certified Public Accountants in Israel.

Accounting principles generally
  accepted in Israel vary in certain cignificant respects from accounting principles
  generally accepted in the United States.Information relating to the nature and
  effect of such differences is presented in note 14 to the consolidated financial
  statements.



|Tel-Aviv,
      Israel | Kesselman
      & Kesselman              
|---------------------- | -----------------------------------------
|March
      9 2004     | Certified
      Public Accountants (Isr.)

2

---

---

|**OPHIR
      HOLDINGS LTD.**    
|---------------------------------
|CONSOLIDATED
      BALANCE SHEETS
|IN ADJUSTED NEW ISRAELI SHEKELS  



|                                                   |  | December 31
|-------------------------------------------------- |  | -----------
|
|
|**A
      s s e t s**                              |  | 8c         
|**CURRENT
      ASSETS:**                          |  | 12         
|Cash
      and cash equivalents                    |  |            
|Marketable
      securities                        |  |            
|Accounts
      receivable                          |  | 13a        
|Deferred
      income taxes                        |  | 10b        
|Rental
      property designated for sale, net of  | 
|advances
      received from the buyers            |  | 5          
|                                                   |  |            
|T
      o t a l  current assets                    |  |            
|                                                   |  |            
|**LAND
      - BUSINESS INVENTORY**                |  | 1e;8a(2)   
|                                                   |  |            
|**INVESTMENTS:**                                   | 
|Associated
      companies                         |  | 3;12       
|Other
      companies                              |  | 4          
|Loan
      to a company which is                   | 
|an
      interested party                          |  | 11b        
|                                                   |  |            
|                                                   |  |            
|                                                   |  |            
|                                                   | 
|**FIXED
      ASSETS - buildings leased ,** net of | 
|accumulated
      depreciation                     |  | 5          
|                                                   |  |            
|                                                   |  |            
|                                                   |  |            

| | **____________________** | **)** | **Roni
      Harel** | 
| | ------------------------ | ----- | -------------------- | 
| | **DIRECTORS**            | **)** |                      | 
| |                          | **)** | **Shlomo Shalev**    | 

Date of approval of the financial
  statements: March 9, 2004.

3

---

---

|                                                   |  | December 31
|-------------------------------------------------- |  | -----------
|
|
|**Liabilities
      and shareholders equity**     |  | 8c         
|**CURRENT
      LIABILITIES:**                     |  | 12         
|Bank
      credit                                  |  | 13b        
|Accounts
      payable and accruals                |  | 13c        
|                                                   |  |            
|T
      o t a l  current liabilities               |  |            
|                                                   |  |            
|**LONG-TERM
      LIABILITIES:**                   |  | 12         
|Bank
      loans (net of current maturities)       |  | 6          
|Capital
      notes to an associated company       |  | 7          
|Capital
      note to an interested party          |  | 7          
|Payables
      in respect of acquisition of land - | 
|business
      inventory                           |  | 8a(2)      
|Deferred
      income taxes                        |  | 10b        
|                                                   |  |            
|T
      o t a l   long-term liabilities            |  |            
|                                                   |  |            
|T
      o t a l   liabilities                      |  |            
|**COMMITMENTS
      AND CONTINGENT**               | 
|**LIABILITIES**                                    |  | 8          
|**MINORITY
      INTEREST**                        |  | 2          
|**SHAREHOLDERS
      EQUITY**                     |  | 9          
|                                                   |  |            
|                                                   |  |            
|                                                   |  |            

* Reclassified.

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

4

---

---

|**OPHIR
      HOLDINGS LTD.**                   
|------------------------------------------------
|CONSOLIDATED
      STATEMENTS OF INCOME (LOSSES)
|IN ADJUSTED NEW
      ISRAELI SHEKELS           



|                                                                             | Note | 2003    | 2002 | 2001  
|---------------------------------------------------------------------------- | ---- | ------- | ---- | ------
|
|**REVENUES
      AND GAINS:**                                                |      |         |      |       
|From
      lease of buildings                                                |      |         |      | 10,278
|Share
      in profits (losses) of associated companies - net                |      | 3       |      | (2,071
|Gain
      from sale and increase in value of marketable shares -        net |      |         |      | 164   
|Gain
      from sale of land-business inventory                              |      |         |      | 120   
|Dividend
      received from other companies                                 |      |         |      | 7,896 
|Management
      fees from associated companies and others                   |      | 11a     |      | 438   
|Financial
      income - net                                                 |      | 11a;13f |      |       
|                                                                             |      |         |      |       
|                                                                             |      |         |      | 16,825
|                                                                             |      |         |      |       
|**EXPENSES
      AND LOSSES:**                                               |     
|Operating
      cost of buildings for rent (including        depreciation)   |      |         |      | 3,613 
|Write-down
      of investments in associated companies                      |      | 3       |      |       
|Write-down
      of investments in other companies                           |      | 4       |      |       
|General
      and administrative expenses - net                              |      | 11a     |      | 4,623 
|Loss
      from sale of leased buildings - net                               |      | 5       |      | 30    
|Financial
      expenses - net                                               |      | 11a;13f |      | 1,532 
|                                                                             |      |         |      |       
|                                                                             |      |         |      | 9,798 
|                                                                             |      |         |      |       
|**INCOME
      (LOSS) BEFORE TAXES ON INCOME**                               |      |         |      | 7,027 
|**TAXES
      ON INCOME (TAX SAVING)**                                       |      | 10      |      | 4,731 
|                                                                             |      |         |      |       
|**INCOME
      (LOSS) AFTER TAXES ON INCOME**                                |     
|**(TAX
      SAVING)**                                                       |      |         |      | 2,296 
|**MINORITY
      INTEREST IN LOSSES (PROFITS) OF A**                         |     
|**SUBSIDIARY**                                                               |      |         |      | 15    
|                                                                             |      |         |      |       
|**NET
      INCOME (LOSS) FOR THE YEAR**                                     |      |         |      | 2,311 
|                                                                             |      |         |      |       

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

5

---

---

|**OPHIR
      HOLDINGS LTD.**                      
|---------------------------------------------------
|STATEMENTS
      OF CHANGES IN SHAREHOLDERS EQUITY
|IN
      ADJUSTED NEW ISRAELI SHEKELS              



|                                       | Share
      capital | Capital
      surplus | Retained
      earnings | Total 
|-------------------------------------- | ------------------- | --------------------- | ----------------------- | ------
|
|
|
|**BALANCE
      AT JANUARY 1, 2001**   |                     | 2,832                 |                         | 80,488
|**CHANGES
      DURING 2001:**         |                    
|Net
      income                       |                     |                       |                         |       
|Dividend                               |                     |                       |                         |       
|                                       |                     |                       |                         |       
|**BALANCE
      AT DECEMBER 31, 2001** |                     | 2,832                 |                         | 80,488
|                                       |                     |                       |                         |       
|**CHANGES
      DURING 2002** - loss   |                     |                       |                         |       
|                                       |                     |                       |                         |       
|**BALANCE
      AT DECEMBER 31, 2002** |                     | 2,832                 |                         | 80,488
|**CHANGES
      DURING 2003:**         |                    
|Net
      income                       |                     |                       |                         |       
|Dividend                               |                     |                       |                         |       
|Erosion
      of capital note          |                     |                       |                         | (20   
|                                       |                     |                       |                         |       
|**BALANCE
      AT DECEMBER 31, 2003** |                     | 2,832                 |                         | 80,468
|                                       |                     |                       |                         |       

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

6

---

---

(Continued) 
  1

|**OPHIR
      HOLDINGS LTD.**              
|-------------------------------------------
|CONSOLIDATED
      STATEMENTS OF CASH FLOWS
|IN
      ADJUSTED NEW ISRAELI SHEKELS      



|                                                                                                | 2003 | 2002    | 2001
|----------------------------------------------------------------------------------------------- | ---- | ------- | ----
|
|**CASH
      FLOWS FROM OPERATING ACTIVITIES:**                                                 |      |         |     
|Net
      income (loss) for the year                                                            |      | 2,311   |     
|Adjustments
      required to reflect the cash flows from operating        activities*          |      | 3,703   |     
|                                                                                                |      |         |     
|Net
      cash provided by operating activities                                                 |      | 6,014   |     
|                                                                                                |      |         |     
|**CASH
      FLOWS FROM INVESTING ACTIVITIES:**                                                 |     
|Proceeds
      from sale of investment in other companies                                       |      |         |     
|Proceed
      from sale of leased buildings                                                     |      | 30,190  |     
|Proceeds
      from sale of marketable shares                                                   |      |         |     
|Investment
      in associated companies (including capital notes and        loans
      - net) |      | (424    | )   
|Investments
      in other companies                                                            |      | (301    | )   
|Investment
      in fixed assets (mainly buildings)                                             |      |         |     
|Short-term
      bank deposit                                                                   |      |         |     
|Withdrawal
      of long-term bank deposit                                                      |      |         |     
|Proceed
      from sale of business inventory                                                   |      | 120     |     
|Advances
      on account of rental property designated for sale                                |      |         |     
|Collection
      of short-term loan to shareholders                                             |      |         |     
|Loan
      to a company which is an interested party                                            |      | (192    | )   
|                                                                                                |      |         |     
|Net
      cash provided by Investing activities                                                 |      | 29,393  |     
|                                                                                                |      |         |     
|**CASH
      FLOWS FROM FINANCING ACTIVITIES:**                                                 |     
|Repayment
      of long-term bank loans- net                                                    |      | (8,307  | )   
|Short-term
      loan from a company which is an interested party- net                          |      |         |     
|Dividend
      paid                                                                             |      | (11,047 | )   
|Short-term
      bank credit and loans - net                                                    |      | (13,254 | )   
|                                                                                                |      |         |     
|Net
      cash used in financing activities                                                     |      | (32,608 | )   
|                                                                                                |      |         |     
|**INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS**                                      |      | 2,799   |     
|**BALANCE
      OF CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR**                             |      | 416     |     
|                                                                                                |      |         |     
|**BALANCE
      OF CASH AND CASH EQUIVALENTS AT END OF YEAR**                                   |      | 3,215   |     
|                                                                                                |      |         |     

7

---

---

(Concluded) -
  2

|**OPHIR
      HOLDINGS LTD.**              
|-------------------------------------------
|CONSOLIDATED
      STATEMENTS OF CASH FLOWS
|IN
      ADJUSTED NEW ISRAELI SHEKELS      



|                                                                             | 2003   | 2002 | 2001  
|---------------------------------------------------------------------------- | ------ | ---- | ------
|
|***
      Adjustments required to reflect the cash flows from operating**    |        |      |       
|**activities:**                                                             
|Income
      and expenses not involving cash flows:                         
|Share
      in losses (profits) of associated companies - net                | 2,071  |      | (1,662
|Depreciation                                                                 | 1,953  |      | 2,490 
|Deferred
      income taxes - net                                            | 2,971  |      | (3,672
|Minority
      interest in losses of a subsidiary (2002 - net of dividend)   | 15     |      | (4    
|Increase
      (decrease) in liabilities for employee rights upon retirement |        |      |       
|Gain
      from sale of fixed assets and business inventory - net            | (120   | )    | (412  
|Loss
      from sale of leased buildings                                     | 30     |     
|Gain
      from sale and decrease in value of marketable shares - net        | (164   | )    | (291  
|Write-down
      of investment in associated companies and other             |        |      | 25,609
|Linkage
      differences (erosion) on long-term bank loans - net            | (67    | )    | 163   
|Linkage
      differences and interest on bank deposit - net                 |        |      | 2     
|Erosion
      (linkage differences) on short-term loan to a company which is
|an
      interested party                                                    | (164   | )    | (64   
|Linkage
      differences and interest on loans to associated companies and 
|others                                                                       | (1,333 | )    | (1,103
|                                                                             |        |      |       
|                                                                             | 5,192  |      | 21,056
|                                                                             |        |      |       
|****Changes
      in operating asset and liability items:                   
|Decrease
      (increase) in accounts receivable                             | 1,677  |      | (247  
|Increase
      (decrease) in accounts payable and accruals                   | (3,166 | )    | (9,536
|                                                                             |        |      |       
|                                                                             | (1,489 | )    | (9,783
|                                                                             |        |      |       
|                                                                             | 3,703  |      | 11,273
|                                                                             |        |      |       

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

8

---

---

|**OPHIR
      HOLDINGS LTD.**      
|-----------------------------------
|NOTES
      TO FINANCIAL STATEMENTS
|                                   

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

| | The significant accounting
      policies, applied on a consistent basis, are as follows:
| | -----------------------------------------------------------------------------------------
| |                                                                                          

| | a. | General:
| | -- | --------
| |    |         

| | 1) | Ophir Holdings Ltd. (Ophir) is a holding company  which also owns commercial buildings
designated for rent.
| | -- | -------------------------------------------------------------------------------------------------------------
| |    |                                                                                                              

| | The subsidiary Merkazim Investments Ltd. is engaged in the renting of commercial buildings. In 2003,
this company sold all its holdings in the commercial buildings that were designated for rent (see
note 5b.).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                  
| | The subsidiary, New Horizons (1993) Ltd., holds a number of properties (designated for sale), which
were purchased from an interested party, see also note 8a(2).                                                
| |                                                                                                                                                                                                                  
| | As to the activities of the associated companies, see note 3c.                                                                                                                                                   
| |                                                                                                                                                                                                                  

| | 2) | Definitions:
| | -- | ------------
| |    |             

| | Subsidiary
        -         | a company controlled
        or owned to the extent of over 50%,                                                                                                                                                                                                                                                                                                                                                         
| | ---------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                              | the financial
        statements of which have been consolidated                                                                                                                                                                                                                                                                                                                                                         
| |                              | with the financial
        statements of Ophir.                                                                                                                                                                                                                                                                                                                                                                          
| |                              |                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                              |                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Associated company
        - | a company controlled
        to the extent of 20% or over (which is not a subsidiary), or a company
        less than 20% controlled which 
        complies with the condition relating to significant influence,
        as prescribed by Opinion 68 of the Institute of Certified Public
        Accountants in Israel (the Israeli Institute), the investment
        in which is presented by the equity method.
| |                              |                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                              |                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Another company
        -    | a company to
        which the conditions specified in the preceding paragraphs do not apply.                                                                                                                                                                                                                                                                                                                            
| |                              |                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                              |                                                                                                                                                                                                                                                                                                                                                                                                                          
| | The Group -                  | Ophir and its
        subsidiaries and associated companies.                                                                                                                                                                                                                                                                                                                                                             
| |                              |                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                              |                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Interested parties
        - | as defined in
        the Israeli Securities (Preparation of Annual Financial Statements) Regulations,
        1993.                                                                                                                                                                                                                                                                                                     
| |                              |                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                              |                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Related parties
        -    | as defined in
        Opinion 29 of the Israeli Institute.                                                                                                                                                                                                                                                                                                                                                               

9

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (continued)
|                                               

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

| | b.
          Adjustedfinancial statements :
| | -------------------------------------------
| |                                            

| | 1) | The financial statements have been prepared on the basis of historical cost adjusted to reflect the
changes in the general purchasing power of Israeli currency, in accordance with pronouncements of
the Israeli Institute. All figures in the financial statements are presented in adjusted new Israeli
shekels (NIS) which have a uniform purchasing power (December 2003 adjusted NIS) - based
upon the changes in the Israeli consumer price index; the Israeli CPI (see also note 12b).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

| |  | The adjustment of the financial statements is based on the accounts of the Ophir and its Israeli subsidiaries,
maintained in nominal NIS.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                          

| | The components of the income statements were, for the most part, adjusted as follows: the components
relating to transactions carried out during the year (revenues, labor costs, etc.) were adjusted
on the basis of the index for the month in which the transaction was carried out, while those relating
to non-monetary balance sheet items (mainly - depreciation and write-downs) were adjusted on the
same basis as the related balance sheet item. The financing component represents financial income
and expenses in real terms and the erosion of balances of monetary items during the year.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

| | 2) | As mentioned in (1) above, these financial statements have been drawn up in accordance with the principles
of adjustment prescribed by pronouncements of the Israeli Institute, on the basis of the changes
in the Israeli CPI.                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 3) | The adjusted amounts of non-monetary assets do not necessarily represent realization value or current
economic value, but only the original historical values, adjusted to reflect the changes in the general
purchasing power of Israeli currency. In these financial statements, the term cost signifies
cost in adjusted Israeli currency.                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 4) | In October 2001, the Israel Accounting Standards Board (the IASB) issued Israel Accounting
Standard No. 12 - Discontinuance of Adjusting Financial Statements for Inflation, which provided
for the discontinuance of adjusting financial statements for the effects of inflation, as of January 1,
2003. In December 2002, Accounting Standard No. 17 was issued that postponed the date from which
Accounting Standard No. 12 is to be applied until January 1, 2004. The inflation-adjusted amounts
as of December 31, 2003 will be the base for the nominal-historical financial reporting in the
following periods.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

| | The implementation of
      Standard No. 12 will mainly affect the financial expenses item.
| | -------------------------------------------------------------------------------------------

10

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (continued)
|                                               

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

| | c.    
      Principlesof
      consolidation :
| | -----------------------------------------------
| |                                                

| | 1) | The consolidated financial statements include the accounts of the Ophir and its subsidiaries. The companies
included in consolidation are listed in note 2a.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                             
| | 2) | Intercompany balances and transactions have been eliminated.                                                                                                
| |    |                                                                                                                                                             

| | d. | Marketable securities
| | -- | ---------------------
| |    |                      

| | These securities (except
      for investment in shares constituting permanent investment,
      see f(3) below), are stated at market value.
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                
| | The changes in value of the above securities are carried to income.                                                                            
| |                                                                                                                                                

| | e. | Land - business inventory
| | -- | -------------------------
| |    |                          

| | The land is presented at cost which - in managements estimation - is lower than market value.                                                          
| | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                         
| | According to the agreements for the purchase of land, the Company might pay additional costs of up
to 90% of the net sale proceeds, see also note 8a(2).
| |                                                                                                                                                         

| | f. | Investments:
| | -- | ------------
| |    |             

| | 1)
            Associatedcompanies :
| | ------------------------------------
| |                                     

| | (a) | The investments in these
      companies are accounted for by the equity method. The balance of the investment
      as of December 31, 2003 is presented net of a provision for the impairment
      in value of an associated company, see j. below and note 3.                                                                                                                                                                                                                                                                                                                             
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (b) | The excess of cost of
      the investment in associated companies over the Companys share in
      their equity in net assets at date of acquisition (excess of cost
      of investment) represents, in part, the amount attributed to land
      and buildings in certain companies and amounts not attributed to specific
      assets (goodwill) in other companies. The amount attributed to buildings
      is amortized in equal annual installments of 4% per year, while the amount
      attributed to goodwill is amortized in equal annual installments of 10%
      per year.

11

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (continued)
|                                               

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

| | 2)
             Othercompanies
| | ------------------------------
| |                               

| | The investments in the shares of these companies, including investments in quoted shares, which the
Company intends to hold for a long period (permanent investment), are stated at cost
(see also below), net of write-down for decrease in value which is not of a temporary nature.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                         
| | Investments in companies, which were accounted for by the equity method, was reclassified as an investments
in other companies, since the Company no longer had a significant influence, are stated
by the equity method as of the date of the reclassification.                      
| |                                                                                                                                                                                                                                                                                         

| | g.    
      Fixedassets
      :
| | --------------------------------
| |                                 

| | 1) | These assets are stated at cost.                                                                                                                                                                      
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                       
| | 2) | Cost of fixed assets includes the Companys share in a joint venture engaged solely in construction
of a building and rental thereof.                                                                 
| |    |                                                                                                                                                                                                       
| | 3) | Financial expenses in respect of loans and credit applied to finance the construction or acquisition
of buildings - incurred until construction was completed - were charged to cost of the buildings.
| |    |                                                                                                                                                                                                       
| | 4) | The assets are depreciated by the straight-line method, on basis of their estimated useful life. Annual rates of depreciation are 2% or 4%.                                                           
| |    |                                                                                                                                                                                                       

| | h.
          Deferredincome taxes:
| | ----------------------------------
| |                                   

| | 1) | Deferred taxes are computed in respect of differences between the amounts presented in these statements
and those taken into account for tax purposes. As to the factors in respect of which deferred taxes
have been included - see note 10b.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                               

| | Deferred tax balances are computed at the tax rate expected to be in effect at time of release to income
from the deferred tax accounts. The amount of deferred taxes presented in the income statement reflects
changes in the above balances during the year.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                

| | 2) | Taxes which would apply in the event of disposal of investments in subsidiaries and associated companies
have not been taken into account in computing the deferred taxes, since as of the date of approval
of these financial statements it is the Companys policy to hold these investments, not to realize
them.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                     

| | i.Revenue
      recognition
| | ---------------------------
| |                            

| | Income
      from leasing of buildings is recognized on the accrual basis, in accordance
      with the terms of the agreements with tenants.
| | ---------------------------------------------------------------------------------------------------------------------------------------------

12

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (continued)
|                                               

**NOTE 1
  - SIGNIFICANT ACCOUNTING POLICIES (continued):**

| | j.    
      Impairment of assets :
| | -----------------------------------
| |                                    

| | In February 2003, Accounting Standard No. 15 of the Israeli Accounting Standards Board - Impairment
of Assets, became effective. This standard requires a periodic review to evaluate the need
for a provision for the impairment of the Companys non-monetary assets - fixed assets and identifiable
intangibles, including goodwill, as well as investments in associated companies.                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | The Company has opted for early adoption of the standard and accordingly, commencing from December
31, 2002, the Company assess - at each balance sheet date - whether any events have occurred
or changes in circumstances have taken place, which might indicate that there has been an impairment
of one or more of the abova assets. When such indicators of impairment are present, the Company evaluates
whether the carrying value of the investment in the asset is recoverable from the cash flows anticipated
from that asset, and, if necessary, records an impairment provision up to the amount needed to adjust
carrying amount to the recoverable amount.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | The recoverable value of an asset is determined according to the higher of the net selling price of
the asset or its value in use to the Company. The value in use is determined according to the present
value of anticipated cash flows from the continued use of the asset, including those expected at
the time of its future retirement and disposal.                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | The impairment loss is carried directly to income. Where indicators are present that beneficial events
have occurred or beneficial changes in circumstances have taken place, the impairment provision in
respect of the asset (other than goodwill) may be cancelled or reduced in the future, so long as
the recoverable value of the asset has increased, as a result of changes in the estimates previously
employed in determining such value.                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

| | k.
          Cashequivalents
| | ----------------------------
| |                             

| | The Group considers all highly liquid investments, which include short-term bank deposits (up to three months
from date of deposit) that are not restricted as to withdrawal or use, to be cash equivalents.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                             

| | l. | Net income per NIS 1 of par value of ordinary shares
| | -- | ----------------------------------------------------
| |    |                                                     

| | The financial statements do not include data regarding net income per NIS 1 of par value of ordinary
shares, since that data would not provide significant additional information to that otherwise provided
by the financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                          

| | m.
         Formatof
      income statements
| | --------------------------------------------
| |                                             

| | In view of the nature
      of the Companys activities - holding of companies which operate in
      different fields - the Company is of the opinion that concentrated presentation
      of all revenue and gain items as a group, and of all expense and loss items
      in a separate group is more suitable to reflect its activities.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (continued)
|                                               

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

| | n. | Linkage basis
| | -- | -------------
| |    |              

| | Balances the linkage arrangements in respect of which stipulate linkage to the last index published
prior to date of payment are stated on basis of the last index published prior to the latest balance
sheet date (the index for November).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                              

| | o. | Use of estimates in the preparation of financial statements
| | -- | -----------------------------------------------------------
| |    |                                                            

| | The preparation of financial
      statements in conformity with generally accepted accounting principles requires
      management to make estimates and assumptions that affect the reported amounts
      of assets and liabilities and disclosure of contingent assets and liabilities
      at the dates of the financial statements and the reported amounts of revenues
      and expenses during the reporting years. Actual results could differ from
      those estimates.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 2 - SUBSIDIARIES:

| | Following
      is a list of the subsidiaries consolidated in Ophirs financial statements:
| | -------------------------------------------------------------------------------------------
| |                                                                                            

| | Wholly-owned:                                                                    
| | ---------------------------------------------------------------------------------
| | Ophir
        Financing Ltd. - inactive;                                         
| | Maoz
        Financial Investments Ltd. (Maoz) - inactive;                     
| | Merkazim
        Investments Ltd. (Merkazim) a wholly-owned subsidiary of Maoz;
| | 80%-owned - New
        Horizons (1993) Ltd. (New Horizons).                   

NOTE 3 - INVESTMENTS IN ASSOCIATED COMPANIES:

| | a. | The investments are
      composed as follows:
| | -- | ----------------------------------------------

| | December 31                                           
| | ------------------------------------------------------
|
|
| | Equity
      in net assets:                           
| | Cost
      of shares                                  
| | Share
      in accumulated undistributed profit       
| | Share
      in capital surplus derived by Mivnat      
| | Holdings
      Ltd. from sale of its investment       
| | in
      Industrial Buildings Ltd. to its             
| | Shareholders
      (see notes 1c(1) and 4(a))         
| |                                                       
| |                                                       
| | Long-term
      loans (2)                             
| | L e s s -
      provision for impairment of investment
| |                                                       
| |                                                       
| |                                                       

| | (1) | Including accumulated erosion of capital notes and gains on dilution of holding in associated companies
resulting from issuance of shares to a third party.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                            
| | (2) | The loans are linked to the Israeli CPI, bear interest at annual rates of 4%-5% and have no fixed maturity
date.                                           
| |     |                                                                                                                                                            

14

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (continued)
|                                               

NOTE 3 - INVESTMENTS IN ASSOCIATED COMPANIES:

| | b.    
      The changes in the investments in 2003 are as follows:
| | -------------------------------------------------------------------

| | Adjusted NIS
      in
      thousands                      
| | -----------------------------------------------------------
| | Balance
      at beginning of year                         
| | Changes during
      the year:                             
| | Share
      in losses of associated companies - net        
| | Loan
      to associated company                           
| | Share
      in erosion of capital note issued to an        
| | associated
      company                                   
| | Accrued
      linkage differentials and interest in respect
| | of
      long-term loans                                   
| |                                                            
| | Balance at
      end of year                               
| |                                                            

| | c. | Following are details relating to the associated companies:
| | -- | -----------------------------------------------------------
| |    |                                                            

| | 1) | Mivnat Holdings Ltd. (Mivnat)
| | -- | -------------------------------
| |    |                                

| | Mivnat was established in 1993 by Ophir, the subsidiary - Merkazim, and others, some of whom were interested
parties, in order to acquire the Israeli Governments shares in Industrial Buildings Ltd. (Industrial
Buildings). During March 1993, Mivnat acquired these shares in consideration of adjusted NIS
1,053 million. Ophir holds 18.75% interest in Mivnat, directly, and 25% interest jointly with Merkazim.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                          
| | As described in note 4(a), on December 31, 1998, Mivnat sold its holdings in Industrial Buildings
to its shareholders (including Ophir). Upon the consummation of the transaction, Mivnat ceased to
have any rights in the shares of Industrial Buildings.                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                          

| | 2) | Shmey-Bar Real Estate
      1993 Ltd., Shmey-Bar (T.H.) 1993 Ltd. and Shmey-Bar(I.A.) 1993 Ltd. (Shmey-Bar
      companies).
| | -- | ------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                               

| | The Company, along with
      a group of companies, established the Shmey-Bar companies in 1993. These
      companies were established for the purpose of dealing in development of
      fruit bearing properties. They purchased rights to real estate and options
      to purchase real estate in Tel-Aviv, Haifa, Beer-Sheva, Kiryat Shemona,
      Eilat Jerusalem, Holon, Tel-Hanan and Ramla, all from Hamashbir Hamerkazi
      Israel Cooperative Wholesale Society Ltd.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | On December 31,
      2002, the Company wrote-down its investment in the Shmey-Bar companies by
      adjusted NIS 5,004,000.                                                                                                                                                                                                                                                                                                                                                      

15

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (continued)
|                                               

NOTE 3 - INVESTMENTS IN ASSOCIATED COMPANIES (continued):

| | 3) | Lysh
      The Coastal High-way Ltd. (L1)
| | -- | -------------------------------------------
| |    |                                            

| | In June 1999, the Company
      entered into an investment agreement  with Lysh Commercial and
      Road Services Ltd. (L2), a company controlled by Polar Investments
      Ltd. - an interested party in the Company, and with L1, a wholly-owned subsidiary
      of L2.                                                                                                                                                                                                                                                                                                                                      
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | L1 has a 50% holding
      in Beit Herut-Lysh Development Company Ltd. (BHL), which has
      invested in a project for the leasing of commercial premises near Moshav
      Beit Herut (the project).                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | BHL developed 16,850
      square meters of land owned by the Israel Lands Administration (the Administration),
      in accordance with resolution 717 of the Administration. A commercial project
      occupying approximately 10,000 square meters was constructed on that land.
      The Companys share in L1 is approximately 25% (its share in the project
      being approximately 12.5%). The project was commercialized in March 2000.
      As of December 31, 2003 and 2002, the Company had invested in L1 approximately
      adjusted NIS 5.5 million and adjusted NIS 5 million, respectively..
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | The Company has also
      undertaken to provide guarantees in an amount equivalent to 25% of the construction
      costs. As of December 31, 2003, the Companys share in the loans made
      to BHL amounts to approximately adjusted NIS 15 million.                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | The auditors of L1,
      while not qualifying their opinion on L1s financial statements for
      2003, drew attention to the financial position of BHL, whose financial statements
      presented a loss of some adjusted NIS 2 million (net of financial expenses
      in the amount of adjusted NIS 4.5 million) and negative working
      capital amounting to some adjusted NIS 8.2 million at December 31,
      2003.                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | In 2003, BHL received
      shareholders loans in the amount of approximately adjusted NIS 1.5
      million from L1. In addition, during the reported period BHL reached an
      arrangement with a bank, which has not yet been put in writing, which postpones
      the repayment of the principal of the loans until January 2005 and schedules
      the repayment of the balance of the loan over a period 18 years.                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | L1s management
      believes that these negotiations will bear fruit and that on their conclusion
      BHL will obtain the additional financing required.                                                                                                                                                                                                                                                                                                                                                                                                                                                        

16

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (continued)
|                                               

NOTE 4 - INVESTMENTS IN OTHER COMPANIES:

| | December 31                                                      
| | -----------------------------------------------------------------
|
|
| | Industrial
      Buildings (a)                                   
| | Memadim Investments
      Ltd. (Memadim) (b)                   
| | Mahalachim
      Investment in Technology Ltd. (Mahalachim) (c)
| | Others                                                           
| |                                                                  
| |                                                                  
| |                                                                  

| | (a) | Industrial Buildings
      is engaged in initiation, and construction, of buildings for industry, designated
      for rental and sale, and in the management of land development and infrastructure
      preparation for residence and industry.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 31, 1998, Mivnat sold to its shareholders (including the Company) its
entire holding in the issued and paid share capital of Industrial Buildings (see note 3c(1)).
Within the framework of this transaction, the Company acquired from Mivnat 13% of the
issued and paid share capital of Industrial Buildings - 37,227,210 ordinary shares of NIS 1
par value and 2,978,177 warrants (Series 3) in consideration of adjusted NIS 279,830
thousands. The shares acquired as above have been pledged in favor of a bank to secure
loans received from it.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
      2001, the Company sold 576,633 shares of Industrial Buildings in consideration
      of adjusted NIS 3.7 million. The pre-tax profit that the Company derived
      from this sale is approximately adjusted NIS 411,000.                                                                                
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                   
| | In
      2002, the Company sold 1,027,653 shares of Industrial Buildings in consideration
      of approximately NIS 6.6 million, at a pre-tax gain of approximately
      adjusted NIS 625,000. The holding rate in Industrial Buildings subsequent
      to this sale is approximately 11.7%.                   
| |                                                                                                                                                                                                                                                                                                                   
| | After
      balance sheet date, in February 2004, the Company sold 3,179,489 shares
      of Industrial Buildings in consideration of approximately adjusted NIS 15
      million. The pre-tax profit that the Company derived from this sale is approximately
      adjusted NIS 1.7 million.                    
| |                                                                                                                                                                                                                                                                                                                   
| | In
      2003, the Company received a dividend of adjusted NIS 7.4 million from
      Industrial Buildings.                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                   
| | The
      shares of Industrial Buildings are traded on the Tel-Aviv Stock Exchange.
      The market value of the holdings of the Company in the shares of Industrial
      Buildings at December 31, 2003 and 2002 is approximately adjusted NIS 153.6 million
      and adjusted NIS 82.4 million, respectively.
| |                                                                                                                                                                                                                                                                                                                   
| | Shortly
      before the date of approval of the financial statements, the market value
      of the Companys share in Industrial Buildings aggregated adjusted
      NIS 176 million (this amount includes the portion sold after balance
      sheet date).                                                    

17

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (continued)
|                                               

NOTE 4 - INVESTMENTS IN OTHER COMPANIES (continued):

| | Based, inter alia, on
      a valuation that it had received, on December 31, 2002 the Company
      wrote-down its investment in Industrial Buildings by adjusted NIS 20,605,000.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                   

| | (b) | Memadim was established
      in 1995 by the Company, along with a group of companies, one of which is
      Industrial Buildings, for the purpose of real estate development. The Company
      directly holds 10% of the ownership and control of Memadim and Industrial
      Buildings holds 40% of the ownership and control of Memadim.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                              
| | (c) | Mahalachim is a venture
      capital fund. The Company holds shares conferring upon it a 3.5% holding
      in this company. The investment as of December 31, 2003 and 2002 is
      presented net of previous years write-down of adjusted NIS 2,273,000.                                                                                 

18

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (continued)
|                                               

NOTE 5 - FIXED ASSETS:

| | a. | Composition of assets (buildings-leased, including land) and the depreciation accumulated in respect
thereof, and changes therein during 2003, are as follows:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                               

| |  | C o s t | A
      c c u m u l a t e d   d e p r e c i a t i o n | 
| |  | ------- | ----------------------------------------------------- | 
|
|
|
|
|
|
|
|
|
| |  |         |                                                       | 
| |  |         | 101,074                                               | 
| |  |         |                                                       | 

19

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (Continued)
|                                               

NOTE 5 - FIXED ASSETS (continued):

| | b. | The companies
      rights in real estate are as follows:
| | -- | ----------------------------------------------------------

| | C o s t                                    | Accumulated
      depreciation
| | ------------------------------------------ | ------------------------------
|
|
|
| | Ophir:                                     |                               
| | Building
      on land jointly leased with |                               
| | other
      companies for 44 years         |                               
| | ending
      October 31, 2037 -            |                               
| | (Ophirs
      share - 70%) (1)            |                               
| |                                            |                               
| | Merkazim
      (2):                        |                               
| | Buildings
      on subsidiarys land       |                               
| | Building
      jointly owned with          |                               
| | an
      interested party                  |                               
| |                                            |                               
| | T
      o t a l - Merkazim                 |                               
| |                                            |                               
| | T
      o t a l                            |                               
| |                                            |                               

| | (1) | The building is located
      on an area of 30,500 Sq.m., of which 17,700 Sq.m. consist of commercial
      areas. The building is leased as part of a joint venture, the Ophirs
      share in which is 70%.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                               

| | On April 14, 2003, the parties entered into a lease agreement with the Administration. The lease
expires on October 31, 2037. The annual lease fees payable by the Company amount to adjusted
NIS 30,000.                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                         
| | In
      order to secure the completion of the registration of an unaffiliated party,
      who had purchased an area of some 900 Sq.m. of the area of the building
      in 1999, with the Land Registry, the Company has provided a guarantee of
      adjusted NIS 3.8 million in favor of the buyer.
| |                                                                                                                                                                                                                                                                                                         

| | (2) | The
      buildings owned by Merkazim have been sold in 2002 and 2003, as follows:
| | --- | ----------------------------------------------------------------------------------
| |     |                                                                                   

| | - | In
      December 2002, Merkazim, has entered into agreements for the sale of four
      buildings for a consideration of adjusted NIS 27,282,000. The sale
      of the buildings was completed in 2003.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                          
| | - | In
      June 2003, Merkazim entered into another agreement for the sale of a real
      estate asset in return for adjusted NIS 2,639,000.                                                              
| |   |                                                                                                                                                                                                          
| | - | In
      July 2003, Merkazim entered into an additional agreement for the sale of
      a real estate asset in return for adjusted NIS 13,860,000.                                                       
| |   |                                                                                                                                                                                                          

| | During the year ended
      December 31, 2003, a loss of adjusted NIS 30,000 was included
      in the accounts in respect of the sale of the aforementioned real estate
      assets.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (continued)
|                                               

NOTE 6 - LONG-TERM BANK LOANS:

| | a. | The loans are linked
      to the Israeli CPI and bear interest at the annual rate of 4%.
| | -- | -----------------------------------------------------------------------------------------
| |    |                                                                                          
| | b. | The loans mature in
      the following years after the balance sheet dates:             

| | December 31                                   
| | ----------------------------------------------
|
|
| | First
      year - current maturities         
| |                                               
| | Second year                                   
| | Third year                                    
| | Fourth year                                   
| | Fifth year                                    
| | Sixth year
      and thereafter (through 2012)
| |                                               
| |                                               
| |                                               
| |                                               
| |                                               

| | c. | As to pledges to secure
      the loans and limitations relating to them, see note 8c.
| | -- | --------------------------------------------------------------------------------------

NOTE 7 - CAPITAL NOTES:

| | a. | On December 31,
      1998, Ophir and a subsidiary, Merkazim, issued capital notes to Mivnat with
      a par value of NIS 113,770,000 and NIS 37,831,000, respectively.
      The capital notes are unlinked and interest-free.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                 

| | Capital notes with an
      aggregate par value of NIS 151,351,000 are repayable at par, upon demand
      of Mivnat, on January 1, 2004 and only on that date. In February 2004,
      the shareholders of Mivnat decided to extend the repayment date until January 1,
      2005. The balance of the capital notes, NIS 250,000 par value, is repayable
      annually under the terms stipulated in the agreement.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                       

| | b. | In 2002, a subsidiary
      issued capital note with a par value of NIS 1,069,000 to the minority
      shareholder in the subsidiary. The minority shareholder in the subsidiary
      is entitled to receive the principal of the note, without interest or linkage,
      this after a period not less than one year.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (continued)
|                                               

|              
|--------------
|NOTE
      8 -
|              

| | a. | Commitments:
| | -- | ------------
| |    |             

| | 1) | The Company has undertaken to invest in Memadim (see note 4b) approximately 10% of the cost of the
land and building of a rental project which is constructed by Memadim on the Carmel shore. The investment
was made partly through investment in Memadim (mainly shareholders loans), and partly by way of a
guarantee provided. The Companys share in future construction costs is estimated at approximately
$ 17 million. As of December 31, 2003, the balance of the loans to Memadim amounts to approximately
adjusted NIS 89 million.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 2) | In December 1996, the subsidiary New Horizons acquired real estate (intended for sale) from a then
interested party which holds 20% of New Horizons shares. The selling company will be entitled
to 90% of the profits from the subsequent sale of the real estate, with the balance accruing to New
Horizons. The registration of the real estate in New Horizons name in the Land Registry has
not yet been completed.                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 3) | As to the Companys commitment to grant guarantees to BHL, see note 3c(3).                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 4) | Ophir and a subsidiary receive various services from the shareholders in Ophir, including management
services, head office services, bookkeeping and legal services. As to the expenses recorded in respect
of such services, see note 11.                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| | b. | Contingent liabilities :
| | -- | ------------------------
| |    |                         

| | 1) | Ophir and Merkazim have provided mutual guarantees to secure the long-term loans received from banks.                                                                                                                                                                                                                                                                                                                                                     
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 2) | The tax authorities have issued betterment tax assessments for the subsidiary Merkazim, claiming that
the actual betterment derived was higher than that reported by the subsidiary and demanding the payment
of additional tax in the amount of approximately NIS 4.1 million. In the opinion of the Companys
management, the tax authorities claims are unfounded. Accordingly, no additional tax expense
was recorded in respect of said assessments.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 3) | As to a guarantee in favor of buyers of premises in a building, see note 5b(1).                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                           

| | c. | Pledges and restrictions in respect of liabilities
| | -- | --------------------------------------------------
| |    |                                                   

| | To secure repayment
      of long-term bank loans in the total amount of adjusted NIS 74.8 million
      at December 31, 2003 the Company has undertaken towards the bank that
      the Companys shareholders equity will not fall below adjusted
      NIS 76 million, the total consolidated liabilities will not be
      more than 3.25 times the shareholders equity, and the average annual
      net income for the recent three years will not, at any time, fall below
      adjusted NIS 7.6 million. As of balance sheet date, the Company
      has not met its obligation to maintain the aforementioned level of annual
      net income. On March 4, 2004, the Company received the banks
      approval that the original repayment schedule is not to be changed, despite
      the Companys failure to meet its obligation, as above. This approval
      is limited to the period ending on January 1, 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

22

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (continued)
|                                               

|NOTE
      8 - | COMMITMENTS, CONTINGENT
      LIABILITIES, PLEDGES AND LIMITATIONS IN
      RESPECT OF LIABILITIES (continued):
|-------------- | ---------------------------------------------------------------------------------------------------------------
|               |                                                                                                                

| | The shares of Industrial
      Buildings have been pledged as security for these loans, see note 4(a).
| | ------------------------------------------------------------------------------------------------------

NOTE 9 - SHARE CAPITAL

| | Composed at December 31,
      2003 and 2002 as follows:
| | --------------------------------------------------------

| | Number of
      shares              | Amount in
      NIS
| | ----------------------------------- | -------------------
|
| | Ordinary
      shares of NIS 0.001  |                    
| | par
      value                     |                    
| |                                     |                    
| | Deferred
      shares of NIS 0.0001 |                    
| | par
      value*                    |                    
| |                                     |                    

| | * | The deferred shares
      confer upon their holders the right to receive their par value upon liquidation
      of the Company.
| | - | -------------------------------------------------------------------------------------------------------------------------------

23

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (continued)
|                                               

NOTE 10 - TAXES ON INCOME:

| | a. | Measurement of results for tax purposes under the Income Tax (Inflationary Adjustments ) Law, 1985
| | -- | --------------------------------------------------------------------------------------------------
| |    |                                                                                                   

| | Under this law, results for tax purposes are measured in real terms, in accordance with the changes
in the Israeli CPI. Ophir and its Israeli subsidiaries are taxed under this law.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                     

| | b. | Deferred income taxes :
| | -- | -----------------------
| |    |                        

| | 1) | The composition of the
      deferred taxes, and the changes therein during the reported years, are as
      follows:
| | -- | ---------------------------------------------------------------------------------------------------------------------

| | Depreciable
      fixed assets*   
| | ----------------------------------
|
| | Balance
      at January 1, 2002  
| | Changes
      in 2002 -           
| | amounts
      carried to income   
| |                                   
| | Balance
      at December 31, 2002
| | Changes
      in 2003 -           
| | amounts
      carried to income   
| |                                   
| | Balance
      at December 31, 2003
| |                                   

*        
  Taking into account the provisions of Opinion 40 of the Israeli Institute, see
  c. below.

| | 2) | Deferred taxes are presented
      in the balance sheets as follows:
| | -- | --------------------------------------------------------------------

| | December 31                      
| | ---------------------------------
|
|
| | Among current
      assets       
| | Among long-term
      liabilities
| |                                  
| |                                  
| |                                  

| | The deferred taxes are computed at the tax rate of 36%.
| | -------------------------------------------------------
| |                                                        

24

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (continued)
|                                               

NOTE 10 - TAXES ON INCOME (continued):

| | c. | Undepreciated balance of cost of fixed assets - the portion in respect of which deferred taxes have not been provided
| | -- | ---------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                      

| | The balance of undepreciated
      cost of certain depreciable fixed assets includes the amounts detailed below
      which will not be allowed for tax purposes by way of depreciation or as
      cost upon realization of the assets. These amounts are regarded as permanent
      differences (in respect of which no deferred taxes are to be provided) in
      accordance with Opinion 40 of the Israeli Institute:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2003                                              | 2002
| | ------------------------------------------------- | ----
|
| | Balance
      at beginning of year                |     
| | Decrease
      in the above balance due to:       |     
| | Depreciation
      charge for the year            |     
| | Buildings
      sold (2002 - designated for sale) |     
| |                                                   |     
| | Balance at
      end of year                      |     
| |                                                   |     

| | d. | Taxes on income included in the income statements :
| | -- | ---------------------------------------------------
| |    |                                                    

| | 1) | As follows:
| | -- | -----------

| | 2003                              | 2002 | 2001 
| | --------------------------------- | ---- | -----
|
| | For
      the reported year:      |      |      
| | Current                           |      | 1,760
| | Deferred,
      see also b. above |      | 2,971
| |                                   |      |      
| |                                   |      | 4,731
| |                                   |      |      
| | For previous
      years:         |     
| | Current                           |      |      
| | Deferred,
      see also b. above |      |      
| |                                   |      |      
| |                                   |      |      
| |                                   |      |      
| |                                   |      | 4,731
| |                                   |      |      

| | Current taxes are computed
      at the tax rates of 36%.
| | ---------------------------------------------------------

25

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (continued)
|                                               

NOTE 10 - TAXES ON INCOME (continued):

| | 2) | Following is a reconciliation
      of the theoretical tax expense, assuming all income is taxed at the regular
      tax rates applicable to companies in Israel (see (1) above), and the actual
      tax expense:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                                           | 2003 | 2002   | 2001
| | ----------------------------------------------------------------------------------------- | ---- | ------ | ----
|
| | Income
      (loss) before taxes on income as reported in
          the income statements |      | 7,027  |     
| | A
      d d  (less) - share in losses (profits) of associated companies - net             |      | 2,071  |     
| |                                                                                           |      |        |     
| | B a l a n
      c e - income                                                              |      | 9,098  |     
| |                                                                                           |      |        |     
| | Theoretical
      tax expense (tax saving)                                                |      | 3,275  |     
| | Increase
      (decrease) in taxes resulting from permanent                              
| | differences
      - the tax effect:                                                      
| | Disallowable
      deductions (exempt income)                                             |      | (156   | )   
| | Differences
      for which deferred taxes were not                                      
| | created
      in previous  years, net                                                     |      | 4,101  |     
| | Taxes
      on income subject to different rates -                                       
| | dividends
      received from other companies                                             |      | (2,843 | )   
| | Sundry
      - net                                                                        |      | 354    |     
| |                                                                                           |      |        |     
| | Taxes
      on income for the reported year                                               |      | 4,731  |     
| |                                                                                           |      |        |     

| | e.    
      Taxassessments
| | ---------------------------
| |                            

| | Ophir has received final
      assessments through tax year 2000.                              
| | -----------------------------------------------------------------------------------------------
| |                                                                                                
| | Subsidiaries:                                                                                  
| | Merkazim - assessments
      that are considered as final through tax year 1999.               
| | New Horizons (1993)
      Ltd.- assessments that are considered as final through tax year 1998.
| | Ophir Financing Ltd.
      - Final assessments have been received through tax year 1999.       

NOTE 11 - TRANSACTIONS
  AND BALANCES WITH INTERESTED PARTIES AND RELATEDPARTIES:

| | a.    
      Transactionswith
      interested parties and related parties :
| | ----------------------------------------------------------------------------
| |                                                                             

| | 2003                                                       | 2002 | 2001
| | ---------------------------------------------------------- | ---- | ----
|
| | Income (expenses):                                         |      |     
| | Financial
      income in respect of short-term loans to   |     
| | shareholders                                               |      |     
| |                                                            |      |     
| | Financial
      income in respect of loans to              |     
| | Associated
      companies                                 |      |     
| |                                                            |      |     
| | Management
      fees from other company                   |      |     
| |                                                            |      |     
| | Included
      in general and administrative expenses      |      |     
| |                                                            |      |     
| | Participation
      in expenses of shareholders and a      |     
| | company
      which is an interested party                 |      |     
| |                                                            |      |     
| | Financial
      income (expenses) in respect of short-term |     
| | loans
      with a company which is an interested party    |      |     
| |                                                            |      |     

| |  | As to other transactions
      with, and commitments to, interested parties, see note 8.
| |  | ----------------------------------------------------------------------------------------

26

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (continued)
|                                               

|NOTE
      11 - | TRANSACTIONS AND
      BALANCES WITH INTERESTED PARTIES AND RELATED
      PARTIES (continued):
|--------------- | ----------------------------------------------------------------------------------------------
|                |                                                                                               

| | b.    
      Balances with interested parties and related parties:
| | ------------------------------------------------------------------
| |                                                                   

| | 1)      
      Receivables (payables):
| | --------------------------------------

| | December 31                                         
| | ----------------------------------------------------
|
|
| | a) Loan to
      a company which is                 
| | an
      interested party (1)                       
| |                                                     
| | b) Long-term
      receivables - loans to associated
| | Companies
      (2)                                 
| |                                                     
| | c) A company
      which is an interested           
| | party
      - current account                       
| |                                                     
| | d) Shareholders
      - current accounts            
| |                                                     

| | (1) | The loan is linked to the Israeli CPI and bears no interest.
| | --- | ------------------------------------------------------------
| |     |                                                             

| | The Company that is
      an interested party is to repay this debt out of its future positive cash
      flow.
| | ---------------------------------------------------------------------------------------------------------------
| |                                                                                                                

| | (2) | The loans are linked to the Israeli CPI and bear annual interest at the rate of 4%-5%.
| | --- | --------------------------------------------------------------------------------------
| |     |                                                                                       
| |     | As to current balances with associated and other companies, see note 13a.             
| |     |                                                                                       

| | 2) | Long-term liability
      in respect of acquisition of land - business inventory - is linked to the
      Israeli CPI and bears no interest.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------

27

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (continued)
|                                               

NOTE 12 - LINKAGE OF MONETARY BALANCES:

| | a. | As follows:
| | -- | -----------

| | December
      31, 2003                  
| | -----------------------------------------
|
|
| | Assets:                                  
| | Current
      assets:                    
| | Cash
      and cash equivalents          
| | Short-term
      investments             
| | Accounts
      receivable                
| | Loan
      to a company which is         
| | an
      interested party                
| | Loans
      to associated companies      
| |                                          
| |                                          
| |                                          
| | Liabilities:                             
| | Current
      liabilities:               
| | Accounts
      payable and accruals      
| | Long-term
      liabilities:             
| | Bank
      loans (including current      
| | maturities)                              
| | Capital
      notes to associated company
| | Capital
      note to an interested party
| |                                          
| |                                          
| |                                          

| | b.     Dataregarding
      the exchange rate and the Israeli
      CPI :
| | ------------------------------------------------------------------------
| |                                                                         

| |                                              | **Exchange
        rate
        of one dollar** | **Israeli
        CPI***
| | -------------------------------------------- | ----------------------------------------------- | ------------------------
| | At end of year:                              |                                                 |                         
| | 2003                                         | NIS 4.379                                       | 178.6 points            
| | 2002                                         | NIS
        4.737                               | 182.01
        points   
| | 2001                                         | NIS
        4.416                               | 170.9
        points    
| | 2000                                         | NIS
        4.041                               | 168.5
        points    
| |                                              |                                                 |                         
| | Increase
        (decrease) during the year: |                                                 |                         
| | 2003                                         | (7.5)%                                          | (1.9)%                  
| | 2002                                         | 7.3%                                            | 6.5%                    
| | 2001                                         | 9.3%                                            | 1.4%                    
| | 2000                                         | (2.7)%                                          | 0.0%                    

| | * | Based on the index for
      the month ending on each balance sheet date, on the basis of 1993 average
      = 100.
| | - | -------------------------------------------------------------------------------------------------------------------

28

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (continued)
|                                               

NOTE 13 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:

| | Balance sheets
      :
| | ----------------------

|                                                            | December 31
|----------------------------------------------------------- | -----------
|
|
|**a.
             Accounts receivable:**                    |            
|Deposits
      in respect of sale                           |            
|of
      fixed assets                                       |            
|Associated
      companies                                  |            
|and
      others                                            |            
|Institutions                                                |            
|VAT
      receivable in respect of                          |            
|buildings
      designated for sale                         |            
|Other                                                       |            
|                                                            |            
|                                                            |            
|                                                            |            
|**b.       Bank
      credit:**                             |            
|Short-term
      credit and loans*                          |            
|Current
      maturities of long-                           |            
|term
      loans, see note 6                                |            
|                                                            |            
|                                                            |            
|                                                            |            
|* 2002
      - Unlinked and bearing annual interest of 4.6% |            
|                                                            |            
|                                                            |            
|**c.
             Accounts payable and accruals:**          |            
|Trade                                                       |            
|Institutions                                                |            
|Accrued
      expenses                                      |            
|Interested
      party - current                            |            
|accounts                                                    |            
|Shareholders
      - current accounts                       |            
|Other                                                       |            
|                                                            |            
|                                                            |            
|                                                            |            

| | d. | Concentrations of credit risks
| | -- | ------------------------------
| |    |                               

| | The Groups
      cash and cash equivalents and short-term investments at December 31,
      2003 and 2002 are deposited with Israeli banks. The Company is of the opinion
      that the credit risk in respect of these balances is remote.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

29

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (continued)
|                                               

NOTE 13 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

| | e. | Fair value of financial instruments
| | -- | -----------------------------------
| |    |                                    

| | The fair value of financial
      instruments included in the working capital of the Group is usually identical
      or close to their carrying value. The fair value of long-term loans to associated
      and other companies and long-term bank loans also approximates their carrying
      value, since they bear interest at rates close to prevailing market rates.
      As to the fair value of the investment in Industrial Buildings - traded
      on the Tel-Aviv Stock Exchange - see note 4(a). The determination of
      the fair value of the capital notes to associated company and subsidiary
      and long-term liabilities in respect of acquisition of land  business
      inventory is not practical.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2003                                                 | 2002 | 2001
| | ---------------------------------------------------- | ---- | ----
|
| | **f.
       Financial expenses (income) - net:**     |      |     
| |                                                      |     
| | Financial
      expenses:                            |     
| | In
      respect of long-term loans                  |      |     
| | In
      respect of short-term bank credit           |      |     
| | In
      respect of a short-term loan from a company |     
| | which
      is an interested party                   |      |     
| | Other                                                |      |     
| |                                                      |      |     
| |                                                      |      |     
| |                                                      |      |     
| | Financial
      income:                              |     
| | In
      respect of bank deposits                    |      |     
| | In
      respect of short-term loans to associated   |     
| | companies                                            |      |     
| | In
      respect of short-term loans to shareholders |      |     
| | In
      respect of a loan to a company which is     |     
| | an
      interested party                            |      |     
| | Assigned
      interest and linkage differences      |      |     
| | Other                                                |      |     
| |                                                      |      |     
| |                                                      |      |     
| |                                                      |      |     
| |                                                      |      |     
| |                                                      |      |     

30

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (continued)
|                                               

|NOTE
      14 |  EFFECT OF
      MATERIAL DIFFERENCES BETWEEN GENERALLY 
          ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN
      THE U.S.A.:
|------------- | -------------------------------------------------------------------------------------------------------------------------------------
|              |                                                                                                                                      
|              | a.     General:                                                                                                                      
|              |                                                                                                                                      

| | 1) | The Company prepares its financial statements in accordance with Israeli GAAP. As applicable to these
financial statements, Israeli GAAP and U.S. of America GAAP vary in certain significant respects,
as described below:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                            

| | 2)        
      Effect of inflation
| | ------------------------------------
| |                                     

| | In accordance with Israeli GAAP, the Company comprehensively includes the effect of the changes in
the general purchasing power of Israeli currency in these financial statements, as described in note 1b.
In view of the inflation in Israel, this is considered a more meaningful presentation than financial
reporting based on historical cost.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                     
| | The adjustments to reflect the changes in the general purchasing power of Israeli currency have been
reversed in the reconciliation of Israeli GAAP to U.S. GAAP.                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                     

| | 3)        
      Investment in marketable securities
| | ----------------------------------------------------
| |                                                     

| | In accordance with Israeli
      GAAP, since the companys intent is to hold this investment for a long
      period, it is stated at cost, net of write-down for decrease in value, which
      is not of a temporary nature.                                          
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                         
| | Under U.S. GAAP, this
      investment is classified as an investment in available for sale and is reported
      at fair value with unrealized gains and losses, recorded as a separate component
      of comprehensive income in shareholders equity until realized.

31

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (continued)
|                                               

|NOTE
      14  | EFFECT OF MATERIAL
      DIFFERENCES BETWEEN GENERALLY 
      ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE U.S.A. (continued):
|--------------- | -------------------------------------------------------------------------------------------------------------------------------------

| |    |                                                                                                                                           
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------
| | b. | The effect of the material
      GAAP differences, as described in a. above, on the consolidated financial
      statements is as follows:
| |    |                                                                                                                                           

| | 1)          Operating results:
| | ------------------------------
| |                               

| | 2003                                           | 2002 | 2001
| | ---------------------------------------------- | ---- | ----
|
| | Net income
      (losses) as reported in these |      |     
| | financial
      statements according           |     
| | to
      Israeli GAAP)                         |      |     
| | Effect of
      the treatment of the following |     
| | items
      under U.S. GAAP:                   |     
| | Reversal
      of the adjustment due to        |     
| | effect
      of inflation                      |      |     
| | Other                                          |      |     
| |                                                |      |     
| | Net
      income under U.S. GAAP               |      |     
| |                                                |      |     

| | 2)          Shareholders equity:
| | ---------------------------------
| |                                  

| | December 31,                           
| | ---------------------------------------
|
|
| | Shareholders
      equity, as reported
| | in
      these financial statements,   
| | according
      to Israeli GAAP        
| | Effect of
      the treatment of the   
| | above
      differences under          
| | U.S.
      GAAP:                       
| | Reversal
      of the adjustment due   
| | effect
      of inflation, net         
| | Marketable
      securities            
| | Other                                  
| |                                        
| | Shareholders
      equity under       
| | U.S.
      GAAP                        
| |                                        

32

---

---

|**OPHIR
      HOLDINGS LTD.**                  
|-----------------------------------------------
|NOTES
      TO FINANCIAL STATEMENTS (continued)
|                                               

|NOTE
      14  | EFFECT OF MATERIAL
      DIFFERENCES BETWEEN GENERALLY 
      ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL AND IN THE U.S.A. (continued):
|--------------- | -------------------------------------------------------------------------------------------------------------------------------------

| | 3) | The effect of the foregoing
      GAAP difference on reporting comprehensive income, is as follows:
| | -- | ---------------------------------------------------------------------------------------------------

| | 2003                                | 2002 | 2001
| | ----------------------------------- | ---- | ----
|
| | Net
      income as recorded to     |      |     
| | U.S.
      GAAP, see above          |      |     
| | Other
      comprehensive           |     
| | income
      - gains not            |     
| | reported
      in the income        |     
| | statement
      -                   |     
| | Unrealized
      gains on           |     
| | marketable
      securities         |      |     
| |                                     |      |     
| | Comprehensive
      income (losses) |      |     
| |                                     |      |     

33

---

---

OPHIRTECH LTD.
(An Israeli Corporation)
2003 ANNUAL REPORT



---

---

**OPHIRTECH
  LTD.**
  2003****ANNUAL REPORT

TABLE OF CONTENTS

|                                             |                                                     | **Page**
|-------------------------------------------- | --------------------------------------------------- | --------
|**REPORT
      OF INDEPENDENT AUDITORS**     | 2                                                  
|**FINANCIAL
      STATEMENTS - IN ADJUSTED** |                                                    
|                                             | **NEW ISRAELI
      SHEKELS (NIS):**                |         
|                                             | Balance
      sheets                                | 3       
|                                             | Statements
      of operations                      | 4       
|                                             | Statements
      of changes in shareholders equity | 5       
|                                             | Statements
      of cash flows                      | 6       
|                                             | Notes
      to financial statements                 | 7-23    

---

---

|
|
|

# REPORT OF INDEPENDENT AUDITORS

To the shareholders of**OPHIRTECH LTD.**

We have audited the balance
  sheets of Ophirtech Ltd. (the Company) as of December 31, 2003 and 2002 and
  the statements of operations, changes in shareholders equity and cash flows
  for each of the three years in the period ended December 31,2003. 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 auditing standards generally accepted in Israel and in the United
  States of America, 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, 2003 and 2002 and the results of
  its operations, the changes in its shareholders equity and its cash flows for
  each of the three years in the period ended December 31,2003, in conformity
  with accounting principles generally accepted in Israel.

As explained in note 1b,
  the financial statements referred to above are presented in values adjusted
  for the changes in the general purchasing power of Israeli currency, in accordance
  with pronouncements of the Institute of Certified Public Accountants in Israel.

Accounting principles generally
  accepted in Israel vary in certain  significant respects from accounting principles generally
  accepted in the United States of America.  Information regarding to the nature and effect of such differences is presented in note 9 to the financial
statements.

|Tel-Aviv,
      Israel | Kesselman
      & Kesselman              
|---------------------- | -----------------------------------------
|March
      9, 2004    | Certified
      Public Accountants (Isr.)
|                       |                                          

|Kesselman
      & Kesselman is a member of PricewaterhouseCoopers International Limited,
      a company limited by guarantee registered in England and Wales.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------

2

---

---

|                                      |  | 
|------------------------------------- |  | 
|**OPHIRTECH
      LTD.**             
|BALANCE
      SHEETS                 
|IN
      ADJUSTED NEW ISRAELI SHEKELS

|                                               |    | December 31
|---------------------------------------------- | -- | -----------
|
|
|**A
      s s e t s**                          |    |            
|**CURRENT
      ASSETS:**                     
|Cash
      and cash equivalents                |    |            
|Accountants
      receivable                   | 7a |            
|                                               |    |            
|T
      o t a l  current assets                |    |            
|                                               |    |            
|**INVESTMENTS
      IN COMPANIES**             | 2  |            
|                                               |    |            
|**FIXED
      ASSETS:**                        | 3  |            
|Cost                                           |    |            
|L
      e s s  - accumulated depreciation      |    |            
|                                               |    |            
|                                               |    |            
|                                               |    |            
|                                               |    |            
|                                               |    |            
|**Liabilities
      and shareholders equity**
|**CURRENT
      LIABILITIES:**                 | 7b | (2)        
|Short-term
      credit:                      
|Bank
      credit                              | 7b |            
|Shareholders                                   |    |            
|Loan
      from a corporate interested party   | 7c |            
|Accounts
      payable and accruals            | 7d |            
|                                               |    |            
|T
      o t a l  current liabilities           |    |            
|**SHAREHOLDERS
      EQUITY**                 | 4  |            
|                                               |    |            
|                                               |    |            
|                                               |    |            

| | ____________________________ | **)** |               | 
| | ---------------------------- | ----- | ------------- | 
| | **Roni
      Harel**         | **)** |               | 
| |                              | **)** | **DIRECTORS** | 
| | ____________________________ | **)** |               | 
| | **Shlomo
      Shalev**      | **)** |               | 
| |                              |       |               | 

| | Date of approval of
      the financial statements: March 9, 2004
| | -----------------------------------------------------------------

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

3

---

---

|                                      |  | 
|------------------------------------- |  | 
|**OPHIRTECH
      LTD.**             
|STATEMENTS
      OF OPERATIONS       
|IN
      ADJUSTED NEW ISRAELI SHEKELS

| | 2003                                                    | 2002 | 2001 
| | ------------------------------------------------------- | ---- | -----
| | **WRITE-DOWN
      OF INVESTMENTS IN COMPANIES**        |      | 1,239
| | **GENERAL
      AND ADMINISTRATIVE EXPENSES** (note 7g) |      | 251  
| | **FINANCIAL
      EXPENSES (INCOME)** **-** net         |      | 416  
| | **CAPITAL
      LOSS ON SALE OF FIXED ASSETS**          |      | 2    
| |                                                         |      |      
| | **LOSS
      FOR THE YEAR**                             |      | 1,908
| |                                                         |      |      

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

4

---

---

|                                                    |  | 
|--------------------------------------------------- |  | 
|**OPHIRTECH
      LTD.**                           
|STATEMENTS
      OF CHANGES IN SHAREHOLDERS EQUITY
|IN
      ADJUSTED NEW ISRAELI SHEKELS              

| | Share
      capital                      | Receipts on
      account
      of shares
      to be allotted | Accumulated
      deficit | Total
| | ---------------------------------------- | -------------------------------------------------------------- | ------------------------- | -----
| |                                          |                                                                |                           |      
|
| | **BALANCE
      AT JANUARY 1, 2001**     |                                                                | *                         |      
| | **CHANGES
      DURING 2001** **-** loss |                                                                |                           |      
| |                                          |                                                                |                           |      
| | **BALANCE
      AT DECEMBER 31, 2001**   |                                                                | *                         |      
| | **CHANGES
      DURING 2002** **-** loss |                                                                |                           |      
| |                                          |                                                                |                           |      
| | **BALANCE
      AT DECEMBER 31, 2002**   |                                                                | *                         |      
| | **CHANGES
      DURING 2003** **-** loss |                                                                |                           |      
| |                                          |                                                                |                           |      
| | **BALANCE
      AT DECEMBER 31, 2003**   |                                                                | *                         |      
| |                                          |                                                                |                           |      

* Represents
  an amount less than adjusted NIS 1,000.

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

5

---

---

|                                      |  | 
|------------------------------------- |  | 
|**OPHIRTECH
      LTD.**             
|STATEMENTS
      OF CASH FLOWS       
|IN
      ADJUSTED NEW ISRAELI SHEKELS

|                                                            | 2003 | 2002   | 2001
|----------------------------------------------------------- | ---- | ------ | ----
|
|**CASH
      FLOWS FROM OPERATING ACTIVITIES:**             |      |        |     
|Loss
      for the year                                     |      | (1,908 | )   
|Adjustments
      required to reflect the cash flows from   |     
|operating activities*                                       |      | 714    |     
|                                                            |      |        |     
|Net
      cash provided by (used in) operating activities   |      | (1,194 | )   
|                                                            |      |        |     
|**CASH
      FLOWS FROM INVESTING ACTIVITIES:**             |     
|Purchase
      of fixed assets                              |      |        |     
|Investment
      in companies                               |      | (3,089 | )   
|Proceeds
      from sale of fixed assets                    |      | 70     |     
|Decrease
      in short-term loan to a corporate            |     
|interested party                                            |      |        |     
|                                                            |      |        |     
|Net
      cash used in investing activities                 |      | (3,019 | )   
|                                                            |      |        |     
|**CASH
      FLOWS FROM FINANCING ACTIVITIES:**             |     
|Credit
      from shareholders - net                        |      | 4,166  |     
|Increase
      in short term loan from a corporate          |     
|interested party                                            |      | 191    |     
|Short-term
      bank credit                                |      | (124   | )   
|                                                            |      |        |     
|Net
      cash provided by financing activities             |      | 4,233  |     
|                                                            |      |        |     
|**INCREASE
      (DECREASE) IN CASH AND CASH**              |     
|**EQUIVALENTS**                                             |      | 20     |     
|**BALANCE
      OF CASH AND CASH EQUIVALENTS AT**           |     
|**BEGINNING
      OF YEAR**                                 |      | 6      |     
|                                                            |      |        |     
|**BALANCE
      OF CASH AND CASH EQUIVALENTS AT**           |     
|**END
      OF YEAR**                                       |      | 26     |     
|                                                            |      |        |     
|***
      Adjustments required to reflect cash flows from** |     
|**operating
      activities:**                             |     
|****Expenses
      not involving cash flows:                |     
|Depreciation                                                |      | 7      |     
|Write-down of investments in companies                      |      | 1,239  |     
|Capital loss on sale of fixed assets                        |      | 2      |     
|Liabilities for employee rights upon retirement - net       |      |        |     
|Linkage differences (erosion) of a loan with a corporate    |     
|interested
      party                                      |      | 165    |     
|                                                            |      |        |     
|                                                            |      | 1,413  |     
|                                                            |      |        |     
|****Changes
      in operating asset and liability items:   |     
|Decrease (increase) in accounts receivable                  |      | (33    | )   
|Increase (decrease) in accounts payable and accruals        |      | (666   | )   
|                                                            |      |        |     
|                                                            |      | (699   | )   
|                                                            |      |        |     
|                                                            |      | 714    |     
|                                                            |      |        |     

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

6

---

---

|                                    |  | 
|----------------------------------- |  | 
|**OPHIRTECH
      LTD.**           
|NOTES
      TO FINANCIAL STATEMENTS

|**NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES**
|--------------------------------------------

|                                                                                                                                                                                                                                                                                                                          | The
      significant accounting policies, applied on a consistent basis, are as follows:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                          |                                                                                          
|                                                                                                                                                                                                                                                                                                                          | **a.**                                                                                   
|                                                                                                                                                                                                                                                                                                                          |                                                                                          
|                                                                                                                                                                                                                                                                                                                          |                                                                                          
|                                                                                                                                                                                                                                                                                                                          |                                                                                          
|                                                                                                                                                                                                                                                                                                                          |                                                                                          
|                                                                                                                                                                                                                                                                                                                          |                                                                                          
|On January
      1, 2001, the employees of Ophir Holdings and one of its subsidiaries were
      transferred to the Company. During 2002 and 2001 Ophir Holdings and its
      subsidiary participated in the employees payroll costs, as well as
      the Companys general and administrative expenses - see note 7g.
|                                                                                                                                                                                                                                                                                                                          |                                                                                          
|                                                                                                                                                                                                                                                                                                                          |                                                                                          
|                                                                                                                                                                                                                                                                                                                          |                                                                                          
|                                                                                                                                                                                                                                                                                                                          | **b.**                                                                                   
|                                                                                                                                                                                                                                                                                                                          |                                                                                          
|                                                                                                                                                                                                                                                                                                                          |                                                                                          
|                                                                                                                                                                                                                                                                                                                          |                                                                                          
|                                                                                                                                                                                                                                                                                                                          |                                                                                          

7

---

---

|                                                |  | 
|----------------------------------------------- |  | 
|**OPHIRTECH
      LTD.**                       
|NOTES
      TO FINANCIAL STATEMENTS (continued)

|                                                              
|--------------------------------------------------------------
|**NOTE 1 - SIGNIFICANT
      ACCOUNTING POLICIES**(continued):

| |        |                                                                                                                                                                                                             | The components of
      the statements of operations were, for the most part, adjusted as follows:
      the components relating to transactions carried out during the year were
      adjusted on the basis of the index for the month in which the transaction
      was carried out, while those relating to non-monetary balance sheet items
      (mainly depreciation and write-down) were adjusted on the same basis as
      the related balance sheet item. The financing component represents financial
      income and expenses in real terms and the erosion of balances of monetary
      items during the year.                                                                                        
| | ------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |        |                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |        | 2)                                                                                                                                                                                                          | The adjusted
      amounts of non-monetary assets do not necessarily represent realization
      value or current economic value, but only the original historical values,
      adjusted to reflect the changes in the general purchasing power of Israeli
      currency. In these financial statements, the term cost signifies
      cost in adjusted Israeli currency.                                                                                                                                                                                                                                                                                                                                          
| |        |                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |        | 3)                                                                                                                                                                                                          | In October 2001,
      the Israel Accounting Standards Board (the IASB) issued Accounting
      Standard No. 12, Discontinuance of Adjusting Financial Statements
      for Inflation, which provided for the discontinuance of adjusting
      financial statements for the effects of inflation, as of January 1, 2003.
      In December 2002, Accounting Standard No. 17 was issued that postponed the
      date from which Accounting Standard No. 12 is to be applied until January
      1, 2004. The inflation-adjusted amounts as of December 31, 2003, as presented
      in these financial statements, will be the base for the nominal-historical
      financial reporting in the following periods.
| |        |                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |        |                                                                                                                                                                                                             | The implementation
      of Standard No. 12 will mainly affect the financial income and expenses
      item.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |        |                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | **c.** | **Investments
      in companies**                                                                                                                                                                         
| |        |                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |        | The investments
      in the shares of these companies are presented at cost.                                                                                                                              
| |        |                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |        | The Company
      reviews for impairment its investments from time to time. Impairment losses,
      that are revealed by such reviews are included in the Companys accounts,
      see also e. hereafter.
| |        |                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | **d.** | **Fixed
      assets:**                                                                                                                                                                                    
| |        |                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |        | 1)                                                                                                                                                                                                          | These assets are stated
      at cost.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |        |                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |        | 2)                                                                                                                                                                                                          | The assets are depreciated
      by the straight-line method, on basis of their estimated useful life.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |        |                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |        |                                                                                                                                                                                                             | Annual rates of depreciation
      for vehicles are 15%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

8

---

---

|                                                |  | 
|----------------------------------------------- |  | 
|**OPHIRTECH
      LTD.**                       
|NOTES
      TO FINANCIAL STATEMENTS (continued)

|**NOTE 1 - SIGNIFICANT
      ACCOUNTING POLICIES**(continued):
|--------------------------------------------------------------

| |        |                                                                                                                                                                                                                                             | 
| | ------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | **e.** | **Cash
      equivalents**                                                                                                                                                                                                                 
| |        |                                                                                                                                                                                                                                             | 
| |        | The Company
      considers all highly liquid investments, which include short-term bank deposits
      (up to three months from date of deposit) that are not restricted as to
      withdrawal or use, to be cash equivalents.           
| |        |                                                                                                                                                                                                                                             | 
| | **f.** | **Loss
      per NIS 1 of par value of shares**                                                                                                                                                                                            
| |        |                                                                                                                                                                                                                                             | 
| |        | The financial
      statements do not include data regarding loss per NIS 1 of par value of
      shares, since the data would not provide significant additional information
      to that otherwise provided by the financial statements.

9

---

---

|                                                |  | 
|----------------------------------------------- |  | 
|**OPHIRTECH
      LTD.**                       
|NOTES
      TO FINANCIAL STATEMENTS (continued)

|**NOTE 1 - SIGNIFICANT
      ACCOUNTING POLICIES**(continued):
|--------------------------------------------------------------

| | **g.** | **Linkage
      basis**                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |        | Balances
      the linkage arrangements in respect of which stipulate linkage to the last
      index published prior to date of payment are stated on basis of the last
      index published prior to balance sheet date (the index for November).                                                                                                                                                                                                                                   
| |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | **h.** | **Use
      of estimates in the preparation of financial statements**                                                                                                                                                                                                                                                                                                                                                                                                                  
| |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |        | The preparation
      of financial statements in conformity with generally accepted accounting
      principles requires management to make estimates and assumptions that affect
      the reported amounts of assets and liabilities and disclosure of contingent
      assets and liabilities at the dates of the financial statements and the
      reported amounts of revenues and expenses during the reporting periods.
      Actual results could differ from those estimates.
| |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | **i.** | **Data
      regarding the exchange rate and the Israeli CPI:**                                                                                                                                                                                                                                                                                                                                                                                                                        

| |                                   | Exchange
      rate of one
      U.S.dollar | Israeli
      CPI*
| | --------------------------------- | ------------------------------------------- | ------------------
| |                                   |                                             |                   
| | At end
      of year:             |                                             |                   
| | 2003                              | NIS
      4.379                             | 178.6
      points
| | 2002                              | NIS 4.737                                   | 182.0 points      
| | 2001                              | NIS 4.416                                   | 170.9 points      
| | 2000                              | NIS 4.041                                   | 168.5 points      
| |                                   |                                             |                   
| | Increase
      (decrease) during: |                                             |                   
| | 2003                              | (7.5)%                                      | (1.9)%            
| | 2002                              | 7.3%                                        | 6.5%              
| | 2001                              | 9.3%                                        | 1.4%              

|* Based
      on the index for the month ending on each balance sheet date, on the basis
      of 1993 average = 100.
|---------------------------------------------------------------------------------------------------------------------

10

---

---

|                                                |  | 
|----------------------------------------------- |  | 
|**OPHIRTECH
      LTD.**                       
|NOTES
      TO FINANCIAL STATEMENTS (continued)

|**NOTE 2 - INVESTMENTS IN COMPANIES:**
|--------------------------------------

| | The composition
      of the investments is as follows:
| | -------------------------------------------------------

| | December
      31                                  
| | ---------------------------------------------------
|
|
|
|
|
|
| |                                                    
| | Pelican Security
      Ltd. - Pelican (a)        
| |                                                    
| | Expand Networks
      Ltd. - Expand (b)          
| |                                                    
| | Mainsoft
      Corporation - Mainsoft (c)        
| |                                                    
| | Netformx
      Ltd. - Netformx (d)               
| |                                                    
| | StoreAge
      Networking Technologies Ltd. -      
| | StoreAge
      (e)                               
| |                                                    
| | Indocs Online
      Ltd. - Indocs (f)            
| |                                                    
| | Celvibe Ltd.
      - Celvibe (g)                 
| |                                                    
| | Viola Networks
      Ltd. - Viola (h)            
| |                                                    
| | Cerel Ceramic
      Technologies Ltd. - Cerel (i)
| |                                                    
| | Others (j)                                         
| |                                                    
| | T
      o t a l                                    
| |                                                    

| | (a) | Pelican
      is engaged in the development of solutions to the problem of safeguarding
      information on the Internet against viruses and hackers.                                                                                                                                     
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                            
| |     | In February 2003,
      Pelican sold the know-how that it had developed and owned.                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                            
| |     | The investment in
      Pelican as of December 31, 2003 is presented net of a provision of adjusted
      NIS 7.9 million for impairment of value. The balance of the investments
      reflects the consideration that the Company expects to receive from the
      sale of the know-how.
| |     |                                                                                                                                                                                                                                                                                            
| | (b) | Expand is engaged
      in the development of technology designed to accelerate communications over
      diverse network infrastructures (including E1, T1 and frame relay lines)
      and improve broadband efficiency.                                                                 
| |     |                                                                                                                                                                                                                                                                                            
| |     | In June 2003, as part
      of a Capital raise from existing shareholders in Expand, the Company invested
      $ 250,000 (adjusted NIS 1,084,000) in Expand .                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                            
| | (c) | Mainsoft is engaged
      in the development of software and tools for software developers.                                                                                                                                                                                                

11

---

---

|                                                |  | 
|----------------------------------------------- |  | 
|**OPHIRTECH
      LTD.**                       
|NOTES
      TO FINANCIAL STATEMENTS (continued)

|**NOTE 2 - INVESTMENTS
      IN COMPANIES**(continued):
|-------------------------------------------------------

| | (d) | Netformx
      is engaged in development, marketing and support of software designed for
      planning, operation and maintenance of computer networks.                                                                                                                                    
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                             
| |     | In January 2003, Netformx
      raised $ 750,000. The Company did not participate in this round.                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                             
| |     | The investment in
      Netformx as of December 31, 2003 is presented net of a provision of adjusted
      NIS 7.6 million for impairment of value.                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                             
| |     | Netformx is partly
      held by companies which are interested parties.                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                             
| | (e) | StoreAge is engaged
      in the development and marketing of a software solution and innovative data
      storage solutions for communications networks (Storage Area Network).                                                                                                           
| |     |                                                                                                                                                                                                                                                                                             
| |     | StoreAge is partly
      held by a company which is an interested party.                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                             
| | (f) | Indocs is engaged
      in the development of software for E-commerce technological applications
      in the printing field, via the Internet and web uses.                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                             
| |     | In 2003, the Company
      invested $ 50,000 (adjusted NIS 223,000) in Indocs, from a total investment
      of adjusted NIS 7,519,000 .                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                             
| |     | As of December 31,
      2003 the investment in Indocs is fully written-down.                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                             
| | (g) | Celvibe develops solutions
      for digital video transmission for Internet broadband networks and mobile
      phone communications.                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                             
| |     | In November 2002,
      Celvibe ceased its operations and it is currently undergoing a winding-up
      procedure.                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                             
| |     | The investment in
      Celvibe as of December 31, 2003 is presented net of a provision for impairment
      of value of adjusted NIS 10.4 million. The balance of the investment reflects
      the consideration that the Company expects to receive upon the winding-up
      of Celvibe.
| |     |                                                                                                                                                                                                                                                                                             
| | (h) | Viola is engaged in
      the development of a software system to allow quick and uninterrupted identifications
      of problems and technical difficulties on various communications networks.                                                                                            
| |     |                                                                                                                                                                                                                                                                                             
| |     | In January 2002, Viola
      converted the bridging loans that it had raised in December 2001 into shares
      constituting approximately 36.2% of its share capital (fully diluted).                                                                                                      
| |     |                                                                                                                                                                                                                                                                                             
| |     | In October 2003, the
      Company invested $ 150,000 (adjusted NIS 668,000) in Viola.                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                             
| |     | The investment in
      Viola as of December 31, 2003 is presented net of a provision of adjusted
      NIS 8 million for impairment of value.                                                                                                                                              

12

---

---

|                                                |  | 
|----------------------------------------------- |  | 
|**OPHIRTECH
      LTD.**                       
|NOTES
      TO FINANCIAL STATEMENTS (continued)

|**NOTE 2 - INVESTMENTS
      IN COMPANIES**(continued):
|-------------------------------------------------------

| | (i) | Cerel develops ceramic layering technologies for the passive electronic components market.                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | In February 2002,
      the Company invested $ 700,000 (adjusted NIS 3,337,000) in Cerel.                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | Cerel has completed
      a financing round of approximately $ 1.5 million in February 2003, based
      on a company value of $ 6.5 million post- money. As part of the investment,
      the Company acquired 47,405 preferred shares of NIS 0.1 par value each,
      at a price per share of $ 14.77, as well as warrants for the purchase of
      Cerel shares at an exercise price of $ 1 million, based on a company value
      of $ 10.7 million pre-money. The warrants are exercisable until September
      30, 2003.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | In October 2003, the
      Company invested $ 250,000 (adjusted NIS 1,113,000) in Cerel based on a
      company value of $ 10.5 million pre- money.                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | The investment in
      Cerel as of December 31, 2003 is presented net of a provision of adjusted
      NIS 980,000 for impairment of value.                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (j) | Following is a list
      of the companies in which the Company has invested approximately NIS 50
      million. An impairment provision has been made for the full amount invested
      :                                                                                                                                                                                                                                                                                                                                       

| |  |  | Cipheractive
      Ltd ;                    
| |  |  | --------------------------------------------
| |  |  | Carmel
      Biosensors Ltd;                
| |  |  | Elpas
      Electro-Optic Systems Ltd       
| |  |  | Romidot
      Ltd;                          
| |  |  | RealM
      Technologies Ltd;               
| |  |  | Camelot
      Information Technologies Ltd; 
| |  |  | Interlink
      Computer Communications Ltd;
| |  |  | Techimage
      Ltd;                        
| |  |  | Iradius.Com,
      Inc;                     
| |  |  | Trans4u
      Ltd ;                         
| |  |  | Praxell
      Inc;                          
| |  |  | Electrochemical
      Light Switch Inc;     

13

---

---

|                                                |  | 
|----------------------------------------------- |  | 
|**OPHIRTECH
      LTD.**                       
|NOTES
      TO FINANCIAL STATEMENTS (continued)

|**NOTE 3 - FIXED ASSETS:**
|--------------------------

| | Composition of assets, and changes therein
      in 2003, are as follows:
| | -------------------------------------------------------------------------

| |          | C o s t | Accumulated
      depreciation | 
| | -------- | ------- | ------------------------------ | 
|
|
|
|
|
|
|
|
|
| |          |         |                                | 
| | Vehicles |         | 112                            | 
| |          |         |                                | 

|**NOTE
      4 - SHAREHOLDERS EQUITY:**
|----------------------------------------
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        

14

---

---

|                                                |  | 
|----------------------------------------------- |  | 
|**OPHIRTECH
      LTD.**                       
|NOTES
      TO FINANCIAL STATEMENTS (continued)

|**NOTE
      5 - TAXES ON INCOME:**
|-----------------------------------
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   

|**NOTE
      6 - INTERESTED PARTY TRANSACTIONS AND BALANCES:**
|--------------------------------------------------------------
|                                                              
|                                                              

| | 2003                                                | 2002 | 2001
| | --------------------------------------------------- | ---- | ----
|
|
|
| | **Income
      (expenses):**                        |      |     
| | Participation
      in expenses from companies     
| | which
      are interested parties, see note 1a     |      |     
| |                                                     |      |     
| | Payroll
      and related expenses of an interested
| | party
      employed by the Company                 | (187 | )   
| |                                                     |      |     
| | Financial
      expenses in respect of short-      
| | term
      loan with a company which is an         
| | Interested
      party                              |      |     
| |                                                     |      |     

| |        |                                     
| | ------ | ------------------------------------
| | **b.** | **Balances receivables (payables):**

| | December 31
| | -----------
|
|
| |            
| | 1)         
| |            
| |            
| | 2)         
| |            
| |            
| |            
| | 3)         
| |            

15

---

---

|                                                |  | 
|----------------------------------------------- |  | 
|**OPHIRTECH
      LTD.**                       
|NOTES
      TO FINANCIAL STATEMENTS (continued)

|**NOTE 7 - SUPPLEMENTARY FINANCIAL STAEMENT INFORMATION:**
|----------------------------------------------------------

| | **Balance sheets:**
| | -------------------
| |                    
| | **a.**             

| |                                           | December 31
| | ----------------------------------------- | -----------
|
|
|
|
| |                                           |            
| | Institutions                              | 49         
| | Interested
      party - current accounts | 589        
| | Others                                    |            
| |                                           |            
| |                                           | 638        
| |                                           |            

| | **b.** | **Short-term
      bank credit:**                                 
| | ------ | ------------------------------------------------------------------
| |        |                                                                   
| |        | 1)                                                                
| |        |                                                                   
| |        | 2)                                                                
| |        |                                                                   
| | **c.** | **Short-term
      loan from a corporate interested party**       
| |        |                                                                   
| |        | The loan
      is linked to the Israeli CPI and bears no interest.
| |        |                                                                   
| | **d.** | **Accounts
      payable and accruals:**                          

| |                                          | December 31
| | ---------------------------------------- | -----------
|
|
|
|
| |                                          |            
| | Employees                                |            
| | Institutions                             |            
| | Accrued expenses                         |            
| | Liability
      for employee rights upon
| | retirement,
      net of amount funded   |            
| | Other                                    | 23         
| |                                          |            
| |                                          | 23         
| |                                          |            

| | **e.** | **Concentrations
      of credit risks**                                                                                                                                                                             
| | ------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |        |                                                                                                                                                                                                                      
| |        | The Companys
      cash and cash equivalents at December 31, 2003 and 2002 were deposited with
      Israeli banks. The Company is of the opinion that the credit risk in respect
      of these balances is remote.

16

---

---

|                                                |  | 
|----------------------------------------------- |  | 
|**OPHIRTECH
      LTD.**                       
|NOTES
      TO FINANCIAL STATEMENTS (continued)

|**NOTE 7 - SUPPLEMENTARY
      FINANCIAL STAEMENT INFORMATION:**(continued):
|----------------------------------------------------------------------------

| | **f.**                               | **Fair
      value of financial instruments**                                                                                                                              
| | ------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                      |                                                                                                                                                                            
| |                                      | The fair value of
      the financial instruments included in working capital of the Company is
      usually identical or close to their carrying value.                  
| |                                      |                                                                                                                                                                            
| |                                      | Data regarding the
      of fair value of investments in companies is omitted because it is not practicable
      to determine such fair value with sufficient reliability.
| |                                      |                                                                                                                                                                            
| | **Statements
      of operations -**
| |                                      |                                                                                                                                                                            
| | **g.**                               | **General and
      administrative expenses:**                                                                                                                             

| |                                                              | 2003 | 2002 | 2001  
| | ------------------------------------------------------------ | ---- | ---- | ------
|
|
|
| | Payroll and
      related expenses                           | 187  |      | 2,778 
| | Office rent
      and maintenance                            | 22   |      | 556   
| | Other                                                        | 42   |      | 313   
| |                                                              |      |      |       
| |                                                              | 251  |      | 3,647 
| | Less - participation
      in expenses by interested parties |      |      | (3,328
| |                                                              |      |      |       
| |                                                              | 251  |      | 319   
| |                                                              |      |      |       

|**NOTE
      8 - NOMINAL DATA:**
|--------------------------------
|                                
|                                

| |                                                     | Nominal NIS
      in thousands
| | --------------------------------------------------- | ------------------------------
|
|
|
|
| |                                                     |                               
| | **A
      s s e t s**                               |                               
| | Current assets:                                    
| | Cash
      and cash equivalents                     | 26                            
| | Accounts
      receivable                           | 638                           
| |                                                     |                               
| |                                                     | 664                           
| | Investments
      in companies                      | 35,706                        
| | Fixed assets,
      net of accumulated depreciation |                               
| |                                                     |                               
| |                                                     | 36,370                        
| |                                                     |                               
| | **Liabilities
      and shareholders equity**     
| | Current liabilities:                               
| | Short-term
      bank credit                        | 1,839                         
| | Loan
      from a company which is an              
| | interested
      party                              | 8,703                         
| | Accounts
      payable and accruals                 | 4,189                         
| |                                                     |                               
| |                                                     | 14,731                        
| | Shareholders
      equity, see c. above            | 21,639                        
| |                                                     |                               
| |                                                     | 36,370                        
| |                                                     |                               

17

---

---

|                                                |  | 
|----------------------------------------------- |  | 
|**OPHIRTECH
      LTD.**                       
|NOTES
      TO FINANCIAL STATEMENTS (continued)

|**NOTE
      8 - NOMINAL DATA**(continued):
|-------------------------------------------
|                                           
|                                           

| |                                                   | Nominal NIS
      in thousands
| | ------------------------------------------------- | ------------------------------
|
|
| |                                                   |                               
| | Write-down
      of investments in companies      |                               
| | General and
      administrative expenses         |                               
| | Financial
      expenses (income) - net           |                               
| | Capital loss
      (gain) on sale of fixed assets |                               
| |                                                   |                               
| | Loss for
      the period - nominal               |                               
| |                                                   |                               

| | **c.** | **Changes
      in shareholders equity:**
| | ------ | ------------------------------------------

| | Nominal
      NIS in thousands    
| | ----------------------------------
|
|
| |                                   
| | Balance at
      January 1, 2001  
| | Changes during
      2001 - loss  
| |                                   
| | Balance at
      December 31, 2001
| | Changes during
      2002 - loss  
| |                                   
| | Balance at
      December 31, 2002
| | Changes during
      2003 - loss  
| |                                   
| | Balance at
      December 31, 2003
| |                                   

|**NOTE
      9 - SPECIAL CONDENSED FINANCIAL STATEMENTS:**
|----------------------------------------------------------
|                                                          
|                                                          
|                                                          
|                                                          
|                                                          
|                                                          
|                                                          
|                                                          

18

---

---

|                                                |  | 
|----------------------------------------------- |  | 
|**OPHIRTECH
      LTD.**                       
|NOTES
      TO FINANCIAL STATEMENTS (continued)

|**NOTE
      9 - SPECIAL CONDENSED FINANCIAL STATEMENTS**(continued):
|---------------------------------------------------------------------
|                                                                     
|                                                                     

| |  |  | (a) | The
      special statements are drawn up in Israeli currency (NIS) terms.                                                                                                                               
| |  |  | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  |     |                                                                                                                                                                                                          
| |  |  | (b) | Adjustments
      required to make the data conform with U.S. generally accepted accounting
      principles (GAAP) have been made, the main difference in U.S
      GAAP is the effect of inflation-

| | The Company, in accordance
      with Israeli GAAP, comprehensively includes the effects of price level changes
      in the accompanying financial statements, as described in Note 1b(1).Such
      Israeli accounting principles measure the effects of price level changes
      in the inflationary nature of the Israeli economy and, as such, is considered
      a more meaningful presentation than financial reporting based on historical
      cost of Israeli and U.S accounting purposes. The effect of inflation was
      eliminated for the purpose of measurement according to U.S GAAP as presented
      in b. below.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 4) | For the convenience
      of Ampal, these special statements have been translated into U.S. dollars
      in accordance with the principles set forth in FAS 52.
| |  |  | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

19

---

---

|                                                |  | 
|----------------------------------------------- |  | 
|**OPHIRTECH
      LTD.**                       
|NOTES
      TO FINANCIAL STATEMENTS (continued)

| |  | **b.** | **Following
      are the special statements:**
| |  | ------ | -----------------------------------------------
| |  |        |                                                
| |  |        | 1)                                             

| | New Israeli
      shekels                     | Translation
      into
      U.S. dollars,
      see a(4) above
| | --------------------------------------------- | ---------------------------------------------------------------
|
|
|
|
|
|
|
| | **A
      s s e t s**                         |                                                                
| | Current assets:                               |                                                                
| | Cash
      and cash equivalents               |                                                                
| | Accounts
      receivable                     |                                                                
| |                                               |                                                                
| | T
      o t a l  current assets               |                                                                
| |                                               |                                                                
| | Investments
      in companies                |                                                                
| | Fixed assets,
      net of accumulated        |                                                                
| | depreciation                                  |                                                                
| |                                               |                                                                
| |                                               |                                                                
| |                                               |                                                                
| | **Liabilities
      and shareholdersequity** |                                                                
| | Current liabilities:                          |                                                                
| | Short-term
      bank credit                  |                                                                
| | Loan
      from a company which is            |                                                                
| | an
      interested party                     |                                                                
| | Accounts
      payable and accruals           |                                                                
| |                                               |                                                                
| | T
      o t a l  current liabilities          |                                                                
| | Shareholders
      equity                    |                                                                
| |                                               |                                                                
| |                                               |                                                                
| |                                               |                                                                

20

---

---

|                                                |  | 
|----------------------------------------------- |  | 
|**OPHIRTECH
      LTD.**                       
|NOTES
      TO FINANCIAL STATEMENTS (continued)

|**NOTE
      9 - SPECIAL CONDENSED FINANCIAL STATEMENTS**(continued):
|---------------------------------------------------------------------
|                                                                     
|                                                                     

|New Israeli
      shekels | Translation
      into U.S. dollars,
      see a(4) above
|------------------------- | ---------------------------------------------------------
|
|
|
|
|                          | Write-down
      of investments in companies             
|                          | General and
      administrative expenses                
|                          | Financial
      expenses (income) - net                  
|                          | Capital loss
      (gain) on sale of fixed assets        
|                          |                                                          
|                          | Loss for
      the period                                
|                          |                                                          

21

---

---

|                                                |  | 
|----------------------------------------------- |  | 
|**OPHIRTECH
      LTD.**                       
|NOTES
      TO FINANCIAL STATEMENTS (continued)

|**NOTE
      9 - SPECIAL CONDENSED FINANCIAL STATEMENTS**(continued):
|---------------------------------------------------------------------
|                                                                     
|                                                                     

| |                                    | New
      Israeli shekels
| | ---------------------------------- | -------------------------
|
|
|
| | Balance at
      January 1, 2001   | 1                        
| | Changes during
      2001 - loss   |                          
| |                                    |                          
| | Balance at
      December 31, 2001 | 1                        
| | Changes during
      2002 - loss   |                          
| |                                    |                          
| | Balance at
      December 31, 2002 | 1                        
| | Changes during
      2003 - loss   |                          
| |                                    |                          
| | Balance at
      December 31, 2003 | 1                        
| |                                    |                          

22

---

---

|                                                |  | 
|----------------------------------------------- |  | 
|**OPHIRTECH
      LTD.**                       
|NOTES
      TO FINANCIAL STATEMENTS (continued)

|**NOTE
      9 - SPECIAL CONDENSED FINANCIAL STATEMENTS**(continued):
|---------------------------------------------------------------------

|                                      | Translation into
      U.S. dollars, see a(4) above
|------------------------------------- | ---------------------------------------------------
|
|
|
|
|Balance at
      January 1, 2001      |                                                    
|                                      |                                                    
|Changes during
      2001:           
|Loss                                  |                                                    
|Other
      comprehensive loss -     
|translation
      differences         |                                                    
|                                      |                                                    
|T
      o t a l  comprehensive loss   |                                                    
|                                      |                                                    
|Balance at
      December 31, 2001    |                                                    
|                                      |                                                    
|Changes during
      2002:           
|Loss                                  |                                                    
|Other
      comprehensive loss -     
|translation
      differences         |                                                    
|                                      |                                                    
|T
      o t a l  comprehensive loss   |                                                    
|                                      |                                                    
|Balance at
      December 31, 2002    |                                                    
|                                      |                                                    
|Changes during
      2003:           
|Loss                                  |                                                    
|Other
      comprehensive loss -     
|translation
      differences         |                                                    
|                                      |                                                    
|T
      o t a l  comprehensive income |                                                    
|                                      |                                                    
|Balance at
      December 31, 2003    |                                                    
|                                      |                                                    

|*  Represents
      an amount less than $ 1,000.
|------------------------------------------------

23

---

---

# TRINET VENTURE CAPITAL
LTD.

# FINANCIAL STATEMENTS

# AS OF DECEMBER 31, 2001



---

---

# TRINET VENTURE CAPITAL LTD.

# FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001

# CONTENTS

|                                                  | Page
|------------------------------------------------- | ----
|Auditors' Report                                  | 1-2 
|Balance Sheets                                    | 3   
|Statements of Operations                          | 4   
|Statements of Changes in Shareholders' Deficiency | 5   
|Statements of Cash Flows                          | 6-7 
|Notes to the Financial Statements                 | 8-18



---

---

# AUDITORS REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF TRINET VENTURE CAPITALLTD.

We have audited the accompanying
balance sheets of Trinet Venture Capital Ltd. (the Company) as of December 31,
2001 and 2000, and the related statements of operations, changes in shareholders
deficiency and cash flows for each of the three years in the period ended December 31,
2001. These financial statements are the responsibility of the Companys Board of
Directors and management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We did not audit the financial
statements of certain affiliates, the investments in which are recorded using the equity
method of accounting. Those financial statements were audited by other auditors, whose
reports have been furnished to us and our opinion, insofar as it relates to the amounts
included for the affiliates, is based solely on the reports of the other auditors.

We conducted our audits in accordance
with generally accepted auditing standards, including those prescribed under the
Auditors Regulations (Auditors Mode of Performance)  1973, which, for
purposes of these financial statements, are substantially identical to generally accepted
auditing standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the Board of
Directors and management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audits
and the reports of other auditors, the aforementioned financial statements present fairly,
in all material respects, the financial position of the Company as of December 31, 2001
and 2000, and the results of operations, changes in shareholders deficiency and cash
flows for each of the three years in the period ended December 31, 2001, in accordance
with generally accepted accounting principles in Israel.

As described in Note 2, the
aforementioned financial statements have been prepared on the basis of historical cost,
adjusted to reflect changes in the general purchasing power of the Israeli currency in
accordance with pronouncements of the Institute of Certified Public Accountants in Israel.

1

---

---

The financial information in U.S.
dollars and in accordance with generally accepted accounting principles in the United
States is based on nominal historical amounts in Israeli currency and is presented in Note
11. Such financial information includes investments valued at $14,768 thousand as of
December 31, 2000 (99% of the total assets). The values of such investments have been
estimated by the Board of Directors and management in the absence of readily ascertainable
market values. We have reviewed the procedures used by the Board of Directors and
management in arriving at their estimates of value of such investments and have inspected
underlying documentation, and, in the circumstances, we believe the procedures are
reasonable and the documentation appropriate. However, because of the inherent uncertainty
of valuation, those estimated values may differ significantly from the values that would
have been used had a ready market for the investments existed, and the differences could
be material.

Brightman Almagor &
Co.Certified Public Accountants

Tel Aviv, March 11, 2002.

2

---

---

TRINET VENTURE CAPITAL
LTD.BALANCE SHEETSAdjusted to NIS of
December 2001(NIS in thousands)

|                              |  | December 31,
|----------------------------- |  | ------------
|
|ASSETS                        |  |             
|                              |  |             
|Current assets                |  |             
|                              |  |             
|Cash and cash equivalents     |  |             
|Related parties               |  |             
|Other current assets          |  |             
|                              |  |             
|                              |  |             
|                              |  |             
|Investments                   |  |             
|Affiliates                    |  |             
|Other companies               |  |             
|                              |  |             
|                              |  |             
|                              |  |             
|                              |  |             
|                              |  |             
|LIABILITIES AND SHAREHOLDERS' |  |             
|DEFICIENCY                    |  |             
|                              |  |             
|Current liabilities           |  |             
|                              |  |             
|Capital notes                 |  |             
|                              |  |             
|Shareholders' deficiency      |  |             
|Share capital                 |  |             
|Capital reserves              |  |             
|Accumulated deficit           |  |             
|                              |  |             
|                              |  |             
|                              |  |             
|                              |  |             
|                              |  |             

|March 11, 2002Date of approval | _____________Director | _____________Director
|------------------------------ | --------------------- | ---------------------

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

3

---

---

TRINET VENTURE CAPITAL
LTD.STATEMENTS OF OPERATIONSAdjusted to NIS of
December 2001(NIS in thousands)

|                                             |  | Year ended December 31,
|-------------------------------------------- |  | -----------------------
|
|Revenues                                     |  |                        
|                                             |  |                        
|Gains from realization of investments        |  |                        
|Gains on changes in ownership                |  |                        
|interests in affiliates                      |  |                        
|                                             |  |                        
|Total revenues                               |  |                        
|                                             |  |                        
|Expenses                                     |  |                        
|                                             |  |                        
|General and administrative                   |  |                        
|Financing, net                               |  |                        
|                                             |  |                        
|Total expenses                               |  |                        
|                                             |  |                        
|Income before equity in operating results of |  |                        
|subsidiaries and affiliates                  |  |                        
|                                             |  |                        
|Equity in operating results of               |  |                        
|subsidiaries and affiliates                  |  |                        
|Write-down for decline in value of long-term |  |                        
|Investments                                  |  |                        
|                                             |  |                        
|Net income                                   |  |                        
|                                             |  |                        

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

4

---

---

TRINET VENTURE CAPITAL
LTD.STATEMENTS OF CHANGES IN SHAREHOLDERS DEFICIENCYAdjusted to NIS of
December 2001(NIS in thousands)

|                             | Share
capital | Capital
reserves | Accumulated
deficit | Total
|---------------------------- | ------------- | ---------------- | ------------------- | -----
|
|Balance at January 1, 1999   |               |                  |                     | 2    
|Effect of changes in the CPI |               |                 
|on unlinked capital notes    |               |                  |                     | -    
|Net income for the year      |               |                  |                     | -    
|                             |               |                  |                     |      
|Balance at December 31, 1999 |               |                  |                     | 2    
|Translation adjustments      |               |                  |                     | -    
|Net income for the year      |               |                  |                     | -    
|                             |               |                  |                     |      
|Balance at December 31, 2000 |               |                  |                     | 2    
|Effect of changes in the CPI |               |                 
|on unlinked capital notes    |               |                  |                     | -    
|Translation adjustments      |               |                  |                     | -    
|Net income for the year      |               |                  |                     | -    
|Dividend                     |               |                  |                     | -    
|                             |               |                  |                     |      
|Balance at December 31, 2001 |               |                  |                     | 2    
|                             |               |                  |                     |      

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

5

---

---

TRINET VENTURE CAPITAL
LTD.STATEMENTS OF CASH FLOWSAdjusted to NIS of
December 2001(NIS in thousands)

|                                                         | Year ended December 31,
|-------------------------------------------------------- | -----------------------
|
|Cash flows from operating activities                     |                        
|                                                         |                        
|Net income                                               |                        
|Adjustments to reconcile net income (loss) to net cash   |                        
|used in operating activities (Appendix A)                |                        
|                                                         |                        
|Net cash provided by (used in) operating activities      |                        
|                                                         |                        
|                                                         |                        
|Cash flows from investments activities                   |                        
|Proceeds from realization of investment in other company |                        
|Investments in affiliates                                |                        
|                                                         |                        
|Net cash provided by (used in) investment activities     |                        
|                                                         |                        
|                                                         |                        
|Cash flows from financing activities                     |                        
|Short-term bank credit, net                              |                        
|                                                         |                        
|Net cash used in financing activities                    |                        
|                                                         |                        
|Net change in cash and cash equivalents                  |                        
|Cash and cash equivalents at beginning of year           |                        
|                                                         |                        
|Cash and cash equivalents at end of year                 |                        
|                                                         |                        

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

6

---

---

TRINET VENTURE CAPITAL
LTD.STATEMENTS OF CASH FLOWSAdjusted to NIS of
December 2001(NIS in thousands)

|                                                         | Year ended December 31,
|-------------------------------------------------------- | -----------------------
|
|Appendix A                                               |                        
|Adjustments to reconcile net income to net cash          |                        
|used in operating activities:                            |                        
|                                                         |                        
|Items not involving cash flows:                          |                        
|Gains from realization of investments                    |                        
|Gains on changes in ownership interests of affiliates    |                        
|Equity in operating results of affiliates                |                        
|Write-down for decline in value of long-term investments |                        
|                                                         |                        
|                                                         |                        
|                                                         |                        
|Changes in assets and liabilities:                       |                        
|Decrease (increase) in receivables from related parties  |                        
|Decrease in other current assets                         |                        
|Increase (decrease) in current liabilities               |                        
|                                                         |                        
|                                                         |                        
|                                                         |                        
|                                                         |                        
|                                                         |                        
|Appendix B                                               |                        
|Activities non involving cash flows:                     |                        
|                                                         |                        
|Dividend                                                 |                        
|Proceeds from realization of investments                 |                        

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

7

---

---

# TRINET VENTURE CAPITAL
LTD.NOTES TO THE FINANCIAL STATEMENTSAS OF DECEMBER 31, 2001

Note 1General

| | A. | The
Company was incorporated and registered on February 1, 1994 and commenced
               operations shortly thereafter. The Company was established for the purpose
of                investing in high-tech companies and projects that are in the
manufacturing                development stage or the production and marketing stage of
developed products                and to generate profits from the activities and
holdings in such companies.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Definitions
| | -- | -----------

|(1) | The Company   | Trinet Venture Capital Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Affiliate     | A company in which the Company has significant influence and
          the investment in which is presented according to the equity method of
          accounting (equity basis).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(3) | Other company |  A company, the investment in which is presented at cost.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(4) | Shareholders  |  Koonras Technologies Ltd., owner of 50% of the
          Companys shares from September 2000.   Ampal
                                                    Industries
                                                    (Israel)
                                                    Ltd.,
                                                    owner
                                                    of
                                                    50%
                                                    of
                                                    the
                                                    Company's
                                                    shares.

8

---

---

|(5) | Related party |  As defined in Opinion No. 29 of the Institute of Certified
          Public Accountants in Israel.
|--- | ------------- | ----------------------------------------------------------------------------------------------------
|(6) | NIS           |  New Israeli shekel                                                                                
|(7) | Dollar        |  U.S. dollar.                                                                                      

9

---

---

# TRINET VENTURE CAPITAL
LTD.NOTES TO THE FINANCIAL STATEMENTSAS OF DECEMBER 31, 2001

Note 2Summary of Significant Accounting Policies

| | A. | Financial
statements in adjusted values
| | -- | ---------------------------------------

| | (1) | General
| | --- | -------

| | In
accordance with certain pronouncements of the Institute of Certified Public Accountants
in Israel, the Company prepares its financial statements on the basis of cost, adjusted
for changes in the purchasing power of the NIS. Condensed financial data in nominal NIS,
on the basis of which the adjusted financial statements have been prepared, is presented
in Note 10.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Principles
of adjustment
| | --- | ------------------------

| | (a) | Balance
sheets
| | --- | --------------

| | Non-monetary
items (i.e. investments and shareholders equity) have been adjusted for changes in
the Israeli Consumer Price Index (CPI) from the month of the transaction to
the last month of the reporting period.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Investments
in affiliates reported on the equity basis have been presented based upon the adjusted
financial statements of such companies.
| | ------------------------------------------------------------------------------------------------------------------------------------------

| | The
adjusted values of non-monetary assets do not necessarily represent the market or
economic values of such assets, but rather their cost adjusted for changes in the
purchasing power of the NIS.
Monetary
items (items whose amounts reflect current or realizable values) have been presented in
the adjusted balance sheet at their nominal amounts as of the balance sheet date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Statements
of operations
| | --- | ------------------------

| | Items
in the statements of operations (other than financing) representing transactions during
the reporting period have been adjusted on the basis of changes in the CPI from the month
of the transaction to the CPI for the last month of the reporting period.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amounts
related to non-monetary items and to various balance sheet accruals have been adjusted
based on the related balance sheet amounts.
| | ------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys equity in the results of subsidiaries and affiliates has been determined
based on the adjusted financial statements of such companies.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | Financing
income or expenses are derived from the other items in the financial statements, and
include, inter alia, amounts required to reconcile certain other components in the
statements of operations for the element of inflation that is included therein.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | The comparative figures in the financial statements have been adjusted to NIS           of December 2001.
| | --- | ---------------------------------------------------------------------------------------------------------

10

---

---

# TRINET VENTURE CAPITAL
LTD.NOTES TO THE FINANCIAL STATEMENTSAS OF DECEMBER 31, 2001

Note 2 Summary of Significant Accounting Policies (contd.)

| | B. | Investments
in affiliates
| | -- | -------------------------

| | The
Companys investments in affiliates are presented on the equity basis. In this
regard, investments are presented at original cost plus/minus the Companys equity
in the operating results of the affiliates or other changes in shareholders equity
which have occurred since acquisition.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company does not record its portion of losses in affiliates to the extent that the
Company has not guaranteed the affiliates liabilities.
| | ---------------------------------------------------------------------------------------------------------------------------------------------

| | Gains
deriving to the Company from the issuance of shares of an investee company to a third
company, which is a Start Up company, have been recorded as deferred income
and are amortized to the statement of operations in accordance with Opinion No. 68 of the
Institute of Certified Public Accountant in Israel.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Differences
arising between the Companys investments in affiliates (which have been adjusted
based on changes in the CPI) and the Companys equity in the net assets of certain
affiliates (based on the financial statements in dollars) are charged or credited to
capital reserves.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Investments
in other companies
| | -- | ------------------------------

| | Investments
in long-term marketable securities are presented in accordance with Opinion No. 44 of the
Institute of Certified Public Accountants in Israel, on the cost basis, net of an
allowance for decline in value.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Investments
in other companies, which are not publicly traded, are presented at cost less allowances
for decline in value as per management estimate.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Transactions
between the Company and Controlling Parties
| | -- | --------------------------------------------------------

| | The
erosion of unlinked, non-interest-bearing capital notes issued by the Company to a
shareholder and a related party are reflected in the Companys capital reserves.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Deferred
income taxes
| | -- | ---------------------

| | Deferred
income taxes are computed for timing differences between the amounts of assets and
liabilities as reported in the financial statements and their amounts for income tax
purposes. The deferred taxes are computed at tax rates that are expected to apply when
the deferred taxes are realized.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has not recorded deferred taxes for accumulated losses for tax purposes due to
the uncertainty of their realization.
| | --------------------------------------------------------------------------------------------------------------------------------

| | F. | Use
of estimates in preparation of financial statements
| | -- | -------------------------------------------------------

| | The
preparation of financial statements in conformity with generally accepted accounting
principles (GAAP) requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

---

---

TRINET VENTURE CAPITAL
LTD.NOTES TO THE FINANCIAL STATEMENTSAS OF DECEMBER 31, 2001(NIS
in thousands)

Note 2 Summary of Significant Accounting Policies (contd.)

| | G. | Linkage
basis
| | -- | -------------

| | (1) | Balances, which are linked to the CPI, are presented on the basis of the
          relevant CPI (according to the term of the transaction).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Data
in respect of the CPI and the U.S. dollar (dollar):
| | --- | ----------------------------------------------------------

|Year ended | CPI
as of December | Percentage
increase during year | Exchange rate
of dollar as of
December 31 | Percentage
increase
(decrease)
during year
|---------- | ------------------ | ------------------------------- | ----------------------------------------- | ------------------------------------------
|
|           |                    |                                 |                                           |                                           
|2001       | 108.1              | 1.4                             | 4.416                                     | 9.3                                       
|2000       | 106.6              | -                               | 4.041                                     | (2.7)                                     
|1999       | 106.6              | 1.3                             | 4.153                                     | (0.2)                                     

Note 3
Investments in Affiliates

|                                            | December 31,
|------------------------------------------- | ------------
|
|A.    Composition:                          |             
|                                            |             
|(1)  Cost (including payments on account of |             
|shares)                                     |             
|Companys share in cumulative net           |             
|changes from acquisition date               |             
|                                            |             
|                                            |             
|Deferred income (See Note 3B(2))            |             
|                                            |             
|Presented as investments in affiliates      |             
|                                            |             
|(2) NetFormx Ltd.                           |             
|Smart Link Ltd.                             |             
|                                            |             
|                                            |             
|                                            |             

| | B. | Additional
details
| | -- | ------------------

| | (1) | In December
2001 the Company sold all of its investments in affiliates and           other companies
to its shareholders in exchange for NIS 26 million, which not           yet been paid and
presented in balance sheet as of December 31, 2001 within           Related parties.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | NetFormx
Ltd. (NetFormx)  (formerly Imagenet Ltd. NetFormx develops,
markets and supports computer-aided network engineering and software products for network
design simulation and optimization. During 1996, the Company invested in the shares of
NetFormx the amount of $1.5 million.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---

---

TRINET VENTURE CAPITAL
LTD.NOTES TO THE FINANCIAL STATEMENTSAS
OF DECEMBER 31, 2001(NIS in thousands)

Note 3 Investments in Affiliates(contd.)

| | B. | Additional
details(contd.)
| | -- | --------------------------

| | (2) | NetFormx
Ltd. (NetFormx)  (formerly Imagenet Ltd.)(contd.)
| | --- | -------------------------------------------------------------

| | In
March 2000, Netformx issued additional shares to a group of investors, for net proceeds
of NIS 75.5 million. As a result, the Companys holding in Netformx was reduced to
16.8%. In accordance with Opinion No.68 of the Institute of Certified Public Accountants
in Israel regarding third party issuances, the gain of NIS 9,823 was recorded as deferred
income, of which NIS 7,934 was credited to income in 2000 against the Companys
share in the losses of Netformx and the remainder of NIS 1,889 was credited to income in
2001.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | See
Note 3B(1) above in respect of realization of investment in Netformx by the Company.
| | ----------------------------------------------------------------------------------------

| | (3) | Smart
Link Ltd. (Smart)
| | --- | -------------------------

| | Smart
is engaged in the development and marketing of efficient software communication. As of
December 31, 1996 the Company held 43.7% of Smart.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2000, Smart issued additional shares to a group of investors, for net proceeds of
NIS 57 million. As a result, the Companys holding in Smart was reduced to 28.73%.
The gain of NIS 15,227 was credited to income. During the period after March 2000 up to
date of realization of investment in Smart (see Note 3B(1) above), the Companys
holding in Smart was reduced to 28.41% due to exercise of options by third parties.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 4
Investments in Other Companies

|                                         | December 31,
|---------------------------------------- | ------------
|
|A.  Composition:                         |             
|Peptor Ltd.                              |             
|Simplayer.com Ltd. (formerly Logal Ltd.) |             
|                                         |             

| | B. | Additional
details
| | -- | ------------------

| | See
Note 3B(1) above in respect of realization of investments by the Company.
| | -----------------------------------------------------------------------------

| | Peptor
Ltd. (Peptor)
| | ----------------------

| | Peptor
is engaged in the research and development of peptides for pharmeceutical medications.
The original investment as of the balance sheet date amounted to $705 thousand
representing 0.98% of Peptors shares.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Simplayer.com
Ltd. (formerly Logal Ltd.)( Simplayer)
| | ------------------------------------------------------

| | In
October 1999, the Company sold all of its investment in Simplayer in exchange for NIS
694. As a result of the sale the Company recorded a gain of approximately NIS 183.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2000, the Company exercised its option to buy back 84,894 shares of Simplayer for $
42 thousand.
| | ---------------------------------------------------------------------------------------------------------

13

---

---

TRINET VENTURE CAPITAL
LTD.NOTES TO THE FINANCIAL STATEMENTSAS
OF DECEMBER 31, 2001 (NIS in thousands)

# Note 5 Current
Liabilities

|                 | December 31,
|---------------- | ------------
|
|Composition:     |             
|Dividend to pay  |             
|Accrued expenses |             
|                 |             
|                 |             
|                 |             

# Note 6 Capital
Notes

| | The
capital notes, which were issued to a related party and a shareholder, are unlinked and
non-interest-bearing.
| | -----------------------------------------------------------------------------------------------------------------

# Note 7 Share
Capital

|                                | December 31,
|------------------------------- | ------------
|
|
|Number of shares:               |             
|Ordinary shares NIS 1 par value |             

# Note 8 General
and Administrative Expenses

|                      | Year ended December 31,
|--------------------- | -----------------------
|
|Composition:          |                        
|Professional services |                        
|Other                 |                        
|                      |                        
|                      |                        
|                      |                        

14

---

---

TRINET VENTURE CAPITAL
LTD.NOTES TO THE FINANCIAL STATEMENTSAS OF DECEMBER 31, 2001(NIS
in thousands)

# Note 9 Income
Taxes

| | A. | The
Company is subject to the provisions of the Income Tax (Inflationary
               Adjustments) Law  1985.
| | -- | ----------------------------------------------------------------------------------------------------------------

| | B. | The
Company has received final tax assessments for the years up to and including
               tax year 1997.
| | -- | --------------------------------------------------------------------------------------------------------------

# Note 10 Condensed
Financial Information in Nominal NIS

| | A. | Condensed
balance sheets:
| | -- | -------------------------

|                                         | December 31,
|---------------------------------------- | ------------
|
|Assets                                   |             
|Current assets                           |             
|                                         |             
|Investments                              |             
|Affiliates                               |             
|                                         |             
|Other companies                          |             
|                                         |             
|                                         |             
|                                         |             
|                                         |             
|Liabilities and Shareholders Deficiency |             
|Current liabilities                      |             
|Capital notes                            |             
|Shareholders' deficiency                 |             
|                                         |             
|                                         |             
|                                         |             

15

---

---

TRINET VENTURE CAPITAL
LTD.NOTES TO THE FINANCIAL
STATEMENTSASOF DECEMBER 31, 2001(NIS in thousands)

# Note 10 Condensed
Financial Information in Nominal NIS(contd.)

| | B. | Condensed
statements of operations:
| | -- | -----------------------------------

|                                          | Year ended December 31,
|----------------------------------------- | -----------------------
|
|Revenues                                  |                        
|Gains from realization of investments     |                        
|Gains on changes in ownership             |                        
|interests in affiliates                   |                        
|Financing, net                            |                        
|                                          |                        
|                                          |                        
|Expenses                                  |                        
|General and administrative                |                        
|Financing, net                            |                        
|                                          |                        
|                                          |                        
|Income before equity in operating results |                        
|of subsidiaries and affiliates            |                        
|                                          |                        
|Equity in operating results of            |                        
|subsidiaries and affiliates               |                        
|Write-down for decline in value of long-  |                        
|term investments                          |                        
|                                          |                        
|Net income                                |                        
|                                          |                        

| | C. | Statement
of changes in shareholders deficiency:
| | -- | -------------------------------------------------

|                             | Share
capital | Capital
reserves | Accumulated
deficit | Total
|---------------------------- | ------------- | ---------------- | ------------------- | -----
|Balance at January 1, 1999   |               |                  |                     | 1    
|Net income for the year      |               |                  |                     | -    
|                             |               |                  |                     |      
|Balance at December 31, 1999 |               |                  |                     | 1    
|Translation adjustments      |               |                  |                     | -    
|Net income for the year      |               |                  |                     | -    
|                             |               |                  |                     |      
|Balance at December 31, 2000 |               |                  |                     | 1    
|Translation adjustments      |               |                  |                     | -    
|Net income for the year      |               |                  |                     | -    
|Dividend                     |               |                  |                     | -    
|                             |               |                  |                     |      
|Balance at December 31, 2001 |               |                  |                     | 1    
|                             |               |                  |                     |      

16

---

---

# TRINET VENTURE CAPITAL
LTD.NOTES TO THE FINANCIAL STATEMENTSAS OF DECEMBER 31, 2001

|Note 11 | Condensed
Financial Data in Dollars and in Accordance with Generally Accepted Accounting Principles
(GAAP) in the United States
|-------- | ---------------------------------------------------------------------------------------------------------------------------------

| | A. | Basis
of presentation
| | -- | ---------------------

| | (1) | The Companys
functional currency is the NIS. Pursuant to the request of a           shareholder, the
financial information of the Company in nominal historical NIS,           as presented in
Note 11, has been remeasured into U.S. dollars in accordance           with the
principles of Statement No. 52 of the Financial Accounting Standards           Board of
the United States, Foreign Currency Translation.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The Companys
objective is to achieve long-term capital appreciation from           its portfolio of
venture capital investments in new and developing companies and           other special
investment situations. In accordance with the U.S. GAAP, such           portfolio
investments should be reflected at fair value, defined as the quoted           market
price for securities for which market quotations are readily available,           or as
an estimate of fair value as determined in good faith by the Board of           Directors
and management.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with the above policy, the following condensed financial information reflects
investments in publicly traded securities at market value and investments in privately
held portfolio securities at cost until significant developments affecting the portfolio
company provide a basis for a change in valuation. In this regard, the fair value of
private securities is adjusted to reflect meaningful third-party transactions in the
private market or to reflect significant progress or deterioration in the development of
the portfolio of the Companys business, such that cost is no longer reflective of
fair value. Unrealized appreciation or depreciation in the value of investments is
reflected in earnings.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Deferred income
taxes in the condensed financial information below have been           recorded on the
unrealized appreciation of investments, net of deferred tax           benefits in respect
of tax loss carryforwards.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17

---

---

# TRINET VENTURE CAPITAL
LTD.NOTES TO THE FINANCIAL STATEMENTSAS OF DECEMBER 31, 2001

|Note 11 | Condensed
Financial Data in Dollars and in Accordance with Generally Accepted Accounting
Principles (GAAP) in the United States(contd.)
|-------- | -----------------------------------------------------------------------------------------------------------------------------------------

| | B. | Condensed
balance sheets (dollars in thousands):
| | -- | ------------------------------------------------

|                                                  | December 31,
|------------------------------------------------- | ------------
|
|Assets                                            |             
|Current assets                                    |             
|Investments                                       |             
|                                                  |             
|                                                  |             
|                                                  |             
|Liabilities and Shareholders Equity (Deficiency) |             
|                                                  |             
|Current liabilities                               |             
|Deferred income taxes                             |             
|Other current liabilities                         |             
|                                                  |             
|                                                  |             
|                                                  |             
|Capital notes                                     |             
|Shareholders' equity (deficiency)                 |             
|                                                  |             
|                                                  |             
|                                                  |             

| | C. | Condensed
statements of operations (dollars in thousands):
| | -- | ----------------------------------------------------------

|                                          | Year ended December 31,
|----------------------------------------- | -----------------------
|
|Revenues                                  |                        
|Gain from realization in other company    |                        
|Gain from increase in investments' value  |                        
|Financing, net                            |                        
|                                          |                        
|                                          |                        
|                                          |                        
|Expenses                                  |                        
|Depreciation of portfolio investments (1) |                        
|Loss from changes in ownership interests  |                        
|in affiliate                              |                        
|General and administrative                |                        
|                                          |                        
|                                          |                        
|                                          |                        
|Income (loss) before tax benefit          |                        
|(income taxes)                            |                        
|Tax benefit (income taxes)                |                        
|                                          |                        
|Net income (loss)                         |                        
|Other comprehensive income (loss)(2)      |                        
|                                          |                        
|Comprehensive income (loss)               |                        
|                                          |                        

18

---

---

# TRINET VENTURE CAPITAL
LTD.NOTES TO THE FINANCIAL STATEMENTSASOF DECEMBER 31, 2000

|Note 11  | Condensed
Financial Data in Dollars and in Accordance with Generally Accepted Accounting
Principles (GAAP) in the United States(contd.)
|--------- | -----------------------------------------------------------------------------------------------------------------------------------------

| | C. | Condensed
statements of operations (dollars in thousands) (contd.)
| | -- | ------------------------------------------------------------------

| | (1) | Due to
various developments relating to the operations of certain portfolio           companies,
the Company determined that the fair value of such companies was less           than the
value reflected in the Companys books.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | In accordance with Statement of Financial Accounting Standards No. 130
          (SFAS 130) foreign currency translation adjustments have been
          presented as a component of comprehensive income. The capital reserves include
          other comprehensive income reflecting this foreign currency translation of 2000,
          1999 and 1998, respectively. No other provision of SFAS 130 affects the
          financial statement presentation of the Company.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Statement
of changes in shareholders equity (deficiency) (dollars inthousands):
| | -- | --------------------------------------------------------------------------------

|                             | Share
capital | Retained earnings | Capital
reserves | Total
|---------------------------- | ------------- | ----------------- | ---------------- | -----
|Balance at January 1, 1999   |               |                   |                  | 1    
|Net income                   |               |                   |                  | -    
|Other comprehensive income - |               |                  
|Translation adjustments      |               |                   |                  | -    
|                             |               |                   |                  |      
|Balance at December 31, 1999 |               |                   |                  | 1    
|Net income                   |               |                   |                  | -    
|Other comprehensive loss -   |               |                  
|Translation adjustments      |               |                   |                  | -    
|                             |               |                   |                  |      
|Balance at December 31, 2000 |               |                   |                  | 1    
|Net loss                     |               |                   |                  | -    
|Other comprehensive income - |               |                  
|Translation adjustments      |               |                   |                  | -    
|Dividend                     |               |                   |                  | -    
|                             |               |                   |                  |      
|Balance at December 31, 2001 |               |                   |                  | 1    
|                             |               |                   |                  |      

19

---

---

# INDEPENDENT
AUDITORS REPORT TO THE SHAREHOLDERS 
OF AM-HAL LTD.

We have audited the accompanying balance
sheets of Am-Hal Ltd. (the Company) and the consolidated balance sheets of the
Company and a consolidated partnership as of December 31, 2003 and 2002, and the related
statements of operations, changes in shareholders equity (deficiency) and cash flows
 of the Company and on a consolidated basis  for each of the three years in
the period ended December 31, 2003. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance
with auditing standards generally accepted in the United States of America. 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 principles used and significant
estimates made by Companys 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 and on a consolidated basis  as of December 31, 2003
and 2002, and the results of operations, changes in shareholders equity (deficiency)
and cash flows  of the Company and on a consolidated basis  for each of the
three years in the period ended December 31, 2003 in conformity with accounting principles
generally accepted in Israel which, with respect to these financial statements, are
substantially identical to accounting principles generally accepted in the United States
of America, except as described in Note 25 to the financial statements.

As explained in Note 2B, these
financial statements have been prepared in values adjusted to reflect the changes in the
general purchasing power of the Israeli currency, in accordance with pronouncements of the
Institute of Certified Public Accountants in Israel.

Brightman Almagor & Co.
Certified Public Accountants

Tel Aviv, February 15,
2004



---

---

# INDEPENDENT
AUDITORS SPECIAL REPORT

We have audited the balance sheets of
Am-Hal Ltd. (the Company) and the consolidated balance sheets of the Company
and a consolidated partnership as of December 31, 2003 and 2002, 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, 2003, and have issued our unqualified report thereon dated
February 15, 2004. The aforementioned financial statements (not presented separately
herein) were prepared in new Israeli shekels (NIS) on the historical cost basis, adjusted
for changes in the general purchasing power of the NIS in accordance with standards
established by the Institute of Certified Public Accountants in Israel.

As described in Note 2B, the
accompanying Company and consolidated financial data in U.S. dollars as of the
abovementioned dates and for the abovementioned years then ended were prepared on the
basis of financial data in nominal NIS (the basis on which the Company and consolidated
adjusted NIS financial statements were also prepared), translated into US dollars in
accordance with the principles described in Note 2B.

In our opinion, the accompanying
financial data in US dollars was translated in accordance with the principles described in
Note 2B.

This report is intended solely for
the information and use of the Boards of Directors and management of the Company and
Ampal-American Israel Corp., and should not be used for any other purpose.

| |                             | Brightman Almagor & Co.
Certified Public Accountants
| | --------------------------- | ----------------------------------------------------
| | Tel Aviv, February 15, 2004 |                                                     



---

---

# INDEPENDENT
AUDITORS REPORT TO THE SHAREHOLDERS OF 
BAY HEART LTD. AND
SUBSIDIARY

We have audited the accompanying
balance sheets of Bay Heart Ltd. (the Company) as of December 31, 2003 and
2002, and the consolidated balance sheets as of such 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, 2003. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements
based on our audits.

We conducted our audits in accordance
with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits 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 and on a consolidated basis  at December 31, 2003 and
2002, 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, 2003, 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 20.

As described in Note 2A, the above
mentioned financial statements have been prepared in adjusted values based on the changes
in the general purchasing power of the Israeli currency in accordance with pronouncements
of the Institute of Certified Public Accountants in Israel.

The condensed consolidated financial
information in U.S. dollars presented in Note 19 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 19A. In our opinion, such translation into
U.S. dollars was appropriately performed on the basis stated in Note 19A.

As described in Note 1C to the
financial statements regarding the Companys business condition, the Company has a
working capital deficit, shareholders deficiency and negative cash flows from
operations. As stated in that note, the continuance of the Companys operations and
its ability to meet its short-term obligations are dependent on obtaining financing from
the shareholders and/or bank financing arrangements. The Companys management is
negotiating with the bank for the refinancing of its short-term loans and the receipt of
long-term loans.

|                              |                                                                                                          
|----------------------------- | ---------------------------------------------------------------------------------------------------------
|                              | Brightman Almagor & Co.
            Certified Public Accountants
 Member firm of Deloitte Touche Tohmatsu
|Haifa, Israel, March 1, 2004. |                                                                                                          



---

---

# 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, 2002 and 2003, and the related consolidated
statements of operations, changes in shareholders equity and cash flows for each of
the three years in the period ended December 31, 2003. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We did not audit the financial
statements of a subsidiary whose assets included in the consolidation constitute
approximately 10% and 10% of total consolidated assets as of December 31, 2002 and 2003,
respectively, and whose revenues included in the consolidation constitute approximately
9%, 9% and 9% of total consolidated revenues for each of the three years ended December
31, 2001, 2002 and 2003, respectively. The financial statements of this Company was
audited by other auditors whose reports has been furnished to us, and our opinion,
insofar as it relates to amounts included for this company is based on the report of the
other auditor.

We conducted our audits in accordance
with auditing standards generally accepted in the United States and in Israel, including
those prescribed by the Israeli Auditors Regulations (Auditors Mode of
Performance), 1973. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits and
the reports of other auditors provide a reasonable basis for our opinion.

In
our opinion, based on our audit and the report of other auditors, the consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of December 31,
2002 and 2003, and the consolidated results of their operations and cash flows for each of
the three years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in Israel, which differ in certain respects from those
followed in the United States (see Note 21 to the consolidated financial statements).

As explained in Note 2, the
consolidated financial statements referred to above are presented in values adjusted for
the changes in the general purchasing power of the Israeli currency, in accordance with
pronouncements of the Institute of Certified Public Accountants in Israel.

|              |                  |                                 
|------------- | ---------------- | --------------------------------
|              | Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|March 9, 2004 |                  | A Member of Ernst & Young Global



---

---

# INDEPENDENT
AUDITORS REPORT TO THE SHAREHOLDERS OF CORAL WORLD
INTERNATIONAL LTD.

We have audited the accompanying
consolidated balance sheets of Coral World International Ltd. (the
Company) and its subsidiaries as of December 31, 2003 and 2002, 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, 2003. These
financial statements are the responsibility of the board of directors and the management
of the Company. Our responsibility is to express an opinion on these financial statements
based on our audit.

We conducted our audit in accordance
with auditing standards generally accepted in the United States and in Israel, including
those prescribed by the Israeli Auditors (Mode of Performance) Regulations, 1973. These
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall financial
statement presentations. We believe that our audit provides a reasonable basis for our
opinion.

The financial statements of the
Israeli subsidiaries of the Company have been prepared in nominal shekel values.
Information regarding the effect of changes in the general purchasing power of the Israeli
currency on the financial statements, as required by opinions of the Institute of
Certified Public Accountants in Israel, has not been included in the financial statements.
These amounts have been translated into US dollars using the method described in
Note 2A.

In our opinion, except for the
exclusion of the information, as mentioned in the preceding paragraph, the financial
statements referred to above present fairly, in all material respects, the financial
position of Coral World International Ltd. and its subsidiaries as of December 31,
2003 and 2002, and the results of operations, changes in shareholders equity and
cash flows for each of the three years in the period ended December 31, 2003, in
accordance with accounting principles generally accepted in Israel, consistently applied
on the basis of the historical cost convention.

Accounting principles generally
accepted in Israel differ in certain respects from accounting principles generally
accepted in the United States. The application of the latter would have affected the
determination of nominal net income (loss) and shareholders equity to the extent
summarized in Note 24 to the financial statements.

| |  |                                                      
| |  | -----------------------------------------------------
| |  | Fahn, Kanne & Co.
Certified Public Accountants (Isr.)

Tel-Aviv, Israel, March 21, 2004



---

---

Report of Independent Public Accountants

To The Shareholders of
Country Club Kfar Saba Ltd.

We have audited the balance sheet of
Country Club Kfar Saba Ltd. as of December 31, 2002 and the related statements of income,
changes in shareholders equity and cash flows for the year then ended. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance
with auditing standards generally accepted in Israel and in the United States. Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our
opinion.

The above statements have been
prepared on the basis of historical cost as adjusted for the changes in the general
purchasing power of the Israel currency in accordance with pronouncements issued by the
Institute of Certified Public Accountants in Israel.

In our opinion, the above-mentioned
financial statements present fairly, in all material respects, the financial position of
the Company as of December 31, 2002 and the results of its operations, changes in
shareholders equity and cash flows for the year then ended, in conformity with
accounting principles generally accepted in Israel, which differ in certain respects from,
accounting principles generally accepted in the United States (see Notes 2F and 16).

| |  |                                                      
| |  | -----------------------------------------------------
| |  | Luboshitz KasiererCertified Public Accountants (Isr.)

March 5, 2003



---

---

# To the shareholders of

# EPSILON INVESTMENT
HOUSE LTD.

We have audited the balance sheet of
Epsilon Investment House Ltd. (the Company) as of December 31, 2003,
and the consolidated balance sheet as of such date and the related statements of income,
changes in shareholders equity and cash flows  Company and consolidated  for
the year ended December 31, 2003. These financial statements are the responsibility of
the Companys board of directors and management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance
with generally accepted auditing standards in Israel and in the United States, including
those prescribed by the Auditors Regulations (Auditors Mode of
Performance)-1973. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by the board of directors and
management, as well as evaluating the overall financial statement presentation. We
believe that our 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 consolidated  as of December 31, 2003, and the
results of operations, changes in shareholders equity and cash flows  of the
Company and consolidated  for the year ended December 31, 2003, in conformity with
generally accepted accounting principles in Israel, which differ in certain respects from
those generally accepted in the United States (see Note 22 to the financial statements).

As explained in Note 2a, the
financial statements referred to above are presented in values adjusted for the changes
in the general purchasing power of the Israeli currency, in accordance with
pronouncements of the Institute of Certified Public Accountants in Israel.

|                                   |  |                                                              
|---------------------------------- |  | -------------------------------------------------------------
|Tel-Aviv, Israel
February 4 , 2004 |  | KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global



---

---

INDEPENDENT
AUDITORS REPORT TO THE SHAREHOLDERS OF GRANITE HACARMEL INVESTMENTS LIMITED

We have audited the accompanying
consolidated balance sheet of Granite Hacarmel Investments Limited and its subsidiaries
(the Company) as of December 31, 2002 and the related consolidated statements of income,
shareholders equity and cash flows for each of the years in the two-year period
ended December 31, 2002. These consolidated financial statements are the responsibility of
the Companys Board of Directors and of its Management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of certain subsidiaries, whose assets constitute 2% of
the total consolidated assets as of December 31, 2002 and whose revenues constitute 3.6%
and 3.2% of the total consolidated revenues for the years ended December 31, 2002 and
2001, respectively. The financial statements of those subsidiaries were audited by other
auditors whose reports thereon were furnished to us, and our opinion, insofar as it
relates to amounts included for such subsidiaries, is based solely on the said reports of
the other auditors. Furthermore, the data included in the financial statements relating to
the net asset value of the Companys investments in affiliates and to its equity in
their operating results is based on the financial statements of such affiliates, some of
which were audited by other auditors.

We conducted our audits in accordance
with generally accepted auditing standards, including standards prescribed by the Auditors
Regulation (Manner of Auditors Performance) 1973 and auditing standards generally
accepted in United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by the Board of Directors and by
Management, as well as evaluating the overall financial statement presentation. We believe
that our audits and the reports of other auditors provide a reasonable basis for our
opinion.

In our opinion, based upon our audits
and the reports of the other auditors, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 2002 and the results of their operations, changes in the
shareholders equity and their cash flows for each of the years, in the two-year
period ended December 31, 2002 in conformity with generally accepted accounting principles
in Israel. Furthermore, these statements have, in our opinion, been prepared in accordance
with the Securities Regulation (Preparation of Annual Financial Statements) 1993.

Accounting principles generally
accepted in Israel vary in certain significant respects from accounting principles
generally accepted in the United States of America. Application of accounting principles
generally accepted in the United States of America would have affected results of
operations and shareholders equity for each of the years in the two-year period
ended December 31, 2002, to the extent summarized in Note 32 to the consolidated financial
statements, as included in U.S. Dollars.



---

---

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

Without qualifying our opinion, we
would like to bring attention to Note 28 in the financial statements regarding four claims
against consolidated companies which the court has been asked to recognize as class
actions and other claims against a consolidated company claiming that its agreements with
its customers are restrictive trade arrangements.

Somekh Chaikin
Certified Public Accountants (Israel)

Haifa Israel, March 12,
2003



---

---

# To the Shareholders of
Hod Hasharon Sport Center Limited

We have audited the balance sheets of
Hod Hasharon Sport Center Limited as at December 31, 2003, the related statements of
income and shareholders equity and cash flows for the year ended December 31, 2003,
expressed in New Israeli Shekels.

These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits

We conducted our audit in accordance
with auditing standards generally accepted in the United States and in Israel, including
those prescribed by the Israeli Auditors (Mode of Performance) Regulations, 1973. these
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.

The above statements have been
prepared on the basis of historical cost as adjusted for the changes in the general
purchasing power of the Israel currency in accordance with Opinions issued by the
Institute of Certified Public Accountants in Israel.

Condensed statements in historical
values which formed the basis of the adjusted statements appear in Note 7 to the financial
statements. These amounts have been translated into U.S. dollars using the method
described in Note 2.

In our opinion, based on our audit,
the above-mentioned financial statements present fairly the financial position of the
Company as at December 31, 2003, the results of its operations, the changes in
shareholders equity and cash flows for the year ended December 31, 2003, in
conformity with accounting principles generally accepted in Israel, consistently applied.
Also, in our opinion, the financial statements based on nominal data (Note 7) present
fairly, in conformity with generally accepted accounting principles, the financial
position of the Company as at December 31, 2003, and the results of its operations, the
changes in shareholders equity, and its cash flows for the year ended December 31,
2003, on the basis of the historical cost convention.

The financial statements of the
Company conform with accounting principles generally accepted in Israel (Israel
GAAP), which differ in certain respects from those followed in the United States
(U.S. GAAP), as described below:



---

---

a. Effect of inflation:

The Company, in accordance with
Israeli GAAP, comprehensively includes the effects of price level changes in the
accompanying consolidated financial statements, as described in Note 2a. Such Israeli
accounting principles measure the effects of price level changes in the inflationary
nature of the Israeli economy and, as such, is considered a more meaningful presentation
than financial reporting based on historical cost for Israeli and U.S. accounting
purposes. The effect of inflation was eliminated for U.S. GAAP measurement purposes as
presented in Note 7.

|                              |  | 
|----------------------------- |  | 
|                              |  | 
|Abraham Schurder              |  | 
|Name (ABAS partner)           |  | 
|KPMG Somekh Chaikin Tel Aviv  |  | 
|Office                        |  | 
|March 21, 2004
          Date |  | 



---

---

# To the Shareholders of
Hod Hasharon Sport Center (1992) Limited Partnership

We have audited the balance sheets of
Hod Hasharon Sport Center (1992) Limited Partnership as at December31, 2003, the related
statements of income and shareholders equity and cash flows for the year ended
December 31, 2003, expressed in New Israeli Shekels.

These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits

We conducted our audit in accordance
with auditing standards generally accepted in the United States and in Israel, including
those prescribed by the Israeli Auditors (Mode of Performance) Regulations, 1973. these
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.

The above statements have been
prepared on the basis of historical cost as adjusted for the changes in the general
purchasing power of the Israel currency in accordance with Opinions issued by the
Institute of Certified Public Accountants in Israel.

Condensed statements in historical
values which formed the basis of the adjusted statements appear in Note 16 to the
financial statements. These amounts have been translated into U.S. dollars using the
method described in Note 2(H).

In our opinion, based on our audit,
the above-mentioned financial statements present fairly the financial position of the
Company as at December 31, 2003, the results of its operations, the changes in
shareholders equity and cash flows for the year ended December 31, 2003, in
conformity with accounting principles generally accepted in Israel, consistently applied.
Also, in our opinion, the financial statements based on nominal data (Note 16) present
fairly, in conformity with generally accepted accounting principles, the financial
position of the Company as at December 31, 2003, and the results of its perations, the
changes in shareholders equity, and its cash flows for the year ended December 31,
2003, on the basis of the historical cost convention.



---

---

The financial statements of
Partnership conform with accounting principles generally accepted in Israel (Israel
GAAP), which differ in certain respects from those followed in the United States
(U.S. GAAP), as described below:

a. Accrued severance pay, net:

According to Israeli GAAP, accrued
severance pay is included in the balance sheet net of amounts funded, and income from
earnings on amounts funded is netted from severance pay expenses.

According to U.S, GAAP accrued
severance pay is included in the balance sheets at the total liabilities amount and total
amounts funded through provident fund and through insurance policies, income from earnings
on amounts funded is added to severance pay fund.

The effect of this difference on both
income and equity is not material.

b. Effect of inflation:

The Company, in accordance with
Israeli GAAP, comprehensively includes the effects of price level changes in the
accompanying consolidated financial statements, as described in Note 2a. Such Israeli
accounting principles measure the effects of price level changes in the inflationary
nature of the Israeli economy and, as such, is considered a more meaningful presentation
than financial reporting based on historical cost for Israeli and U.S. accounting
purposes. The effect of inflation was eliminated for U.S. GAAP measurement purposes as
presented in Note 16.

|                                 |  | 
|-------------------------------- |  | 
|                                 |  | 
|Abraham Schurder                 |  | 
|Name (ABAS partner)              |  | 
|KPMG Somekh Chaikin Tel Aviv     |  | 
|Office                           |  | 
|February 24, 2004
          Date |  | 

1

---

---

Report of Independent Public Accountants

To The Partners of Hod
Hasharon Sport Center (1992) Limited Partnership.

We have audited the balance sheet of
Hod Hasharon Sport Center (1992) Limited Partnership as of December 31, 2002 and the
related statements of income, changes in patners equity and cash flows for the year
then ended. These financial statements are the responsibility of the Partnerships
management. Our responsibility is to express an opinion on these financial statements
based on our audit.

We conducted our audit in accordance
with auditing standards generally accepted in Israel and in the United States. Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our
opinion.

The above statements have been
prepared on the basis of historical cost as adjusted for the changes in the general
purchasing power of the Israel currency in accordance with pronouncements issued by the
Institute of Certified Public Accountants in Israel.

In our opinion, the above-mentioned
financial statements present fairly, in all material respects, the financial position of
the Partnership as of December 31, 2002 and the results of its operations, changes in
patners equity and cash flows for the year then ended, in conformity with accounting
principles generally accepted in Israel, which differ in certain respects from, accounting
principles generally accepted in the United States (see Notes 2E and 16).

| |  |                                                      
| |  | -----------------------------------------------------
| |  | Luboshitz KasiererCertified Public Accountants (Isr.)

February 27, 2003

2

---

---

# AUDITORS REPORT

# To the shareholders of

# RENAISSANCE INVESTMENT
COMPANY LTD.

We
have audited the balance sheet of Renaissance Investment Company Ltd. (the
Company) as of December 31, 2003, and the related statements of income, changes in
shareholders equity and cash flows for each of the year ended December 31, 2003.
These financial statements are the responsibility of the Companys board of directors
and management. Our responsibility is to express an opinion on these financial statements
based on our audits.

We
conducted our audit in accordance with generally accepted auditing standards in Israel and
in the Unites States, including those prescribed by the Auditors Regulations
(Auditors Mode of Performance)-1973. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the board of
directors and management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of December 31, 2003, and the results
of its operations, the changes in shareholders equity and its cash flows for each of
the year ended December 31, 2003, in conformity with generally accepted accounting
principles in Israel, which differ in certain respects from those generally accepted in
the United States (see Note 14 to the financial statements),

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

|                  |                                 
|----------------- | --------------------------------
|
|
|
|Tel-Aviv, Israel  | KOST FORER GABBAY & KASIERER    
|February 4 , 2004 | A Member of Ernst & Young Global

| |  | 
| |  | 
| |  | 

3

---

---

Messrs.
Ampal Ltd.

| | Re: | Financial
statements of Shmay-Bar Real Estate (1993) Ltd.("the Company") translated into U.S. dollars
| | --- | -----------------------------------------------------------------------------------------------------

As
you know, the Company publishes in Israel financial statements in NIS adjusted to the
changes in the Consumer Price Index, in accordance with Statements of the Institute of
Certified Public Accountants in Israel. These primary annual financial statements of the
Company for the years 2002 and 2001, which were audited by us, and on which we expressed
our opinion on February 16, 2003, have been provided to you.

We
have audited the accompanying translated U.S. dollar balance sheets of the Company as of
December 31, 2002 and 2001, and the related translated U.S. dollar statements of income
for each of the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with generally accepted auditing standards in Israel
and the United States, including those prescribed by the Israeli Auditors Regulations
(Mode of Performance) (Israel), 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, either originating within the financial statements themselves, or
due to any misleading statement included therein. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

The
aforementioned translated U.S. dollar financial statements have been prepared on the basis
of nominal NIS historical cost. Disclosure of the effect of the changes in the general
purchasing power of the Israeli currency in the financial statements as stated in the
Opinions of the Institute of Certified Public Accountants in Israel, has not been included
in the above mentioned statements.

Full
financial statement disclosures and statements of cash flows that are as required
according to generally accepted accounting principles have not been presented and as such,
the translated U.S. dollar financial statements mentioned above are to be read in
conjunction with the primary annual audited financial statements of the Company, as of
December 31, 2002 and their accompanying Notes.

In
our opinion, except for the effects of the matters discussed in the preceding paragraphs,
the translated U.S. dollar financial statements referred to above present fairly, in all
material respects, the translated U.S. dollar financial position of the Company as of
December 31, 2002 and 2001, and the related translated U.S. dollar results of its
operations for each of the three years in the period ended December 31, 2002, in
conformity with generally accepted accounting principles in Israel. As applicable to the
Companys financial statements, accounting principles generally excepted in the
United Sates and in Israel are substantially identical in all material respects.

Also,
in our opinion, the translation of the aforementioned nominal figures into U.S. dollars
was made in accordance with the principles set forth in SFAS 52, see Note 2.

The
aforementioned financial statements are designated solely for you as shareholders of the
Company, are not to be published or delivered to others.

|                  |                                        
|----------------- | ---------------------------------------
|
|
|
|Tel-Aviv, Israel  | KOST FORER & GABBAY                    
|February 16, 2003 | A Member of Ernst & Young International

4

---

---

Messrs.
Ampal Ltd.

| | Re: | Financial
statements of Shmay-Bar (I.A) 1993 Ltd. ("the
Company") translated into U.S. dollars
| | --- | ----------------------------------------------------------------------------------------------

As
you know, the Company publishes in Israel financial statements in NIS adjusted to the
changes in the Consumer Price Index, in accordance with Statements of the Institute of
Certified Public Accountants in Israel. These primary annual financial statements of the
Company for the years 2002 and 2001, which were audited by us, and on which we expressed
our opinion on February 16, 2003, have been provided to you.

We
have audited the accompanying translated U.S. dollar balance sheets of the Company as of
December 31, 2002 and 2001, and the related translated U.S. dollar statements of income
for each of the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with generally accepted auditing standards in Israel
and the United States, including those prescribed by the Israeli Auditors Regulations
(Mode of Performance) (Israel), 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, either originating within the financial statements themselves, or
due to any misleading statement included therein. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

The
aforementioned translated U.S. dollar financial statements have been prepared on the basis
of nominal NIS historical cost. Disclosure of the effect of the changes in the general
purchasing power of the Israeli currency in the financial statements as stated in the
Opinions of the Institute of Certified Public Accountants in Israel, has not been included
in the above mentioned statements.

Full
financial statement disclosures and statements of cash flows that are as required
according to generally accepted accounting principles have not been presented and as such,
the translated U.S. dollar financial statements mentioned above are to be read in
conjunction with the primary annual audited financial statements of the Company, as of
December 31, 2002 and their accompanying Notes.

In
our opinion, except for the effects of the matters discussed in the preceding paragraphs,
the translated U.S. dollar financial statements referred to above present fairly, in all
material respects, the translated U.S. dollar financial position of the Company as of
December 31, 2002 and 2001, and the related translated U.S. dollar results of its
operations for each of the three years in the period ended December 31, 2002, in
conformity with generally accepted accounting principles in Israel. As applicable to the
Companys financial statements, accounting principles generally excepted in the
United Sates and in Israel are substantially identical in all material respects.

Also,
in our opinion, the translation of the aforementioned nominal figures into U.S. dollars
was made in accordance with the principles set forth in SFAS 52, see Note 2.

The
aforementioned financial statements are designated solely for you as shareholders of the
Company, are not to be published or delivered to others.

|                  |                                        
|----------------- | ---------------------------------------
|
|
|
|Tel-Aviv, Israel  | KOST FORER & GABBAY                    
|February 16, 2003 | A Member of Ernst & Young International

5

---

---

Messrs.
Ampal Ltd.

| | Re: | Financial
statements of Shmay-Bar (T.H) 1993 Ltd. ("the
Company") translated into U.S. dollars
| | --- | ----------------------------------------------------------------------------------------------

As
you know, the Company publishes in Israel financial statements in NIS adjusted to the
changes in the Consumer Price Index, in accordance with Statements of the Institute of
Certified Public Accountants in Israel. These primary annual financial statements of the
Company for the years 2002 and 2001, which were audited by us, and on which we expressed
our opinion on February 16, 2003, have been provided to you.

We
have audited the accompanying translated U.S. dollar balance sheets of the Company as of
December 31, 2002 and 2001, and the related translated U.S. dollar statements of income
for each of the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with generally accepted auditing standards in Israel
and the United States, including those prescribed by the Israeli Auditors Regulations
(Mode of Performance) (Israel), 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, either originating within the financial statements themselves, or
due to any misleading statement included therein. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

The
aforementioned translated U.S. dollar financial statements have been prepared on the basis
of nominal NIS historical cost. Disclosure of the effect of the changes in the general
purchasing power of the Israeli currency in the financial statements as stated in the
Opinions of the Institute of Certified Public Accountants in Israel, has not been included
in the above mentioned statements.

Full
financial statement disclosures and statements of cash flows that are as required
according to generally accepted accounting principles have not been presented and as such,
the translated U.S. dollar financial statements mentioned above are to be read in
conjunction with the primary annual audited financial statements of the Company, as of
December 31, 2002 and their accompanying Notes.

In
our opinion, except for the effects of the matters discussed in the preceding paragraphs,
the translated U.S. dollar financial statements referred to above present fairly, in all
material respects, the translated U.S. dollar financial position of the Company as of
December 31, 2002 and 2001, and the related translated U.S. dollar results of its
operations for each of the three years in the period ended December 31, 2002, in
conformity with generally accepted accounting principles in Israel. As applicable to the
Companys financial statements, accounting principles generally excepted in the
United Sates and in Israel are substantially identical in all material respects.

Also,
in our opinion, the translation of the aforementioned nominal figures into U.S. dollars
was made in accordance with the principles set forth in SFAS 52, see Note 2.

The
aforementioned financial statements are designated solely for you as shareholders of the
Company, are not to be published or delivered to others.

|                  |                                        
|----------------- | ---------------------------------------
|
|
|
|Tel-Aviv, Israel  | KOST FORER & GABBAY                    
|February 16, 2003 | A Member of Ernst & Young International

6

---

---

# TO THE BOARD OF
DIRECTORS AND SHAREHOLDERS OF TRINET INVESTMENTS IN
HIGH-TECH LTD.

We have audited the accompanying
balance sheets of Trinet Investments in High-Tech Ltd. (the Company) as of
December 31, 2002 and 2001, and the related statements of operations and changes in
shareholders deficiency for each of the three years in the period ended December 31,
2002. These financial statements are the responsibility of the Companys Board of
Directors and management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance
with generally accepted auditing standards in Israel, including those prescribed under the
Auditors Regulations (Auditors Mode of Performance)  1973, which, for
purposes of these financial statements, are substantially identical to generally accepted
auditing standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the Board of
Directors and management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

During 2002 the company ceased its
operations.

In our opinion, the aforementioned financial
statements present fairly, in all material respects, the financial position of the Company
as of December 31, 2002 and 2001, and the results of its operations and changes in
shareholders deficiency for each of the three years in the period ended December 31,
2002, in accordance with generally accepted accounting principles in Israel.

As described in Note 2, the
aforementioned financial statements have been prepared on the basis of historical cost,
adjusted to reflect changes in the general purchasing power of the Israeli currency in
accordance with pronouncements of the Institute of Certified Public Accountants in Israel.

The financial information presented
in U.S. dollars and in accordance with generally accepted accounting principles in the
United States is based on nominal historical amounts in Israeli currency and is presented
in Note 8 to the financial statements.

Brightman Almagor & Co.
Certified Public Accountants

Tel Aviv, March 13, 2003



---

---

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 29th
  day of March, 2004.

| | Ampal-American
      Israel Corporation      
| | ---------------------------------------------
| |                                              
| | By:         
      /s/JACK BIGIO             
| | Jack
      Bigio, Chief Executive Officer 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 29, 2004.

| | Signatures                        | Title                            | Date                  | 
| | --------------------------------- | -------------------------------- | --------------------- | 
| |                                   |                                  |                       | 
| | /s/ YOSEF
      A. MAIMAN         | Chairman of the Board
      of   | March 
      29, 2004 | 
| | Yosef A. Maiman                   | Directors                        |                       | 
| |                                   |                                  |                       | 
| | /s/ Jack
      Bigio              | President & CEO
      - Director | March 
      29, 2004 | 
| | Jack Bigio                        |                                  |                       | 
| |                                   |                                  |                       | 
| | /s/ LEO
      MALAMUD             | Director                         | March 
      29, 2004 | 
| | Leo Malamud                       |                                  |                       | 
| |                                   |                                  |                       | 
| | /S/ DR.
        JOSEPH YERUSHALMI | Director                         | March 
      29, 2004 | 
| | Dr. Joseph Yerushalmi             |                                  |                       | 
| |                                   |                                  |                       | 
| | /s/ YEHUDA
      KARNI            | Director                         | March 
      29, 2004 | 
| | Yehuda Karni                      |                                  |                       | 
| |                                   |                                  |                       | 
| | /s/ EITAN
      HABER             | Director                         | March 
      29, 2004 | 
| | Eitan Haber                       |                                  |                       | 
| |                                   |                                  |                       | 
| | /s/ MICHAEL
      ARNON           | Director                         | March 
      29, 2004 | 
| | Michael Arnon                     |                                  |                       | 
| |                                   |                                  |                       | 
| | /s/ MENAHEM MORAG                 | Director                         | March 
      29, 2004 | 
| | Menahem Morag                     |                                  |                       | 
| |                                   |                                  |                       | 
| | /s/ IRIT
      ELUZ               | CFO, Vice President
            | March 
      29, 2004 | 
| | Irit Eluz                         | Finance  and
      Treasurer     |                       | 
| |                                   | Principal Financal
      Officer |                       | 
| |                                   |                                  |                       | 
| | /s/ ALLA
      KANTER             | Vice President                  | March 
      29, 2004 | 
| | Alla Kanter                       | Accounting and Controller        |                       | 
| |                                   | (Principal Accounting            |                       | 
| |                                   | Officer)                         |                       | 
| |                                   |                                  |                       | 
| | /s/ GIORA
      BAR  NIR         | Controller                       | March 
      29, 2004 | 
| | Giora Bar-Nir                     |                                  |                       | 

83

---

---