---

---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

|         
|---------
|         
|FORM 10-K
|         

(Mark One)

|                                              |                                                                                             
|--------------------------------------------- | --------------------------------------------------------------------------------------------
|x                                             | ANNUAL
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
  ACT OF 1934    
|                                              |                                                                                             
|For the fiscal year ended
  December 31, 2006
|                                              |                                                                                             
|                                              | OR                                                                                          
|                                              |                                                                                             
| ̈                                             | TRANSITION REPORT PURSUANT
  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
  ACT OF 1934

For the transition period
from _______ to _______

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

|                                         |                    
|---------------------------------------- | -------------------
|New York                                 | 13-0435685         
|(State or Other Jurisdiction of          | (I.R.S. Employer   
|Incorporation
  or Organization)         | Identification No.)
|                                         |                    
|111 Arlozorov Street, Tel Aviv, Israel   | 62098              
|(Address of Principal Executive Offices) | (Zip Code)         

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

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

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

Indicate
by check mark if the registrant is a well-known seasoned issuer (as defined in
Rule 405 of the Securities Act). Yes o  No x

Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o  No x

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

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K o.

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

Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o  No x

The
aggregate market value of the registrants voting stock held by non 
affiliates of the registrant on June 30, 2006, the last business day of the
registrants most recently completed second fiscal quarter was $41,854,745
based upon the closing market price of such stock on that date. As of March 28,
2007, the number of shares outstanding of the registrants Class A Stock,
its only authorized and outstanding common stock, is 49,355,791.

1

---

---



AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES

Index to Form 10-K

|         |                                                                                                                |      | 
|-------- | -------------------------------------------------------------------------------------------------------------- | ---- | 
|         |                                                                                                                | Page
|         |                                                                                                                |     
|         |                                                                                                                |      | 
|PART I   |                                                                                                                |      | 
|         |                                                                                                                |      | 
|ITEM
1.  | BUSINESS                                                                                                       | 3    | 
|ITEM
1A. | RISK FACTORS                                                                                                   | 10   | 
|ITEM
1B. | UNRESOLVED STAFF COMMENTS                                                                                      | 12   | 
|ITEM
2.  | PROPERTY                                                                                                       | 12   | 
|ITEM
3.  | LEGAL PROCEEDINGS                                                                                              | 12   | 
|ITEM
4.  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                            | 13   | 
|         |                                                                                                                |      | 
|PART II  |                                                                                                                |      | 
|         |                                                                                                                |      | 
|ITEM
5.  | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
  STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | 13   | 
|ITEM
6.  | SELECTED FINANCIAL DATA                                                                                        | 14   | 
|ITEM
7.  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
  CONDITION AND RESULTS OF OPERATIONS                        | 14   | 
|ITEM
7A  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
  RISK                                                   | 25   | 
|ITEM
8   | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                    | 27   | 
|ITEM
9.  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
  ACCOUNTING AND FINANCIAL DISCLOSURE                         | 58   | 
|ITEM
9A. | CONTROLS AND PROCEDURES                                                                                        | 58   | 
|ITEM
9B. | OTHER INFORMATION                                                                                              | 59   | 
|         |                                                                                                                |      | 
|PART III |                                                                                                                |      | 
|         |                                                                                                                |      | 
|ITEM
10. | DIRECTORS,
  EXECUTIVE OFFICERS AND CORPORATE
  GOVERNANCE                                                     | 59   | 
|ITEM
11. | EXECUTIVE COMPENSATION                                                                                         | 62   | 
|ITEM
12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
  MANAGEMENT AND RELATED STOCKHOLDER MATTERS               | 70   | 
|ITEM
13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
  DIRECTOR INDEPENDENCE                                    | 72   | 
|ITEM
14. | PRINCIPAL ACCOUNTING FEES AND SERVICES                                                                         | 73   | 
|         |                                                                                                                |      | 
|PART IV  |                                                                                                                |      | 
|         |                                                                                                                |      | 
|ITEM
15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES                                                                        | 74   | 

2

---

---





ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
OF AMPAL-AMERICAN ISRAEL CORPORATION

PART I

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

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As
  used in this report on Form 10-K (the Report), the term Ampal or
  registrant refers to Ampal-American Israel Corporation. The term Company
  refers to Ampal and its consolidated subsidiaries. Ampal is a New York
  corporation founded in 1942.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The
  Company primarily acquires interests in businesses located in the State of
  Israel or that are Israel-related. Ampals investment focus is principally on
  companies or ventures where Ampal can exercise significant influence, on its
  own or with investment partners, and use its management experience to enhance
  those investments. 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: Energy, Real Estate, Project Development
  and Leisure Time. We believe that past experience, current opportunities and
  a deep understanding of the above-referenced sectors both domestically in
  Israel and internationally will allow the Company to bring high returns to
  its shareholders. The Company emphasizes investments which have long-term
  growth potential over investments which yield short-term returns.                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The
  Company provides its investee companies with ongoing support through its
  involvement in the investees strategic decisions and introduction to the
  financial community, investment bankers and other potential investors both in
  and outside of Israel.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Listed
  below by industry segment are all of the substantial investee companies in
  which the Ampal had ownership interests as of December 31, 2006, the
  principal business of each and the percentage of equity owned, directly or
  indirectly, by Ampal. Further information with respect to the more
  significant investee companies is provided after the following table. For
  additional information concerning the investee companies, previously provided
  annual reports on Forms 10-K of Ampal are incorporated by reference herein.
  For industry segment financial information and financial information about
  foreign and domestic operations, see Note 14 to the Companys consolidated
  financial statements included elsewhere in this Report.

3

---

---



|                                   |  |                                             |  |                                          | 
|---------------------------------- |  | ------------------------------------------- |  | ---------------------------------------- | 
|Industry Segment                   |  | Principal Business                          |  | Percentageas of
  December 31,
  2006(1)
|                                   |  |                                             |  |                                         
|                                   |  |                                             |  |                                          | 
|Energy                             |  |                                             |  |                                          | 
|                                   |  |                                             |  |                                          | 
|East Mediterranean Gas
Company     |  | Natural Gas Provider &
  Pipeline Owner     |  | 12.5                                     | 
|                                   |  |                                             |  |                                          | 
|Real Estate                        |  |                                             |  |                                          | 
|Am-Hal Ltd.                        |  | Chain
  of Senior Citizen Facilities        |  | 100.0                                    | 
|Bay Heart Limited                  |  | Shopping
  Mall Owner/Lessor                |  | 37.0                                     | 
|                                   |  |                                             |  |                                          | 
|Leisure-Time                       |  |                                             |  |                                          | 
|Country Club Kfar Saba
Limited     |  | Country
  Club Facility                     |  | 51.0                                     | 
|Hod Hasharon Sport Center
(1992)   |  |                                             |  |                                          | 
|Limited Partnership                |  | Country
  Club Facility                     |  | 50.0                                     | 
|                                   |  |                                             |  |                                          | 
|Finance                            |  |                                             |  |                                          | 
|Ampal (Israel) Ltd.                |  | Holding
  Company and Real Estate           |  | 100.0                                    | 
|Ampal Development (Israel)
Ltd.    |  | Holding
  Company                           |  | 100.0                                    | 
|Ampal Holdings (1991)
Ltd.         |  | Holding
  Company                           |  | 100.0                                    | 
|                                   |  |                                             |  |                                          | 
|Capital Markets and Other Holdings |  |                                             |  |                                          | 
|Carmel Container Systems
Limited   |  | Packaging
  Materials and Carton Production |  |                                          | 
|                                   |  | Holding
  Company                           |  | 21.8                                     | 
|Fimi Opportunity Fund,
L.P         |  | Investment
  Fund                           |  | 2.1                                      | 

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

Significant
Developments Since the Fiscal Year Ended December 31, 2006

On
February 18, 2007, Ampal reached a non binding letter of understanding with
Merkaz Mishan Ltd. (Mishan) for a potential sale of all of its holdings in
Am-Hal Ltd., a wholly owned subsidiary of Ampal (Am-Hal). The potential transaction is
subject to the customary due diligence process, negotiation and signing of a
definitive sale and purchase agreement, the approvals of the Board of Directors
of Ampal (the Board) and Mishan and the receipt of all necessary regulatory
and governmental approvals and other customary conditions. There can be no
assurance that the parties will consummate a transaction regarding Am-Hal Ltd.

On
March 18, 2007, tenants of the retirements centers for senior citizens of
Am-Hal filed a lawsuit in the Tel Aviv District Court against Ampal, Am-Hal and
other subsidiaries of Ampal. The lawsuit was filed after Ampal announced the
potential sale of its holdings in Am-Hal to Mishan. Among other things, the
plaintiffs requested that the District Court (i) issue warrants that will
oblige Am-Hal to keep the deposits received from the tenants in a designated account
for each tenant controlled by an accountant agreed to by Am-Hal and the
tenants, (ii) maintain the level of services provided by Am-Hal to the tenants
and (iii) maintain the ratio of independent tenants and supportive tenants in
the centers. The plaintiffs also asked the District Court to issue temporary ex
parte injunctions to prohibit Ampal from signing an agreement for the sale of
its holdings in Am-Hal and to nominate a receiver to locate and keep the
tenants deposits. The District Court did not grant the temporary injunctions
ex parte and requested that the defendants  reply to the claim in accordance with normal
procedures.

On
March 7, 2007, Ampal entered into an agreement to sell to Carmel Container
Systems Ltd., a packaging manufacturer based in Israel (Carmel), all of the
holdings of Carmel held by Ampal and its subsidiaries. Pursuant to this
transaction, Ampal and its subsidiaries will sell to Carmel an aggregate of
522,350 ordinary shares of Carmel for an expected aggregate sales price of approximately
$4.57 million. The Company expects to record a loss before tax of $0.4 million.
The completion of the sale of shares to Carmel is subject to the satisfaction
of certain closing conditions.

4

---

---



Energy

EAST
MEDITERRANEAN GAS COMPANY (EMG)

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

As
of December 31, 2006, the Company beneficially owns approximately 12.5% of EMG.
For more information concerning our interest in EMG please see Item 7 -
Management Discussion and Analysis of Financial Condition and Results of
Operations below.

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.

AM-HAL
LTD. (AM-HAL)

Am-Hal
is a wholly-owned subsidiary of the Company, which 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.

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.

On
April 7, 2005 Am-Hal Ltd. entered into an agreement to build a new project in
Tel-Aviv. Am-Hal Ltd. holds 75% of the new project through a limited
partnership (Ad 120 Ramat-Hahayal), the project, which is in its early stages,
is still subject to further regulatory and financing approvals.(See Significant Developments Since the
Fiscal Year
Ended December 31, 2006).

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 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. A train station on the west side of the Mall
was completed in 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.

5

---

---



Leisure-Time

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 1,722
member families for the 2006 season. The Company owns 51% of Kfar Saba.

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

Hod
Hasharon operates a country club facility (the H.H. Club) in Hod Hasharon, a
town north of Tel Aviv. The H.H. Club, which opened in July 1994, occupies a
7-1/4 acre lot which is leased for a 49 year period. The lease expires in 2043.
The H.H. Club has a capacity of 1,600 member families and has operated at
capacity for the past three years.
In 2006, the H.H. Club contributed $0.2 million to each of its partners. As of
December 31, 2006, the Company holds a 50% direct interest in Hod Hasharon.

Capital Markets and Other Holdings

CARMEL
CONTAINERS SYSTEMS LIMITED (CARMEL)

Carmel
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s equity interest in Carmel
is 21.75%. As of December 31, 2006, the Company accounts for this investment
pursuant to the equity method as $3.5 million (which includes impairment in an amount
of $3.0 million). For information about our agreement to sell our holdings of
Carmel, please see the section entitled Significant Developments Since the
Fiscal Year Ended December 31, 2006.

EMPLOYEES

The
executives officers of Ampal are listed in Item 11 below. As of December 31,
2006, Ampal (Israel) Ltd. had 13 employees, Am-Hal Ltd. (a wholly owned
subsidiary of Ampal) had 180 employees and Country Club Kfar Saba Ltd., of which
the Company owns 51% of the interest, had 100 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.
During the summer of 2006, Israel was engaged in a military conflict with the
Hizballa movement in Lebanon. This conflict was the most violent outbreak of
hostilities in which Israel has been involved during the past several years.
This situation had an adverse effect on the economy, primarily in the
relevant geographic areas, and increased the political and military
uncertainty in Israel and the Middle East. See Item 1A - Risk Factors below
for a further discussion of the possible impact of the political and military
situation in Israel on the Company.

6

---

---



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

CERTAIN
UNITED STATES AND ISRAELI REGULATORY MATTERS

SEC Exemptive Order

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

TAX INFORMATION

Ampal
(to the extent that it has income derived in Israel) and Ampals Israeli
subsidiaries are subject to taxes imposed under the Israeli Income Tax
Ordinance. Through December 31, 2003, the corporate tax rate was 36%. In
July 2004, Amendment No. 140 to the Income Tax Ordinance was enacted. One
of the provisions of this amendment is that the corporate tax rate is to be
gradually reduced from 36% to 30%. In August 2005, a further amendment
(No. 147) was published, which makes a further revision to the corporate
tax rates prescribed by Amendment No. 140. As a result of the
aforementioned amendments, the corporate tax rates for 2004 and thereafter are
as follows: 2004  35%, 2005  34%, 2006  31%, 2007  29%, 2008  27%, 2009 
26% and for 2010 and thereafter  25%.

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

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

Pursuant
to an arrangement with the Israeli tax authorities, Ampals income from Israeli
sources has been taxed based on principles generally applied in Israel to
income of non-residents. Ampal has filed tax returns with the Israeli tax
authorities through the tax year 2004. Based on the tax returns filed by Ampal
through 2004, it has not been required to make any additional tax payments in
excess of the tax withheld on dividends it has received. In addition, pursuant
to Ampals arrangement with the Israeli tax authorities, the aggregate taxes
paid by Ampal in Israel and in the United States on interest, rent and dividend
income derived from Israeli sources has not exceeded the tax which would have
been payable by Ampal in the United States had such interest, rent and dividend
income been derived by Ampal from United States sources. There can be no
assurance that this arrangement will continue to be effective in the future.
This arrangement does not apply to taxation of Ampals Israeli subsidiaries.

7

---

---



Generally,
under the provisions of the Israeli Income Tax Ordinance, taxable income from
Israeli sources paid to non-residents of Israel by residents of Israel is
subject to withholding tax at the rate of 25%. However, such rate of
withholding tax may be reduced under the Treaty, with respect to certain
payments made by Israeli tax residents to US tax residents that qualify for
benefits of the Treaty. For example, under the Treaty, the rate of withholding
tax applicable to interest is generally reduced to 17.5%. The continued tax
treatment of Ampal by the Israeli tax authorities in the manner described above
is based, among other things, on Ampal continuing to be treated, for tax
purposes, as a non-resident of Israel that is not doing business in Israel.

Under
Israeli law, Israeli tax residents are taxed on capital gains generated from
sources in Israel or outside of Israel, whereas non residents are taxable only
with respect to gains generated from sources in Israel. Gains are generally
regarded as being from Israeli sources if arising from the sale of assets
either located in Israel or which represent a right to assets located in Israel
(including gains arising from the sale of shares of stock in companies resident
in Israel, and of rights in non-resident entities that mainly represent
ownership and rights to assets located in Israel, with regard to such assets).
Under the Treaty, US tax residents are subject to Israeli capital gains tax on
the sale of shares in Israeli companies if they have held 10% or more of the
voting rights in such company at any time during the 12 months immediately
preceding the sale.

Since
January 1, 1994, the portion of the gain attributable to inflationary
differences prior to that date is taxable at a rate of 10%, while the portion
of the gain attributable to inflationary differences between such date and the
date of disposition of the asset is exempt from tax. Non-residents of Israel
are exempt from the 10% tax on the inflationary gain derived from the sale of
shares in companies that are considered Israeli tax residents if they elect to
compute the inflationary portion of the gain based on the change in the rate of
exchange between Israeli currency and the foreign currency in which the shares
were purchased, rather than the change in the Israeli consumer price index.
Beginning January 1, 2006, the section of the Israeli Tax Ordinance under which
the regulations providing such tax exemption to non-Israeli residents were
promulgated, was rescinded. It is therefore unclear whether this exemption
shall continue to be applicable. The remainder of the gain (Real Capital
Gain), if any, is taxable to corporations at the rate of 25%. However, Real
Capital Gains arising from the sale of capital assets that had been acquired
prior to January 1, 2003 shall be apportioned on a linear basis to the periods
before and after the same date, namely - the portion of the gain attributed to
the period before January 1, 2003 shall be subject to tax at a rate equal to
the corporate tax rate in affect at the time of the sale (in 2006  31%), whereas the
portion of the gain attributed to the period after January 1, 2003 shall be
taxed at the preferential rate of 25%. This 25% preferential tax rate may also
apply to a certain portion of the profit upon the sale of Israeli shares.

Foreign
corporations are generally exempt from tax on gains from the sale of shares in
publicly traded companies. Amendment No. 147 introduces a broader exemption
under domestic law for non-residents regardless of their percentage holding in
an Israeli company (not holding real estate rights) to include capital gains
from the sale of securities (even where not traded in Israel), which are
purchased between July 1, 2005 through December 31, 2008, provided certain
conditions are met.

The
Income Tax Law (Adjustment for Inflation), 1985 (Inflationary Adjustment
Law), 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. Under the Inflationary Adjustment Law, results for tax purposes
are measured in real terms. The law provides for the preservation of equity,
whereby certain corporate assets are classified broadly into Fixed (inflation
resistant) and Non-Fixed (non-inflation resistant) Assets. Where shareholders
equity, as defined therein, exceeds the depreciated cost of Fixed Assets, a tax
deduction which takes into account the effect of the annual inflationary change
on such excess is allowed, subject to certain limitations. Conversely, if the
depreciated cost of Fixed Assets exceeds shareholders equity, then such
excess, multiplied by the annual inflation change, is added to taxable income.

Individuals
and companies in Israel pay value added tax (VAT) at a rate of 15.5% (16.5%
until June 30, 2006, 17.0% from March 1, 2004 to August 31, 2005) of the price
of assets sold and services rendered. In computing its VAT liability, Ampals
Israeli subsidiaries are entitled to claim as a deduction input VAT it has
incurred with respect to goods and services acquired for the purpose of the
business.

United States Federal Taxation of
Ampal

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

8

---

---



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

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

In
general, the total foreign tax credit that Ampal U.S. may claim is limited to
the same proportion of Ampal U.S.s United States income taxes that its foreign
source taxable income bears to its taxable income from all sources, US and
non-US. This limitation is applied separately with respect to passive and
active items of income, which may further limit Ampals ability to claim
foreign taxes as a credit against its U.S. tax liability. The use of foreign
taxes as an offset against United States tax liability is further limited by
certain rules pertaining to the sourcing of income and the allocation of
deductions. As a result of the combined operation of these rules, it is
possible that Ampal U.S. would exercise its right to elect to deduct the
foreign taxes, in lieu of claiming such taxes as a foreign tax credit.

Ampal
U.S. may also be subject to the alternative minimum tax (AMT) on
corporations. Generally, the tax base for the AMT on corporations is the
taxpayers taxable income increased or decreased by certain adjustments and tax
preferences for the year. The resulting amount, called alternative minimum
taxable income, is then reduced by an exemption amount and subject to tax at a
20% rate.

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. These risks and uncertainties include, but are not limited
to, those described in Part I, Item 1A - Risk Factors and elsewhere in
this report and those described from time to time in our future reports filed
with the Securities and Exchange Commission.

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

9

---

---



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

An
investment in our securities involves risks and uncertainties. These risks and
uncertainties could cause our actual results to differ materially from our
historical results or the results contemplated by any forward-looking
statements contained in this report on Form 10-K or that we make in other
filings with the SEC under the Securities and Exchange Act of 1934 or in other
public statements. The risks described below are not the only risks facing the
Company. Additional risks and uncertainties not currently known to us or that
we currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results. You should consider the
following factors carefully, in addition to the other information contained in
this Report, before deciding to purchase, sell or hold our securities:

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

Most
of the companies in which we directly or indirectly invest have principal
operations that are Israel-related. We may, therefore, be directly affected by
economic, political, social and military conditions in the Middle East,
including Israels relationship with the Palestinian Authority and Arab
countries. In addition, many of the companies in which we invest are dependent
upon materials imported from outside of Israel. We also have interests in
companies that export significant amounts of products from Israel. Our existing
12.5% stake in East Mediterranean Gas Company, an Egyptian joint stock company,
represents a substantial portion of our investment portfolio and may be
particularly sensitive to conditions in the Middle East. Accordingly, our
operations could be materially and adversely affected by acts of terrorism or if
major hostilities should continue or occur in the future in the Middle East or
trade between Israel and its present trading partners should be curtailed,
including as a result of acts of terrorism in the United States. Any such
effects may impact our value and the value of our investee companies.

During
the summer of 2006, Israel was engaged in a military conflict with the Hizballa
movement in Lebanon. This conflict was the most violent outbreak of hostilities
in which Israel has been involved during the past several years. This situation
had an adverse effect on the economy, primarily in the
relevant geographic areas. Although we do not believe that this
situation has had a material adverse effect on our business or financial
condition, if such situation resumes and/or escalates,
the adverse economic effect may deepen and spread to additional areas
and may materially adversely affect the Company and its subsidiaries business
and financial condition.

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

As of December 31, 2006, the Company beneficially owns approximately 12.5% of EMG, a result of a
transaction with our controlling shareholder, which was accounted as transaction between entities under
common control. This investment constitutes our single largest holding. As a result, changes in the
financial condition, business or operations of EMG, including, without limitation, unexpected delays in
first gas delivery, the completion of the pipeline, and the ability of EMG to utilize the pipeline,
whether as a result of environmental, regulatory or political issues or otherwise, may impact our
ability to received dividends from EMG which could adversely affect our operations and financial
condition. Additionally, we have a minority interest in EMG, and therefore, do not have the ability to
direct the affairs of EMG.

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

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

10

---

---



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

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

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

Changes in
accounting standards and taxation requirements could affect our financial
results.

New
accounting standards or pronouncements that may become applicable to the
Company from time to time, or changes in the interpretation of existing
standards and pronouncements, could have a significant effect on our reported
results for the affected periods. We are also subject to income tax in the
numerous jurisdictions in which we generate revenues. Increases in income tax
rates could reduce our after-tax income from affected jurisdictions.

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

We
have had losses in four of the past five fiscal years. The net loss for 2006
was approximately $7.1 million. We will continue to make investments
opportunistically and to divest ourselves from certain assets which we believe
lack growth potential. However, if we are not able to generate sufficient
revenues or we have insufficient capital resources, we will not be able to
implement our business plan of investing in, and growing, companies with strong
long-term growth prospectus and investors will suffer a loss in their
investment. This may result in a change in our business strategies.

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

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

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

A
group of shareholders consisting of Yosef A. Maiman, Ohad Maiman, Noa Maiman,
and Yoav Maiman, and the companies Merhav (M.N.F.) Limited, De Majorca Holdings
Ltd. and Di-Rapallo Holdings Ltd. beneficially owns approximately 62.0% of the
voting power of our Class A Stock. The group was formed in recognition of the
Maiman familys strong connection with the Company and in furtherance of the
groups common goals and objectives as shareholders, including the orderly
management and operation of the Company. By virtue of its ownership of Ampal,
this group is able to control our affairs and to influence the election of the
members of our board of directors. This group also has the ability to prevent
or cause a change in control of Ampal. Mr. Maiman owns 100% of the economic
shares and one-quarter of the voting shares of De Majorca and Di-Rapallo.
Merhav (M.N.F.) Limited is wholly owned by Mr. Maiman.

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

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

11

---

---



We do not publish the
value of our assets.

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

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

We
have not paid a dividend on our Class A Stock other than in 1995. Past
decisions not to pay cash dividends on Class A Stock reflected our policy to
apply retained earnings, including funds realized from the disposition of
holdings, to finance our business activities and to redeem or repay our
outstanding debt, including our $58,000,000 unsecured debentures on which
principal payments commence in 2011. The payment of cash dividends in the
future will depend upon our operating results, cash flow, working capital
requirements and other factors we deem pertinent.

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

Stock
prices of companies, both domestically and abroad, are subject to fluctuations
in trading price. Therefore, as with a company like ours that invests in stocks
of other companies, our book value and market price will fluctuate, especially
in the short term. As of March 9, 2007 the market price on NASDAQ was $4.50 per
share. However our shares have in the past traded below book value. You may
experience a decline in the value of your investment and you could lose money
if you sell your shares at a price lower than you paid for them.

Our Class A Stock may not be liquid.

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

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

None.

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

On
September 12, 2006, we sold our building located at 111 Arlozorov Street,
Tel-Aviv which contains our headquarters. The new owner has agreed to lease to
us the office space that contains our headquarters for a period of up to 2
years commencing on November 28, 2006. The annual rent for this lease is $162,000.

We
also lease an office at 10 Abba Even St., Herzelia Pituach, which is currently
under renovation. The lease is for a period of 10 years commencing on January
24, 2007. The annual rent for this lease is $130,000.

We
also lease 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 $120,588. On March 31, 2004, the Company closed
this office. The office space has been subleased.

Country
Club Kfar Saba Ltd. occupies a 7-1/4 acre lot in the town of Kfar Saba which
will be leased for five consecutive ten-year periods, at the end of which the
land returns to the lessor. The lease expires on July 14, 2038, and lease
payments in 2006 totaled $185,020.

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

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

On
January 1, 2002, Galha (1960) Ltd. (Galha) filed a suit against the Company
and other parties, including directors of Paradise Industries Ltd. (Paradise)
appointed by the Company, in the Tel Aviv District Court, in the amount of NIS 10,927,100
($2.6 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 4,059,000 ($961,000) if a final judgment against the Company will be given.

12

---

---



On
May 26, 2003, the Company and the directors of Paradise appointed by the
Company filed a third party claim against Arieh Israeli Insurance Company Ltd.
in the Tel Aviv District Court claiming that, to the extent the court decides
that the directors of Paradise appointed by the Company will have to pay any
amounts to Galha, Arieh will pay such amounts on behalf of the directors in
accordance with the Directors and Officers insurance policy that the Company
had at that time with Arieh. Arieh filed a statement of defense and stated that
the policy does not cover the claim. At this stage, the Company cannot estimate
the impact this claim will have on it. There have not been any significant
developments in this matter as of the date of filing this report.

Claims
Against Subsidiaries and Affiliates:

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

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

None.

PART II

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

PRICE RANGE OF CLASS A STOCK

Ampals
Class A Stock is listed on NASDAQ Global Market under the symbol AMPL. The
following table sets forth the high and low bid prices for the Class A Stock,
by quarterly period for the fiscal years 2006 and 2005, as reported by NASDAQ
Global Market and representing inter-dealer quotations which do not include
retail markups, markdowns or commissions for each period, and each calendar
quarter during the periods indicated. Such prices do not necessarily represent
actual transactions.

| |                  |  |      |      |     |  |      | 
| | ---------------- |  | ---- | ---- | --- |  | ---- | 
| |                  |  | High |      | Low | 
| |                  |  |      |      |     | 
|
| | 2006:            |  |      |      |     | 
| | Fourth
  Quarter |  |      | 5.15 |     |  | 4.25 | 
| | Third
  Quarter  |  |      | 5.03 |     |  | 4.44 | 
| | Second
  Quarter |  |      | 5.22 |     |  | 4.13 | 
| | First
  Quarter  |  |      | 4.75 |     |  | 3.60 | 
| |                  |  |      |      |     |  |      | 
| | 2005:            |  |      |      |     |  |      | 
| | Fourth
  Quarter |  |      | 4.05 |     |  | 2.80 | 
| | Third
  Quarter  |  |      | 4.09 |     |  | 3.21 | 
| | Second
  Quarter |  |      | 4.29 |     |  | 3.52 | 
| | First
  Quarter  |  |      | 4.38 |     |  | 3.61 | 

As
of March 20 2007, there were
approximately 1,339 record holders of Class A Stock.

13

---

---



VOTING RIGHTS

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

DIVIDEND POLICY

Ampal
has not paid a dividend on its Class A Stock other than in 1995. Past decisions
not to pay cash dividends on Class A Stock reflected the policy of Ampal to
apply retained earnings, including funds realized from the disposition of
holdings, to finance its business activities and to redeem debentures. The
payment of cash dividends in the future will depend upon the Companys
operating results, cash flow, working capital requirements and other factors
deemed pertinent by the Board.

For
equity compensation plan information required Item 2.01(d) of Regulation
S-K, please see Item 12 below.

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

The
selected consolidated statement of operations data for the years ended December
31, 2004, 2005 and 2006 and consolidated balance sheet data as of December 31,
2005 and 2006 have been derived from our audited consolidated financial statements
included in this Report. The selected consolidated statement of operations data
for the years ended December 31, 2002 and 2003 and the selected consolidated
balance sheet data as of December 31, 2002, 2003 and 2004 have been derived
from our audited consolidated financial statements not included herein.

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

|                                       |  |                                                    |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|-------------------------------------- |  | -------------------------------------------------- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------- |  | - | ------- | -
|                                       |  | Fiscal year ended December 31,                     |        
|                                       |  |                                                    |        
|FISCAL
  YEAR ENDED DECEMBER 31,       |  | 2006(2)                                            |         | 2005 |   | 2004    |   | 2003 |         | 2002 |  
|                                       |  |                                                    |         |      |   |         |   |      |         |      |  
|                                       |  | (U.S. Dollars in thousands, except per share data) |        
|                                       |  |                                                    |        
|                                       |  |                                                    |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Revenues                               |  | $                                                  | 23,949  |      | $ | 30,530  |   | $    | 31,464  |      | $ | 51,814  |  | $ | 16,732  |  
|                                       |  |                                                    |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Net income (loss)                      |  | $                                                  | (7,087  | )    | $ | (5,958  | ) | $    | (18,385 | )    | $ | 8,847   |  | $ | (44,047 | )
|                                       |  |                                                    |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Earnings (loss) per Class A Share(1):  |  |                                                    |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Basic EPS                              |  | $                                                  | (0.40   | )    | $ | (0.31   | ) | $    | (0.94   | )    | $ | 0.42    |  | $ | (2.27   | )
|Diluted EPS                            |  | $                                                  | (0.40   | )    | $ | (0.31   | ) | $    | (0.94   | )    | $ | 0.40    |  | $ | (2.27   | )
|                                       |  |                                                    |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Total assets                           |  | $                                                  | 401,683 |      | $ | 211,485 |   | $    | 304,947 |      | $ | 354,367 |  | $ | 323,699 |  
|                                       |  |                                                    |         |      |   |         |   |      |         |      |   |         |  |   |         |  
|Notes and loans and debentures payable |  | $                                                  | 105,625 |      | $ | 50,366  |   | $    | 120,796 |      | $ | 138,334 |  | $ | 136,803 |  

|    |                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Computation is based on
  net income (loss) after deduction of preferred stock dividends (in thousands)
  of $2,438, $191, $200, $213 and $218 for the years ended 2006, 2005, 2004,
  2003, and 2002, respectively.
|    |                                                                                                                                                                                                                     
|(2) | In 2006, the Company
  changed the method by which it accounts for share-based compensation by
  adopting SFAS 123R, which resulted in expenses of $720 thousand and impacted
  the EPS by $(0.03).                 

See Significant Developments Since the Fiscal Year Ended December 31, 2006.

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

OVERVIEW

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

14

---

---



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

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
results of investee companies which are greater than 50% owned by us are
included in the consolidated financial statements. We account for our holdings
in investee companies over which we exercise significant influence, generally
20% to 50% owned companies (affiliates), under the equity method. Under the
equity method, we recognize our proportionate share of such companies income
or loss based on its percentage of direct and indirect equity interests in
earnings or losses of those companies. The results of operations are affected
by capital transactions of the affiliates. Thus, the issuance of shares by an
affiliate at a price per share above our carrying value per share for such
affiliate results in our recognizing income for the period in which such
issuance is made, while the issuance of shares by such affiliate at a price per
share that is below our carrying value per share for such affiliate results in
our recognizing a loss for the period in which such issuance is made. We account
for our holdings in investee companies, other than those described above, on
the cost method or in accordance with Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and
Equity Securities. In addition, we review investments accounted for under the
cost method and those accounted for under the equity method periodically in
order to determine whether to maintain the current carrying value or to write
off some or all of the investment. For more information as to how we make these
determinations, see Critical Accounting Policies.

For
those subsidiaries and affiliates whose functional currency is considered to be
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,
2006, the accumulated effect on shareholders equity was a decrease of
approximately $16.6 million. Upon the disposition of an investment, the related
cumulative translation adjustment balance will be recognized in determining
gains or losses.

CRITICAL ACCOUNTING POLICIES

The
preparation of Ampals consolidated financial statements is in conformity with
generally accepted accounting principles in the United States 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, 2006 for a summary of all of Ampals significant accounting policies.

Investment in EMG and
other cost basis investments

The Company accounts for its 12.5%
equity interest in EMG and a number of other investments on the basis of the cost method.
EMG, which is the Companys most significant holding as of December 31, 2006, was
acquired from Merhav (M.N.F.) Ltd. (Merhav), which is an entity controlled by
one of the members of the Companys controlling shareholder group. As a result,
the transaction was accounted for as a transfer of assets between entities under common
control, which resulted in Merhav transferring the investment in EMG to Ampal at carrying
value. Due to the nature of Merhavs operations, this entity would be treated as an
investment company under US GAAP, and as such, the carrying value of the investment in EMG
would equal fair value. As a result, the 12.5% investment in EMG was transferred at
carrying value, which equals fair value.

 Application of the cost basis method requires the Company to
periodically review these investments in order to determine whether to maintain the
current carrying value or to write 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.

15

---

---



Long-
lived assets

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

Accounting
for Income Taxes

As
part of the process of preparing our consolidated financial statements, we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves us estimating our current tax exposure together
with assessing temporary differences resulting from differing treatment of
items for tax and accounting purposes. These differences result in deferred tax
assets and liabilities, which are included in our consolidated balance sheet.
We must then assess the likelihood that our deferred tax assets will be
recovered from future taxable income, and, to the extent we believe that
recovery is not likely, we must establish a valuation allowance. To the extent
we establish a valuation allowance or increase this allowance in a period, we
must include an expense within the tax provision in the statement of
operations. A valuation allowance is currently set against certain tax assets
because management believes it is more likely than not that these deferred tax
assets will not be realized through the generation of future taxable income. We
also do not provide for taxes on undistributed earnings of our foreign
subsidiaries, as it is our intention to reinvest undistributed earnings
indefinitely outside the United States. In 2006, there were no undistributed
earnings from foreign subsidiaries.

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.

Employee
Stock-Based Compensation

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

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

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

16

---

---



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

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

NEWLY ISSUED AND RECENTLY ADOPTED ACCOUNTING
PRONOUNCEMENTS

SFAS No. 155  Accounting for Certain
Hybrid Financial Instruments - an Amendment of FASB Statements No. 133 and 140.

In February 2006,
the Financial Accounting Standards Board (FASB) issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments  an Amendment of FASB
Statements No. 133 and 140 (SFAS No. 155). SFAS No. 155
allows financial instruments that contain an embedded derivative and that
otherwise would require bifurcation to be accounted for as a whole on a fair
value basis, at the holders election. SFAS No. 155 also clarifies and
amends certain other provisions of SFAS No. 133 and SFAS No. 140.
This statement is effective for all financial instruments acquired or issued in
fiscal years beginning after September 15, 2006 (January 1, 2007 for the
Company). Management does not expect the adoption of SFAS No. 155 will
have a material impact on the Companys consolidated financial condition or
results of operations.

ASB Interpretation No. 48  Accounting
for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109

In July 2006,
the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
recognition threshold and measurement of a tax position taken on a tax return.
FIN 48 is effective for fiscal years beginning after December 15, 2006
(January 1, 2007 for the Company). FIN 48 also requires expanded disclosure
with respect to the uncertainty in income taxes. Management does not expect the
adoption of this interpretation to have a material impact on the Companys
financial statements.

SFAS No. 157 - Fair Value Measurements

In September
2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157),
which provides guidance on how to measure assets and liabilities that use fair
value. SFAS 157 will apply whenever another US GAAP standard requires (or
permits) assets or liabilities to be measured at fair value but does not expand
the use of fair value to any new circumstances. This standard also will require
additional disclosures in both annual and quarterly reports. SFAS 157 will be
effective for fiscal years beginning after November 15, 2007 (January 1, 2008
for the Company). The Company is currently evaluating the impact, if any, the
adoption of SFAS 157 will have on its financial statements.

Staff Accounting Bulletin No. 108 -
Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements

In September
2006, the SEC staff issued Staff Accounting Bulletin (SAB) No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108). SAB 108 was
issued in order to eliminate the diversity of practice in how public companies
quantify misstatements of financial statements, including misstatements that
were not material to prior years financial statements. The Company adopted SAB
108 and follows SAB 108 requirements when quantifying financial statement
misstatements. The adoption of SAB 108 did not have any impact on the Companys
consolidated financial condition or results of operations.

FAS No. 159 - The Fair Value Option for
Financial Assets and Financial Liabilities

In February
2007, the FASB issued FAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities. This standard permits entities to choose to measure
many financial assets and financial liabilities at fair value. Unrealized gains
and losses on items for which the fair value option has been elected are
reported in earnings. As applicable to the Company, this statement will be
effective as of the year beginning January 1, 2008. The Company is
currently evaluating the impact that the adoption of FAS 159 would have on its
consolidated financial statements.

17

---

---



RESULTS OF OPERATIONS

Fiscal year ended December 31, 2006 compared
to fiscal year ended December 31, 2005:

The Company
recorded a consolidated net loss of $7.1 million for the fiscal year ended
December 31, 2006, as compared to $6.0 million loss for the same period in
2005. The increase in net loss is primarily attributable to a decrease in
earnings of affiliates and a decrease in other income. The increase in net loss
was partially offset by an increase in net realized and unrealized gains from
marketable securities and investments, gain on sale of real estate, a decrease
in loss from impairment of investments and a decrease in translation losses in
2006, as compared to 2005.

Income from
equity of affiliates decreased to $1.6 million for the fiscal year ended
December 31, 2006 as compared to $6.7 million for the fiscal year ended in
2005. The decrease is primarily attributable to a decrease in the earnings of
Ophir Holdings Ltd., which was sold during the second quarter of 2006 and did
not record any earnings in the fiscal year ended December 31, 2006, as compared
to a gain of $6.1 million recorded by Ophir Holdings, Ltd. in the same period
in 2005.

In the fiscal
year ended December 31, 2006, Ampal recorded a gain of $2.2 million on the sale
of its building in Tel-Aviv (proceeds of $4.6 million).

In the fiscal
year ended December 31, 2006, the Company recorded $2.5 million in other
income, as compared to $9.9 million for the same period in 2005. The decrease
in other income is primarily related to the committed dividend for 2005 which
had been fully paid on October 3, 2005 by Motorola Israel Ltd. as part of the
sale of its investment in MIRS Communications Ltd. last year.

In the fiscal
year ended December 31, 2006, the Company recorded $4.4 million of net realized
gain on investments, as compared to $2.7 million of net realized loss in the
same period in 2005. The gain recorded in 2006 was primarily attributable to
the sale of Coral World International ($4.2 million gain), additional proceeds
from the sale of Modem Art Ltd. ($0.6 million gain), the sale of certain assets
by PSINet Europe, one of the holdings of Ampals investee company, Telecom
Partners (TP)($0.4 million gain) and the sale of certain assets by FIMI
Opportunity Fund L.P (FIMI) ($0.2 million gain). These gains were partially
offset by a loss recorded in connection with the sale of Ophir Holding Ltd.
($1.0 million loss).

The Company
recorded realized and unrealized gains from marketable securities in the amount
of $1.1 million in fiscal year ended December 31, 2006, compared to $3.2
million in the same period in 2005.

In the fiscal
year ended December 31, 2005, the Company recorded $14.0 million of losses from
the impairment of its investment in MIRS ($13.3 million), Shiron Ltd. ($0.6
million) and other loans ($0.1 million). In the same period in 2006, the
Company recorded no such impairments.

In the fiscal
year ended December 31, 2006, the Company recorded a $0.3 million translation
gain, as compared to a $2.2 million translation loss for the same period in
2005. The decrease in translation loss is related to a change in the valuation
of the New Israeli Shekel as compared to the U.S. Dollar.

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

Fiscal year ended December 31, 2005 compared
to fiscal year ended December 31, 2004:

The
Company recorded a consolidated net loss of $6.0 million for the fiscal year
ended December 31, 2005, as compared to $18.4 million loss for the same period
in 2004. The decrease in net loss is primarily attributable to an increase in
earnings of affiliates, an increase in interest income and a decrease in loss
from impairment of investments. The decrease in net loss was partially offset
by a decrease in realized and unrealized gains from marketable securities and
investments and an increase in translation losses in 2005, as compared to 2004.

18

---

---



Income
from equity of affiliates increased to $6.7 million for the fiscal year ended
December 31, 2005 as compared to $4.0 million for the fiscal year ended in
2004. The increase is primarily attributable to a $6.6 million gain recorded by
Ophir Holding Ltd. as a result of the sale of all its holdings in Industrial
Building Corporation Ltd.

In
the fiscal year ended December 31, 2005, the Company recorded $14.0 million in
losses from the impairment of its investments and loans relating primarily to
MIRS ($13.3 million) and Shiron Satelite Communications (1996) Ltd. (Shiron
Ltd.) ($0.6 million). On October 3, 2005, the Company, through Ampal
Communications L.P., a limited partnership controlled by the Company, completed
the previously announced sale to Motorola Israel Ltd. of all of its holdings of
MIRS pursuant to the terms of a Stock Purchase and Indemnification Agreement,
dated as of August 30, 2005, by and among Motorola Israel, Ampal Communications
L.P. and MIRS. In connection with the sale of its holdings of MIRS, Ampal
Communications L.P. received approximately US $89 million of total proceeds,
composed of $67.7 million for the purchase price and an additional $ 21.3
million related to guaranteed dividend payments. In the fiscal year ended
December 31, 2004, the Company recorded $38.8 million in losses from the
impairment of its investments and loans which was comprised primarily of the
following losses: MIRS ($30.0 million), ShellCase ($3.8 million) and Star
Management ($1.6 million).

During
the fiscal year ended December 31, 2005, Ampal recorded $2.7 million of
realized losses on investments, as compared to $6.0 million of realized gains
in the same period in 2004. The loss recorded in 2005 was primarily
attributable to the third-party investment in the high-tech portfolio (which is
treated as a disposition for accounting purposes) which resulted in a $7.3
million loss ($4.6 net loss after tax). This loss was partially offset by the
gain recorded from the sale of all of Ampals shares of Modem Art Ltd. ($3.3
million gain) and the sale of all of its shares in Epsilon investment ($1.4
million gain). The $6.0 million gain recorded in 2004 is mainly attributable to
the sale of PowerDsine Ltd. and the sale of assets by PSINet Europe, one of the
holdings of Ampals investee company, TP.

The
Company recorded realized and unrealized gains from marketable securities in
the amount of $3.2 million in the year 2005 as compared to $1.9 million in
2004.

The
increase in real estate income and expenses in 2005 as compared to 2004 is
primarily attributable to the increase in the tenant occupancy rate in Am-Hal
Ltd.

Other
income realized by the Company is principally composed of guaranteed dividend
payments from Motorola equal to $7.1 million for the years ended
December 31, 2005, and December 31, 2004.

The
Company recorded higher interest income in the fiscal year ended December 31,
2005, as compared to the same period in 2004, primarily as a result of a $0.7
million gain from forward contracts to purchase U.S. Dollars and increases in
interest rates.

The
Company recorded an interest expense of $5.3 million in the fiscal year ended
December 31, 2005, as compared to $4.9 million in the same period in 2004,
primarily as a result of increases in applicable interest rates.

SELECTED QUARTERLY FINANCIAL DATA

|                                     |  |                                                      |       |   |                  |       |   |                 |        |   |                  |        |  
|------------------------------------ |  | ---------------------------------------------------- | ----- | - | ---------------- | ----- | - | --------------- | ------ | - | ---------------- | ------ | -
|                                     |  | First
  Quarter                                      |       |   | Second
  Quarter |       |   | Third
  Quarter |        |   | Fourth
  Quarter |       
|                                     |  |                                                      |       |   |                  |       |   |                 |        |   |                  |       
|                                     |  | (U.S.
  Dollars in thousands, except per share data) |      
|                                     |  |                                                      |      
|                                     |  | Unaudited                                            |      
|                                     |  |                                                      |      
|Fiscal Year Ended December 31, 2006  |  |                                                      |       |   |                  |       |   |                 |        |   |                  |        |  
|Revenues                             |  | $                                                    | 5,548 |   | $                | 8,519 |   | $               | 6,424  |   | $                | 3,458  |  
|Net interest expense                 |  |                                                      | (781  | ) |                  | (408  | ) |                 | (339   | ) |                  | (2,147 | )
|Net (loss) income                    |  |                                                      | (575  | ) |                  | 1,381 |   |                 | (1,795 | ) |                  | (6,098 | )
|Basic EPS:                           |  |                                                      |       |   |                  |       |   |                 |        |   |                  |        |  
|Earnings (Loss) per Class A
share(1) |  |                                                      | (0.03 | ) |                  | 0.06  |   |                 | (0.18  | ) |                  | (0.19  | )
|Diluted EPS:                         |  |                                                      |       |   |                  |       |   |                 |        |   |                  |        |  
|Earnings (Loss) per Class A share.   |  |                                                      | (0.03 | ) |                  | 0.06  |   |                 | (0.18  | ) |                  | (0.19  | )

19

---

---



|                                     |  |                                                      |        |                  |   |                 |   |                  |         |   |   |       |  
|------------------------------------ |  | ---------------------------------------------------- | ------ | ---------------- | - | --------------- | - | ---------------- | ------- | - | - | ----- | -
|                                     |  | First
  Quarter                                      |        | Second
  Quarter |   | Third
  Quarter |   | Fourth
  Quarter |        
|                                     |  |                                                      |        |                  |   |                 |   |                  |        
|                                     |  | (U.S.
  Dollars in thousands, except per share data) |       
|                                     |  |                                                      |       
|                                     |  | Unaudited                                            |       
|                                     |  |                                                      |       
|Fiscal Year Ended December 31, 2005  |  |                                                      |        |                  |   |                 |   |                  |         |   |   |       |  
|Revenues                             |  | $                                                    | 15,634 |                  | $ | 5,827           |   | $                | 7,907   |   | $ | 1,162 |  
|Net interest expense                 |  |                                                      | (1,017 | )                |   | (1,439          | ) |                  | (1,143  | ) |   | (91   | )
|Net (loss) income                    |  |                                                      | 6,728  |                  |   | (2,511          | ) |                  | (10,630 | ) |   | 455   |  
|Basic EPS:                           |  |                                                      |        |                  |   |                 |   |                  |         |   |   |       |  
|Earnings (Loss) per Class A
share(1) |  |                                                      | 0.33   |                  |   | (0.13           | ) |                  | (0.53   | ) |   | 0.02  |  
|Diluted EPS:                         |  |                                                      |        |                  |   |                 |   |                  |         |   |   |       |  
|Earnings (Loss) per Class A share.   |  |                                                      | 0.30   |                  |   | (0.13           | ) |                  | (0.53   | ) |   | 0.02  |  

|    |                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | After deduction of
  dividends on the 4% and 6 1/2% Cumulative Convertible Preferred Stock in 2006
  and 2005 (in thousands) of $2,438 and $191, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Cash
Flows

On
December 31, 2006, cash, cash equivalents and marketable securities were $37.1 million,
as compared with $62.9 million at December 31, 2005. The decrease in cash, cash
equivalents and marketable securities is primarily attributable to the sale of
marketable securities, which were used to partially finance our acquisition of
interests in EMG in August and November 2006 as described below.

The
Company 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 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. 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, cash equal to $9 million has been placed as a compensating balance
for various loans provided to the Company and would therefore be unavailable if
the Company wished to pledge them in order to provide an additional source of
cash.

Cash
flows from operating activities

Net
cash provided by operating activities totaled approximately $29.8 million for
the fiscal year ended December 31, 2006, as compared to approximately $43.2
million at the same period in 2005. The decrease is primarily attributable to
(i) the receipt of a $21.3 million dividend from MIRS Communications Ltd. as
part of the sale of MIRS to Motorola Communication Israel Ltd. in 2005 while
there was none in 2006 and (ii) the $0.2 million in dividend payments received
from affiliates as compared to $4.3 million in dividend payments received from
affiliates in 2005. The decrease was primarily offset by $39.6 million of net
proceeds from marketable securities ($89.6 million proceeds offset by $50.0
million invested) as compared to $19.7 million net proceeds in the same period
of 2005.

Cash flows from investing activities

Net
cash used in investing activities totaled approximately $107.3 million for the
fiscal year ended December 31, 2006, as compared to approximately $36.7 million
provided by investing activities for the same period in 2005. The change is
primarily attributable to the Companys investments in EMG ($120.9 million),
Bay Heart ($1.7 million) and FIMI ($0.4 million) and $10.0 million deposit at
Hermatic Trust (1975) Ltd. to secure the payment of interest on the debenture.
This increase was partially offset by proceeds in the amount of $23.4 million
from the sale of our interests in Coral World International, Ophir Holdings
Ltd., Modem Art Ltd., certain dispositions by FIMI, certain dispositions by TP,
other dispositions and $3.8 million from the sale of the building which
contains our headquarters in Tel-Aviv.

20

---

---



Cash flows
from financing activities

Net
cash provided by financing activities was approximately $86.2 million for the
fiscal year ended December 31, 2006, as compared to approximately $73.5 million
of net cash used in financing activities for the same period in 2005. In
November, 2006, the Company issued notes to institutional investors in
Israel in the principal aggregate amount of approximately $58.0 million ($56.4
million after deducting related expense) in accordance with Regulation S under
the Securities Act of 1933, as amended. In December 2006, the
Company completed a private placement of the sale of 8,142,705 shares
of its Class A Stock for aggregate proceeds of $37.8 million ($36.7
million after deducting related expenses) to certain non-U.S.
institutional investors in accordance with Regulation S under the Securities
Act of 1933, as amended. In 2006, the Company paid down its existing notes
payable to banks in the amount of $11.2 million and paid a dividend to the
holders of its preferred stock in the aggregate amount of $2.3 million while
using its own cash and borrowed an additional $6.0 million. In 2005, the
Company repaid in full the $73.1 million loan which was received from Bank
Hapoalim Ltd. and Bank Leumi Le-Israel Ltd. relating to the investment in MIRS
Communications Ltd., repaid $2.5 million of loans made to Am-Hal Ltd.
and used its own cash to pay down Ampals existing notes payable and
debentures in the amount of $5.3 million. Those effects were offset in 2005 by
the borrowing of $8.8 million to finance a new project by Am-Hal Ltd. and its
minority partner.

Investments

On
December 31, 2006, the aggregate fair value of trading and available-for-sale
securities were approximately $0.4 million, as compared to $38.6 million at
December 31, 2005. The decrease in 2006 is mainly attributable to the sale of
various marketable securities in order to finance the purchase of EMG.

|   |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | ------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|a) | In 2006, the
  Company made the following investments:
|   |                                                       
|   | 1.                                                     | During 2006,
  the Company made an additional investment of $229.9 million in EMG as
  follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                        | The Company, through Merhav Ampal
Energy, Ltd., a wholly-owned subsidiary of the Company, entered into an agreement with
Merhav (M.N.F.) Ltd. (Merhav) for the purchase from Merhav a portion of its
interest in East Mediterranean Gas Co. S.A.E., an Egyptian joint stock company
(EMG). The sole owner of Merhav is Yosef A. Maiman, who is also the Chairman,
President and CEO of the Company and a member of the controlling shareholder group of
Ampal.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                        | On August 1, 2006 the Company
acquired the beneficial ownership of 4.6% of the outstanding shares of EMGs capital
stock from Merhav. The transaction was accounted for as a transfer of assets between
entities under common control, which resulted in Merhav transferring the investment in EMG
to Ampal at carrying value. Due to the nature of Merhavs operations, this entity
would be treated as an investment company under US GAAP, and as such, the carrying value
of the investment in EMG would equal fair value. On this basis, the 4.6% investment in EMG
was transferred to Ampal at carrying value, which also equals fair value. The purchase
price for the shares was $100.0 million, of which, $50.0 million was paid in cash and the
balance was paid in 10,248,002 shares of the Company Class A Stock (based on a purchase
price of $4.88 per share) that was accounted for at a fair value of $49.0 million (the
fair value was determined based on the average price per share from 2 days before the
agreement press release through 2 days after the agreement press release). The issuance of
the shares of Class A Stock received the approval of the shareholders of the Company as
required by the marketplace rules of the NASDAQ Global Market. As a result of this
transaction, the Company beneficially owned 6.6% of the total outstanding shares of EMG.
Through August 2008, the purchase price may be adjusted downward should Merhav sell any of
its remaining shares of EMG to a third-party purchaser at a purchase price per share lower
than the price per share paid by the Company pursuant to the agreement. Additionally,
pursuant to the agreement, the Company was granted an option for a period of up to two
years to have the right to acquire up to an additional 5.9% of the total outstanding
shares of EMG stock.
|   |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                        | Yosef A. Maiman, the Chairman,
President and CEO of the Company and a member of the controlling shareholder group of the
Company, is the sole owner of Merhav. Because of the foregoing relationships, a
special committee of the Board of Directors composed of the Companys independent
directors, who also constitute all of the members of the Companys Audit Committee,
negotiated and approved the transaction. Houlihan Lokey Howard & Zukin Financial
Advisors, Inc., which was retained as financial advisor to the special committee,
delivered a fairness opinion to the special committee regarding the transaction.On August 22, 2006, EMG called for
additional capital from all of its shareholders. As a result, the Company paid an
additional $2.7 million in order to maintain its pro rata beneficial interest in this
investment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

21

---

---



|   |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | ------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                   | On December 21, 2006, the Company
acquired the beneficial ownership of an additional 5.9% of the outstanding shares of
EMGs capital stock pursuant to an option granted by Merhav in August 2006. The
transaction was accounted for as a transfer of assets between entities under common
control, which resulted in Merhav transferring the investment in EMG to Ampal at carrying
value. Due to the nature of Merhavs operations, this entity would be treated as an
investment company under US GAAP, and as such, the carrying value of the investment in EMG
would equal fair value. On this basis, the 5.9% investment in EMG was transferred to Ampal
at carrying value, which also equals fair value.The purchase price for the shares was
approximately $128.3 million, of which approximately $68.3 million was paid in cash, $40
million was paid in 8,602,151 shares of the Companys Class A Stock and the balance
was satisfied by the issuance of a promissory note in the principal amount of $20 million
(the Convertible Promissory Note), which, at the option of Merhav, will be
paid in cash, additional shares of the Company Class A Stock (based on a price per share
of $4.65 per share), or a combination thereof. As permitted under the stock purchase
agreement, Merhav assigned its right to the 8,602,151 Shares to De Majorca Holdings
Limited as part of Merhavs restructuring process. The Convertible Promissory Note
bears interest at 6 months LIBOR (5.375%) and matures on the earlier of September 20, 2007
or upon demand by Merhav. Ampal may pre-pay the Convertible Promissory Note at any time in
whole or in part. The maximum number of shares that can be issued in this transaction
(including accrued interest payable through the maturity date on the Convertible
Promissory Note) is 13,078,540 shares of Class A Stock. As a result of this transaction,
Ampal beneficially owns 12.5% of the total outstanding shares of EMG. The issuance of the
8,602,151 shares and the shares underlying the Convertible Promissory Note received the
approval of the shareholders of the Company on February 7, 2007, as required by the
marketplace rules of the NASDAQ Global Market. Due to the agreement of the controlling
shareholder group to vote in favor of the issuance of these shares to Merhav as of the
closing date of the EMG transaction (which ensured that the proposal would be adopted by
the requisite shareholder vote on February 7, 2007), the Company classified for accounting
purposes the sale of these shares as part of the exchange with Merhav on December 21,
2006, and recognized the $40 million within shareholders equity as Receipt on
account of unallocated shares. The investment in EMG is included in the energy
segment.Yosef A. Maiman, the Chairman,
President and CEO of the Company and a member of the controlling shareholder group of the
Company, is the sole owner of Merhav. Because of the foregoing relationships, a special
committee of the Board of Directors composed of the Companys independent directors,
who also constitute all of the members of the Companys Audit Committee, negotiated
and approved the transaction. Houlihan Lokey Howard & Zukin Financial Advisors, Inc.,
which was retained as financial advisor to the special committee, advised the special
committee on these transactions.
|   |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                   | For more
  information regarding our interest in EMG, see Item 13.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | 2.                                                | Additional
  investment of $0.4 million in FIMI Opportunity Fund, L.P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | 3.                                                | A loan to
  Bay Heart of $1.7 million, for a shopping mall in Haifa, Israel.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|b) | In 2006,
  Ampal made the following dispositions:
|   |                                                  
|   | 1.                                                | In June and
  December 2006, the Company received proceeds in the total amount of $0.6
  million from the sales of certain investments by FIMI.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | 2.                                                | On June 13,
  2006, the Company sold its holdings in Coral World International for $21.0
  million and recorded a gain of $4.2 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | 3.                                                | In March
  2006, the Company received additional proceeds from the sale of Modem Art
  Ltd. in the amount of $ 0.6 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | 4.                                                | In April
  2006, the Company received additional proceeds in the amount of $0.4 million
  from the sale of certain assets by PSINet Europe, one of the holdings of
  Ampals investee company, TP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | 5.                                                | On May 8,
  2006, the Company sold its holdings in Ophir Holdings Ltd. for $1.1 million
  and recorded a loss of $1.0 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | 6.                                                | On September
  12, 2006, the Company sold the building in Tel-Aviv containing its
  headquarters for proceeds of $4.6 million and recorded a gain of $2.2
  million. The new owner has agreed to lease to us the office space that
  contains our headquarters for a period of up to 2 years commencing on
  November 28, 2006. The annual rent for this lease is $162,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

Debt

Notes
issued to institutional investors in Israel, the convertible note issued to
Merhav and other loans payable pursuant to bank borrowings are either in U.S.
dollars, linked to the Consumer Price Index in Israel or in unlinked Israel
Shekels, with interest rates varying depending upon their linkage provision and
mature between 2007-2015.

The
Company finances its general operations and other financial commitments through
bank loans from Bank Hapoalim. These loans in the amount of $26.3 million
mature through 2007-2010. (As of December 31, 2005 the amount was $31.3
million).

On
November 20, 2006, the Company entered into a trust agreement with Hermatic
Trust (1975) Ltd. pursuant to which the Company issued notes to institutional
investors in Israel in the principal aggregate amount of NIS 250,000,000
(approximately $58 million) with an interest rate of 5.75%, which is linked to
the Israeli consumer price index. The notes shall rank pari passu with our unsecured
indebtedness. The notes will be repaid in five equal annual installments
commencing on November 20, 2011, and the interest will be paid semi-annually.
The Company received the funds from the private placement on November 20, 2006.
Midroog Ltd., an affiliate of Moodys Investors Service rated the Company as
A3.

22

---

---



The
Company intends to register the notes for trading on the TASE subject to
publishing a final prospectus approved by the Israeli Securities Authority as
well as the approval of the TASE for the listing of the notes. Until the
listing is approved, Ampal will pay an additional annual interest rate of 0.5%
on the notes.

The
following additional terms apply to the notes:

|  |                                                                                                                                                                                                                                                                                                
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Until the
  listing of the notes is approved, if the rating of the notes from Midroog is
  reduced below A3, the interest rate per annum of the notes will increase by
  0.2% increments subject to the terms and conditions set forth in the notes;                                           
|  |                                                                                                                                                                                                                                                                                                
| | Ampal may
  issue additional notes without limitation, but until the listing is approved
  by the TASE, Ampal cannot issue additional notes if such issuance would
  adversely affect the Midroog rating of our existing series of notes, which
  are the subject of this prospectus;          
|  |                                                                                                                                                                                                                                                                                                
| | The notes
  will be listed for trade on the TASE no sooner than 47 days after the final
  prospectus is approved by the Israeli Securities Authority and the TASE, and
  during such 47 day period, the notes will not be tradable;                                                            
|  |                                                                                                                                                                                                                                                                                                
| | If Yosef A.
  Maiman ceases to directly or indirectly own the largest amount of shares of
  Ampal (relative to the rest of the shareholders of Ampal) before the notes
  are listed on the TASE, a meeting of the noteholders will be convened to
  discuss whether the notes will be redeemed.

In
addition, as part of the EMG transaction in December 2006, the Company issued
to Merhav a promissory note in the principal amount of $20 million, which at
the option of Merhav, will be paid in cash, additional shares of Ampal Class A
Stock (based on a price per share of $4.65 per share), or a combination
thereof. The Convertible Promissory Note bears interest at 6 months LIBOR
(5.375%) and matures on the earlier of September 20, 2007 or upon demand by
Merhav. Ampal may pre-pay the Convertible Promissory Note at any time in whole
or in part.

The
Company financed a portion of the development of Am-Hal, a wholly-owned
subsidiary of the Company, which develops and operates luxury retirement
centers for senior citizens, through a revolving credit facility from Bank
Hapoalim Ltd., Phoenix Insurance Company and others. On December 1, 2005, a loan
agreement creating the facility was signed between Am-Hal, Phoenix Insurance
Company and others. Pursuant to the loan agreement, the lenders granted the
Company a revolving credit facility in Israeli Shekels equal to $12.5 million.
The annual interest rate on the loan, which matures in 10 years, is 7.5%. The
interest rate and the principal of the loan will be adjusted based on the
changes in the Israeli Consumer Price Index. As of December 31, 2006 the
Company had drawn $2.5 million from the facility. As of December 31, 2006 and
December 31, 2005 the amount of Am-Hals outstanding debt under the loans from
Bank Hapoalim Ltd., Phoenix Insurance Company and others, were $15.0 million
and $13.5 million, respectively. The loans, excluding the Phoenix loan, mature
in up to one year and have interest rates ranging between 6.5% and 7.5%. 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 $2.9 million in favor of tenants of Am-Hal in order to secure
their deposits.

Other
long term borrowings in the amount of $1.7 million are linked to the Israeli
C.P.I and mature between 2007 and 2010, of which an amount of $1.5 million
bears no interest. The remaining $0.2 million bears an annual interest of 5.7%.

The
weighted average interest rates and the balances of these short-term borrowings
at December 31, 2006 and December 31, 2005 were 6.4% on $21.2 million and 6.0%
on $15.0 million, respectively.

23

---

---



|                                                                                  |  |                                         |         |                    |   |             |  |           |        |                  |   |        |  |   |        | 
|--------------------------------------------------------------------------------- |  | --------------------------------------- | ------- | ------------------ | - | ----------- |  | --------- | ------ | ---------------- | - | ------ |  | - | ------ | 
|                                                                                  |  | Payments
  due by period (in thousands) |        
|                                                                                  |  |                                         |        
|Contractual
  Obligations                                                         |  | Total                                   |         | Less than
  1 year |   | 1  3 years |  | 3-5 years |        | More than5 years |  
|                                                                                  |  |                                         |         |                    |   |             |  |           |        |                  |  
|Long-Term Debt                                                                    |  | $                                       | 25,260  |                    | $ | 6,212       |  | $         | 10,672 |                  | $ | 5,139  |  | $ | 3,237  | 
|Debentures                                                                        |  | $                                       | 59,172  |                    |   | -           |  |           | -      |                  | $ | 11,834 |  | $ | 47,338 | 
|Convertible Promissory Note                                                       |  | $                                       | 20,000  |                    | $ | 20,000      |  |           |        |                  |   |        |  |   |        | 
|Short-Term Debt                                                                   |  | $                                       | 21,193  |                    | $ | 21,193      |  |           |        |                  |   |        |  |   |        | 
|Capital Call Obligation(1)                                                        |  | $                                       | 2,800   |                    | $ | 2,800       |  |           |        |                  |   |        |  |   |        | 
|Operating Lease (2)Obligation                                                     |  | $                                       | 7,827   |                    | $ | 591         |  | $         | 887    |                  | $ | 647    |  | $ | 5,702  | 
|Capital Lease Obligation                                                          |  |                                         | --      |                    |   | --          |  |           | --     |                  |   | --     |  |   | --     | 
|Purchase Obligations                                                              |  |                                         | --      |                    |   | --          |  |           | --     |                  |   | --     |  |   | --     | 
|Other Long-Term Liabilities Reflected on the Companys Balance
Sheet
  Under GAAP |  |                                         | --      |                    |   | --          |  |           | --     |                  |   | --     |  |   | --     | 
|Total                                                                             |  | $                                       | 136,252 |                    | $ | 50,796      |  | $         | 11,559 |                  | $ | 17,620 |  | $ | 56,277 | 
|                                                                                  |  |                                         |         |                    |   |             |  |           |        |                  |  

|    |               
|--- | --------------
|(1) | See note 16(d)
|    |               
|(2) | See note 16(a)

As
of December 31, 2006, the Company had issued guarantees on certain outstanding
loans to its investees and subsidiaries in the aggregate principal amount of
$9.5 million. This includes:

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | $5.6 million
  guarantee on indebtedness incurred by Bay Heart ($2.6 million of which is
  recorded as a liability in the Companys financial statements at December 31,
  2006) in connection with the development of its property. Bay Heart recorded
  losses in 2006 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.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 2. | $2.9 million
  guarantee to Am- Hal tenants as described above.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 3. | $1.0 million
  guarantee to Galha 1960 Ltd. as described in Item 3 of this Report.                                                                                                                                                                                                                                                                                                                                                                                                                                 

In
each of 2005 and 2004, 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. In 2006, the preferred shares were converted to Class A Shares and the
dividend paid was approximately $2.3 million (see Change in Shareholders
Equity- below).

Off-Balance
Sheet Arrangements

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

Foreign
Currency Contracts

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

As
of December 31, 2006, the Company did not have any open foreign currency forward
exchange contracts to purchase or sell U.S. Dollars.

24

---

---



CHANGES
IN SHAREHOLDERS EQUITY

During
the third and fourth quarter of 2006, the shareholders equity changed as
follows:

On
July 31, 2006, all outstanding shares of our 4% Cumulative Convertible
Preferred Stock and our 6-1/2% Cumulative Convertible Preferred Stock were
converted as follows:

Each
share of our 4% Cumulative Convertible Preferred Stock was converted to five
shares of Ampals Class A Stock plus an additional $2.58 per share paid in cash
and each share of Ampals 6-1/2% Cumulative Convertible Preferred Stock was
converted to three shares of Ampals Class A Stock plus an additional $4.09 per
share paid in cash.

Holders
of our 4% Cumulative Convertible Preferred Stock and 6-1/2% Cumulative
Convertible Preferred Stock who voted in favor of the amendments to Ampals
Restated Certificate of Incorporation received an additional $0.15 per share.

As
of July 31, 2006, the only class of outstanding shares of our capital stock is
our Class A Stock.

On
October 9, 2006, as part of our additional investment in EMG, the Company sold
to Merhav (M.N.F.) Ltd. 10,248,002 shares of the Companys Class A Stock that
was accounted for at a fair market value of $49.0 million. The issuance of
these shares received the approval of the shareholders of the Company on
September 19, 2006, as required by the marketplace rules of the NASDAQ Global Market.

On
December 21, 2006, as part of the closing of the Companys additional investment in
EMG, the Company sold to Merhav (M.N.F.) Ltd. 8,602,151 shares of the Companys Class
A Stock that was accounted for at a fair market value of $40.0 million. The sale of these
shares received the approval of the shareholders of the Company on February 7, 2007, as
required by the marketplace rules of the NASDAQ Global Market. Due to the agreement of the
controlling shareholder group to vote in favor of the issuance of these shares to Merhav
as of the closing date of the EMG transaction (which ensured that the proposal would be
adopted by the requisite shareholder vote on February 7, 2007), the Company classified for
accounting purposes the sale of these shares as part of the exchange with Merhav on
December 21, 2006, and recognized the $40 million within shareholders equity as
Receipt on account of unallocated shares.

On
December 28, 2006, the Company completed the sale of 8,142,705 shares of our
Class A Stock (based on a price per share of $4.65) for an aggregate price of
approximately $37.9 million (recorded at $36.7 million after deducting related
expenses) and warrants to purchase 4,071,352 shares of the Class A Stock of the
Company for an exercise price of $4.65 per share. The warrants will expire on
August 27, 2007. The shareholders of the Company approved the issuance of the
shares underlying the warrants on February 7, 2007, as required by the
marketplace rules of the NASDAQ Global Market. The fair value market, from an
accounting stand point, of the warrants is $308,000, and it was estimated using
the following weighted average assumption: 1) expected life of warrants of 8
months, 2) dividend yield of 0%, 3) volatility of 13.76% and 4) risk free
interest of 4.97%. The offering was made solely to certain non-U.S.
institutional investors in accordance with Regulation S under the U.S. Securities
Act of 1933, as amended.

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

MARKET RISKS AND SENSITIVITY ANALYSIS

The
Company is exposed to various market risks, including changes in interest
rates, foreign currency exchange rates and equity price changes. The following
analysis presents the hypothetical loss in earnings, cash flows and fair values
of the financial instruments which were held by the Company at December 31,
2006, and are sensitive to the above market risks.

During
the fiscal year ended December 31, 2006, 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, 2005.

25

---

---



Interest Rate Risks

At
December 31, 2006, the Company had financial assets totaling $27.7 million and
financial liabilities totaling $105.6 million. For fixed rate financial
instruments, interest rate changes affect the fair market value but do not
impact earnings or cash flows. Conversely, for variable rate financial
instruments, interest rate changes generally do not affect the fair market
value but do impact future earnings and cash flows, assuming other factors are
held constant.

At
December 31, 2006, the Company did not have fixed rate financial assets and had
variable rate financial assets of $27.7 million. A ten percent decrease in
interest rates would not increase the unrealized fair value of the fixed rate
assets.

At
December 31, 2006, the Company had fixed rate debt of $66.3 million and
variable rate debt of $39.3 million. A ten percent decrease in interest rates
would increase the unrealized fair value of the financial debts in the form of
the fixed rate debt by approximately $0.1 million.

The
net decrease in earnings and cash flow for the next year resulting from a ten percent
interest rate increase would be approximately $0.2 million, holding other
variables constant.

Foreign Currency Exchange Rate Sensitivity
Analysis

The
Companys exchange rate exposure on its financial instruments results from its
investments and ongoing operations in Israel. During 2006, the Company entered
into various foreign exchange forward purchase contracts to partially hedge
this exposure. At December 31, 2006, the Company didnt have any open foreign
exchange forward purchase contracts. Holding other variables constant, if there
were a ten percent devaluation of the foreign currency, the Companys
cumulative translation loss reflected in the Companys accumulated other
comprehensive loss would increase by $1.3 million, and regarding the statements
of operations a ten percent devaluation of the foreign currency would be
reflected in a net increase in earnings and cash flow would be $7.3 million.

Equity Price Risk

The
Companys investments at December 31, 2006, included marketable securities
which are recorded at a fair value of $0.4 million, including a net unrealized
gain of $0.1 million. Those securities have exposure to equity price risk. The
estimated potential loss in fair value resulting from a hypothetical ten
percent decrease in prices quoted on stock exchanges is approximately $0.1
million. There will be no impact on cash flow resulting
from a hypothetical ten percent decrease in prices quoted on stock exchanges.

26

---

---



ITEM 8  FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

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, 2006 and 2005,
and the related consolidated statements of operations, cash flows, changes in
shareholders equity, for each of the three years in the period ended December
31, 2006. These financial statements are the responsibility of the Companys
Board of Directors and management. Our responsibility is to express an opinion
on these financial statements based on our audits.

We did not
audit the financial statements of certain affiliated companies, the companys
interest in which as reflected in the balance sheets as of December 31, 2006
and 2005 is $1,262 thousands and $14,001 thousands, respectively, and the
Companys share in excess of profits over losses in a net amount of $1,620
thousands, $88 thousands and $1,931 thousands for the years ended December 31,
2006, 2005 and 2004, respectively. The financial statements of those affiliated
companies were audited by other independent registered public accounting firms
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 registered public
accounting firms. We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Boards (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 independent auditors provide a
reasonable basis for our opinion.

In our
opinion, based on our audits and the reports of other independent registered
public accounting firms, the financial statements referred to above present
fairly, in all material respects, the financial position of the Company and its
subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2006, in conformity with accounting principles generally accepted
in the United States of America.

As discussed
in note 1(n) to the consolidated financial statements, effective January 1,
2006, the Company changed its method of accounting for share based payment, to
conform with FASB Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment.

|                                     |                                                                                                
|------------------------------------ | -----------------------------------------------------------------------------------------------
|Tel Aviv,
  Israel 
  March 30, 2007 |                                                                                                
|                                     |                                                                                                
|                                     | /s/ KESSELMAN & KESSELMAN CPAs (ISR) A member of
  PricewaterhouseCoopers International Limited

27

---

---



AMPAL-AMERICAN ISRAEL CORPORATION AND
SUBSIDIARIESCONSOLIDATED BALANCE SHEETS

|                                                                             |  |                               |         |                       |   |         | 
|---------------------------------------------------------------------------- |  | ----------------------------- | ------- | --------------------- | - | ------- | 
|                                                                             |  | Assets As
  At                |        
|                                                                             |  |                               |        
|                                                                             |  | December
  31,
  2006         |         | December
  31,
  2005 |  
|                                                                             |  |                               |         |                       |  
|                                                                            
|                                                                             |  | (U.S.
  Dollars in thousands) |        
|                                                                             |  |                               |        
|                                                                            
|Cash and cash equivalents                                                    |  | $                             | 36,733  |                       | $ | 24,314  | 
|                                                                             |  |                               |         |                       |   |         | 
|                                                                             |  |                               |         |                       |   |         | 
|Deposits, notes and loans
  receivable (Note 6)                              |  |                               | 10,207  |                       |   | 343     | 
|Investments (Notes 2, 3
  and 13):                                           |  |                               |         |                       |   |         | 
|Non marketable securities                                                    |  |                               | 265,236 |                       |   | 54,903  | 
|Marketable securities                                                        |  |                               | 380     |                       |   | 38,575  | 
|                                                                             |  |                               |         |                       |   |         | 
|Total investments                                                            |  |                               | 265,616 |                       |   | 93,478  | 
|                                                                             |  |                               |         |                       |   |         | 
|Real estate property, less
  accumulated depreciation of $14,003 and $13,907 |  |                               | 69,319  |                       |   | 70,989  | 
|                                                                             |  |                               |         |                       |   |         | 
|Other assets (Note 4)                                                        |  |                               | 19,808  |                       |   | 22,361  | 
|                                                                             |  |                               |         |                       |   |         | 
|                                                                             |  |                               |         |                       |   |         | 
|TOTAL
  ASSETS                                                               |  | $                             | 401,683 |                       | $ | 211,485 | 
|                                                                             |  |                               |         |                       |   |         | 

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

28

---

---



AMPAL-AMERICAN ISRAEL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                      |  |                                                                     |         |                       |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------- | ------- | --------------------- | - | ------- | -
|                                                                                                                                                                      |  | Liabilities
  and Shareholders
  Equity As At                      |        
|                                                                                                                                                                      |  |                                                                     |        
|                                                                                                                                                                      |  | December
  31,
  2006                                               |         | December
  31,
  2005 |  
|                                                                                                                                                                      |  |                                                                     |         |                       |  
|                                                                                                                                                                      |  | (U.S.
  Dollars in thousands except share
  amounts per share data) |        
|                                                                                                                                                                      |  |                                                                     |        
|LIABILITIES                                                                                                                                                           |  |                                                                     |         |                       |   |         |  
|                                                                                                                                                                     
|Notes and loans payable (Note 5)                                                                                                                                      |  | $                                                                   | 46,453  |                       | $ | 50,366  |  
|Debentures (Note 6)                                                                                                                                                   |  |                                                                     | 59,172  |                       |   | --      |  
|Deposits from tenants                                                                                                                                                 |  |                                                                     | 54,979  |                       |   | 53,461  |  
|Accounts payable, accrued expenses and others (Note 7)                                                                                                                |  |                                                                     | 30,964  |                       |   | 17,369  |  
|                                                                                                                                                                      |  |                                                                     |         |                       |   |         |  
|Commitments and Contingencies (note 16)                                                                                                                               |  |                                                                     |         |                       |   |         |  
|Total liabilities                                                                                                                                                     |  |                                                                     | 191,568 |                       |   | 121,196 |  
|                                                                                                                                                                      |  |                                                                     |         |                       |   |         |  
|Minority interests, net (Note 8)                                                                                                                                      |  |                                                                     | 1,302   |                       |   | 1,420   |  
|                                                                                                                                                                      |  |                                                                     |         |                       |   |         |  
|                                                                                                                                                                      |  |                                                                     |         |                       |   |         |  
|SHAREHOLDERS EQUITY(Note 9)                                                                                                                                          |  |                                                                     |         |                       |   |         |  
|                                                                                                                                                                      |  |                                                                     |         |                       |   |         |  
|Class A Stock $1 par value; authorized 60,000,000 shares; issued
  46,328,429 and 25,826,821 shares; outstanding 40,753,640 and 20,075,782
  shares                   |  |                                                                     | 46,328  |                       |   | 25,827  |  
|                                                                                                                                                                      |  |                                                                     |         |                       |   |         |  
|4% Cumulative Convertible Preferred Stock, $5 par value as of
  December 31, 2005; authorized 189,287 shares; issued 114,198 shares;
  outstanding 110,848 shares     |  |                                                                     | -       |                       |   | 571     |  
|                                                                                                                                                                      |  |                                                                     |         |                       |   |         |  
|6-1/2% Cumulative Convertible Preferred Stock, $5 par value as of
  December 31, 2005; authorized 988,055 shares; issued 641,423 shares;
  outstanding 518,887 shares |  |                                                                     | -       |                       |   | 3,207   |  
|                                                                                                                                                                      |  |                                                                     |         |                       |   |         |  
|Receipt on account of unallocated shares                                                                                                                              |  |                                                                     | 40,000  |                       |   | -       |  
|                                                                                                                                                                      |  |                                                                     |         |                       |   |         |  
|Additional paid-in capital                                                                                                                                            |  |                                                                     | 126,945 |                       |   | 58,252  |  
|                                                                                                                                                                      |  |                                                                     |         |                       |   |         |  
|Warrants                                                                                                                                                              |  |                                                                     | 308     |                       |   | -       |  
|                                                                                                                                                                      |  |                                                                     |         |                       |   |         |  
|Retained earnings                                                                                                                                                     |  |                                                                     | 40,165  |                       |   | 51,223  |  
|                                                                                                                                                                      |  |                                                                     |         |                       |   |         |  
|Accumulated other comprehensive loss                                                                                                                                  |  |                                                                     | (17,059 | )                     |   | (19,518 | )
|                                                                                                                                                                      |  |                                                                     |         |                       |   |         |  
|Treasury stock, at cost                                                                                                                                               |  |                                                                     | (27,874 | )                     |   | (30,693 | )
|                                                                                                                                                                      |  |                                                                     |         |                       |   |         |  
|                                                                                                                                                                      |  |                                                                     |         |                       |   |         |  
|Total shareholders equity                                                                                                                                            |  |                                                                     | 208,813 |                       |   | 88,869  |  
|                                                                                                                                                                      |  |                                                                     |         |                       |   |         |  
|                                                                                                                                                                      |  |                                                                     |         |                       |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                            |  | $                                                                   | 401,683 |                       | $ | 211,485 |  
|                                                                                                                                                                      |  |                                                                     |         |                       |   |         |  

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

29

---

---



AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS

|                                                            |  |                                                      |        |      |   |         |   |   |         |  
|----------------------------------------------------------- |  | ---------------------------------------------------- | ------ | ---- | - | ------- | - | - | ------- | -
|                                                            |  | Fiscal
  Year Ended December 31,                     |       
|                                                            |  |                                                      |       
|                                                            |  | 2006                                                 |        | 2005 |   | 2004    |  
|                                                            |  |                                                      |        |      |   |         |  
|                                                            |  | (U.S.
  Dollars in thousands, except per share data) |       
|                                                            |  |                                                      |       
|REVENUES:                                                   |  |                                                      |        |      |   |         |   |   |         |  
|Real estate income                                          |  | $                                                    | 9,642  |      | $ | 9,244   |   | $ | 9,020   |  
|Equity in earnings of affiliates (Note 13)                  |  |                                                      | 1,610  |      |   | 6,666   |   |   | 4,031   |  
|Realized gains on investments (Note 3)                      |  |                                                      | 5,386  |      |   | --      |   |   | 5,964   |  
|Realized and unrealized gains on marketable securities      |  |                                                      | 1,126  |      |   | 3,203   |   |   | 1,929   |  
|Gain (loss) on sale of real estate rental property (Note
3) |  |                                                      | 2,186  |      |   | --      |   |   | (123    | )
|Interest income                                             |  |                                                      | 1,479  |      |   | 1,567   |   |   | 590     |  
|Other income                                                |  |                                                      | 2,520  |      |   | 9,850   |   |   | 10,053  |  
|                                                            |  |                                                      |        |      |   |         |   |   |         |  
|Total
  revenues                                            |  |                                                      | 23,949 |      |   | 30,530  |   |   | 31,464  |  
|                                                            |  |                                                      |        |      |   |         |   |   |         |  
|                                                            |  |                                                      |        |      |   |         |   |   |         |  
|EXPENSES:                                                   |  |                                                      |        |      |   |         |   |   |         |  
|Real estate expenses                                        |  |                                                      | 9,229  |      |   | 8,651   |   |   | 8,874   |  
|Realized losses on investments (Note 3)                     |  |                                                      | 1,016  |      |   | 2,735   |   |   | --      |  
|Loss from impairment of investments & real estate (Note
3)  |  |                                                      | --     |      |   | 13,984  |   |   | 38,811  |  
|Interest expense                                            |  |                                                      | 5,154  |      |   | 5,257   |   |   | 4,880   |  
|Translation (gain) loss                                     |  |                                                      | (303   | )    |   | 2,220   |   |   | (194    | )
|Other (mainly general and administrative)                   |  |                                                      | 13,548 |      |   | 10,957  |   |   | 11,806  |  
|                                                            |  |                                                      |        |      |   |         |   |   |         |  
|Total
  expenses                                            |  |                                                      | 28,644 |      |   | 43,804  |   |   | 64,177  |  
|                                                            |  |                                                      |        |      |   |         |   |   |         |  
|Loss before income taxes                                    |  |                                                      | (4,695 | )    |   | (13,274 | ) |   | (32,713 | )
|Provision for income taxes (tax benefits) (Note 12)         |  |                                                      | 2,731  |      |   | (2,849  | ) |   | (10,198 | )
|                                                            |  |                                                      |        |      |   |         |   |   |         |  
|                                                            |  |                                                      |        |      |   |         |   |   |         |  
|Loss after income taxes (tax benefits)                      |  |                                                      | (7,426 | )    |   | (10,425 | ) |   | (22,515 | )
|Minority interests, net                                     |  |                                                      | (339   | )    |   | (4,467  | ) |   | (4,130  | )
|                                                            |  |                                                      |        |      |   |         |   |   |         |  
|NET LOSS                                                    |  | $                                                    | (7,087 | )    | $ | (5,958  | ) | $ | (18,385 | )
|                                                            |  |                                                      |        |      |   |         |   |   |         |  
|                                                            |  |                                                      |        |      |   |         |   |   |         |  
|Basic and diluted EPS (Note 11):                            |  |                                                      |        |      |   |         |   |   |         |  
|Loss per Class A share                                      |  | $                                                    | (0.40  | )    | $ | (0.31   | ) | $ | (0.94   | )
|                                                            |  |                                                      |        |      |   |         |   |   |         |  
|Shares used in calculation (in thousands)                   |  |                                                      | 24,109 |      |   | 19,967  |   |   | 19,841  |  
|                                                            |  |                                                      |        |      |   |         |   |   |         |  

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

30

---

---



AMPAL-AMERICAN ISRAEL CORPORATION AND
SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                  |  |                                  |          |      |   |         |   |   |         |  
|--------------------------------------------------------------------------------- |  | -------------------------------- | -------- | ---- | - | ------- | - | - | ------- | -
|                                                                                  |  | Fiscal
  Year Ended December 31, |         
|                                                                                  |  |                                  |         
|                                                                                  |  | 2006                             |          | 2005 |   | 2004    |  
|                                                                                  |  |                                  |          |      |   |         |  
|                                                                                  |  | (U.S. Dollars in thousands)      |         
|                                                                                  |  |                                  |         
|Cash flows from operating activities:                                             |  |                                  |          |      |   |         |   |   |         |  
|Net loss                                                                          |  | $                                | (7,087   | )    | $ | (5,958  | ) | $ | (18,385 | )
|Adjustments to reconcile net loss to net cash provided by operating
  activities: |  |                                  |          |      |   |         |   |   |         |  
|Equity in earnings of affiliates                                                  |  |                                  | (1,610   | )    |   | (6,666  | ) |   | (4,031  | )
|Realized and unrealized gains on investments, net                                 |  |                                  | (5,496   | )    |   | (468    | ) |   | (7,893  | )
|Loss (gain) on sale of real estate rental
  property                              |  |                                  | (2,186   | )    |   | --      |   |   | 123     |  
|Depreciation expense                                                              |  |                                  | 1,967    |      |   | 1,978   |   |   | 2,168   |  
|Amortization income from tenants deposits                                         |  |                                  | (1,747   | )    |   | (1,876  | ) |   | (1,944  | )
|Impairment of investments                                                         |  |                                  | --       |      |   | 13,984  |   |   | 38,811  |  
|Non cash stock based
  compensation                                               |  |                                  | 720      |      |   | --      |   |   | --      |  
|Minority interests                                                                |  |                                  | (339     | )    |   | (4,467  | ) |   | (4,130  | )
|Translation (gain) loss                                                           |  |                                  | (303     | )    |   | 2,220   |   |   | (194    | )
|Decrease in other assets                                                          |  |                                  | 4,196    |      |   | 13,425  |   |   | 537     |  
|Increase (decrease) in accounts payable, accrued expenses and
other               |  |                                  | 1,817    |      |   | 6,968   |   |   | (18,273 | )
|Investments made in trading securities                                            |  |                                  | (49,994  | )    |   | (12,868 | ) |   | (36,811 | )
|Proceeds from sale of trading securities                                          |  |                                  | 89,622   |      |   | 32,595  |   |   | 59,834  |  
|Dividends received from affiliates                                                |  |                                  | 217      |      |   | 4,335   |   |   | 3,277   |  
|                                                                                  |  |                                  |          |      |   |         |   |   |         |  
|                                                                                  |  |                                  |          |      |   |         |   |   |         |  
|Net cash provided by operating activities                                         |  |                                  | 29,777   |      |   | 43,202  |   |   | 13,089  |  
|                                                                                  |  |                                  |          |      |   |         |   |   |         |  
|                                                                                  |  |                                  |          |      |   |         |   |   |         |  
|Cash flows from investing activities:                                             |  |                                  |          |      |   |         |   |   |         |  
|Deposits, notes and loans receivable
collected                                    |  |                                  | --       |      |   | 2,872   |   |   | 14,935  |  
|Deposits, notes and loans receivable
granted                                      |  |                                  | (10,001  | )    |   | (1,024  | ) |   | (6,696  | )
|Investments made                                                                  |  |                                  | (123,031 | )    |   | (30,621 | ) |   | (6,295  | )
|Proceeds from sale of investments:                                                |  |                                  |          |      |   |         |   |   |         |  
|Affiliate companies                                                               |  |                                  | 21,714   |      |   | 3,041   |   |   | --      |  
|Others                                                                            |  |                                  | 1,663    |      |   | 72,315  |   |   | 16,556  |  
|Capital improvements                                                              |  |                                  | (1,430   | )    |   | (9,884  | ) |   | (1,075  | )
|Proceeds from sale of real estate
property                                        |  |                                  | 3,800    |      |   | --      |   |   | 236     |  
|                                                                                  |  |                                  |          |      |   |         |   |   |         |  
|                                                                                  |  |                                  |          |      |   |         |   |   |         |  
|Net cash provided by (used in) investing activities                               |  |                                  | (107,285 | )    |   | 36,699  |   |   | 17,661  |  
|                                                                                  |  |                                  |          |      |   |         |   |   |         |  

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

31

---

---



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

|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|------------------------------------------------------------------------------------ |  | -------------------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                     |  | Fiscal
  Year Ended December 31, |        
|                                                                                     |  |                                  |        
|                                                                                     |  | 2006                             |         | 2005 |   | 2004    |  
|                                                                                     |  |                                  |         |      |   |         |  
|                                                                                     |  | (U.S. Dollars in thousands)      |        
|                                                                                     |  |                                  |        
|Cash flows from financing activities:                                                |  |                                  |         |      |   |         |   |   |         |  
|Notes and loans payable received                                                     |  | $                                | 6,015   |      | $ | 8,869   |   | $ | 6,463   |  
|Long term loan received by partnership minority                                      |  |                                  | 166     |      |   | 2,050   |   |   | --      |  
|Notes and loans payable repaid                                                       |  |                                  | (11,210 | )    |   | (78,875 | ) |   | (23,655 | )
|Proceeds from exercise of stock options                                              |  |                                  | 550     |      |   | 251     |   |   | --      |  
|Debentures repaid                                                                    |  |                                  | --      |      |   | (2,023  | ) |   | (1,753  | )
|Proceeds from issuance of shares, net                                                |  |                                  | 36,668  |      |   | --      |   |   | --      |  
|Proceeds from issuance of debentures                                                 |  |                                  | 57,978  |      |   | --      |   |   | --      |  
|Deferred expense relating to issuance of debentures                                  |  |                                  | (1,607  | )    |   | --      |   |   | --      |  
|Contribution (distribution) to partnership by minority
interests                     |  |                                  | --      |      |   | (3,567  | ) |   | 40      |  
|Dividends paid on preferred stock                                                    |  |                                  | (2,332  | )    |   | (191    | ) |   | (200    | )
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|                                                                                    
|Net cash provided by (used) in financing activities                                  |  |                                  | 86,228  |      |   | (73,486 | ) |   | (19,105 | )
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|Effect of exchange rate changes on cash and cash
equivalents                         |  |                                  | 3,699   |      |   | 281     |   |   | 1,401   |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|Net increase in cash and cash equivalents                                            |  |                                  | 12,419  |      |   | 6,696   |   |   | 13,046  |  
|Cash and cash equivalents at beginning of year                                       |  |                                  | 24,314  |      |   | 17,618  |   |   | 4,572   |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|Cash and cash equivalents at end of year                                             |  | $                                | 36,733  |      | $ | 24,314  |   | $ | 17,618  |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|Supplemental Disclosure of Cash Flow Information Cash paid during the
  year:        |  |                                  |         |      |   |         |   |   |         |  
|Interest                                                                             |  |                                  | 2,969   |      |   | 2,535   |   |   | 5,170   |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|Income taxes paid                                                                    |  | $                                | 66      |      | $ | 68      |   | $ | 3,763   |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|Supplemental Disclosure of Non-Cash investing and financing
activity:                |  |                                  |         |      |   |         |   |   |         |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|Consideration for sale of an investment recorded as other
assets                     |  |                                  | 418     |      |   | --      |   |   | --      |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|Consideration for sale of fixed assets recorded as other
assets                      |  |                                  | 800     |      |   | --      |   |   | --      |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|Capital improvement recorded as account payable                                      |  |                                  | 868     |      |   | --      |   |   | --      |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|Investment made in consideration for sale of shares
capital                          |  |                                  | 88,965  |      |   | --      |   |   | --      |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|Investment made in investee by issuance of promissory note
payable                   |  |                                  | 20,000  |      |   | --      |   |   | --      |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|Marketable securities received as consideration for sale of an
  investment          |  |                                  | --      |      |   | 3,316   |   |   | 2,267   |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|                                                                                    
|Dividend in kind from an affiliate                                                   |  |                                  | --      |      |   | 7,088   |   |   | --      |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|Dividend from an equity investment recorded as payable accounts in
  previous period |  |                                  | 5,060   |      |   | --      |   |   | --      |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  
|Conversion of preferred stock to class A stock                                       |  |                                  | 2,111   |      |   | --      |   |   | --      |  
|                                                                                     |  |                                  |         |      |   |         |   |   |         |  

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

32

---

---



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

(U.S. Dollars in thousands)

|                                                                                                 |  |                    |        |                    |  |                      |  |        |      |                    |  |        |   |                                            |      |                                |  |          |   |                     |        |                                                     |  |                  |  |                            |     |  |  |        |   |  |         |   |  |         |   |  |         |  
|------------------------------------------------------------------------------------------------ |  | ------------------ | ------ | ------------------ |  | -------------------- |  | ------ | ---- | ------------------ |  | ------ | - | ------------------------------------------ | ---- | ------------------------------ |  | -------- | - | ------------------- | ------ | --------------------------------------------------- |  | ---------------- |  | -------------------------- | --- |  |  | ------ | - |  | ------- | - |  | ------- | - |  | ------- | -
|                                                                                                 |  | Class A stock      |        | 4% Preferred stock |  | 6.5% Preferred stock |  |        |      |                    |  |        |   |                                            |      |                                |  |          |   |                     |       
|                                                                                                 |  |                    |        |                    |  |                      |  |        |      |                    |  |        |   |                                            |      |                                |  |          |   |                     |       
|                                                                                                 |  | Number
  of shares |        | Amount             |  | Number
  of shares   |  | Amount |      | Number
  of shares |  | Amount |   | Receipt on  account of  unallocated shares |      | Additional
  paid in
  capital |  | Warrants |   | Retained
  earnings |        | Accumulated
  other
  comprehensive
  income (loss) |  | Treasury
  stock |  | Total
  sharehold
  equity |    
|                                                                                                 |  |                    |        |                    |  |                      |  |        |      |                    |  |        |   |                                            |      |                                |  |          |   |                     |        |                                                     |  |                  |  |                            |    
|BALANCE
  AT JANUARY 1, 2006                                                                     |  |                    | 25,827 |                    |  | 25,827               |  |        | 114  |                    |  | 571    |   |                                            | 641  |                                |  | 3,207    |   |                     | --     |                                                     |  | 58,252           |  |                            | --  |  |  | 51,223 |   |  | (19,518 | ) |  | (30,693 | ) |  | 88,869  |  
|CHANGES
  DURING 2006:                                                                           |  |                    |        |                    |  |                      |  |        |      |                    |  |        |   |                                            |      |                                |  |          |   |                     |        |                                                     |  |                  |  |                            |     |  |  |        |   |  |         |   |  |         |   |  |         |  
|Net
  loss                                                                                       |  |                    |        |                    |  |                      |  |        |      |                    |  |        |   |                                            |      |                                |  |          |   |                     |        |                                                     |  |                  |  |                            |     |  |  | (7,087 | ) |  |         |   |  |         |   |  | (7,087  | )
|Other
  comprehensive income (loss):                                                             |  |                    |        |                    |  |                      |  |        |      |                    |  |        |   |                                            |      |                                |  |          |   |                     |        |                                                     |  |                  |  |                            |     |  |  |        |   |  |         |   |  |         |   |  |         |  
|Foreign
  currency translation adjustments                                                       |  |                    |        |                    |  |                      |  |        |      |                    |  |        |   |                                            |      |                                |  |          |   |                     |        |                                                     |  |                  |  |                            |     |  |  |        |   |  | 2,676   |   |  |         |   |  | 2,676   |  
|Unrealized
  gain on marketable securities                                                       |  |                    |        |                    |  |                      |  |        |      |                    |  |        |   |                                            |      |                                |  |          |   |                     |        |                                                     |  |                  |  |                            |     |  |  |        |   |  | 109     |   |  |         |   |  | 109     |  
|Sale
  of available for sale securities                                                          |  |                    |        |                    |  |                      |  |        |      |                    |  |        |   |                                            |      |                                |  |          |   |                     |        |                                                     |  |                  |  |                            |     |  |  |        |   |  | (326    | ) |  |         |   |  | (326    | )
|                                                                                                 |  |                    |        |                    |  |                      |  |        |      |                    |  |        |   |                                            |      |                                |  |          |   |                     |        |                                                     |  |                  |  |                            |     |  |  |        |   |  |         |   |  |         |   |  |         |  
|Total
  comprehensive loss                                                                       |  |                    |        |                    |  |                      |  |        |      |                    |  |        |   |                                            |      |                                |  |          |   |                     |        |                                                     |  |                  |  |                            |     |  |  |        |   |  |         |   |  |         |   |  | (4,628  | )
|Conversion
  of 110,848 4% preferred stock and 518,887 6.5% preferred stock into Class A
  stock |  |                    | 2,111  |                    |  | 2,111                |  |        | (111 | )                  |  | (554   | ) |                                            | (519 | )                              |  | (2,594   | ) |                     |        |                                                     |  | 1,037            |  |                            |     |  |  |        |   |  |         |   |  |         |   |  | --      |  
|Elimination
  of treasury stock                                                                  |  |                    |        |                    |  |                      |  |        | (3   | )                  |  | (17    | ) |                                            | (122 | )                              |  | (613     | ) |                     |        |                                                     |  |                  |  |                            |     |  |  | (1,307 | ) |  |         |   |  | 1,937   |   |  | --      |  
|Shares
  issued for investment made                                                              |  |                    | 10,248 |                    |  | 10,248               |  |        |      |                    |  |        |   |                                            |      |                                |  |          |   |                     | 40,000 |                                                     |  | 38,717           |  |                            |     |  |  |        |   |  |         |   |  |         |   |  | 88,965  |  
|Shares
  issued and warrants in a private placement                                              |  |                    | 8,142  |                    |  | 8,142                |  |        |      |                    |  |        |   |                                            |      |                                |  |          |   |                     |        |                                                     |  | 28,219           |  |                            | 308 |  |  |        |   |  |         |   |  |         |   |  | 36,669  |  
|Compensation
  expense recognized under SFAS 123R                                                |  |                    |        |                    |  |                      |  |        |      |                    |  |        |   |                                            |      |                                |  |          |   |                     |        |                                                     |  | 720              |  |                            |     |  |  |        |   |  |         |   |  |         |   |  | 720     |  
|Reissuance
  of 176,250 treasury stock for exercise of stock options                             |  |                    |        |                    |  |                      |  |        |      |                    |  |        |   |                                            |      |                                |  |          |   |                     |        |                                                     |  |                  |  |                            |     |  |  | (332   | ) |  |         |   |  | 882     |   |  | 550     |  
|Dividend
   4% Preferred stock                                                                  |  |                    |        |                    |  |                      |  |        |      |                    |  |        |   |                                            |      |                                |  |          |   |                     |        |                                                     |  |                  |  |                            |     |  |  | (285   | ) |  |         |   |  |         |   |  | (285    | )
|
  6.5% Preferred stock                                                                         |  |                    |        |                    |  |                      |  |        |      |                    |  |        |   |                                            |      |                                |  |          |   |                     |        |                                                     |  |                  |  |                            |     |  |  | (2,047 | ) |  |         |   |  |         |   |  | (2,047  | )
|                                                                                                 |  |                    |        |                    |  |                      |  |        |      |                    |  |        |   |                                            |      |                                |  |          |   |                     |        |                                                     |  |                  |  |                            |     |  |  |        |   |  |         |   |  |         |   |  |         |  
|                                                                                                 |  |                    |        |                    |  |                      |  |        |      |                    |  |        |   |                                            |      |                                |  |          |   |                     |        |                                                     |  |                  |  |                            |     |  |  |        |   |  |         |   |  |         |   |  |         |  
|BALANCE
  AT DECEMBER 31, 2006                                                                   |  |                    | 46,328 |                    |  | 46,328               |  |        | -    |                    |  | -      |   |                                            | -    |                                |  | -        |   |                     | 40,000 |                                                     |  | 126,945          |  |                            | 308 |  |  | 40,165 |   |  | (17,059 | ) |  | (27,874 | ) |  | 208,813 |  
|                                                                                                 |  |                    |        |                    |  |                      |  |        |      |                    |  |        |   |                                            |      |                                |  |          |   |                     |        |                                                     |  |                  |  |                            |     |  |  |        |   |  |         |   |  |         |   |  |         |  

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

33

---

---



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

(U.S. Dollars in thousands)

|                                                                                            |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |        |   |  |         |   |  |         |   |  |         |  
|------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ------------------- |  | --------------------- |  | ------ | --- | ------------------ |  | ------ | - | ---------------------------- | --- | ------------------- |  | --------------------------------------------------- | - | ---------------- | ------ | ----------------------------- |  | ------ | - |  | ------- | - |  | ------- | - |  | ------- | -
|                                                                                            |  | Class A stock      |        | 4 % preferred stock |  | 6.5 % preferred stock |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                              
|                                                                                            |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                              
|                                                                                            |  | Number of
  shares |        | Amount              |  | Number of
  shares    |  | Amount |     | Number of
  shares |  | Amount |   | Additional
  paid in capital |     | Retained
  earnings |  | Accumulated
  other
  comprehensive
  income (loss) |   | Treasury
  stock |        | Total
  shareholders
  equity | 
|                                                                                            |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               | 
|BALANCE AT JANUARY 1, 2005                                                                  |  |                    | 25,715 |                     |  | 25,715                |  |        | 124 |                    |  | 620    |   |                              | 662 |                     |  | 3,311                                               |   |                  | 58,211 |                               |  | 57,524 |   |  | (14,272 | ) |  | (31,096 | ) |  | 100,013 |  
|CHANGES DURING 2005:                                                                        |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |        |   |  |         |   |  |         |   |  |         |  
|Net loss                                                                                    |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  | (5,958 | ) |  |         |   |  |         |   |  | (5,958  | )
|Other comprehensive income
  (loss):                                                        |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |        |   |  |         |   |  |         |   |  |         |  
|Foreign currency translation
  adjustments                                                  |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |        |   |  | 348     |   |  |         |   |  | 348     |  
|Unrealized loss on
  marketable securities                                                  |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |        |   |  | (1,472  | ) |  |         |   |  | (1,472  | )
|Sale of available for sale
  securities                                                     |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |        |   |  | (4,122  | ) |  |         |   |  | (4,122  | )
|                                                                                            |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |        |   |  |         |   |  |         |   |  |         |  
|Total comprehensive loss                                                                    |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |        |   |  |         |   |  |         |   |  | (11,204 | )
|Conversion of 9,826 4%
  preferred stock and 20,796 6.5% preferred stock into Class A stock |  |                    | 112    |                     |  | 112                   |  |        | (10 | )                  |  | (49    | ) |                              | (21 | )                   |  | (104                                                | ) |                  | 41     |                               |  |        |   |  |         |   |  |         |   |  | -       |  
|Reissuance of 80,625
  treasury stock for exercise of stock options                         |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  | (152   | ) |  |         |   |  | 403     |   |  | 251     |  
|Dividends :                                                                                 |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |        |   |  |         |   |  |         |   |  |         |  
|4% preferred stock, $0.2 per
  share                                                        |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  | (22    | ) |  |         |   |  |         |   |  | (22     | )
|6.5% preferred stock, $0.325
  per share                                                    |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  | (169   | ) |  |         |   |  |         |   |  | (169    | )
|                                                                                            |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |        |   |  |         |   |  |         |   |  |         |  
|                                                                                            |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |        |   |  |         |   |  |         |   |  |         |  
|                                                                                            |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |        |   |  |         |   |  |         |   |  |         |  
|BALANCE AT DECEMBER 31, 2005                                                                |  |                    | 25,827 |                     |  | 25,827                |  |        | 114 |                    |  | 571    |   |                              | 641 |                     |  | 3,207                                               |   |                  | 58,252 |                               |  | 51,223 |   |  | (19,518 | ) |  | (30,693 | ) |  | 88,869  |  
|                                                                                            |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |        |   |  |         |   |  |         |   |  |         |  

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

34

---

---



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

(U.S. Dollars in thousands)

|                                                    |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |         |   |  |         |   |  |         |   |  |         |  
|--------------------------------------------------- |  | ------------------ | ------ | ------------------- |  | --------------------- |  | ------ | --- | ------------------ |  | ------ | - | ---------------------------- | --- | ------------------- |  | --------------------------------------------------- | - | ---------------- | ------ | ----------------------------- |  | ------- | - |  | ------- | - |  | ------- | - |  | ------- | -
|                                                    |  | Class A stock      |        | 4 % preferred stock |  | 6.5 % preferred stock |  |        |     |                    |  |        |   |                              |     |                     | 
|                                                    |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     | 
|                                                    |  | Number of
  shares |        | Amount              |  | Number of
  shares    |  | Amount |     | Number of
  shares |  | Amount |   | Additional
  paid in capital |     | Retained
  earnings |  | Accumulated
  other
  comprehensive
  income (loss) |   | Treasury
  stock |        | Total
  shareholders
  equity | 
|                                                    |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               | 
|BALANCE AT JANUARY 1, 2004                          |  |                    | 25,567 |                     |  | 25,567                |  |        | 132 |                    |  | 660    |   |                              | 697 |                     |  | 3,487                                               |   |                  | 58,143 |                               |  | 76,109  |   |  | (17,847 | ) |  | (31,096 | ) |  | 115,023 |  
|CHANGES DURING 2004:                                |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |         |   |  |         |   |  |         |   |  |         |  
|Net loss                                            |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  | (18,385 | ) |  |         |   |  |         |   |  | (18,385 | )
|Other comprehensive income
  (loss):                |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |         |   |  |         |   |  |         |   |  |         |  
|Foreign currency translation
  adjustments          |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |         |   |  | 513     |   |  |         |   |  | 513     |  
|Unrealized loss on
  marketable securities          |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |         |   |  | 3,396   |   |  |         |   |  | 3,396   |  
|Sale of available for sale
  securities             |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |         |   |  | (334    | ) |  |         |   |  | (334    | )
|                                                    |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |         |   |  |         |   |  |         |   |  |         |  
|Total comprehensive loss                            |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |         |   |  |         |   |  |         |   |  | (14,810 | )
|Conversion of 7,928 4%
  preferred stock and 35,161 |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |         |   |  |         |   |  |         |   |  |         |  
|6.5% preferred stock into
  Class A stock           |  |                    | 148    |                     |  | 148                   |  |        | (8  | )                  |  | (40    | ) |                              | (35 | )                   |  | (176                                                | ) |                  | 68     |                               |  |         |   |  |         |   |  |         |   |  |         |  
|4% preferred stock, $0.2 per
  share                |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  | (24     | ) |  |         |   |  |         |   |  | (24     | )
|6.5% preferred stock, $0.325
  per share            |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  | (176    | ) |  |         |   |  |         |   |  | (176    | )
|                                                    |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |         |   |  |         |   |  |         |   |  |         |  
|                                                    |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |         |   |  |         |   |  |         |   |  |         |  
|                                                    |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |         |   |  |         |   |  |         |   |  |         |  
|BALANCE AT DECEMBER 31, 2004                        |  |                    | 25,715 |                     |  | 25,715                |  |        | 124 |                    |  | 620    |   |                              | 662 |                     |  | 3,311                                               |   |                  | 58,211 |                               |  | 57,524  |   |  | (14,272 | ) |  | (31,096 | ) |  | 100,013 |  
|                                                    |  |                    |        |                     |  |                       |  |        |     |                    |  |        |   |                              |     |                     |  |                                                     |   |                  |        |                               |  |         |   |  |         |   |  |         |   |  |         |  

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

35

---

---



AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Summary of Significant Accounting Policies

|    |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | General      
|    |              
|    | (1)           | Ampal-American
  Israel Corporation is a New York corporation founded in 1942. The Company
  primarily acquires interests in businesses located in the State of Israel or
  that are Israel-related.                                                                                                                                                                                                                                                      
|    |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | (2)           | As used in
  these financial statements, the term the Company refers to Ampal-American
  Israel Corporation (Ampal) and its consolidated subsidiaries. As to segment
  information see Note 14.                                                                                                                                                                                                                                                     
|    |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | (3)           | The
  consolidated financial statements are prepared in accordance with accounting
  principals generally accepted in the United States of America.                                                                                                                                                                                                                                                                                                       
|    |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | (4)           | The
  preparation of financial statements in conformity with generally accepted
  accounting principles requires management to make estimates and assumptions
  that affect the reported amounts of assets and liabilities, disclosure of
  contingent assets and liabilities at the date of the financial statements and
  the reported amounts of revenues and expenses during the reporting period.
  Actual results could differ from those estimates.
|    |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(b) | Consolidation

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

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

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

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

|    |                                   
|--- | ----------------------------------
|(d) | Foreign Exchange 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, 2006, the Company did not have any open foreign currency forward
exchange contracts to purchase or sell US Dollars.

36

---

---



|    |             |                            
|--- | ----------- | ---------------------------
|(e) | Investments
|    |            
|    | (i)         | Investments
  in Affiliates

Investments
in which the Company exercises significant influence, generally 20% to 50%
owned companies (affiliates), are accounted for by the equity method, whereby
the Company recognizes its proportionate share of such companies net income or
loss and in other comprehensive income its proportional share in translation
difference on net investments and in other comprehensive income (loss). The
Company reduces the carrying value of its investment in an affiliate if an
impairment in value of that investment is deemed to be other than temporary.

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

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

| |       |                         
| | ----- | ------------------------
| | (iii) | Cost Basis
  Investments

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

|    |                                
|--- | -------------------------------
|(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s management believes
that the credit risk in respect of these balances is not material.

The
company performs ongoing credit evaluations of its receivables allowance for
doubtful accounts.

|    |                    
|--- | -------------------
|(g) | Long - Lived Assets

The
assets are recorded at cost, depreciating 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.

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

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

|    |                       
|--- | ----------------------
|(h) | Leasehold improvements

Fixed
assets leased by the companies under capital leases are classified as the
companies assets and are recorded, at the inception of the lease, at the lower
of the assets fair value or the present value of the minimum lease payments
(not including the financial component). Leasehold improvements are amortized
by the straight-line method over the term of the lease, which is shorter than
the estimated useful life of the improvements.

37

---

---



|    |             
|--- | ------------
|(i) | Income Taxes

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

The
Company does not record deferred income taxes on undistributed earnings of
foreign subsidiaries adjusted for translation effect since such earnings are
currently expected to be permanently reinvested outside the United States. As
of December 31, 2006 and 2005 there were no undistributed earnings of foreign
subsidiaries.

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.

|    |                    
|--- | -------------------
|(j) | Revenue Recognition

The
Company recognizes revenue in accordance with Staff Accounting Bulletin (SAB)
No. 104  Revenue Recognition. Revenue is recognized when there is persuasive
evidence of an arrangement, the fee is fixed or determinable, delivery has
occurred and the Company has determined that collection of the fee is probable.

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

|    |                          
|--- | -------------------------
|(k) | Cash and Cash Equivalents

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

Cash
equal to $9.0 million has been placed as a compensating balance for various
loans provided to the Company and would therefore be unavailable if the Company
wished to pledge them in order to provide an additional source of cash.

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

Basic
and diluted net earning (loss) per share are presented in accordance with SFAS
No. 128 Earnings per share (SFAS No. 128) and with EITF 03-06
participating securities and the two-class method under FAS 128. In 2006,
2005 and 2004, all outstanding stock options and preferred shares have been
excluded from the calculation of the diluted loss per share because all such
securities are anti-dilutive for these periods presented. Also, participating
4% Convertible Preferred Stock was not taken into account in the computation of
the basic EPS for those years (in the period in which it was outstanding) since
its shareholders do not have contractual obligation to share in the losses of
the Company.

|    |                     
|--- | --------------------
|(m) | Comprehensive Income

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

38

---

---



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

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

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

The
Company has applied the provisions of SAB 107 in its adoption of SFAS 123R. The
Company recognizes no income tax benefit on its stock compensation expense as
it is not more likely than not that it will be able to utilize them to offset
future income taxes.

Prior
to January 1, 2006, the Company accounted for the stock-based compensation
plans in accordance with the provisions of APB No. 25, as permitted by
SFAS No. 123, and accordingly did not recognize compensation expense for
stock options since the exercise price was equal to the market price of the
underlying stock at the date of grant. 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 for the years 2005 and 2004 would have been
reduced as follows:

|                                                                             |  |                                         |        |                                         |   |         |  
|---------------------------------------------------------------------------- |  | --------------------------------------- | ------ | --------------------------------------- | - | ------- | -
|                                                                             |  | Year ended
  December 31,               |       
|                                                                             |  |                                         | 2005   |                                         |   | 2004    |  
|                                                                             |  | (In
  thousands, except per share data) |        | (In thousands,
  except per share data) |  
|                                                                             |  |                                         |        |                                         |  
|                                                                            
|Net loss, as reported                                                        |  | $                                       | (5,958 | )                                       | $ | (18,385 | )
|                                                                             |  |                                         |        |                                         |   |         |  
|Less  stock
  based compensation expense determined under fair value method |  |                                         | (874   | )                                       |   | (569    | )
|                                                                             |  |                                         |        |                                         |   |         |  
|                                                                            
|Pro forma,
  net loss                                                        |  |                                         | (6,832 | )                                       |   | (18,954 | )
|                                                                             |  |                                         |        |                                         |   |         |  
|                                                                            
|Basic and diluted EPS:                                                       |  |                                         |        |                                         |   |         |  
|As reported (1)(2)                                                           |  | $                                       | (0.31  | )                                       | $ | (0.94   | )
|Pro forma (1)(2)                                                             |  | $                                       | (0.35  | )                                       | $ | (0.97   | )

|                                                                                                                                                              
|--------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)After
  deduction of accrued Preferred Stock Dividend of $191 thousands and $200
  thousands for the years 2005 and 2004, respectively.                    
|                                                                                                                                                              
|(2)The
  effect of the conversion of the 4% and 6.5% Preferred Stock was excluded from
  the basic and diluted EPS calculation due to its antidilutive effect.

39

---

---



|    |               
|--- | --------------
|(o) | Treasury stock

These
shares are presented as a reduction of shareholders equity at their cost to
the Company. The Company does not have a policy to repurchase its shares.

|    |                                                            
|--- | -----------------------------------------------------------
|(p) | Newly Issued and Recently Adopted Accounting Pronouncements

SFAS No. 155  Accounting for Certain Hybrid
Financial Instruments - an Amendment of FASB Statements No. 133 and 140.

In February
2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 155, Accounting for Certain Hybrid Financial Instruments  an
Amendment of FASB Statements No. 133 and 140 (SFAS No. 155). SFAS
No. 155 allows financial instruments that contain an embedded derivative
and that otherwise would require bifurcation to be accounted for as a whole on
a fair value basis, at the holders election. SFAS No. 155 also clarifies
and amends certain other provisions of SFAS No. 133 and SFAS No. 140.
This statement is effective for all financial instruments acquired or issued in
fiscal years beginning after September 15, 2006 (January 1, 2007 for the
Company). Management does not expect the adoption of SFAS No. 155 will
have a material impact on the Companys consolidated financial condition or
results of operations.

FASB Interpretation No. 48  Accounting
for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109

In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement No. 109 (FIN 48).
FIN 48 clarifies the recognition threshold and measurement of a tax position
taken on a tax return. FIN 48 is effective for fiscal years beginning after
December 15, 2006 (January 1, 2007 for the Company). FIN 48 also requires
expanded disclosure with respect to the uncertainty in income taxes. Management
does not expect the adoption of this interpretation to have a material impact
on the Companys financial statements.

SFAS No. 157 - Fair Value Measurements

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
157), which provides guidance on how to measure assets and liabilities that
use fair value. SFAS 157 will apply whenever another US GAAP standard requires
(or permits) assets or liabilities to be measured at fair value but does not
expand the use of fair value to any new circumstances. This standard also will
require additional disclosures in both annual and quarterly reports. SFAS 157
will be effective for fiscal years beginning after November 15, 2007 (January
1, 2008 for the Company). The Company is currently evaluating the impact, if
any, the adoption of SFAS 157 will have on its financial statements.

Staff Accounting Bulletin No. 108 -
Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements

In
September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108). SAB 108 was
issued in order to eliminate the diversity of practice in how public companies
quantify misstatements of financial statements, including misstatements that
were not material to prior years financial statements. The Company adopted SAB
108 and follows SAB 108 requirements when quantifying financial statement
misstatements. The adoption of SAB No.108 did not have any impact on the
Companys financial statements.

FAS No. 159 - The
Fair Value Option for Financial Assets and Financial Liabilities

In February 2007, the FASB issued FAS 159, The Fair Value Option for
Financial Assets and Financial Liabilities. This standard permits entities to
choose to measure many financial assets and financial liabilities at fair
value. Unrealized gains and losses on items for which the fair value option has
been elected are reported in earnings. As applicable to Ampal, this statement
will be effective as of the year beginning January 1, 2008. Ampal is
currently evaluating the impact that the adoption of FAS 159 would have on its
consolidated financial statements.

40

---

---



|    |                  
|--- | -----------------
|(q) | Reclassifications

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

Note
2  Investments

The
balance of investments as of December 31, 2006 and 2005, are composed of the
following items:

| |                            |  |                             |         |      |   |        | 
| | -------------------------- |  | --------------------------- | ------- | ---- | - | ------ | 
| |                            |  | As of
December 31,          |        
| |                            |  |                             |        
| |                            |  |                             |         |      |   |        | 
| |                            |  | 2006                        |         | 2005 |  
| |                            |  |                             |         |      |  
| |                            |  |                             |         |      |   |        | 
| |                            |  | (U.S.
Dollars in thousands) |        
| |                            |  |                             |         |      |  
| |                            |  |                             |         |      |   |        | 
| | EMG                        |  | $                           | 259,860 |      | $ | 29,960 | 
| |                            |  |                             |         |      |   |        | 
| | Investment
  in Affiliates |  |                             | 3,855   |      |   | 23,427 | 
| |                            |  |                             |         |      |   |        | 
| | Other
  Investments        |  |                             | 1,521   |      |   | 1,516  | 
| |                            |  |                             |         |      |   |        | 
| | Marketable
  Securities(1) |  |                             | 380     |      |   | 38,575 | 
| |                            |  |                             |         |      |   |        | 
| |                            |  |                             |         |      |   |        | 
| |                            |  | $                           | 265,616 |      | $ | 93,478 | 
| |                            |  |                             |         |      |   |        | 

| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | (1)     The Company classifies investments in
  marketable securities as trading securities or available-for-sale securities.

| |     |                                                                                                 
| | --- | ------------------------------------------------------------------------------------------------
| | (a) | Trading Securities                                                                              
| |     |                                                                                                 
| |     | The cost and market values of Trading securities at December 31, 2006
  and 2005 are as follows:

| |      |  |                             |        |                    |   |                |  |   |        | 
| | ---- |  | --------------------------- | ------ | ------------------ | - | -------------- |  | - | ------ | 
| |      |  | Cost                        |        | Unrealized
  Gains |   | Market
  Value | 
| |      |  |                             |        |                    |   |                | 
|
| |      |  | (U.S. Dollars in thousands) |       
| |      |  |                             |        |                    |   |                | 
| |      |  |                             |        |                    |   |                |  |   |        | 
| | 2006 |  | $                           | 245    |                    | $ | 135            |  | $ | 380    | 
| |      |  |                             |        |                    |   |                |  |   |        | 
|
| | 2005 |  | $                           | 36,316 |                    | $ | 71             |  | $ | 36,387 | 
| |      |  |                             |        |                    |   |                |  |   |        | 

| |     |                                                                                                                                                       
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) | Available-For-Sale Securities                                                                                                                         
| |     |                                                                                                                                                       
| |     | The cost and
  market values of available-for-sale securities consisting of marketable
  securities only at December 31, 2006 and 2005 are as follows:

| |      |  |                             |       |                    |   |                |  |   |       | 
| | ---- |  | --------------------------- | ----- | ------------------ | - | -------------- |  | - | ----- | 
| |      |  | Cost                        |       | Unrealized
  Gains |   | Market
  Value | 
| |      |  |                             |       |                    |   |                | 
| |      |  | (U.S. Dollars in thousands) |      
| |      |  |                             |       |                    |   |                | 
| |      |  |                             |       |                    |   |                |  |   |       | 
| | 2006 |  | $                           | -     |                    | $ | -              |  | $ | -     | 
| |      |  |                             |       |                    |   |                |  |   |       | 
| |      |  |                             |       |                    |   |                |  |   |       | 
| | 2005 |  | $                           | 1,855 |                    | $ | 333            |  | $ | 2,188 | 
| |      |  |                             |       |                    |   |                |  |   |       | 

41

---

---



Note 3  Acquisitions, Dispositions and
Impairments

|   |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | ------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|a) | In 2006, the Company made
  the following investments:
|   |                                                       
|   | 1.                                                     | During 2006, the Company
  made an additional investments of $229.9 million in EMG as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                        | The Company, through Merhav Ampal
Energy, Ltd., a wholly-owned subsidiary of the Company, entered into an agreement with
Merhav (M.N.F.) Ltd. (Merhav) for the purchase from Merhav a portion of its
interest in East Mediterranean Gas Co. S.A.E., an Egyptian joint stock company
(EMG). The sole owner of Merhav is Yosef A. Maiman, who is also the Chairman,
President and CEO of the Company and a member of the controlling shareholder group of
Ampal.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                        | On August 1, 2006 the Company
acquired the beneficial ownership of 4.6% of the outstanding shares of EMGs capital
stock from Merhav. The transaction was accounted for as a transfer of assets between
entities under common control, which resulted in Merhav transferring the investment in EMG
to Ampal at carrying value. Due to the nature of Merhavs operations, this entity
would be treated as an investment company under US GAAP, and as such, the carrying value
of the investment in EMG would equal fair value. On this basis, the 4.6% investment in EMG
was transferred to Ampal at carrying value, which also equals fair value. The purchase
price for the shares was $100.0 million, of which, $50.0 million was paid in cash and the
balance was paid in 10,248,002 shares of the Company Class A Stock (based on a purchase
price of $4.88 per share) that was accounted for at a fair value of $49.0 million (the
fair value was determined based on the average price per share from 2 days before the
agreement press release through 2 days after the agreement press release). The issuance of
the shares of Class A Stock received the approval of the shareholders of the Company as
required by the marketplace rules of the NASDAQ Global Market. As a result of this
transaction, the Company beneficially owned 6.6% of the total outstanding shares of EMG.
Through August 2008, the purchase price may be adjusted downward should Merhav sell any of
its remaining shares of EMG to a third-party purchaser at a purchase price per share lower
than the price per share paid by the Company pursuant to the agreement. Additionally,
pursuant to the agreement, the Company was granted an option for a period of up to two
years to have the right to acquire up to an additional 5.9% of the total outstanding
shares of EMG stock.
|   |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                        | Yosef A. Maiman, the Chairman,
President and CEO of the Company and a member of the controlling shareholder group of the
Company, is the sole owner of Merhav. Because of the foregoing relationships, a
special committee of the Board of Directors composed of the Companys independent
directors, who also constitute all of the members of the Companys Audit Committee,
negotiated and approved the transaction. Houlihan Lokey Howard & Zukin Financial
Advisors, Inc., which was retained as financial advisor to the special committee,
delivered a fairness opinion to the special committee regarding the transaction.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                        | On August 22, 2006, EMG called for
additional capital from all of its shareholders. As a result, the Company paid an
additional $2.7 million in order to maintain its pro rata beneficial interest in this
investment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                        | On December 21, 2006, the Company
acquired the beneficial ownership of an additional 5.9% of the outstanding shares of
EMGs capital stock pursuant to an option granted by Merhav in August 2006. The
transaction was accounted for as a transfer of assets between entities under common
control, which resulted in Merhav transferring the investment in EMG to Ampal at carrying
value. Due to the nature of Merhavs operations, this entity would be treated as an
investment company under US GAAP, and as such, the carrying value of the investment in EMG
would equal fair value. On this basis, the 5.9% investment in EMG was transferred to Ampal
at carrying value, which also equals fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

42

---

---



|    |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ------------------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                        | The purchase price for the shares was
approximately $128.3 million, of which approximately $68.3 million was paid in cash, $40
million was paid in 8,602,151 shares of the Companys Class A Stock and the balance
was satisfied by the issuance of a promissory note in the principal amount of $20 million
(the Convertible Promissory Note), which, at the option of Merhav, will be
paid in cash, additional shares of the Company Class A Stock (based on a price per share
of $4.65 per share), or a combination thereof. As permitted under the stock purchase
agreement, Merhav assigned its right to the 8,602,151 Shares to De Majorca Holdings
Limited as part of Merhavs restructuring process. The Convertible Promissory Note
bears interest at 6 months LIBOR (5.375%) and matures on the earlier of September 20, 2007
or upon demand by Merhav. Ampal may pre-pay the Convertible Promissory Note at any time in
whole or in part. The maximum number of shares that can be issued in this transaction
(including accrued interest payable through the maturity date on the Convertible
Promissory Note) is 13,078,540 shares of Class A Stock. As a result of this transaction,
Ampal beneficially owns 12.5% of the total outstanding shares of EMG. The issuance of the
8,602,151 shares and the shares underlying the Convertible Promissory Note received the
approval of the shareholders of the Company on February 7, 2007, as required by the
marketplace rules of the NASDAQ Global Market. Due to the agreement of the controlling
shareholder group to vote in favor of the issuance of these shares to Merhav as of the
closing date of the EMG transaction (which ensured that the proposal would be adopted by
the requisite shareholder vote on February 7, 2007), the Company classified for accounting
purposes the sale of these shares as part of the exchange with Merhav on December 21,
2006, and recognized the $40 million within shareholders equity as Receipt on
account of unallocated shares. The investment in EMG is included in the energy
segment.Yosef A. Maiman, the Chairman,
President and CEO of the Company and a member of the controlling shareholder group of the
Company, is the sole owner of Merhav. Because of the foregoing relationships, a special
committee of the Board of Directors composed of the Companys independent directors,
who also constitute all of the members of the Companys Audit Committee, negotiated
and approved the transaction. Houlihan Lokey Howard & Zukin Financial Advisors, Inc.,
which was retained as financial advisor to the special committee, advised the special
committee on these transactions.
|    |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | 2.                                                     | Additional investment of
  $0.4 million in FIMI Opportunity Fund, L.P. (FIMI).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | 3.                                                     | A loan to Bay Heart of
  $1.7 million, for a shopping mall in Haifa, Israel                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|b)  | In 2006, Ampal made the
  following dispositions:     
|    |                                                       
|    | 1.                                                     | In June and December 2006,
  the Company received proceeds in the total amount of $0.6 million from the
  sales of certain investments by FIMI.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | 2.                                                     | On June 13, 2006, the
  Company sold its holdings in Coral World Iinternational for $21.0 million and
  recorded a gain of $4.2 million. The gain is included in the leisure-time
  segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | 3.                                                     | In March 2006, the Company
  received an additional proceeds from the sale of Modem Art Ltd. in the amount
  of $0.6 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | 4.                                                     | In April 2006, the Company
  received additional proceeds in the amount of $0.4 million from the sale of
  certain assets by PSINet Europe, one of the holdings of Ampals investee company, TP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | 5.                                                     | On May 8, 2006, the
  Company sold its holdings in Ophir Holdings Ltd. for $1.1 million and
  recorded a loss of $1.0 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | 6.                                                     | In September 2006, the
  Company sold the building in Tel-Aviv containing its headquarters for a
  proceeds of $4.6 million and recorded a gain of $2.2 million. The new owner
  has agreed to lease to the Company the office space containing the Companys
  headquarters for a period of up to 2 years commencing on November 28, 2006.
  The annual rent for this lease is $162,000. The gain from the sale is
  included in the real-estate segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(c) | In 2005, the
  Company made the following investments:
|    |                                                       
|    | 1.                                                     | On December 1, 2005, the
  Company acquired a 2% interest in EMG from Merhav. EMG is an Egyptian joint
  stock company organized in accordance with the Egyptian Special Free Zones
  system which has been given the right to export natural gas from Egypt to
  Israel and other locations in the East Mediterranean basin and other
  countries. Egyptian natural gas shall reach the Israeli market via an
  underwater pipeline owned by EMG. Under the terms of the transaction, the
  Company acquired a 2% beneficial ownership in EMG for a purchase price of
  $29,960,000. Additionally, the Company was granted the exclusive right to
  negotiate to acquire a substantial portion of Merhavs remaining shares of
  EMG. The Company also has the right for a period of time to require Merhav to
  repurchase the EMG interest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                        | Yosef A. Maiman, the
  chairman of the Companys Board of Directors, is the sole owner of Merhav.
  The transaction was approved by a special committee of the Board of Directors
  composed of the Companys independent directors. Houlihan Lokey Howard &
  Zukin Financial Advisors, Inc. acted as financial advisors to the special committee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

43

---

---



|    |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | 2.                                                                                                                              | Additional investment of
  $0.7 million in FIMI Opportunity Fund, L.P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | 3.                                                                                                                              | A loan to Bay Heart Ltd.
  of $0.9 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(d) | In 2005, the Company made
  the following dispositions:                                                                        
|    |                                                                                                                                
|    | 1.                                                                                                                              | During
  the third and fourth quarter of 2005, one of the holdings of Ampals investee
  companies, TP, received proceeds at the amount of $1.1 million from selling
  all its assets in Grapes Communications N.V./S.A. and its holdings in PSINet Europe B.V.                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | 2.                                                                                                                              | On
  October 3, 2005, the Company, through Ampal Communications L.P.,
  completed the sale to Motorola Israel Ltd. of all of its 25% holdings of MIRS
  pursuant to the Agreement. In connection with the sale of its holdings of
  MIRS, Ampal Communications L.P. received approximately US $89 million of total
  proceeds, composed of US $67.7 million for the purchase price and an
  additional US $21.3 million related to guaranteed dividend payments. During
  the third quarter of 2005, the Company recorded a $13.3 million loss from
  impairment relating to this investment.
|    |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | 3.                                                                                                                              | On
  September 7, 2005, a third-party Israeli based venture fund and certain of
  its affiliated companies invested $2.65 million in the Companys high-tech
  and communications portfolio. Ampal received $2.5 million in connection with
  this transaction. The Company treated this investment as a disposition for
  accounting purposes and recorded a loss of $7.3 million ($4.6 million after
  taxes).                                                                                                                                                                             
|    |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | 4.                                                                                                                              | On August 15, 2005, the
  Company sold its holdings in Epsilon Investment House Ltd. and Renaissance Investment
  Company Ltd. for $2.0 million and recorded a $1.4 million gain.                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | 5.                                                                                                                              | On July 11, 2005, the
  Company sold its holdings in Xpert Ltd. for $0.8 million and recorded a loss
  of $0.2 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | 6.                                                                                                                              | On March 8, 2005, the
  Company sold its holdings in Modem Art Ltd. for $4.4 million and recorded a
  gain of $3.3 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(e) | In 2005, the Company
  recorded loss from impairment of investments and loans of $14.0 million as
  follows:                   
|    |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | 1.       MIRS Communications
  Ltd. ($13.3 million)
  2.       Shiron Ltd. ($0.6 million)
  3.       Other loans ($0.1 million)
|    |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(f) | In 2004, the Company made
  investments aggregating $6.3 million, as follows:                                                  
|    |                                                                                                                                
|    | 1.                                                                                                                              | The Company invested EUR
  4.9 million (approximately US$5.8 million) in Telecom Partners Limited
  Partnership (TP), a newly formed entity that will serve as a platform for
  investments in the telecommunication industry predominantly outside of
  Israel. Ampal holds 33.3% of TP which currently holds investments in two
  European telecom service providers: PSINet Europe B.V. (PSInet) and Grapes
  Communications N.V./S.A.                                                                                                                                                
|    |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | 2.                                                                                                                              | A loan of $0.2 million to
  ShellCase, the principal business of which is the packaging process of
  semiconductor chips.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | 3.                                                                                                                              | An investment of $0.3
  million in FIMI Opportunity Fund, L.P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(g) | In 2004, the Company made
  the following dispositions:                                                                        
|    |                                                                                                                                
|    | 1.                                                                                                                              | On February 19, 2004,
  Ampal sold its holdings in XACCT Technology Ltd. for $3.8 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

44

---

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                             | During May 2004, the
  Company sold 49% of its holdings in PowerDSine Ltd. for approximately $7.4
  million.                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                     
|    | 3.                                                                                                                                                                                                                                                                                                                                                                                                                                             | During the third quarter
  of 2004, PSInet, one of the holdings of Ampals investee company, TP, sold
  all its assets to large telecommunications providers. Following the sale, a
  portion of the proceeds was distributed to TP, of which Ampal received $7.1
  million and recorded a gain of $2.5 million in connection with this
  transaction. The remaining carrying value is $1.2 million.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                     
|(h) | In 2004, the Company
  recorded loss from the impairment of investments in an aggregate amount equal
  to $38.8 million as follows:                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | 1.       MIRS
  Communications Ltd. ($30 million)*
  2.       Star Management of Investment ($1.6 million)
  3.       Courses Investment in Technology Ltd. ($0.3
  million)
  4.       VisionCare Opthalmic Technologies ($0.5 million
  investment)
  5.       ShellCase Ltd. ($3.8 million)
  6.       Identify Solutons Ltd. ($0.7 million)
  7.       Xpert Integrated Systems Ltd. ($1.7 million)
  8.       Peptor Ltd. ($0.2 million).
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                     
|    | * Management determined
  that a reduction in the carrying value of MIRS by $30 million was appropriate
  at the time due to the then existing relationship with Motorola.                                                                                                                                                                                                                                                                    

Note 4  Other Assets

The balance of Other Assets as of December
31, 2006 and
2005 is composed as follows:

|                            |  |                               |        |      |   |        | 
|--------------------------- |  | ----------------------------- | ------ | ---- | - | ------ | 
|                            |  | As of December 31,            |       
|                            |  |                               |       
|                            |  | 2006                          |        | 2005 |  
|                            |  |                               |        |      |  
|                            |  | (U.S.
  Dollars in thousands) |       
|                            |  |                               |       
|                            |  |                               |        |      |   |        | 
|Deferred
  tax assets       |  | $                             | 10,398 |      | $ | 15,681 | 
|                            |  |                               |        |      |   |        | 
|Accounts
  receivable-trade |  |                               | 1,943  |      |   | 1,713  | 
|                            |  |                               |        |      |   |        | 
|Deferred
  expenses         |  |                               | 2,727  |      |   | 1,424  | 
|                            |  |                               |        |      |   |        | 
|Leasehold
  improvements    |  |                               | 2,562  |      |   | 2,595  | 
|                            |  |                               |        |      |   |        | 
|Other                       |  |                               | 2,178  |      |   | 948    | 
|                            |  |                               |        |      |   |        | 
|                            |  |                               |        |      |   |        | 
|                            |  | $                             | 19,808 |      | $ | 22,361 | 
|                            |  |                               |        |      |   |        | 

Note 5  Notes and Loans Payable

Notes
issued in December 2006 to institutional investors in Israel, the convertible
note issued to Merhav and other loans payable pursuant to bank borrowings are
either in U.S. dollars, linked to the Consumer Price Index (CPI) in Israel or
in unlinked Israel Shekels, with interest rates varying depending upon their
linkage provision and mature between 2007-2015.

The
Company financed a portion of the development of Am-Hal, a wholly-owned
subsidiary of the Company, which develops and operates luxury retirement
centers for senior citizens, through a revolving credit facility from Bank
Hapoalim Ltd., Phoenix Insurance Company and others. On December 1, 2005, a
loan agreement creating the facility was signed between Am-Hal, Phoenix
Insurance Company and others. Pursuant to the loan agreement, the lenders
granted the Company a revolving credit facility in Israeli Shekels equal to
$12.5 million. The annual interest rate on the loan, which matures in 10 years,
is 7.5%. The interest rate and the principal of the loan will be adjusted based
on the changes in the Israeli Consumer Price Index. As of December 31, 2006 the
Company had drawn $2.5 million from the facility. As of December 31, 2006 and
December 31, 2005 the amount of Am-Hals outstanding debt under the loans from
Bank Hapoalim Ltd., Phoenix Insurance Company and others, were $15.0 million
and $13.5 million, respectively. The loans, excluding the Phoenix Insurance
Company loan, mature in up to one year and have interest rates ranging between
6.5% and 7.5%. 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 $2.9 million in favor of tenants of Am-Hal in order
to secure their deposits.

45

---

---



The
Company finances its general operations and other financial commitments through
bank loans from Bank Hapoalim. As of December 31, 2006, these loans in the
amount of $26.3 million will mature during 2007-2010. (As of December 31, 2005
the amount was $31.3 million).

Other
long term borrowings in the amount of $1.7 million are linked to the Israeli
CPI and mature between 2007 and 2010, of which an amount of $1.5 million bears
no interest. The remaining $0.2 million bears an annual interest of 5.7%.

The
weighted average interest rates and the balances of these short-term borrowings
at December 31, 2006 and December 31, 2005 were 6.4% on $21.2 million and 6.0%
on $15.0 million, respectively.

Payments due by period:

|                |  |                            |        |                    |   |           |  |           |        |                     |   |       |  |   |       | 
|--------------- |  | -------------------------- | ------ | ------------------ | - | --------- |  | --------- | ------ | ------------------- | - | ----- |  | - | ----- | 
|                |  | (US. Dollars in thousands) |       
|                |  |                            |        |                    |   |          
|                |  |                            |        |                    |   |          
|                |  | Total                      |        | Less than 1
  year |   | 1-3 years |  | 3-5 years |        | More than
  5 years |  
|                |  |                            |        |                    |   |           |  |           |        |                     |  
|               
|Long-Term Debt  |  | $                          | 25,260 |                    | $ | 6,212     |  | $         | 10,672 |                     | $ | 5,139 |  | $ | 3,237 | 
|                |  |                            |        |                    |   |           |  |           |        |                     |   |       |  |   |       | 
|Short-Term Debt |  | $                          | 21,193 |                    | $ | 21,193    |  |           |        |                     |   |       |  |   |       | 
|                |  |                            |        |                    |   |           |  |           |        |                     |   |       |  |   |       | 
|                |  |                            |        |                    |   |           |  |           |        |                     |   |       |  |   |       | 
|                |  | $                          | 46,453 |                    | $ | 27,405    |  | $         | 10,672 |                     | $ | 5,139 |  | $ | 3,237 | 
|                |  |                            |        |                    |   |           |  |           |        |                     |   |       |  |   |       | 

Note 6  Debentures

On
November 20, 2006, the Company entered into a trust agreement with Hermatic
Trust (1975) Ltd. pursuant to which the Company issued notes to institutional
investors in Israel in the principal aggregate amount of NIS 250,000,000
(approximately $58 million) with an interest rate of 5.75%, which is linked to
the Israeli consumer price index. The notes shall rank pari passu with the
Companys unsecured indebtedness. The notes will be repaid in five equal annual
installments commencing on November 20, 2011, and the interest will be paid
semi-annually. The Company deposited an amount of $10,207 thousands at Hermatic
Trust (1975) Ltd. to secure the first 3 years worth of payments of interest on
the debentures. Prior to the issuance of the debentures Midroog Ltd., an
affiliate of Moodys Investors Service, rated the Company as A3.

The
Company intends to register the notes for trading on the TASE subject to
publishing a final prospectus approved by the Israeli Securities Authority as
well as the approval of the TASE for the listing of the notes. Until the
listing is approved, Ampal will pay an additional annual interest rate of 0.5%
on the notes.

The
following additional terms apply to the notes:

| |   |                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Until the listing of the
  notes is approved, if the rating of the notes from Midroog is reduced below
  A3, the interest rate per annum of the notes will increase by 0.2% increments
  subject to the terms and conditions set forth in the notes;                                 
| |   |                                                                                                                                                                                                                                                                                      
| |  | Ampal may issue additional
  notes without limitation, but until the listing is approved by the TASE,
  Ampal cannot issue additional notes if such issuance would adversely affect
  the Midroog rating of our existing series of notes, which are the subject of
  this prospectus;
| |   |                                                                                                                                                                                                                                                                                      
| |  | The notes will be listed
  for trade on the TASE no sooner than 47 days after the final prospectus is
  approved by the Israeli Securities Authority and the TASE, and during such 47
  day period, the notes will not be tradable;                                                  

46

---

---



| |   |                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | If Yosef A. Maiman ceases
  to directly or indirectly own the largest amount of shares of Ampal (relative
  to the rest of the shareholders of Ampal) before the notes are listed on the
  TASE, a meeting of the noteholders will be convened to discuss whether the
  notes will be redeemed.

Note 7  Accounts payable accrued expenses and others

|    |                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------
|(a) | The balance of accounts
  payable accrued expenses and others as of December 31, 2006 and 2005 is
  comprised as follows:

|                                                                     |  |                             |        |      |   |        | 
|-------------------------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------ | 
|                                                                     |  | As of December 31,          |       
|                                                                     |  |                             |       
|                                                                     |  | 2006                        |        | 2005 |  
|                                                                     |  |                             |        |      |  
|                                                                     |  | (U.S. Dollars in thousands) |       
|                                                                     |  |                             |       
|                                                                     |  |                             |       
|Deferred
  tax liabilities                                           |  | $                           | 974    |      | $ | 3,310  | 
|                                                                     |  |                             |        |      |   |        | 
|Deferred
  income and accrued expenses                               |  |                             | 2,808  |      |   | 2,283  | 
|                                                                     |  |                             |        |      |   |        | 
|Excess
  of share in losses of affiliate over the investment therein |  |                             | 2,574  |      |   | 3,456  | 
|                                                                     |  |                             |        |      |   |        | 
|Related
  party                                                      |  |                             | --     |      |   | 5,081  | 
|                                                                     |  |                             |        |      |   |        | 
|Convertible
  promissory note*                                       |  |                             | 20,000 |      |   | --     | 
|                                                                     |  |                             |        |      |   |        | 
|Others                                                               |  |                             | 4,608  |      |   | 3,239  | 
|                                                                     |  |                             |        |      |   |        | 
|                                                                     |  |                             |        |      |   |        | 
|                                                                     |  | $                           | 30,964 |      | $ | 17,369 | 
|                                                                     |  |                             |        |      |   |        | 

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | The Convertible Promissory
  Note bears interest at 6 months LIBOR (5.375%) and matures on the earlier of
  September 20, 2007 or upon demand by Merhav. Ampal may pre-pay the
  Convertible Promissory Note at any time in whole or in part. The maximum
  number of shares that can be issued with respect to the promissory note
  (including accrued interest payable through the maturity date on the
  Convertible Promissory Note) is 4,476,389 shares of Class A Stock. The
  Company concluded that there was no beneficial conversion feature embedded
  within the Convertible Promissory Note.

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 $0.3 million, is included in
  accounts payable, accrued expenses and other liabilities - others.                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | The Company expects that
  the payments relating to future benefits to its employees upon their
  retirement at normal retirement age in the next 10 years will be immaterial.
  These payments are determined based on recent salary rates and do not include
  amounts that might be paid to employees that will cease working with the
  Company, before their normal retirement age or amount paid to employees that
  their normal retirement age extends beyond the year 2016.

Note 8  Minority Interest, net

The
minority interest is mostly attributable to the warrants granted by Am-Hal to
Phoenix Insurance Company. As part of the loan agreement which was signed on
December 1, 2005 between Am-Hal and Phoenix Insurance Company, the lender is
granted a warrant to purchase 19.9% (on fully diluted basis) of the issued and
paid capital of Am-Hal (the warrant). The warrant is exercisable during a
period of 4 years and can be exercised for payment of $5,960,000. The number of
shares under the warrant is adjusted for stock splits or bonus shares, and also
adjusted for any new issuances to third parties; in such case the lenders
number of shares under the warrant will increase respectively, so as to provide
the lender with 19.9% of the outstanding shares after the issuance to a third
party. The exercise price for the additional shares (19.9% of the shares issued
to the third party) will be equal the price paid by such third party. Also if
there is a public offering in a price less then the exercise price of the
warrant, the exercise price of the warrant will be adjusted to represent the
price in the public offering discounted by 15%. The warrant can only be
exercised for the full 19.9% - there can be no partial exercise at any time.
The value of the warrant was estimated at approximately $1.3million and
recorded as deferred expenses (Note 4). The amortization that was recorded in
the reported period is $0.2 million.

47

---

---



Note 9  Shareholders Equity

During the third quarter of
2006 the sharesholders equity changed as follows:

On
July 31, 2006, all outstanding 4% Cumulative Convertible Preferred Stock and
6-1/2% Cumulative Convertible Preferred Stock were converted as follows:

Each
share of Ampals 4% Cumulative Convertible Preferred Stock was converted to
five shares of Ampals Class A Stock plus an additional $2.58 per share paid in
cash and each share of Ampals 6-1/2% Cumulative Convertible Preferred Stock
was converted to three shares of Ampals Class A Stock plus an additional $4.09
per share paid in cash. The total amount paid upon conversion was $2.3 million.

Holders
of Ampals 4% Cumulative Convertible Preferred Stock and 6-1/2% Cumulative
Convertible Preferred Stock who voted in favor of the amendments to Ampals
Restated Certificate of Incorporation received an additional $0.15 per share.
These payments amounted to $49,000.

As
of July 31, 2006, the only class of outstanding shares of our capital stock is
our Class A Stock.

On
October 9, 2006, as part of the Companys additional investment in EMG, the Company
issued to Merhav (M.N.F.) Ltd. 10,248,002 shares of the Companys Class A Stock
that was accounted for at a fair market value of $49.0 million. The issuance of
these shares received the approval of the shareholders of the Company on
September 19, 2006, as required by the marketplace rules of the NASDAQ Global
Market.

On
December 21, 2006, as part of the closing of the Companys additional investment in
EMG, the Company sold to Merhav (M.N.F.) Ltd. 8,602,151 shares of the Companys Class
A Stock that was accounted for at a fair market value of $40.0 million. The sale of these
shares received the approval of the shareholders of the Company on February 7, 2007, as
required by the marketplace rules of the NASDAQ Global Market. Due to the agreement of the
controlling shareholder group to vote in favor of the issuance of these shares to Merhav
as of the closing date of the EMG transaction (which ensured that the proposal would be
adopted by the requisite shareholder vote on February 7, 2007), the Company classified for
accounting purposes the sale of these shares as part of the exchange with Merhav on
December 21, 2006, and recognized the $40 million within shareholders equity as
Receipt on account of unallocated shares.

On
December 28, 2006, the Company completed the sale of 8,142,705 shares of its
Class A Stock (based on a price per share of $4.65) for an aggregate price of
approximately $37.9 million (recorded at $36.7 millions after deducting related
expenses) and warrants to purchase 4,071,352 shares of the Class A Stock of the
Company for an exercise price of $4.65 per share. The warrants will expire on August
27, 2007 as the shareholders of the Company approved the issuance of the shares
underlying the warrants on February 7, 2007, as required by the marketplace
rules of the NASDAQ Global Market. The fair value market of the warrants is
$308 thousand and it was estimated using the following weighted average
assumption: 1) expected life of warrants of 8 months; 2) dividend yield of 0%;
3) volatility of 13.76%; and 4) risk free interest of 4.97%. The offering was
made solely to certain non-U.S. institutional investors in accordance with
Regulation S under the U.S. Securities Act of 1933, as amended.

48

---

---



Set
forth below is our treasury stock as of December 31, 2006, 2005 and 2004:

|                                                                                  |  |  |                                                                       |         |   |  |      |   |         |   |      |  |   |         |   | 
|--------------------------------------------------------------------------------- |  |  | --------------------------------------------------------------------- | ------- | - |  | ---- | - | ------- | - | ---- |  | - | ------- | - | 
|                                                                                  |  |  | Fiscal
  Year Ended December 31,                                      |         |  
|                                                                                  |  |  |                                                                       |         |  
|                                                                                  |  |  | 2006                                                                  |         |   |  | 2005 |   |         |   | 2004 |  |  
|                                                                                  |  |  |                                                                       |         |   |  |      |   |         |   |      |  |  
|                                                                                  |  |  | (U.S.
  Dollars in thousands, except share 
  amounts per share data) |         |  
|                                                                                  |  |  |                                                                       |         |  
|TREASURY STOCK:                                                                   |  |  |                                                                       |         |   |  |      |   |         |   |      |  |   |         |   | 
|                                                                                  |  |  |                                                                       |         |   |  |      |   |         |   |      |  |   |         |   | 
|4% PREFERRED STOCK                                                                |  |  |                                                                       |         |   |  |      |   |         |   |      |  |   |         |   | 
|Balance, beginning of year 3,350 shares                                           |  |  | $                                                                     | (84     | ) |  |      | $ | (84     | ) |      |  | $ | (84     | ) | 
|                                                                                  |  |  |                                                                       |         |   |  |      |   |         |   |      |  |   |         |   | 
|Elimination of treasury stock 3,350 shares                                        |  |  |                                                                       | 84      |   |  |      |   | --      |   |      |  |   | --      |   | 
|                                                                                  |  |  |                                                                       |         |   |  |      |   |         |   |      |  |   |         |   | 
|Balance, at the end of year                                                       |  |  | $                                                                     | --      |   |  |      | $ | (84     | ) |      |  | $ | (84     | ) | 
|                                                                                  |  |  |                                                                       |         |   |  |      |   |         |   |      |  |   |         |   | 
|                                                                                  |  |  |                                                                       |         |   |  |      |   |         |   |      |  |   |         |   | 
|6-1/2% PREFERRED STOCK                                                            |  |  |                                                                       |         |   |  |      |   |         |   |      |  |   |         |   | 
|Balance, beginning and end of year 122,536 shares                                 |  |  | $                                                                     | (1,853  | ) |  |      | $ | (1,853  | ) |      |  | $ | (1,853  | ) | 
|                                                                                  |  |  |                                                                       |         |   |  |      |   |         |   |      |  |   |         |   | 
|Elimination of treasury stock 122,536 shares                                      |  |  |                                                                       | 1,853   |   |  |      |   | --      |   |      |  |   | --      |   | 
|                                                                                  |  |  |                                                                       |         |   |  |      |   |         |   |      |  |   |         |   | 
|Balance, at the end of year                                                       |  |  | $                                                                     | --      |   |  |      | $ | (1,853  | ) |      |  | $ | (1,853  | ) | 
|                                                                                  |  |  |                                                                       |         |   |  |      |   |         |   |      |  |   |         |   | 
|                                                                                  |  |  |                                                                       |         |   |  |      |   |         |   |      |  |   |         |   | 
|CLASS A STOCK                                                                     |  |  |                                                                       |         |   |  |      |   |         |   |      |  |   |         |   | 
|Balance, beginning of year  5,751,039, 5,831,664 and 5,831,664
  shares, at cost |  |  | $                                                                     | (28,756 | ) |  |      | $ | (29,159 | ) |      |  | $ | (29,159 | ) | 
|                                                                                  |  |  |                                                                       |         |   |  |      |   |         |   |      |  |   |         |   | 
|Issuance of 176,250 and 80,625 shares                                             |  |  |                                                                       | 882     |   |  |      |   | 403     |   |      |  |   | --      |   | 
|                                                                                  |  |  |                                                                       |         |   |  |      |   |         |   |      |  |   |         |   | 
|Balance, end of year  5,574,789, 5,751,039 and 5,831,664
shares, at
  cost       |  |  | $                                                                     | (27,874 | ) |  |      | $ | (28,756 | ) |      |  | $ | (29,159 | ) | 
|                                                                                  |  |  |                                                                       |         |   |  |      |   |         |   |      |  |   |         |   | 
|Balance end of year                                                               |  |  | $                                                                     | (27,874 | ) |  |      | $ | (30,693 | ) |      |  | $ | (31,096 | ) | 
|                                                                                  |  |  |                                                                       |         |   |  |      |   |         |   |      |  |   |         |   | 

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, 2006, no options of the 1998 Plan are fully vested and 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, 2006, 2,164,500 options under the 2000 Plan are outstanding.

The
option term is for a period of five years from the grant date for the options
granted under the 1998 Plan and ten years from the grant date for the options
granted under the 2000 Plan. If the options are not exercised and the shares
not paid for by such date, all interests and rights of any grantee shall
expire. These options were granted for no consideration.

The
options granted under the 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 stock options granted under the plans were granted either
at market value or above. Under the Plans, the Committee may also grant, at its
discretion, restricted stock, dividend equivalent awards, which entitle the
recipient to receive dividends in the form of Class A Stock, cash or a
combination of both and stock appreciation rights, which permit the recipient
to receive an amount in the form of Class A Stock, cash or a combination of
both, equal to the number of shares of Class A Stock with respect to which the
rights are exercised multiplied by the excess of the fair market value of the
Class A Stock on the exercise date over the exercise price. During 2006, no
such compensation instrument were granted by the Committee.

49

---

---



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

The
following table summarizes the activity of both Plans for the years 2006, 2005
and 2004 respectively:

|                                   |  |                            |       |                                                         |   |                                                                |  |                                                                |      |  |  |       | 
|---------------------------------- |  | -------------------------- | ----- | ------------------------------------------------------- | - | -------------------------------------------------------------- |  | -------------------------------------------------------------- | ---- |  |  | ----- | 
|                                   |  | Options
  (in
  thousands) |       | Weighted-
  Average
  Exercise
  Price
  (U.S. Dollars) |   | Weighted-
  Average
  Remaining
  Contractual
  Term(in years) |  | Aggregate 
  Intrinsic Value 
  (U.S. Dollars in 
  thousands) |     
|                                   |  |                            |       |                                                         |   |                                                                |  |                                                                |     
|                                   |  |                            |       |                                                         |   |                                                                |  |                                                                |      |  |  |       | 
|Outstanding at
  January 1, 2006   |  |                            | 2,024 |                                                         | $ | 3.37                                                           |  |                                                                |      |  |  |       | 
|Granted at fair value              |  |                            | 630   |                                                         | $ | 5.06                                                           |  |                                                                |      |  |  |       | 
|Exercised                          |  |                            | (176  | )                                                       | $ | 3.12                                                           |  |                                                                |      |  |  |       | 
|Forfeited                          |  |                            | (284  | )                                                       | $ | 3.50                                                           |  |                                                                |      |  |  |       | 
|Expired                            |  |                            | (30   | )                                                       | $ | 5.94                                                           |  |                                                                |      |  |  |       | 
|                                   |  |                            |       |                                                         |   |                                                                |  |                                                                |      |  |  |       | 
|                                   |  |                            |       |                                                         |   |                                                                |  |                                                                |      |  |  |       | 
|Outstanding at December 31,
  2006 |  |                            | 2,164 |                                                         | $ | 3.83                                                           |  |                                                                | 7.70 |  |  | 2,078 | 
|                                   |  |                            |       |                                                         |   |                                                                |  |                                                                |      |  |  |       | 
|Exercisable at December 31,
  2006 |  |                            | 1,111 |                                                         | $ | 3.24                                                           |  |                                                                | -    |  |  | 1,644 | 

|                                   |  |                            |       |                                                         |   |                                                                |  |                                                                |      |  |  |   | 
|---------------------------------- |  | -------------------------- | ----- | ------------------------------------------------------- | - | -------------------------------------------------------------- |  | -------------------------------------------------------------- | ---- |  |  | - | 
|                                   |  | Options
  (in
  thousands) |       | Weighted-
  Average
  Exercise
  Price
  (U.S. Dollars) |   | Weighted-
  Average
  Remaining
  Contractual
  Term(in years) |  | Aggregate 
  Intrinsic Value 
  (U.S. Dollars in 
  thousands) |     
|                                   |  |                            |       |                                                         |   |                                                                |  |                                                                |     
|                                   |  |                            |       |                                                         |   |                                                                |  |                                                                |      |  |  |   | 
|Outstanding at
  January 1, 2005   |  |                            | 2,064 |                                                         | $ | 3.39                                                           |  |                                                                |      |  |  |   | 
|Granted at fair value              |  |                            | 135   |                                                         | $ | 3.69                                                           |  |                                                                |      |  |  |   | 
|Exercised                          |  |                            | -     |                                                         | $ | -                                                              |  |                                                                |      |  |  |   | 
|Forfeited                          |  |                            | (175  | )                                                       | $ | 3.85                                                           |  |                                                                |      |  |  |   | 
|Expired                            |  |                            | -     |                                                         | $ | -                                                              |  |                                                                |      |  |  |   | 
|                                   |  |                            |       |                                                         |   |                                                                |  |                                                                |      |  |  |   | 
|                                   |  |                            |       |                                                         |   |                                                                |  |                                                                |      |  |  |   | 
|Outstanding at December 31,
  2005 |  |                            | 2,024 |                                                         | $ | 3.37                                                           |  |                                                                | 7.72 |  |  | - | 
|                                   |  |                            |       |                                                         |   |                                                                |  |                                                                |      |  |  |   | 
|Exercisable at December 31,
  2005 |  |                            | 1,044 |                                                         | $ | 3.29                                                           |  |                                                                | -    |  |  | - | 

50

---

---



|                                   |  |                            |       |                                                         |   |                                                                |  |                                                                |      |  |  |   | 
|---------------------------------- |  | -------------------------- | ----- | ------------------------------------------------------- | - | -------------------------------------------------------------- |  | -------------------------------------------------------------- | ---- |  |  | - | 
|                                   |  | Options
  (in
  thousands) |       | Weighted-
  Average
  Exercise
  Price
  (U.S. Dollars) |   | Weighted-
  Average
  Remaining
  Contractual
  Term(in years) |  | Aggregate 
  Intrinsic Value 
  (U.S. Dollars in 
  thousands) |     
|                                   |  |                            |       |                                                         |   |                                                                |  |                                                                |     
|                                   |  |                            |       |                                                         |   |                                                                |  |                                                                |      |  |  |   | 
|Outstanding at
  January 1, 2004   |  |                            | 1,396 |                                                         | $ | 3.46                                                           |  |                                                                |      |  |  |   | 
|Granted at fair value              |  |                            | 886   |                                                         | $ | 3.49                                                           |  |                                                                |      |  |  |   | 
|Exercised                          |  |                            | -     |                                                         | $ | -                                                              |  |                                                                |      |  |  |   | 
|Forfeited                          |  |                            | (218  | )                                                       | $ | 4.22                                                           |  |                                                                |      |  |  |   | 
|Expired                            |  |                            | -     |                                                         | $ | -                                                              |  |                                                                |      |  |  |   | 
|                                   |  |                            |       |                                                         |   |                                                                |  |                                                                |      |  |  |   | 
|                                   |  |                            |       |                                                         |   |                                                                |  |                                                                |      |  |  |   | 
|Outstanding at December 31,
  2004 |  |                            | 2,064 |                                                         | $ | 3.39                                                           |  |                                                                | 8.40 |  |  | - | 
|                                   |  |                            |       |                                                         |   |                                                                |  |                                                                |      |  |  |   | 
|Exercisable at December 31,
  2004 |  |                            | 678   |                                                         | $ | 3.43                                                           |  |                                                                | -    |  |  | - | 

Valuation and Expenses under 123R

The
fair value of each stock option is estimated on the date of grant using the
Black-Scholes option pricing model that uses the assumptions noted below.
Expected life is based on the Companys management estimate for future
behavior. Expected volatility is based on the historical volatility of the
Class A common stock. The risk free rate is based on the U.S. Treasury
yield curve for a term consistent with the expected life of the award, in
effect at the date of grant.

The
fair value of options granted during the years ended December 31, 2006, 2005
and 2004 were estimated using the following weighted average assumptions: (1)
expected life of options of 5, 5 and 6 years, respectively; (2) dividend yield
of 0%; (3) volatility of 41.11%, 46.07% and 60%, respectively; and (4) risk
free interest of 4.42%, 4.08% and 3.3%, respectively.

Total
stock-based compensation expense recognized under SFAS No. 123R, was
approximately $720,000 for the year 2006. No share-based compensation was
capitalized in the consolidated financial statements.

The
total intrinsic value (market value on date of exercise less exercise price) of
options exercise during 2006 was $260,000.

Cash
received from option exercises for the year 2006 was $550,000.

At
December 31, 2006, there was $2.16 million of total unrecognized, pre-tax
compensation cost related to non-vested stock options. This cost is expected to
be recognized over a weighted-average period of approximately four years. The
Company settles employee stock options exercises primarily with newly issued
common shares and occasionally with treasury shares.

Note 11  Earnings (Loss) Per Class A Share

Basic
net loss per share is computed by dividing net loss after deduction of
preferred stock dividends by the weighted-average number of common stock shares
outstanding for the period. In 2006, 2005 and 2004, all outstanding stock
options and preferred shares have been excluded from the calculation of the
diluted loss per share because all such securities are anti-dilutive for these
periods presented. Also, participating 4% Convertible Preferred Stock were not
taken into account in the computation of the basic EPS for those years (in the
period in which it was outstanding) since its shareholders did not have
contractual obligation to share in the losses of the Company. A reconciliation
of the numerator and denominator used in the calculation of basic and diluted
net income per share follows (in thousands, except per share amounts):

51

---

---



|                                              |  |                         |        |      |   |        |   |   |         |  
|--------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ | - | - | ------- | -
|                                              |  | Year Ended December 31, |       
|                                              |  |                         |       
|                                              |  | 2006                    |        | 2005 |   | 2004   |  
|                                              |  |                         |        |      |   |        |  
|                                              |  |                         |        |      |   |        |  
|Net loss                                      |  |                         | (7,087 | )    |   | (5,958 | ) |   | (18,385 | )
|                                              |  |                         |        |      |   |        |   |   |         |  
|Less:
  preferred stock dividend              |  |                         | (2,438 | )    |   | (191   | ) |   | (200    | )
|                                              |  |                         |        |      |   |        |   |   |         |  
|                                              |  |                         |        |      |   |        |   |   |         |  
|Net loss
  available for class A stock        |  |                         | (9,525 | )    |   | (6,149 | ) |   | (18,585 | )
|                                              |  |                         |        |      |   |        |   |   |         |  
|                                              |  |                         |        |      |   |        |   |   |         |  
|Weighted
  average class A shares outstanding |  |                         | 24,109 |      |   | 19,967 |   |   | 19,841  |  
|                                              |  |                         |        |      |   |        |   |   |         |  
|                                              |  |                         |        |      |   |        |   |   |         |  
|Net loss per
  share:                         |  |                         |        |      |   |        |   |   |         |  
|                                              |  |                         |        |      |   |        |   |   |         |  
|Basic and
  diluted                           |  | $                       | (0.40  | )    | $ | (0.31  | ) | $ | (0.94   | )
|                                              |  |                         |        |      |   |        |   |   |         |  

The
following table summarized securities that were not included in the
calculations of diluted earnings per class A shares for the years ended
December 31, 2006, 2005 and 2004 because such shares are anti-dilutive.

|                         |  |              |       |      |  |       |  |  |       | 
|------------------------ |  | ------------ | ----- | ---- |  | ----- |  |  | ----- | 
|                         |  | December 31, |      
|(Shares in
  thousands)  |  | 2006         |       | 2005 |  | 2004  | 
|                         |  |              |       |      |  |       | 
|                        
|Options and
  Rights     |  |              | 2,164 |      |  | 2,024 |  |  | 2,064 | 
|6-1/2%
  Preferred Stock |  |              | -     |      |  | 641   |  |  | 662   | 
|4% Preferred
  Stock     |  |              | -     |      |  | 114   |  |  | 124   | 
|Warrants                 |  |              | 4,071 |      |  | -     |  |  | -     | 
|Promissory
  note        |  |              | 4,476 |      |  | -     |  |  | -     | 

52

---

---



Note 12  Income Taxes

|                                                                                          |  |                                |        |      |   |         |   |   |         |  
|----------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | ---- | - | ------- | - | - | ------- | -
|                                                                                          |  | Fiscal Year Ended December 31, |       
|                                                                                          |  |                                |       
|                                                                                          |  | 2006                           |        | 2005 |   | 2004    |  
|                                                                                          |  |                                |        |      |   |         |  
|                                                                                          |  | (U.S. Dollars in thousands)    |       
|                                                                                          |  |                                |       
|The components of current and deferred income
tax expense (benefit)
  are:                |  |                                |        |      |   |         |   |   |         |  
|Current:                                                                                  |  |                                |        |      |   |         |   |   |         |  
|Federal                                                                                   |  | $                              | -      |      | $ | -       |   | $ | -       |  
|Foreign                                                                                   |  |                                | 308    |      |   | -       |   |   | 1,472   |  
|Deferred:                                                                                 |  |                                |        |      |   |         |   |   |         |  
|State and local                                                                           |  |                                | -      |      |   | 3       |   |   | -       |  
|Federal                                                                                   |  |                                | 2,464  |      |   | (2,955  | ) |   | (20,404 | )
|Foreign                                                                                   |  |                                | (41    | )    |   | 103     |   |   | 8,734   |  
|                                                                                          |  |                                |        |      |   |         |   |   |         |  
|Total                                                                                     |  | $                              | 2,731  |      | $ | (2,849  | ) | $ | (10,198 | )
|                                                                                          |  |                                |        |      |   |         |   |   |         |  
|                                                                                          |  |                                |        |      |   |         |   |   |         |  
|The domestic and foreign components of income
(loss) before income
  taxes are:           |  |                                |        |      |   |         |   |   |         |  
|                                                                                          |  |                                |        |      |   |         |   |   |         |  
|Domestic                                                                                  |  | $                              | (4,855 | )    | $ | (14,046 | ) | $ | (29,286 | )
|Foreign                                                                                   |  |                                | 160    |      |   | 772     |   |   | (3,427  | )
|                                                                                          |  |                                |        |      |   |         |   |   |         |  
|Total                                                                                     |  | $                              | (4,695 | )    | $ | (13,274 | ) | $ | (32,713 | )
|                                                                                          |  |                                |        |      |   |         |   |   |         |  
|                                                                                          |  |                                |        |      |   |         |   |   |         |  
|A reconciliation of income taxes between the
statutory and effective
  tax is as follows: |  |                                |        |      |   |         |   |   |         |  
|                                                                                          |  |                                |        |      |   |         |   |   |         |  
|Federal income tax (benefit) at 34%                                                       |  | $                              | (1,596 | )    | $ | (4,513  | ) | $ | (11,123 | )
|Taxes on foreign Gain (Loss) below U.S. rate                                              |  |                                | 5,058  |      |   | (12,796 | ) |   | (806    | )
|Changes in valuation allowance                                                            |  |                                | (446   | )    |   | 14,639  |   |   | 2,304   |  
|Other                                                                                     |  |                                | (285   | )    |   | (179    | ) |   | (573    | )
|                                                                                          |  |                                |        |      |   |         |   |   |         |  
|Total effective tax: 58.2%; 22%
and 31%                                                   |  | $                              | 2,731  |      | $ | (2,849  | ) | $ | (10,198 | )
|                                                                                          |  |                                |        |      |   |         |   |   |         |  

|                                                                        |  |                    |         |      |   |         |  
|----------------------------------------------------------------------- |  | ------------------ | ------- | ---- | - | ------- | -
|                                                                        |  | As of December 31, |        
|                                                                        |  |                    |        
|                                                                        |  | 2006               |         | 2005 |  
|                                                                        |  |                    |         |      |  
|                                                                        |  |                    |         |      |   |         |  
|Deferred tax assets:                                                    |  |                    |         |      |   |         |  
|The components of deferred
  tax assets and liabilities are as follows: |  |                    |         |      |   |         |  
|Net operating loss and capital
loss carryforwards                       |  | $                  | 30,629  |      | $ | 35,925  |  
|Unrealized losses on
investments                                        |  |                    | 700     |      |   | 1,132   |  
|Foreign tax credits
carryforwards                                       |  |                    | 5,456   |      |   | 5,456   |  
|                                                                        |  |                    |         |      |   |         |  
|Total deferred assets                                                   |  |                    | 36,785  |      |   | 42,513  |  
|Valuation allowance                                                     |  |                    | (26,387 | )    |   | (26,832 | )
|                                                                        |  |                    |         |      |   |         |  
|Net deferred tax assets                                                 |  |                    | 10,398  |      |   | 15,681  |  
|                                                                        |  |                    |         |      |   |         |  
|                                                                        |  |                    |         |      |   |         |  
|Deferred tax liabilities:                                               |  |                    |         |      |   |         |  
|Tax on equity in earnings of
affiliates                                 |  |                    | 434     |      |   | 2,470   |  
|Other                                                                   |  |                    | 540     |      |   | 840     |  
|                                                                        |  |                    |         |      |   |         |  
|Total deferred tax
  liability                                          |  |                    | 974     |      |   | 3,310   |  
|                                                                        |  |                    |         |      |   |         |  
|                                                                        |  |                    |         |      |   |         |  
|Net deferred tax assets                                                 |  | $                  | 9,424   |      | $ | 12,371  |  
|                                                                        |  |                    |         |      |   |         |  

As
of December 31, 2006, valuation allowance is provided against tax benefits on
domestic and foreign net operating loss carryforwards of $5.1 million and $21.3 million, respectively.

As
of December 31, 2006, the Company has foreign tax credits of $5.5 million that
will expire in the years 2009 through 2014.

As
of December 31, 2006, the Company has U.S. Federal net operating loss
carryforwards of approximately $24.7 million that will expire in the years 2022
through 2025. 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.

53

---

---



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, | 
|                                                       |  |                    | 
|                                                       |  | 2006               |  | 2005 |     
|                                                       |  |                    |  |      |     
|                                                       |  | %                  |  | %    |     
|                                                       |  |                    |  |      |     
|Bay Heart Limited                                      |  | 37                 |  |      | 37   |  | 
|Carmel Containers Systems
  Limited                    |  | 21.8               |  |      | 21.8 |  | 
|Coral World International
  Limited                    |  | --                 |  |      | 50   |  | 
|Hod Hasharon Sport Center
  (1992) Limited Partnership |  | 50                 |  |      | 50   |  | 
|Ophir Holdings                                         |  | --                 |  |      | 42.5 |  | 
|Trinet Investment in
  High-Tech Ltd.                  |  | 37.5               |  |      | 37.5 |  | 
|Trinet Venture Capital Ltd.                            |  | 50                 |  |      | 50   |  | 

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

|             |  |                                |         |      |   |         |  |   |         | 
|------------ |  | ------------------------------ | ------- | ---- | - | ------- |  | - | ------- | 
|             |  | Fiscal Year Ended December 31, |        
|             |  |                                |        
|             |  | 2006                           |         | 2005 |   | 2004    | 
|             |  |                                |         |      |   |         | 
|             |  | (U.S. Dollars in thousands)    |        
|             |  |                                |        
|             |  |                                |         |      |   |         |  |   |         | 
|Revenues     |  | $                              | 100,567 |      | $ | 140,197 |  | $ | 129,091 | 
|Gross profit |  |                                | 12,707  |      |   | 30,918  |  |   | 22,200  | 
|Net income   |  |                                | 57      |      |   | 15,803  |  |   | 8,184   | 

|                                               |  |                             |         |      |   |         | 
|---------------------------------------------- |  | --------------------------- | ------- | ---- | - | ------- | 
|                                               |  | As of December 31,          |        
|                                               |  |                             |        
|                                               |  | 2006                        |         | 2005 |  
|                                               |  |                             |         |      |  
|                                               |  | (U.S. Dollars in thousands) |        
|                                               |  |                             |        
|                                               |  |                             |         |      |   |         | 
|Property and equipment                         |  | $                           | 56,835  |      | $ | 65,931  | 
|Other assets                                   |  |                             | 63,240  |      |   | 134,700 | 
|                                               |  |                             |         |      |   |         | 
|Total assets                                   |  | $                           | 120,075 |      | $ | 200,631 | 
|                                               |  |                             |         |      |   |         | 
|                                               |  |                             |         |      |   |         | 
|Total liabilities,
  including bank borrowings |  | $                           | 104,176 |      | $ | 143,217 | 
|                                               |  |                             |         |      |   |         | 

Note 14  Operating Segments Information

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

The
energy segment consists of the investment in EMG, an Egyptian Joint Stock
Company, which holds the rith to supply natural gas to Israel through a pipe line
to be constructed from Egypt to Israel.

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) and Country Club Hod Hasharon Sport Center and
Kfar Saba, the Companys 51%-owned subsidiary located in Israel. In June 2006,
the Company sold all of its interest in Coral World International Limited (see
Note 3).

The
finance segment consists of all other activity which are not part of the above
segments.

54

---

---



|                                             |  |                                |          |      |   |         |   |   |         |  
|-------------------------------------------- |  | ------------------------------ | -------- | ---- | - | ------- | - | - | ------- | -
|                                             |  | Fiscal Year Ended December 31, |         
|                                             |  |                                |         
|                                             |  | 2006                           |          | 2005 |   | 2004    |  
|                                             |  |                                |          |      |   |         |  
|                                             |  | (U.S. Dollars in thousands)    |         
|                                             |  |                                |         
|Revenues:                                    |  |                                |          |      |   |         |   |   |         |  
|Finance                                      |  | $                              | 4,271    |      | $ | 12,475  |   | $ | 16,379  |  
|Real estate income                           |  |                                | 11,828   |      |   | 9,244   |   |   | 8,897   |  
|Leisure-time                                 |  |                                | 6,317    |      |   | 2,208   |   |   | 2,233   |  
|Intercompany adjustments                     |  |                                | (77      | )    |   | (63     | ) |   | (76     | )
|                                             |  |                                |          |      |   |         |   |   |         |  
|                                             |  |                                | 22,339   |      |   | 23,864  |   |   | 27,433  |  
|Equity in earning of
  affiliates            |  |                                | 1,610    |      |   | 6,666   |   |   | 4,031   |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|Total                                        |  | $                              | 23,949   |      | $ | 30,530  |   | $ | 31,464  |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|Equity in
  Earnings (losses) of Affiliates: |  |                                |          |      |   |         |   |   |         |  
|Finance                                      |  | $                              | 566      |      | $ | 106     |   | $ | 1,523   |  
|Real estate rental                           |  |                                | (676     | )    |   | 5,448   |   |   | 590     |  
|Leisure-time                                 |  |                                | 1,720    |      |   | 1,112   |   |   | 1,122   |  
|Others                                       |  |                                | --       |      |   | --      |   |   | 796     |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|Total                                        |  | $                              | 1,610    |      | $ | 6,666   |   | $ | 4,031   |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|Interest
  Income:                           |  |                                |          |      |   |         |   |   |         |  
|Finance                                      |  | $                              | 1,502    |      | $ | 1,586   |   | $ | 613     |  
|Intercompany adjustments                     |  |                                | (23      | )    |   | (19     | ) |   | (23     | )
|                                             |  |                                |          |      |   |         |   |   |         |  
|Total                                        |  | $                              | 1,479    |      | $ | 1,567   |   | $ | 590     |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|Interest
  Expense:                          |  |                                |          |      |   |         |   |   |         |  
|Finance                                      |  | $                              | 4,248    |      | $ | 4,278   |   | $ | 4,246   |  
|Real estate rental                           |  |                                | 849      |      |   | 836     |   |   | 540     |  
|Leisure-time                                 |  |                                | 83       |      |   | 162     |   |   | 117     |  
|Intercompany adjustments                     |  |                                | (26      | )    |   | (19     | ) |   | (23     | )
|                                             |  |                                |          |      |   |         |   |   |         |  
|Total                                        |  | $                              | 5,154    |      | $ | 5,257   |   | $ | 4,880   |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|Pretax
  Operating (Loss) Income:            |  |                                |          |      |   |         |   |   |         |  
|Finance                                      |  | $                              | (11,570  | )    | $ | (20,472 | ) | $ | (36,192 | )
|Real estate rental                           |  |                                | 861      |      |   | 287     |   |   | (963    | )
|Leisure-time                                 |  |                                | 4,404    |      |   | 245     |   |   | 411     |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|                                             |  |                                | (6,305   | )    |   | (19,940 | ) |   | (36,744 | )
|Equity in earning of
  affiliates            |  |                                | 1,610    |      |   | 6,666   |   |   | 4,031   |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|Total                                        |  | $                              | (4,695   | )    | $ | (13,274 | ) | $ | (32,713 | )
|                                             |  |                                |          |      |   |         |   |   |         |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|Income
  (Benefit) Tax Expense:              |  |                                |          |      |   |         |   |   |         |  
|Finance                                      |  | $                              | 2,518    |      | $ | (2,970  | ) | $ | (10,558 | )
|Real estate rental                           |  |                                | 146      |      |   | 63      |   |   | 334     |  
|Leisure-time                                 |  |                                | 67       |      |   | 58      |   |   | 26      |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|Total                                        |  | $                              | 2,731    |      | $ | (2,849  | ) | $ | (10,198 | )
|                                             |  |                                |          |      |   |         |   |   |         |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|Net
  Income:                                |  |                                |          |      |   |         |   |   |         |  
|Finance                                      |  | $                              | (13,522  | )    | $ | (17,396 | ) | $ | (24,111 | )
|Real estate rental                           |  |                                | 39       |      |   | 5,672   |   |   | (707    | )
|Leisure-time                                 |  |                                | 6,057    |      |   | 1,299   |   |   | 1,507   |  
|Others                                       |  |                                | --       |      |   | --      |   |   | 796     |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|                                             |  |                                | (7,426   | )    |   | (10,425 | ) |   | (22,515 | )
|Minority interest, net                       |  |                                | (339     | )    |   | (4,467  | ) |   | (4,130  | )
|                                             |  |                                |          |      |   |         |   |   |         |  
|Total                                        |  | $                              | (7,087   | )    | $ | (5,958  | ) | $ | (18,385 | )
|                                             |  |                                |          |      |   |         |   |   |         |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|Total
  Assets for year end:                 |  |                                |          |      |   |         |   |   |         |  
|Finance                                      |  | $                              | 330,548  |      | $ | 88,498  |   | $ | 225,577 |  
|Energy                                       |  |                                | 259,860  |      |   | 29,960  |   |   | --      |  
|Real estate rental                           |  |                                | 76,513   |      |   | 76,117  |   |   | 64,128  |  
|Leisure-time                                 |  |                                | 2,874    |      |   | 17,568  |   |   | 17,426  |  
|Intercompany adjustments                     |  |                                | (268,112 | )    |   | (1,239  | ) |   | (2,184  | )
|                                             |  |                                |          |      |   |         |   |   |         |  
|Total                                        |  | $                              | 401,683  |      | $ | 210,904 |   | $ | 304,947 |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|Investments
  in Affiliates for year end:    |  |                                |          |      |   |         |   |   |         |  
|Finance                                      |  | $                              | 3,498    |      | $ | 8,360   |   | $ | 3,389   |  
|Real estate rental                           |  |                                | (2,574   | )    |   | (3,456  | ) |   | 10,987  |  
|Leisure-time                                 |  |                                | 357      |      |   | 15,066  |   |   | 14,479  |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|Total                                        |  | $                              | 1,281    |      | $ | 19,970  |   | $ | 28,855  |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|Capital
  Expenditures:                      |  |                                |          |      |   |         |   |   |         |  
|Finance                                      |  | $                              | 28       |      | $ | --      |   | $ | 5       |  
|Real estate rental                           |  |                                | 1,300    |      |   | 9,794   |   |   | 774     |  
|Leisure-time                                 |  |                                | 102      |      |   | 90      |   |   | 296     |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|Total                                        |  | $                              | 1,430    |      | $ | 9,884   |   | $ | 1,075   |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|Depreciation,
  Amortization and Impairment: |  |                                |          |      |   |         |   |   |         |  
|Finance                                      |  | $                              | 66       |      | $ | 14,039  |   | $ | 38,984  |  
|Real estate rental                           |  |                                | (32      | )    |   | (160    | ) |   | (111    | )
|Leisure-time                                 |  |                                | 186      |      |   | 207     |   |   | 162     |  
|                                             |  |                                |          |      |   |         |   |   |         |  
|Total                                        |  | $                              | 220      |      | $ | 14,086  |   | $ | 9,035   |  
|                                             |  |                                |          |      |   |         |   |   |         |  

55

---

---



Corporate
office expense is principally applicable to the financing operation and has
been charged to that segment above. Revenues and pretax operating gain above
exclude equity in earnings of affiliates.

Note 15  Disclosures about Fair Value of
Financial Instruments

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

|                                                                                                                                                                                                                                                                                      |                                           
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------
|(a)                                                                                                                                                                                                                                                                                   | Cash and Cash Equivalents                 
|                                                                                                                                                                                                                                                                                      |                                           
|For
  cash and cash equivalents, the carrying amount is a reasonable estimate of
  fair value (see Note 1(k)).                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                      |                                           
|(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 16, 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.

56

---

---



|                                       |  |                             |         |              |   |                   |  |              |        |  |   |        | 
|-------------------------------------- |  | --------------------------- | ------- | ------------ | - | ----------------- |  | ------------ | ------ |  | - | ------ | 
|                                       |  | As of December 31,          |        
|                                       |  |                             |        
|                                       |  | 2006                        |         | 2005         |  
|                                       |  |                             |         |              |  
|                                       |  | Carrying
  Amount           |         | Fair
  Value |   | Carrying
  Amount |  | Fair
  Value |       
|                                       |  |                             |         |              |   |                   |  |              |       
|                                       |  | (U.S. Dollars in thousands) |        
|Financial assets:                      |  |                             |         |              |   |                   |  |              |        |  |   |        | 
|                                       |  |                             |         |              |   |                   |  |              |        |  |   |        | 
|Cash and cash equivalents              |  | $                           | 36,733  |              | $ | 36,733            |  | $            | 24,314 |  | $ | 24,314 | 
|Deposits, notes and loans
  receivable |  |                             | --      |              |   | --                |  |              | 343    |  |   | 343    | 
|Investments                            |  |                             | 380     |              |   | 380               |  |              | 38,575 |  |   | 38,575 | 
|                                       |  |                             |         |              |   |                   |  |              |        |  |   |        | 
|                                       |  | $                           | 37,113  |              | $ | 37,113            |  | $            | 63,232 |  | $ | 63,232 | 
|                                       |  |                             |         |              |   |                   |  |              |        |  |   |        | 
|                                       |  |                             |         |              |   |                   |  |              |        |  |   |        | 
|Financial liabilities:                 |  |                             |         |              |   |                   |  |              |        |  |   |        | 
|                                       |  |                             |         |              |   |                   |  |              |        |  |   |        | 
|Notes and loans payable                |  | $                           | 46,453  |              | $ | 46,648            |  | $            | 50,366 |  | $ | 50,362 | 
|Debentures outstanding                 |  |                             | 59,172  |              |   | 58,353            |  |              | --     |  |   | --     | 
|                                       |  |                             |         |              |   |                   |  |              |        |  |   |        | 
|                                       |  | $                           | 105,625 |              | $ | 105,001           |  | $            | 50,366 |  | $ | 50,362 | 
|                                       |  |                             |         |              |   |                   |  |              |        |  |   |        | 

Note 16 Commitments and Contingencies

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                   
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | The combined
  minimum annual lease payments on Ampals corporate offices in New York and in
  Israel and its subsidiary Country Club Kfar Saba Ltd. in 2006 were $0.3
  million. The lease of the corporate office in New York expires in 2009, the
  lease of the office in Tel Aviv expires in 2008, the lease of the office in
  Herzelia Pituach expires in 2017 and the Kfar Saba lease expires in 2038. In
  the years 2007-2011, the combined annual lease payments on those premises
  will be in an aggregate amount of $2.1 million, and thereafter, an amount
  totaling $5.7 million.                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (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 $11.5 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (c) | The Company
  has issued guarantees on bank loans to its investees and subsidiaries
  totaling $9.5 million as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                   
| |     | (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | The Company
  provided a $2.9 million guarantee to AMHal tenants.                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                   
| |     | (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | The Company
  provided a $5.6 million guarantee on indebtedness incurred by Bay Heart.                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                   
| |     | (3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | The Company
  provided a $1.0 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. (See below)
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (d) | The Company
  made a commitment to invest $2.8 million in Star II (2000 L.P.).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (e) | 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 10,927,100 ($2.6 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 4,059,000 ($961,000) if a final judgment against the Company will be
  given.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     | On May 26,
  2003 the Company and the directors of Paradise appointed by the Company filed
  a third party claim against Arieh Israeli Insurance Company Ltd., in the Tel
  Aviv District Court, claiming that, to the extent the court decides that the
  directors of Paradise appointed by the Company will have to pay any amounts
  to Galha, Arieh will pay such amounts on behalf of the directors in
  accordance with the Directors and Officers insurance policy that the Company
  had at that time with Arieh. Arieh filed a statement of defense and stated
  that the policy does not cover the claim. At this stage, the Company cannot
  estimate the impact this claim will have on it. There have not been any
  significant developments in this matter as of the date of filing this report.            

57

---

---



Note 17  Subsequent Events

Significant Developments Since the Fiscal
Year Ended December 31, 2006

On
February 18, 2007, Ampal reached a non binding letter of understanding with
Merkaz Mishan Ltd. (Mishan) for a potential sale of all of its holdings in
Am-Hal Ltd., a wholly owned subsidiary of Ampal (Am-Hal). The potential
transaction is subject to the customary due diligence process, negotiation and
signing of a definitive sale and purchase agreement, the approvals of the Board
of Directors of Ampal (the Board) and Mishan and the receipt of all
necessary regulatory and governmental approvals and other customary conditions.
There can be no assurance that the parties will consummate a transaction
regarding Am-Hal Ltd.

On
March 18, 2007, tenants of the retirements centers for senior citizens of
Am-Hal filed a lawsuit in the Tel Aviv District Court against Ampal, Am-Hal and
other subsidiaries of Ampal. The lawsuit was filed after Ampal announced the
potential sale of its holdings in Am-Hal to Mishan. Among other things, the
plaintiffs requested that the District Court (i) issue warrants that will
oblige Am-Hal to keep the deposits received from the tenants in a designated
account for each tenant controlled by an accountant agreed to by Am-Hal and the
tenants, (ii) maintain the level of services provided by Am-Hal to the tenants
and (iii) maintain the ratio of independent tenants and supportive tenants in
the centers. The plaintiffs also asked the District Court to issue temporary ex
parte injunctions to prohibit Ampal from signing an agreement for the sale of
its holdings in Am-Hal and to nominate a receiver to locate and keep the
tenants deposits. The District Court did not grant the temporary injunctions
ex parte and requested that the defendants  reply to the claim in accordance with the normal
procedures.

On
March 7, 2007, Ampal entered into an agreement to sell to Carmel Container
Systems Ltd., a packaging manufacturer based in Israel (Carmel), all of the
holdings of Carmel held by Ampal and its subsidiaries. Pursuant to this
transaction, Ampal and its subsidiaries will sell to Carmel an aggregate of
522,350 ordinary shares of Carmel for an expected aggregate sales price of
approximately $4.57 million. The Company expects to record a loss before tax of
$0.4 million. The completion of the sale of shares to Carmel is subject to the
satisfaction of certain closing conditions.

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

None.

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

Disclosure Controls and Procedures

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

58

---

---



Internal Control Over Financial Reporting

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

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

On
December 12, 2006, the Stock Option and Compensation Committee of the Board
approved the grant pursuant to the Companys 2000 Incentive Plan to Yosef A.
Maiman an option to purchase 250,000 shares of the Companys Class A Stock.
This option has an exercise price of $5.06 per share and will vest in equal
installments beginning on March 12, 2007 and each three month anniversary
thereafter. Additionally, the exercise price of this option may only be paid by
the holder by having the Company withhold from the underlying option stock the
number of shares having a fair market value equal to the exercise price. The
form of option agreement pursuant to which this option was granted under the
2000 Plan is being filed as Exhibit 10o hereto.

PART III

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

MANAGEMENT

The
following table sets forth certain information regarding Ampals directors and
executive officers as of March 28, 2007:

|                             |  |                                                                         
|---------------------------- |  | ------------------------------------------------------------------------
|Name                         |  | Position                                                                
|                             |  |                                                                         
|                             |  |                                                                         
|Yosef A. Maiman              |  | President, Chief Executive
  Officer, Chairman of the Board of Directors
|Jack Bigio                   |  | Director                                                                
|Leo Malamud(1)               |  | Director                                                                
|Dr. Joseph Yerushalmi(1)     |  | Director                                                                
|Dr. Nimrod Novik             |  | Director                                                                
|Yehuda Karni(1) (2)
  (3)(4) |  | Director                                                                
|Eitan Haber(2) (3)(4)        |  | Director                                                                
|Menahem Morag(2) (3)(4)      |  | Director                                                                
|Irit Eluz                    |  | CFO, Senior Vice President
  - Finance and Treasurer                    
|Yoram Firon                  |  | Vice President-Investments
  and Corporate Affairs and Secretary        
|Amit Mantsur                 |  | Vice President-Investments                                              
|Giora Bar-Nir                |  | Vice President -
  Accounting and Controller                            

|                                                                                                                         |     |                                                                                                                                                                                                                       
|------------------------------------------------------------------------------------------------------------------------ | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                        
|The
  numbers listed below, which follow the names of some of the foregoing
  directors, designate committee membership:
|                                                                                                                         |     |                                                                                                                                                                                                                       
|                                                                                                                         | (1) | Member of the Executive
  Committee of the Board which meets as necessary between regularly scheduled
  Board meetings and, consistent with certain statutory limitations, exercises
  all the authority of the Board.
|                                                                                                                         |     |                                                                                                                                                                                                                       
|                                                                                                                         | (2) | Member of the Audit
  Committee of the Board which reviews functions of the outside auditors,
  auditors fees and related matters. Mr. Karni is the Chairman of the Audit
  Committee of the Board.                  
|                                                                                                                         |     |                                                                                                                                                                                                                       
|                                                                                                                         | (3) | Member of the Stock Option
  and Compensation Committee of the Board.                                                                                                                                                 
|                                                                                                                         |     |                                                                                                                                                                                                                       
|                                                                                                                         | (4) | Member of the Special
  Committee of the Board.                                                                                                                                                                       

59

---

---



In
2006, the Board met twelve times and acted four times by written consent; the
Executive Committee acted one time by written consent; the Audit Committee met
four times and did not act by written consent. The Stock Option and
Compensation Committee met one time and did not act by written consent. The
Special Committee met four times and did not act by written consent. All
directors attended more than 75% of the aggregate of (1) the total number of
Board meetings held during the period in 2006 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 2006 (during the period of such
service). Each director of the Board is elected for a one year term and serves
until his or her successor is duly elected and qualified.

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

YOSEF
A. MAIMAN, 61, has been the Chairman of the Board of Ampal since April 25, 2002
and President and Chief Executive Officer of Ampal since October 1, 2006. Mr.
Maiman has been President and Chief Executive Officer of Merhav (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, 41 has been the President and Chief Executive Officer of Ampal since
between April 25, 2002 and September 30, 2006, and a director of Ampal since
March 6, 2002. From 1996 until April 2002, Mr. Bigio served as Senior Vice
President - Operations and Finance of Merhav. Mr. Bigio is also a director of
Eltek, a member of the Board of Israel-America Chamber of Commerce &
Industry and a member of Young Presidents Organization.

LEO
MALAMUD, 55, has been a director of Ampal since March 6, 2002. Since 1995, Mr.
Malamud is Senior Vice President of Merhav. Mr. Malamud is also a director of
Eltek.

Dr.
JOSEPH YERUSHALMI, 69, 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.

Dr.
NIMROD NOVIK, 61, has been a director of Ampal since September 19, 2006. Dr.
Novik has been Senior Vice President of Merhav since 1995, responsible for
Middle East projects (including the MIDOR petroleum refinery in Egypt and the
current EMG project for the export of Egyptian natural gas to Israel) as well
as for corporate and government relations. He is a member of the board of EMG
and of Channel 10 News Corp. Mr. Novik is an advisor to the Israeli National
Security Council as well as to several members of the Israeli cabinet, and a
former Special Ambassador of the State of Israel as well as Chief Advisor on
Foreign Policy to Israels Prime Minister and Minister of Foreign Affairs.

YEHUDA
KARNI, 78, 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, 67, was the Head of Bureau for the former Prime Minister of Israel,
Yitzhak Rabin, from July 1992 until November 1995. Since 1996, Mr. Haber has
been the President and Chief Executive Officer of Geopol Ltd., which represents
the Korean conglomerate Samsung Aircraft and Industries in Israel and the
Middle East; Kavim Ltd., a production and project development company; Mr.
Haber is a member in the Board of Directors of Africa Israel Ltd. Mr. Haber is
also a member of various non-profit organizations. He has been a director of
Ampal since August 16, 2002.

60

---

---



MENAHEM
MORAG, 56, 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, director in Palram Industries since 2004 and since 2005 he is the CEO
of Keren-Shemesh Foundation for the Encouragement of Young Entrepreneurs.

IRIT
ELUZ, 40, has been the Chief Financial Officer and Senior Vice President -
Finance and Treasurer since October 2004. From May 2002 through October 2004,
Ms. Eluz was Chief Financial Officer and Vice President  Finance and
Treasurer. 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, 38, 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
MANTSUR, 37, has been Vice President  Investments since March 2003. From
September 2000 through December 2002, Mr. Mantsur served at Alrov Group as
Strategy & Business Development Manager. From February 1997 through
September 2000, Mr. Mantsur was a projects manager at the Financial Advisory
Services of KPMG Somekh Chaikin.

GIORA
BAR-NIR, 50, has been Vice-President  Accounting and Controller Since October
2004. From March 2002 through October 2004 Mr. Bar-Nir has been the Controller.
During the preceding five years, Mr. Bar-Nir was the Controller of the Israeli
subsidiaries of Ampal.

AUDIT COMMITTEE

The
Company has an Audit Committee of the Board consisting of Messrs. 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, except that Leo Malamud did not timely file a Form 4 reporting
the stock option award granted on December 12, 2006.

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.

61

---

---



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

COMPENSATION
DISCUSSION AND ANALYSIS

Objectives of Compensation Program

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

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

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

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

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

Responsibilities

Prior to
September 19, 2006, the Stock Option and Compensation Committee of the Board
(the Compensation Committee) was responsible for determining all facets of
executive compensation including annual base salary and bonuses for executive
officers, administration of the Companys 1998 Long Term Incentive Plan and the
Companys 2000 Incentive Plan (collectively, the Option Plans), and director
compensation. The Compensation Committee is composed of independent directors
as defined under the rules of NASDAQ and the SEC. The Compensation Committee
does not operate pursuant to a written charter.

On
September 19, 2006, the members of the Board engaged in discussions regarding
the appropriate scope of the responsibilities of the Compensation Committee in
light of the Companys controlled company status under the rules of NASDAQ
and the fact that Mr. Yosef A. Maiman was appointed as the Chief Executive
Officer of Ampal. During these discussions, the Board decided to re-allocate
certain of the responsibilities with regard to executive compensation to Yosef
A. Maiman, the Chairman, President and Chief Executive Officer.

Effective
as of September 19, 2006, the Board determined that the Compensation Committee
will continue to be responsible for (i) administering the Option Plans and
determining the officers and key employees who are to be granted options under
the Option Plans and the number of shares subject to such options and (ii)
determining the annual base salary and non-equity based annual bonus for Mr.
Maiman in his capacity as Chairman, President and Chief Executive Officer.

Effective
as of September 19, 2006, the Board also determined that Mr. Maiman will be
responsible for (i) determining the annual base salary and non-equity based
annual bonuses for all executive officers(other than the Chief Executive
Officer) and for (ii) recommending to the Board director compensation and
benefit programs. Mr. Maiman also may attend and participate in meetings of the
Compensation Committee.

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

62

---

---



Elements of Compensation

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

Base
Salary

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

Determinations
for annual base salary for the fiscal year ended December 31, 2006 were made by
the Compensation Committee in
consultation with Mr. Maiman and other executive officers.

Annual
Cash Incentive Bonus Compensation

The
non-equity based annual bonus compensation is based on each Named Executive
Officers individual performance for the Company over the fiscal year, which is
measured in terms of overall effort, performance and contribution to the
Company. In the past, bonuses were based on a multiple of the Named Executive
Officers base salary, but in the interest of flexibility, we no longer
exclusively utilize this approach. In 2006, we considered the performance of
our Named Executive Officers with respect to certain material transactions and
the amount of funds raised during the year and allocated an amount among the
Named Executive Officers who were involved in those special efforts. We take
into account the amount of annual base salary paid to each Named Executive
Officers in determining such Named Executive Officers non-equity based annual
bonus compensation. Determinations for non-equity based annual bonus
compensation for the fiscal year ended December 31, 2006 were made by Mr.
Maiman.

Long-Term
Equity Incentive Compensation

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

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

Beginning
January 1, 2006, the Company accounts for all options in accordance with SFAS
123R

63

---

---



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

Perquisites

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

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

Severance
and Change of Control Benefits

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

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

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

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

Education
Fund

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

64

---

---



Vacation
Provision and Recreation Pay

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

Stock
Ownership and Retention Guidelines

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

Summary Compensation Table
For Fiscal Year Ended December 31, 2006

The following
table sets forth all of the compensation awards to our Named Executive Officers
for the year ended December 31, 2006.

|                                                                   |  |      |      |        |  |         |  |                |         |                         |  |                                |  |           |         |  |  |         |      |  |           | 
|------------------------------------------------------------------ |  | ---- | ---- | ------ |  | ------- |  | -------------- | ------- | ----------------------- |  | ------------------------------ |  | --------- | ------- |  |  | ------- | ---- |  | --------- | 
|Name and
  Principal Position                                      |  | Year |      | Salary |  | Bonus   |  | Stock
  Awards |         | Option 
  Awards
  (12) |  | All Other
  Compensation
  (7) |  | Total (9) |        
|                                                                   |  |      |      |        |  |         |  |                |         |                         |  |                                |  |           |        
|                                                                   |  |      |      | $      |  | $       |  | $              |         | $                       |  | $                              |  | $         |        
|                                                                   |  |      |      |        |  |         |  |                |         |                         |  |                                |  |           |        
|Yosef A.
  Maiman (1) (8) Chairman of the Board, President and CEO |  |      | 2006 |        |  | 632,144 |  |                | 984,627 |                         |  | -                              |  |           | 68,947  |  |  | 30,605  | (10) |  | 1,716,323 | 
|                                                                   |  |      |      |        |  |         |  |                |         |                         |  |                                |  |           |         |  |  |         |      |  |           | 
|Irit Eluz
  (2) (8) CFO  SVPFinance & Treasurer                   |  |      | 2006 |        |  | 263,848 |  |                | 673,692 |                         |  | -                              |  |           | 152,664 |  |  | 152,928 |      |  | 1,243,133 | 
|                                                                   |  |      |      |        |  |         |  |                |         |                         |  |                                |  |           |         |  |  |         |      |  |           | 
|Yoram Firon
  (3) (8) Secretary, VicePresident Investments         |  |      | 2006 |        |  | 206,194 |  |                | 173,964 |                         |  | -                              |  |           | 107,504 |  |  | 80,235  |      |  | 567,897   | 
|                                                                   |  |      |      |        |  |         |  |                |         |                         |  |                                |  |           |         |  |  |         |      |  |           | 
|Amit Mantsur
  (4) Vice President Investments                      |  |      | 2006 |        |  | 141,538 |  |                | 49,704  |                         |  | -                              |  |           | 37,969  |  |  | 50,902  |      |  | 280,114   | 
|                                                                   |  |      |      |        |  |         |  |                |         |                         |  |                                |  |           |         |  |  |         |      |  |           | 
|Giora Bar
  Nir (5) Vice President Accounting & Controller         |  |      | 2006 |        |  | 152,196 |  |                | 29,822  |                         |  | -                              |  |           | 30,501  |  |  | 57,362  |      |  | 269,882   | 
|                                                                   |  |      |      |        |  |         |  |                |         |                         |  |                                |  |           |         |  |  |         |      |  |           | 
|Jack Bigio
  (6)(8) Former President & CEO                         |  |      | 2006 |        |  | 388,346 |  |                | 206,580 |                         |  | -                              |  |           | 148,935 |  |  | 662,570 | (11) |  | 1,406,431 | 

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

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

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

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

65

---

---



(5) Mr.
Bar-Nir has been employed by Ampal since June 17, 1990.

(6) Mr. Bigio
served as President and CEO from April 25, 2002 until September 30, 2006. The
amounts include final account settlement. Mr. Bigio exercised 150,000 options
on October 4 , 2006.

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

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

(9) All cash
compensation is paid in New Israeli Shekels. The amounts in the table are
converted from the New Israeli Shekel to U.S. Dollars based on the exchange
rate of 4.225, which represents the exchange rate as of December 31, 2006.

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

(11) Of such
amount, for services as director, $4,500 was paid in cash.

(12)
Represents the compensation cost in 2006 in accordance with SFAS No. 123R for
stock options, which includes amounts from awards granted in and prior to 2006.

Grants of Plan-Based AwardsFor Fiscal Year Ended December 31, 2006

|                  |  |            |          |                                                                              |  |                                                     |  |                                                           |      |  |  |         | 
|----------------- |  | ---------- | -------- | ---------------------------------------------------------------------------- |  | --------------------------------------------------- |  | --------------------------------------------------------- | ---- |  |  | ------- | 
|Name              |  | Grant Date |          | All Other Option 
  Awards: Number 
  of Securities 
  Underlying 
  Options |  | Exercise or Base 
  Price of Option 
  Awards
  ($) |  | Grant Date Fair
  Value of Stock
  and Option
  Awards(1) |     
|                  |  |            |          |                                                                              |  |                                                     |  |                                                           |     
|                 
|Yosef A.
  Maiman |  |            | 12/12/06 |                                                                              |  | 250,000                                             |  |                                                           | 5.06 |  |  | 591,610 | 

| |     |                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------
| | (1) | Represents
  the grant date fair value of stock option awards computed in accordance with
  SFAS No. 123R.

Outstanding Equity Awards For Fiscal Year Ended December 31, 2006

Option Awards

|                  |  |                                                                             |  |                                                                      |         |                        |  |                      |  |                     | 
|----------------- |  | --------------------------------------------------------------------------- |  | -------------------------------------------------------------------- | ------- | ---------------------- |  | -------------------- |  | ------------------- | 
|                  | 
|Name              |  | Number of
  Securities
  Underlying
  Unexercised
  Options(Exercisable)(1) |  | Number ofSecuritiesUnderlyingUnexercisedOptions(Unexercisable)
  (1) |         | OptionExercisePrice($) |  | OptionExpirationDate | 
|                  |  |                                                                             |  |                                                                      |         |                        |  |                      | 
|Yosef
  A. Maiman |  | 250,000                                                                     |  |                                                                      |         |                        |  | 3.12                 |  | August 15,
  2012   | 
|                  |  |                                                                             |  |                                                                      | 250,000 |                        |  | 5.06                 |  | December 11,
  2016 | 
|Irit Eluz         |  | 78,500                                                                      |  |                                                                      |         |                        |  | 3.12                 |  | August 15,
  2012   | 
|                  |  | 140,000                                                                     |  |                                                                      | 140,000 |                        |  | 3.5                  |  | October 27,
  2014  | 
|Yoram Firon       |  | 68,500                                                                      |  |                                                                      |         |                        |  | 3.12                 |  | August 15,
  2012   | 
|                  |  | 95,000                                                                      |  |                                                                      | 95,000  |                        |  | 3.5                  |  | October 27,
  2014  | 
|Amit Mantsur      |  | 54,375                                                                      |  |                                                                      | 3,625   |                        |  | 3.69                 |  | February 12,
  2013 | 
|                  |  | 7,500                                                                       |  |                                                                      | 7,500   |                        |  | 3.5                  |  | October 27,
  2014  | 
|Giora Bar
  Nir   |  | 63,500                                                                      |  |                                                                      |         |                        |  | 3.12                 |  | August 15,
  2012   | 
|                  |  | 15,000                                                                      |  |                                                                      | 15,000  |                        |  | 3.5                  |  | October 27,
  2014  | 
|Jack Bigio        |  | 0                                                                           |  |                                                                      | 0       |                        |  | -                    |  | -                   | 

(1) Options expire 10 years
from the grant date and vest in sixteen equal installments on the three month
anniversary of the date of grant and each three month period thereafter.

66

---

---



Option Exercises and Stock Vested as of Fiscal Year Ended December 31, 2006Option Awards

|           |  |                                         |  |                                  |  |  |  |  |  |  | 
|---------- |  | --------------------------------------- |  | -------------------------------- |  |  |  |  |  |  | 
|Name       |  | Number of Shares
  Acquired on Exercise |  | Value Realized
  on Exercise ($) | 
|           |  |                                         |  |                                  | 
|          
|Jack Bigio |  | 150,000                                 |  | 242,994                          | 

Compensation of
Directors

Directors
of Ampal (other than Mr. Maiman and prior to September 19, 2006, Mr. Bigio)
received $1,500 per Board meeting attended. The Chairman of the Board receives
$2,000 per Board meeting attended. Directors of Ampal also receive the same
amount for attendance at meetings of committees of the Board, provided that
such committee meetings are on separate days and on a day other than the day of
a regularly scheduled Board meeting.

For
attending Special Committee, Audit Committee and Executive Committee meetings
Mr. Karni, the Chairman of the Special and the Audit Committee, is entitled to
$30,000 per year. Each of Mr. Haber and Mr. Morag are entitled to $20,000 per
year, for attending Special Committee and Audit Committee meetings.

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

On December
12, 2006, the Stock Option and Compensation Committee of the Board approved the
grant, pursuant to the Companys 2000 Incentive Plan to (i) Yosef A. Maiman an
option to purchase 250,000 shares of the Companys Class A Stock (ii) Nimrod
Novik an option to purchase 180,000 shares of the Companys Class A Stock, (iii)
Joseph Yerushalmi an option to purchase 80,000 options, (iv) Leo Malamud an
option to purchase 30,000 shares of the Companys Class A Stock and (v) each of
Eitan Haber,Yehuda Karni and Menahem Morag, the Companys non-employee
directors, an option to purchase 30,000 shares of the Companys Class A Stock.
All of the foregoing options have an exercise price of $5.06 per share and will
vest in equal installments beginning on March 12, 2007 and each three month
anniversary thereafter. Additionally, the exercise price of these options may
only be paid by the holders by having the Company withhold from the underlying
option stock the number of shares having a fair market value equal to the
exercise price.

Director CompensationFor Fiscal Year Ended December 31, 2006

|                          |  |                         |  |                          |        |           |  |        |  | 
|------------------------- |  | ----------------------- |  | ------------------------ | ------ | --------- |  | ------ |  | 
|                          |  |                         | 
|                          |  |                         | 
|Name                      |  | Fees Paid
  in Cash ($) |  | Option(1)
  Award 
  ($) |        | Total ($) | 
|                          |  |                         |  |                          |        |           | 
|Yehuda Karni
  (2)(3)     |  | 48,500                  |  |                          | 23,345 |           |  | 71,845 |  | 
|Menahem
  Morag(2)(4)     |  | 34,500                  |  |                          | 27,478 |           |  | 61,978 |  | 
|Eitan Haber(2)(3)         |  | 34,500                  |  |                          | 23,345 |           |  | 57,845 |  | 
|Leo Malamud(5)            |  | 13,500                  |  |                          | 39,082 |           |  | 52,582 |  | 
|Dr. Yossi
  Yerushalmi(6) |  | 16,500                  |  |                          | 27,198 |           |  | 43,698 |  | 
|Dr. Nimrod
  Novik(7)     |  | 6,000                   |  |                          | 3,430  |           |  | 9,430  |  | 

|                                                                                                                                                                                                                                                                                                                                                               
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)
  Represents the compensation cost in 2006 in accordance with SFAS 123(R) for
  stock options, which includes amounts from awards granted in and prior
  to fiscal 2006.                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                               
|(2) In
  fiscal 2006, Messrs. Karni, Morag and Haber were each granted an option to
  purchase 30,000 shares of our Class A Stock, each with a grant date fair
  value of $70,993. In fiscal 2005,
  Messrs. Karni, Morag and Haber were each granted an option to purchase 45,000
  shares of our Class A Stock, each with a grant date fair value of $75,690.

67

---

---



|                                                                                                                                                                                                                                                                                                          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                          
|(3) In
  fiscal 2002, Messrs. Karni, Morag and Haber were each granted an option to
  purchase 15,000 shares of our Class A Stock, each with a grant date fair
  value of $24,299.                                                                                                                        
|                                                                                                                                                                                                                                                                                                          
|(4) In
  fiscal 2004, Mr. Morag was granted an option to purchase 15,000 shares of our
  Class A Stock, with a grant date fair value of $31,935.                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                          
|(5) In
  fiscal 2006, Mr. Malamud was granted an option to purchase 30,000 shares of
  our Class A Stock, with a grant date fair value of $70,993. In fiscal 2002,
  Mr. Malamud was granted an option to purchase 150,000 shares of our Class A
  Stock, with a grant date fair value of $242,994.       
|                                                                                                                                                                                                                                                                                                          
|(6) In
  fiscal 2006, Mr. Yerushalmi was granted an option to purchase 80,000 shares
  of our Class A Stock, with a grant date fair value of $189,315. In fiscal
  2002, Mr. Yerushalmi was granted an option to purchase 100,000 shares of our
  Class A Stock, with a grant date fair value of $161,996.
|                                                                                                                                                                                                                                                                                                          
|(7) In
  fiscal 2006, Mr. Novik was granted an option to purchase 180,000 shares of
  our Class A Stock, with a grant date fair value of $425,960.                                                                                                                                                        

The
following table sets forth certain information regarding stock options granted
to purchase our Class A Stock to our directors during the fiscal year ended
December 31, 2006.

|                           |  |      |         | 
|-------------------------- |  | ---- | ------- | 
|                           |  | 2006 |        
|                           |  |      |        
|Yosef A.
  Maiman (1)      |  |      | 250,000 | 
|Jack Bigio
  (2)           |  |      | -       | 
|Eitan Haber
  (3)          |  |      | 30,000  | 
|Yehuda Karni
  (3)         |  |      | 30,000  | 
|Menahem
  Morag (4)        |  |      | 30,000  | 
|Leo Malamud
  (2)          |  |      | 30,000  | 
|Dr. Yosef
  Yerushalmi (3) |  |      | 80,000  | 
|Dr. Nimrod
  Novik (5)     |  |      | 180,000 | 

|                                        
|----------------------------------------
|(1) Director
  since August 16, 2002    
|                                        
|(2) Director
  since March 6, 2002.     
|                                        
|(3) Director
  since August 16, 2002.   
|                                        
|(4) Director
  since March 24, 2004.    
|                                        
|(5) Director
  since September 19, 2006.

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, 2006, no options of the 1998 Plan
are outstanding.

On February
15, 2000, the Compensation 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, 2006, 2,164,500 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
Compensation Committee but not less than 100% of the fair market value of the
underlying options on the date of grant, or non-incentive stock options, at an
exercise price to be determined by the Compensation Committee. The Compensation
Committee may also grant, at its discretion, restricted stock, dividend
equivalent awards, which entitle the recipient to receive dividends in the
form of Class A Stock, cash or a combination of both and stock appreciation
rights, which permit the recipient to receive an amount in the form of Class A
Stock, cash or a combination of both, equal to the number of shares of Class A
Stock with respect to which the rights are exercised multiplied by the excess
of the fair market value of the Class A Stock on the exercise date over the
exercise price. The options granted under the Plans were granted either at
market value or above.

68

---

---



Under each
of the Plans, all granted but unvested options become immediately exercisable
upon the occurrence of a change in control of the Company. Prior to January 1,
2006 the Company accounted for all plans under APB Opinion No. 25, under which
no compensation costs were incurred in the years ended December 31, 2004 and
2005. 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)
would have been ($6.8 million) and ($19.0 million) for the years 2005 and 2004,
respectively.

Effective January
1, 2006, the Company adopted SFAS No. 123R SFAS No. 123R revises SFAS No. 123,
and supersedes Accounting Principles Board (APB) Opinion No. 25, SFAS No.
123R requires the cost of all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements
based on their fair values at grant date, over the requisite service period.
For the year ended December 31, 2006 the Company recorded $720,000 as
compensation expenses.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION

The current
members of the Stock Option and Compensation Committee are Mr. Yehuda Karni,
Mr. Eitan Haber and Mr. Menahem Morag, none of whom is an officer or employee
or former officer or employee of the Company. During 2006, no executive officer
of the Company served on the compensation committee or the Board of Directors
of another entity whose executive officer(s) served on the Companys Stock
Option and Compensation Committee for the Board of Directors.

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

COMPENSATION COMMITTEE REPORT

The Stock
Option and Compensation Committee and Yosef A. Maiman have reviewed and
discussed the Compensation Discussion and Analysis required by Regulation S-K,
Item 402(b) with management. Based on the review and discussions referred to in
the preceding sentence, the Stock Option and Compensation Committee and Yosef
A. Maiman recommended to the board of directors that the Compensation
Discussion and Analysis be included in this Annual Report on Form 10-K.

Yehuda Karni
Eitan Harber
Menahem Morag
Yosef A. Maiman

69

---

---



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

|                                                           |  |                                                                                                     |  |                                                                                   |      |                                                                                                                                                         |  |           |     | 
|---------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------- | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- | --- | 
|                                                           |  | Equity Compensation Plan Information(1)                                                             | 
|                                                           |  |                                                                                                     | 
|                                                          
|Plan
  category                                            |  | Number of securities
  to be issued
  upon exercise of
  outstanding options,
  warrants and rights |  | Weighted-average
  exercise price of
  outstanding options,
  warrants and rights |      | Number of securities
  remaining available
  for future issuance
  under equity
  compensation plans
  (excluding securities
  reflected in column (a)) | 
|                                                           |  |                                                                                                     |  |                                                                                   |      |                                                                                                                                                         | 
|                                                           |  | (a)                                                                                                 |  | (b)                                                                               |      | (c)                                                                                                                                                     | 
|                                                           |  |                                                                                                     |  |                                                                                   |      |                                                                                                                                                         |  |           |     | 
|Equity compensation plans approved by security
holders     |  | 2,164,500                                                                                           |  |                                                                                   | 3.83 |                                                                                                                                                         |  | 1,796,625 | (2) | 
|                                                           |  |                                                                                                     |  |                                                                                   |      |                                                                                                                                                         |  |           |     | 
|Equity compensation plans not approved by security
holders |  | N/A                                                                                                 |  |                                                                                   | N/A  |                                                                                                                                                         |  | N/A       |     | 
|                                                           |  |                                                                                                     |  |                                                                                   |      |                                                                                                                                                         |  |           |     | 
|Total                                                      |  | 2,164,500                                                                                           |  |                                                                                   | 3.83 |                                                                                                                                                         |  | 1,796,625 |     | 

| |     |                                                                                                                                                                                                  
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | All information provided
  as of December 31, 2006.                                                                                                                                              
| |     |                                                                                                                                                                                                  
| | (2) | The number of securities
  remaining available for future issuance under 1998 Plan is 388,000. The
  number of securities remaining available for future issuance under 2000 Plan
  is 1,408,625.

PRINCIPAL
SHAREHOLDERS OF AMPAL

The
following table sets forth information as of March 28, 2007, as to the holders
known to Ampal who beneficially own more than 5% of the Class A Stock, the only
outstanding series of voting securities of Ampal. As of March 28, 2007, there
were 49,355,791 (not including treasury shares) shares of Class A Stock of
Ampal outstanding.

Security
Ownership of Certain Beneficial Owners

|                                                                                                  |                |  |                                                         |           |                                                        |       
|------------------------------------------------------------------------------------------------- | -------------- |  | ------------------------------------------------------- | --------- | ------------------------------------------------------ | ------
|Name and Address
  of Beneficial Owner                                                            | Title of Class |  | Number of Shares
  and Nature
  of Beneficial Ownership |           | Percent
  of Outstanding 
  Shares of 
  Class A Stock
|                                                                                                  |                |  |                                                         |           |                                                       
|                                                                                                  |                |  |                                                         |           |                                                        |       
|Di-Rapallo
  Holdings Ltd., of
  33 Havazelet Hasharon St.,
  Herzliya, Israel                    | Class A Stock  |  | 11,750,132                                              | (1)       |                                                        | 23.81%
|                                                                                                  |                |  |                                                         |           |                                                        |       
|De-Majorca
  Holdings Ltd., of
  33 Havazelet Hasharon St.,
  Herzliya, Israel                    | Class A Stock  |  | 18,850,153                                              | (2)       |                                                        | 38.19%
|                                                                                                  |                |  |                                                         |           |                                                        |       
|Yosef
  A. Maiman
  Y.M. Noy Investments Ltd., of
  33 Havazelet Hasharon St.,
  Herzliya, Israel | Class A Stock  |  | 30,865,910                                              | (1)(2)(3) |                                                        | 62.20%
|                                                                                                  |                |  |                                                         |           |                                                        |       
|Ohad
  Maiman
  Y.M. Noy Investments Ltd., of
  33 Havazelet Hasharon St.,
  Herzliya, Israel     | Class A Stock  |  | 30,600,285                                              | (1)(2)    |                                                        | 62.00%
|                                                                                                  |                |  |                                                         |           |                                                        |       
|Noa
  Maiman
  Y.M. Noy Investments Ltd., of
  33 Havazelet Hasharon St.,
  Herzliya, Israel      | Class A Stock  |  | 30,600,285                                              | (1)(2)    |                                                        | 62.00%
|                                                                                                  |                |  |                                                         |           |                                                        |       
|Yoav
  Maiman
  Y.M. Noy Investments Ltd., of
  33 Havazelet Hasharon St.,
  Herzliya, Israel     | Class A Stock  |  | 30,600,285                                              | (1)(2)    |                                                        | 62.00%

70

---

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Consists of 11,750,132
  shares of Class A Stock held directly by Di-Rapallo Holdings Ltd. Yosef A. Maiman owns 100% of the
  economic shares and one-fourth of the voting shares of Di-Rapallo Holdings
  Ltd.. In addition, Mr. Maiman
  holds an option to acquire the remaining three quarters of the voting shares
  of Di-Rapallo Holdings Ltd. (which
  are currently owned by Ohad Maiman, Noa Maiman and Yoav Maiman, the son,
  daughter and son, respectively, of Mr. Maiman).
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(2) | Consists of 18,850,153
  shares of Class A Stock held directly by De-Majorca Holdings Ltd. Yosef A. Maiman owns 100% of the
  economic shares and one-fourth of the voting shares of De-Majorca Holdings
  Ltd.. In addition, Mr. Maiman
  holds an option to acquire the remaining three quarters of the voting shares
  of De-Majorca Holdings Ltd. (which
  are currently owned by Ohad Maiman, Noa Maiman and Yoav Maiman, the son,
  daughter and son, respectively, of Mr. Maiman).
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(3) | Includes 265,625 shares of
  Class A Stock underlying options which are currently exercisable by Mr.
  Maiman.                                                                                                                                                                                                                                                                                                                                                                           

Security
Ownership of Management

The
following table sets forth information as of March 28, 2007 as to each class of
equity securities of Ampal or any of its subsidiaries beneficially owned by
each director and named executive officer of Ampal listed in the Summary
Compensation Table and by all directors and named executive officers of Ampal
as a group. All ownership is direct unless otherwise noted. The table does not
include directors or named executive officers who do not own any such shares:

|                                                  |  |                                                                              |        |                                                     |       |   | 
|------------------------------------------------- |  | ---------------------------------------------------------------------------- | ------ | --------------------------------------------------- | ----- | - | 
|Name                                              |  | Number of Shares and 
  Nature of Beneficial 
  Ownership
  of Class A Stock |        | Percent of Outstanding 
  Shares of
  Class A Stock |      
|                                                  |  |                                                                              |        |                                                     |      
|                                                  |  |                                                                              |        |                                                     |       |   | 
|Yosef
  Maiman                                    |  | 30,865,910                                                                   | (1)(2) |                                                     | 62.20 | % | 
|Irit
  Eluz                                       |  | 253,500                                                                      | (2)    |                                                     | *     |   | 
|Yoram
  Firon                                     |  | 187,250                                                                      | (2)    |                                                     | *     |   | 
|Amit
  Mantsur                                    |  | 56,500                                                                       | (2)    |                                                     |       |   | 
|Leo
  Malamud                                     |  | 151,875                                                                      | (2)    |                                                     | *     |   | 
|Dr.
  Joseph Yerushalmi                           |  | 105,000                                                                      | (2)    |                                                     | *     |   | 
|Dr.
  Nimrod Novik                                |  | 11,250                                                                       | (2)    |                                                     |       |   | 
|Eitan
  Haber                                     |  | 33,750                                                                       | (2)    |                                                     | *     |   | 
|Yehuda
  Karni                                    |  | 33,750                                                                       | (2)    |                                                     | *     |   | 
|Menahem
  Morag                                   |  | 30,000                                                                       | (2)    |                                                     | *     |   | 
|Giora
  Bar-Nir                                   |  | 82,250                                                                       | (2)    |                                                     | *     |   | 
|Jack
  Bigio                                      |  | 150,000                                                                      | (2)    |                                                     | *     |   | 
|All
  Directors and Executive Officers as a Group |  | 31,961,035                                                                   | (2)    |                                                     | 63.21 | % | 

|    |                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Represents less than 1% of
  the class of securities.                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                         
|(1) | Attributable to 11,750,132
  and 18,850,153 shares of Class A Stock held directly by Di-Rapallo Holdings
  Ltd and De-Majorca Holdings Ltd.,
  respectively. See Security Ownership of Certain Beneficial Owners.
  In addition, this represents 265,625 shares underlying options for Yosef
  Maiman which are presently exercisable.
|    |                                                                                                                                                                                                                                                                                                                                         
|(2) | Represents shares
  underlying options which are presently exercisable or exercisable in 60 days.                                                                                                                                                                                                                                       

71

---

---



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

The
Company, through Merhav Ampal Energy, Ltd., a wholly-owned subsidiary of the Company,
entered into an agreement with Merhav (M.N.F.) Ltd. (Merhav) for the purchase
from Merhav a portion of its interest in East Mediterranean Gas Co. S.A.E., an Egyptian
joint stock company (EMG). The sole owner of Merhav is Yosef A. Maiman, who
is also the Chairman, President and CEO of the Company and a member of the controlling
shareholder group of Ampal.

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

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

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

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

The
purchase price for the shares was approximately $128.3 million, of which approximately
$68.3 million was paid in cash, $40 million was paid in 8,602,151 shares of the Companys
Class A Stock and the balance was satisfied by the issuance of a promissory note in the
principal amount of $20 million (the Convertible Promissory Note), which, at
the option of Merhav, will be paid in cash, additional shares of the Company Class A
Stock (based on a price per share of $4.65 per share), or a combination thereof. As
permitted under the stock purchase agreement, Merhav assigned its right to the 8,602,151
Shares to De Majorca Holdings Limited as part of Merhavs restructuring process. The
Convertible Promissory Note bears interest at 6 months LIBOR (5.375%) and matures on the
earlier of September 20, 2007 or upon demand by Merhav. Ampal may pre-pay the Convertible
Promissory Note at any time in whole or in part. The maximum number of shares that can be
issued in this transaction (including accrued interest payable through the maturity date
on the Convertible Promissory Note) is 13,078,540 shares of Class A Stock. As a result of
this transaction, Ampal beneficially owns 12.5% of the total outstanding shares of EMG.
The issuance of the 8,602,151 shares and the shares underlying the Convertible Promissory
Note received the approval of the shareholders of the Company on February 7, 2007, as
required by the marketplace rules of the NASDAQ Global Market. Due to the agreement of
the controlling shareholder group to vote in favor of the issuance of these shares to
Merhav as of the closing date of the EMG transaction (which ensured that the proposal
would be adopted by the requisite shareholder vote on February 7, 2007), the Company
classified for accounting purposes the sale of these shares as part of the exchange with
Merhav on December 21, 2006, and recognized the $40 million within shareholders equity
as Receipt on account of unallocated shares. The investment in EMG is
included in the energy segment.

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

72

---

---



Review
and Approval of Transactions with Management and Others

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

Director
Independence

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

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

AUDIT FEES.
The fees of Kesselman & Kesselman (Kesselman) CPA (ISR) for professional
services rendered for the audit of the Companys annual financial statements
for the fiscal years ended December 31, 2006 and December 31, 2005 and
reviewing the financial statements included in the Companys quarterly reports
on Form 10-Q were $276,000 and $266,000, respectively.

TAX FEES.
Kesselmans tax fees for the fiscal years ended December 31, 2006 and December
31, 2005, were $205,000 and $209,000, respectively.

ALL OTHER
FEES - Kesselmans fees for other services for the fiscal years ended December
31, 2006 and December 31, 2005, were $316,500 and $236,000, respectively.

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.

73

---

---



PART
IV

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

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

|                                                                                                                                                                                                          |                  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------
|                                                                                                                                                                                                          | Page 
  Reference
|                                                                                                                                                                                                          |                  
|(1) Financial Statements and Supplementary Data                                                                                                                                                           |                  
|                                                                                                                                                                                                          |                  
|Ampal-American Israel
  Corporation and Subsidiaries                                                                                                                                                      |                  
|                                                                                                                                                                                                          |                  
|Report of
  Independent Registered Public Accounting Firm                                                                                                                                                 | 27               
|                                                                                                                                                                                                          |                  
|Consolidated
  Balance Sheets as of December 31, 2006 and 2005                                                                                                                                            | 28-29            
|                                                                                                                                                                                                          |                  
|Consolidated
  Statements of Operations for the years ended December 31, 2006, 2005 and 2004                                                                                                              | 30               
|                                                                                                                                                                                                          |                  
|Consolidated
  Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004                                                                                                              | 3132            
|                                                                                                                                                                                                          |                  
|Consolidated
  Statements of Changes in Shareholders Equity for the years ended December
  31, 2006, 2005 and 2004                                                                                       | 33-35            
|                                                                                                                                                                                                          |                  
|Consolidated
  Statements of Comprehensive Income for the years ended December 31, 2006,
  2005 and 2004 (included as part of the Statements of Changes in Shareholders' Equity for the respective years) | 33-35            
|                                                                                                                                                                                                          |                  
|Notes to
  Consolidated Financial Statements                                                                                                                                                              | 36-58            
|                                                                                                                                                                                                          |                  
|Supplementary
Data:                                                                                                                                                                                       |                  
|                                                                                                                                                                                                          |                  
|Selected quarterly financial
  data for the years ended December 31, 2006 and 2005                                                                                                                        | 24               

(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, 2006
|                                                                                                                                    |                                                                                                                                          
|Representative Rates of Exchange
  Between the U.S. Dollar and the New Israeli Shekel
  For the Three Years Ended December 31, 2006
|                                                                                                                                    |                                                                                                                                          
|                                                                                                                                    | The following
  table shows the amount of New Israeli Shekels equivalent to one U.S. Dollar
  on the dates indicated:                    

| |                |  |  | 2006  |  |  | 2005  |  |  | 2004  | 
| | -------------- |  |  | ----- |  |  | ----- |  |  | ----- | 
| |                |  |  |       |  |  |       |  |  |       | 
| | March
  31     |  |  | 4.665 |  |  | 4.361 |  |  | 4.528 | 
| | June
  30      |  |  | 4.440 |  |  | 4.574 |  |  | 4.497 | 
| | September
  30 |  |  | 4.302 |  |  | 4.598 |  |  | 4.482 | 
| | December
  31  |  |  | 4.225 |  |  | 4.603 |  |  | 4.308 | 

74

---

---



| |                                                                                                      |                                                                                                                  
| | ---------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------
| | (ii) Consolidated financial statements filed pursuant to Rule 3-09 of
  Regulation S-X              
| |                                                                                                      |                                                                                                                  
| | Coral World
  International Ltd.                                                                    
| |                                                                                                      |                                                                                                                  
| |                                                                                                      | Report of
  Certified Public Accountants                                                                         
| |                                                                                                      |                                                                                                                  
| |                                                                                                      | Consolidated Balance Sheets as at December 31, 2006 and 2005                                                     
| |                                                                                                      | Consolidated Statements of Income for the years ended December 31,
  2006, 2005 and 2004                         
| |                                                                                                      | Consolidated Statements of Changes in Shareholders Equity for the
  years ended December 31, 2006, 2005 and 2004
| |                                                                                                      | Consolidated Statements of Cash Flows for the years ended December
  31, 2006, 2005 and 2004                     
| |                                                                                                      | Notes to Financial Statements                                                                                    
| |                                                                                                      |                                                                                                                  
| | Ophir
  Holdings Ltd.                                                                               
| |                                                                                                      |                                                                                                                  
| |                                                                                                      | Report of
  Certified Public Accountants                                                                         
| |                                                                                                      |                                                                                                                  
| |                                                                                                      | Consolidated Balance Sheets as at December 31, 2006 and 2005                                                     
| |                                                                                                      | Consolidated Statements of Income for the years ended December 31,
  2006, 2005 and 2004                         
| |                                                                                                      | Consolidated Statements of Changes in Shareholders Equity for the
  years ended December 31, 2006, 2005 and 2004
| |                                                                                                      | Consolidated Statements of Cash Flows for the years ended December
  31, 2006, 2005 and 2004                     
| |                                                                                                      | Notes to Financial Statements                                                                                    
| |                                                                                                      |                                                                                                                  
| | Ophirtech Ltd.                                                                                      
| |                                                                                                      |                                                                                                                  
| |                                                                                                      | Report of Certified Public Accountants                                                                           
| |                                                                                                      |                                                                                                                  
| |                                                                                                      | Consolidated Balance Sheets as at December 31, 2005 and 2004                                                     
| |                                                                                                      | Consolidated Statements of Income for the years ended December 31,
  2005, 2004 and 2003                         
| |                                                                                                      | Consolidated Statements of Changes in Shareholders Equity for the
  years ended December 31, 2005, 2004 and 2003
| |                                                                                                      | Consolidated Statements of Cash Flows for the years ended December
  31, 2005, 2004 and 2003                     
| |                                                                                                      | Notes to Financial Statements                                                                                    
| |                                                                                                      |                                                                                                                  
| | (iii) Reports of Other Certified Public Accountants filed pursuant to
  Rule 2-05 of Regulation S-X:
| |                                                                                                      |                                                                                                                  
| |                                                                                                      | Bay Heart Ltd.                                                                                                   
| |                                                                                                      | Carmel Container Systems Ltd.                                                                                    
| |                                                                                                      | C.D Packaging System Ltd.                                                                                        
| |                                                                                                      | Epsilon Investment House Ltd.                                                                                    
| |                                                                                                      | Hod Hasharon Sport Center Ltd.                                                                                   
| |                                                                                                      | Hod Hasharon Sport Center (1992) Limited Partnership                                                             
| |                                                                                                      | Renaissance Investment Co. Ltd.                                                                                  

Exhibit 2 - Plan of Acquisition,
Reorganization, Arrangement, Liquidation or Succession

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

75

---

---



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

|                                                                                        |                                                                                                                                                                                                                                                                                                                               
|--------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 3 - Articles of Incorporation and By-Laws                                      
|                                                                                       
|3a.                                                                                     | Amended and
  Restated Certificate of Incorporation of Ampal-American Israel Corporation,
  dated May 28, 1997. (Filed as Exhibit 3a. to Form 10-Q, for the quarter ended
  June 30, 1997 and incorporated herein by reference, File No. 0-5380).                                                                             
|                                                                                        |                                                                                                                                                                                                                                                                                                                               
|3b.                                                                                     | Certificate
  of Amendment of Certificate of Incorporation, dated July 18, 2006 (Filed as
  Exhibit 3.1 to Form 8-K, filed with the SEC on July 19, 2006, and
  incorporated herein by reference).                                                                                                                            
|                                                                                        |                                                                                                                                                                                                                                                                                                                               
|3c.                                                                                     | Certificate
  of Amendment of Certificate of Incorporation, dated July 18, 2006 (Filed as
  Exhibit 3.1 to Form 8-K, filed with the SEC on July 19, 2006, and
  incorporated herein by reference).                                                                                                                            
|                                                                                        |                                                                                                                                                                                                                                                                                                                               
|3d.                                                                                     | Certificate
  of Amendment of Certificate of Incorporation, dated February 7, 2007 (Filed
  as Exhibit 3.4 to Form S-3, filed with the SEC on February 28, 2007, and
  incorporated herein by reference).                                                                                                                     
|                                                                                        |                                                                                                                                                                                                                                                                                                                               
|3e.                                                                                     | By-Laws of
  Ampal-American Israel Corporation as amended, dated February 14, 2002
  (incorporated by reference to Exhibit 3b. of Ampals Form 10-K filed on March
  27, 2002).                                                                                                                                               
|                                                                                        |                                                                                                                                                                                                                                                                                                                               
|Exhibit 4 - Instruments Defining the Rights of Security Holders,
  Including Indentures
|                                                                                       
|4a.                                                                                     | Form of
  Indenture dated as of November 1, 1984. (Filed as Exhibit 4a. to Registration
  Statement No. 2-88582 and incorporated herein by reference).                                                                                                                                                                        
|                                                                                        |                                                                                                                                                                                                                                                                                                                               
|4b.                                                                                     | Form of
  Indenture dated as of May 1, 1986. (Filed as Exhibit 4a. to
  Pre-Effective Amendment No. 1 to Registration Statement No. 33-5578 and
  incorporated herein by reference).                                                                                                                                          
|                                                                                        |                                                                                                                                                                                                                                                                                                                               
|4c.                                                                                     | English
  translation of the original Hebrew language Trust Deed dated November 20,
  2006 between Ampal-American Israel Corporation and Hermatic Trustee (1975)
  Ltd. for debt offering.                                                                                                                                    
|                                                                                        |                                                                                                                                                                                                                                                                                                                               
|Exhibit 10 - Material Contracts                                                        
|                                                                                        |                                                                                                                                                                                                                                                                                                                               
|10a.                                                                                    | Agreement,
  dated March 22, 1993, between the Investment Company of Bank Leumi,
  Ltd., and Ophir Holdings Ltd., Mercazim Investments Ltd., Diur B.P. Ltd. and
  Mivnat Holdings Ltd. (Filed as Exhibit 10.4 to Pre-Effective Amendment No. 1
  to Registration Statement No. 33-51023 and incorporated herein by reference).
|                                                                                        |                                                                                                                                                                                                                                                                                                                               
|10b.                                                                                    | Agreement,
  dated March 30, 1994, between Poalim Investments Ltd., Ampal (Israel)
  Ltd. and Ampal Industries (Israel) Ltd. (Translation). (Filed as Exhibit 10l,
  to Form 10-K for the fiscal year ended December 31, 1994 and
  incorporated herein by reference, File No. 0-538).                                        
|                                                                                        |                                                                                                                                                                                                                                                                                                                               
|10c.                                                                                    | Loan
  Agreement, dated April 27, 1998, between Bank Hapoalim Ltd. and Ampal
  Communications Limited Partnership (Filed as Exhibit 10.1 to Report on Form
  10-Q for the quarter ended June 30, 1998, File No. 0-538).                                                                                                       
|                                                                                        |                                                                                                                                                                                                                                                                                                                               
|10d.                                                                                    | Form of Loan
  Agreement between Ampal Communications Limited Partnership and Bank Leumi
  Le-Israel B.M. (Filed as Exhibit 10.2 to Report on Form 10-Q for the quarter
  ended June 30, 1998, File No. 0-538).                                                                                                               
|                                                                                        |                                                                                                                                                                                                                                                                                                                               
|10e.                                                                                    | Sale and
  Purchase Agreement, dated November 8, 2000, between Ampal Realty Corporation
  and Second 800 LLC. (Filed as Exhibit 10I to Form 10-K for the fiscal year
  ended December 31, 2002, File No. 000-00538).                                                                                                          

76

---

---



|                                                          |                                                                                                                                                                                                                                                                                                               
|--------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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).                                                                                                                      
|                                                          |                                                                                                                                                                                                                                                                                                               
|10j.                                                      | Compensation
  and Indemnification Agreement, dated as of December 13, 2004, between
  Ampal-American Israel Corporation and each of Mr. Yehuda Karni, Mr. Eitan
  Haber and Mr. Menachem Morag. (Filed as Exhibit 10j to the report on Form
  10K. Filed on March 15, 2005).                                 
|                                                          |                                                                                                                                                                                                                                                                                                               
|10k.                                                      | Stock Option
  Cancellation Agreement, dated as of November 30, 2004, between Ampal-American
  Israel Corporation and Dafna Sharir. (Filed as Exhibit 10k to the report on
  Form 10K. Filed on March 15, 2005).                                                                                              
|                                                          |                                                                                                                                                                                                                                                                                                               
|10l.                                                      | Omnibus
  Agreement, dated as of December 1, 2005, between Merhav Ampal Energy Limited
  and Merhav (M.N.F.) Limited. (Filed as Exhibit 10l to the report on Form 10K
  filed on March 29, 2006)                                                                                                              
|                                                          |                                                                                                                                                                                                                                                                                                               
|10m.                                                      | Stock
  Purchase and Indemnification Agreement, dated as of August 30, 2005, by and
  among Motorola Israeli Ltd., Ampal Communications Limited Partnership and
  MIRS Communications Ltd. (Filed as Exhibit 99.1 of Form 8-K, filed with the
  SEC on October 3, 2005, and incorporated herein by reference).
|                                                          |                                                                                                                                                                                                                                                                                                               
|10n.                                                      | Form of
  Option Agreement pursuant to the 2000 Incentive Plan (Filed as Exhibit 99.1
  of Form 8-K, filed with the SEC on October 11, 2005, and incorporated herein
  by reference).                                                                                                                         
|                                                          |                                                                                                                                                                                                                                                                                                               
|10o.                                                      | Form of
  Option Agreement for December 12, 2006 grants pursuant to the 2000 Incentive
  Plan.                                                                                                                                                                                                                
|                                                          |                                                                                                                                                                                                                                                                                                               
|10p.                                                      | Stock
  Purchase Agreement between Merhav Ampal Energy Limited and Merhav (M.N.F.)
  Limited, dated August 1, 2006 (Filed as Exhibit 10 of Form 8-K, filed with
  the SEC on August 3, 2006, an incorporated herein by reference).                                                                            
|                                                          |                                                                                                                                                                                                                                                                                                               
|10q.                                                      | Stock
  Purchase Agreement between Merhav Ampal Energy Limited and Merhav (M.N.F.)
  Limited, dated November 28, 2006 (Filed as Exhibit 10.1 to Form 8-K, filed
  with the SEC on December 1, 2006, and incorporated herein by reference).                                                                    
|                                                          |                                                                                                                                                                                                                                                                                                               
|10r.                                                      | Agreement of Certain Shareholders
  between Merhav Ampal Energy Ltd. and Merhav (M.N.F.) Ltd. dated August 1,
  2006.                                                                                                                                                                                         
|                                                          |                                                                                                                                                                                                                                                                                                               
|10s.                                                      | Form of
  Convertible Promissory Note between Ampal-American Israel Corporation and
  Merhav (M.N.F.) Ltd. (Filed as Exhibit 10.2 to Form 8-K, filed with the SEC
  on December 1, 2006, and incorporated herein by reference).                                                                               
|                                                          |                                                                                                                                                                                                                                                                                                               
|10t.                                                      | Form of
  Securities Purchase Agreement, dated as of November 28, 2006, between
  Ampal-American Israel Corporation and certain investors (Filed as Exhibit
  10.1 of 8-K, filed with the SEC on January 3, 2007, and incorporated herein
  by reference).                                                    
|                                                          |                                                                                                                                                                                                                                                                                                               
|10u.                                                      | Form of
  Warrant Agreement, dated as of December 28, 2006, between Ampal-American
  Israel Corporation and certain investors (Filed as Exhibit 10.2 of 8-K, filed
  with the SEC on January 3, 2007, and incorporated herein by reference).                                                                  
|                                                          |                                                                                                                                                                                                                                                                                                               
|10v.                                                      | Form of
  Registration Rights Agreement, dated as of December 28, 2006, between
  Ampal-American Israel Corporation and certain investors (Filed as Exhibit
  10.3 of 8-K, filed with the SEC on January 3, 2007, and incorporated herein
  by reference).                                                    
|                                                          |                                                                                                                                                                                                                                                                                                               
|10w.                                                      | Share Sale
  and Purchase Agreements dated May 22, 2006, between Ampal-American Israel
  Corporation and Red Sea Underwater Observatory Ltd. for the sale of Coral
  World International Ltd. shares and Ted Sea Marinland Holdings 1973 Ltd.                                                                 
|                                                          |                                                                                                                                                                                                                                                                                                               
|10x.                                                      | English
  translation of the original Hebrew language Form of Employment Agreement for
  each of Yosef A. Maiman, Jack Bigio, Irit Eluz, Yoram Firon and Amit
  Mantsur.*                                                                                                                                     
|                                                          |                                                                                                                                                                                                                                                                                                               
|10y.                                                      | English
  translation of the original Hebrew language   Employment Agreement for
  Giora Bar-Nir.*                                                                                                                                                                                                            
|                                                          |                                                                                                                                                                                                                                                                                                               
|*Management
  contract, compensatory plan or arrangement.

77

---

---



Exhibit 11 - Statement re
Computation of Earnings Per Share

Exhibit 12 - Statement re
Computation of Ratios

Exhibit 21 - Subsidiaries of the
Registrant

Exhibit 23 - Consents of Experts and
Counsel:

|      |  |                                                                                                     |  |        
|----- |  | --------------------------------------------------------------------------------------------------- |  | -------
|23.1  |  | Kesselman
  & Kesselman CPAs (Isr) A member of PricewaterhouseCoopers International
  Limited       |  | E-23.1 
|      |  |                                                                                                     |  |        
|23.2  |  | Brightman
  Almagor & Co., Certified Public Accountants A member firm of Deloitte
  Touche Tohmatsu |  | E-23.2 
|      |  |                                                                                                     |  |        
|23.3  |  | Kost
  Forer Gabbay & Kasierer Member of Ernst & Young Global                                       |  | E-23.3 
|      |  |                                                                                                     |  |        
|23.4  |  | Kesselman
  & Kesselman CPAs (Isr) A member of PricewaterhouseCoopers International
  Limited       |  | E-23.4 
|      |  |                                                                                                     |  |        
|23.5  |  | Fahn,
  Kanne & Co. Certified Public Accountants (Isr.)                                             |  | E-23.5 
|      |  |                                                                                                     |  |        
|23.6  |  | Kost
  Forer Gabbay & Kasierer Member practice of Ernst & Young Global                              |  | E-23.6 
|      |  |                                                                                                     |  |        
|23.7  |  | KPMG Somekh
  Chaikin, Certified Public Accountants                                                 |  | E-23.7 
|      |  |                                                                                                     |  |        
|23.8  |  | KPMG Somekh
  Chaikin, Certified Public Accountants                                                 |  | E-23.8 
|      |  |                                                                                                     |  |        
|23.9  |  | Kesselman
  & Kesselman CPAs (Isr) A member of PricewaterhouseCoopers International
  Limited       |  | E-23.9 
|      |  |                                                                                                     |  |        
|23.10 |  | Kesselman
  & Kesselman CPAs (Isr) A member of PricewaterhouseCoopers International
  Limited       |  | E-23.10
|      |  |                                                                                                     |  |        
|23.11 |  | Kost
  Forer Gabbay & Kasierer Member practice of Ernst & Young Global                              |  | E-23.11

78

---

---



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

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

Exhibit 32 - Certification of Yosef
A. Maiman and Irit Eluz pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.

79

---

---



SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 30th
day of March, 2007.

| |                    |                                                                                         
| | ------------------ | ----------------------------------------------------------------------------------------
| | AMPAL-AMERICAN    
| | ISRAEL CORPORATION
| | By:                | /s/ YOSEF A. MAIMAN                                                                     
| |                    |                                                                                         
| |                    | Yosef A. Maiman, 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 30, 2007.

|                          |  |                                                                                    |  |               
|------------------------- |  | ---------------------------------------------------------------------------------- |  | --------------
|Signatures                |  | Title                                                                              |  | Date          
|                          |  |                                                                                    |  |               
|                          |  |                                                                                    |  |               
|/s/ YOSEF A. MAIMAN       |  | Chairman of the Board of
  Directors, President & CEO                              |  | March 30, 2007
|                          |  |                                                                                    | 
|Yosef A.
Maiman           |  |                                                                                    | 
|                          |  |                                                                                    | 
|/s/ JACK BIGIO            |  | Director                                                                           |  | March 30, 2007
|                          |  |                                                                                    |  |               
|Jack Bigio                |  |                                                                                    |  |               
|                          |  |                                                                                    |  |               
|/s/ LEO MALAMUD           |  | Director                                                                           |  | March 30, 2007
|                          |  |                                                                                    |  |               
|Leo
Malamud               |  |                                                                                    |  |               
|                          |  |                                                                                    |  |               
|/s/ DR. JOSEPH YERUSHALMI |  | Director                                                                           |  | March 30, 2007
|                          |  |                                                                                    |  |               
|Dr. Joseph
Yerushalmi     |  |                                                                                    |  |               
|                          |  |                                                                                    |  |               
|/s/ DR. NIMROD NOVIK      |  | Director                                                                           |  | March 30, 2007
|                          |  |                                                                                    |  |               
|Dr. Nimrod
Novik          |  |                                                                                    |  |               
|                          |  |                                                                                    |  |               
|/s/ YEHUDA KARNI          |  | Director                                                                           |  | March 30, 2007
|                          |  |                                                                                    |  |               
|Yehuda
Karni              |  |                                                                                    |  |               
|                          |  |                                                                                    |  |               
|/s/ EITAN HABER           |  | Director                                                                           |  | March 30, 2007
|                          |  |                                                                                    |  |               
|Eitan
Haber               |  |                                                                                    |  |               
|                          |  |                                                                                    |  |               
|/s/ MENAHEM MORAG         |  | Director                                                                           |  | March 30, 2007
|                          |  |                                                                                    |  |               
|Menahem
Morag             |  |                                                                                    |  |               
|                          |  |                                                                                    |  |               
|/s/ IRIT ELUZ             |  | CFO, Senior Vice President  Finance and Treasurer
  (Principal Financial Officer) |  | March 30, 2007
|                          |  |                                                                                    |  |               
|Irit Eluz                 |  |                                                                                    |  |               
|                          |  |                                                                                    |  |               
|/s/
  GIORA BAR  NIR     |  | VP Accounting
  & Controller
  (Principal Accounting Officer)                      |  | March 30, 2007
|                          |  |                                                                                    |  |               
|Giora
Bar-Nir             |  |                                                                                    |  |               

80

---

---

CORAL WORLD INTERNATIONAL LTD.

Consolidated Financial Statements 
as of December 31, 2006

---

---



CORAL WORLD INTERNATIONAL LTD.

Consolidated financial statements 
as of December 31, 2006

Table of Contents

|                                                          |       
|--------------------------------------------------------- | ------
|                                                          | Page  
|                                                          |       
|                                                          |       
|Report of Independent Registered Public
  Accounting Firm | 2     
|                                                          |       
|Consolidated Financial Statements                         |       
|                                                          |       
|Balance
Sheets                                            | 3     
|                                                          |       
|Statements of
Income                                      | 4     
|                                                          |       
|Statements of Changes
in Shareholders Equity             | 5     
|                                                          |       
|Statements of Cash
Flows                                  | 6  7 
|                                                          |       
|Notes to the
Consolidated Financial
  Statements          | 8  25
|                                                          |       
|Appendix                                                  |       
|                                                          |       
|List of Subsidiaries
and Associated Companies             | 26    

---

---

---

---



REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

TO THE SHAREHOLDERS

OF CORAL WORLD INTERNATIONAL LTD.

We have audited the
accompanying consolidated balance sheets of Coral World International Ltd.
(the Company) as of December 31, 2006 and 2005, and the related consolidated
statements of income, changes in shareholders equity and cash flows for each
of the three years in the period ended December 31, 2006. These consolidated
financial statements are the responsibility of the Board of Directors and
management of the Company. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(PCAOB) (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by the Board of Directors and management of the Company, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the
financial statements referred to above present fairly, in all material
respects, the financial position of Coral World International Ltd. as of
December 31, 2006 and 2005, and the results of its operations, changes in
shareholders equity and changes in cash flows for each of the three years in
the period ended December 31, 2006, in conformity with accounting principles
generally accepted in the United States of America.

|                                   |                                       | 
|---------------------------------- | ------------------------------------- | 
|                                   | Fahn
  Kanne & Co.                    | 
|                                   | Certified
  Public Accountants (Isr.) | 
|                                   |                                       | 
|Tel-Aviv, Israel, March
  22, 2007 |                                      

- 2 -

---

---



CORAL WORLD INTERNATIONAL
LTD.

CONSOLIDATED BALANCE SHEETS

|                                                              |  |              |        |      |  |        | 
|------------------------------------------------------------- |  | ------------ | ------ | ---- |  | ------ | 
|                                                              |  | US Dollars   |       
|                                                              |  |              |       
|                                                              |  | December 31, |       
|(in
  thousands)                                              |  | 2006         |        | 2005 | 
|                                                              |  |              |        |      | 
|                                                              |  |              |        |      |  |        | 
|A S S E T
  S                                                 |  |              |        |      |  |        | 
|                                                              |  |              |        |      |  |        | 
|Current
  assets                                              |  |              |        |      |  |        | 
|Cash and cash equivalents (Note
2)                            |  |              | 7,432  |      |  | 8,742  | 
|                                                             
|Accounts receivable:                                          |  |              |        |      |  |        | 
|                                                             
|Trade (Note 3)                                                |  |              | 1,358  |      |  | 1,167  | 
|Other (Note 4)                                                |  |              | 4,034  |      |  | 994    | 
|Inventories                                                   |  |              | 1,880  |      |  | 1,867  | 
|                                                              |  |              |        |      |  |        | 
|Total current
  assets                                        |  |              | 14,704 |      |  | 12,770 | 
|                                                              |  |              |        |      |  |        | 
|                                                              |  |              |        |      |  |        | 
|                                                              |  |              |        |      |  |        | 
|Long-term
  investments and other debit balances              |  |              |        |      |  |        | 
|                                                             
|Long-term balance  related
party                             |  |              | -      |      |  | 914    | 
|Investments in affiliated company
(Note 5)                    |  |              | -      |      |  | 10,331 | 
|                                                             
|Funds in respect of employee rights
upon retirement (Note 11) |  |              | 1,092  |      |  | 901    | 
|                                                              |  |              |        |      |  |        | 
|Total
  long-term investments and other debit balances        |  |              | 1,092  |      |  | 12,146 | 
|                                                              |  |              |        |      |  |        | 
|                                                              |  |              |        |      |  |        | 
|Property
  and equipment, net (Note 6)                        |  |              | 52,007 |      |  | 15,065 | 
|                                                              |  |              |        |      |  |        | 
|                                                              |  |              |        |      |  |        | 
|Deferred
  income taxes (Note 7)                              |  |              | 341    |      |  | 472    | 
|                                                              |  |              |        |      |  |        | 
|                                                              |  |              |        |      |  |        | 
|Minority
  share of shareholders deficit of subsidiary        |  |              | 998    |      |  | 497    | 
|                                                              |  |              |        |      |  |        | 
|                                                              |  |              |        |      |  |        | 
|                                                              |  |              |        |      |  |        | 
|Total
  assets                                                |  |              | 69,142 |      |  | 40,950 | 
|                                                              |  |              |        |      |  |        | 

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

- 3 -

---

---



CORAL WORLD INTERNATIONAL LTD.

CONSOLIDATED BALANCE SHEETS

|                                                          |    |                                                                                                 |         |      |   |        |   |   | 
|--------------------------------------------------------- | -- | ----------------------------------------------------------------------------------------------- | ------- | ---- | - | ------ | - | - | 
|                                                          |    | US Dollars                                                                                      |        
|                                                         
|                                                          |    | December 31,                                                                                    |        
|(in
  thousands)                                          |    | 2006                                                                                            |         | 2005 |  
|                                                          |    |                                                                                                 |         |      |  
|                                                          |    |                                                                                                 |         |      |  
|LIABILITIES
  AND SHAREHOLDERS EQUITY                    |    |                                                                                                 |         |      |   |        |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Current
  liabilities                                     |    |                                                                                                 |         |      |   |        |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Credit from banking institutions (Note
8)                 |    |                                                                                                 | 10,395  |      |   | 5,714  |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Accounts payable and other
accruals:                      |    |                                                                                                 |         |      |   |        |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Trade                                                     |    |                                                                                                 | 2,104   |      |   | 1,134  |  
|Other (Note 9)                                            |    |                                                                                                 | 2,026   |      |   | 2,308  |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Total
  current liabilities                               |    |                                                                                                 | 14,525  |      |   | 9,156  |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Long-term
  liabilities                                   |    |                                                                                                 |         |      |   |        |  
|Long-term loans (Note 10)                                 |    |                                                                                                 | 39,497  |      |   | 1,093  |  
|Deferred taxes (Note 7)                                   |    |                                                                                                 | 836     |      |   | -      |  
|Liability for employee rights upon
retirement (Note 11)   |    |                                                                                                 | 1,675   |      |   | 1,413  |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|                                                          |    |                                                                                                 | 42,008  |      |   | 2,506  |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Contingent
  liabilities, commitments and liens (Note 12) |    |                                                                                                 |         |      |   |        |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Minority
  interests                                      |    |                                                                                                 | 2,766   |      |   | 2,424  |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Total
  long-term liabilities                             |    |                                                                                                 | 59,299  |      |   | 14,086 |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Shareholders
  equity (Note 13)                          |    |                                                                                                 |         |      |   |        |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|                                                          | A. | Management shares, $2 par
  value; authorized 5,000 shares; issued and outstanding 2,500 shares |         |      | 5 |        |   | 5 | 
|                                                          |    |                                                                                                 |         |      |   |        |   |   | 
|                                                          | B. | Management shares, $2 par
  value; authorized 5,000 shares; issued and outstanding 2,500 shares |         |      | 5 |        |   | 5 | 
|                                                          |    |                                                                                                 |         |      |   |        |   |   | 
|                                                          | C. | Preference shares, $2 par
  value; authorized 1,000 shares; issued and outstanding 1,000 shares |         |      | 2 |        |   | 2 | 
|                                                          |    |                                                                                                 |         |      |   |        |   |   | 
|Cost of company shares held
  by subsidiary               |    |                                                                                                 | (21,000 | )    |   | -      |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Additional paid-in capital                                |    |                                                                                                 | 17,550  |      |   | 17,550 |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Retained earnings                                         |    |                                                                                                 | 14,374  |      |   | 10,444 |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Accumulated other
  comprehensive loss                    |    |                                                                                                 | (1,093  | )    |   | (1,142 | )
|                                                          |    |                                                                                                 |         |      |   |        |  
|Total
  shareholders equity                              |    |                                                                                                 | 9,843   |      |   | 26,864 |  
|                                                          |    |                                                                                                 |         |      |   |        |  
|Total
  liabilities and shareholders equity              |    |                                                                                                 | 69,142  |      |   | 40,950 |  
|                                                          |    |                                                                                                 |         |      |   |        |  

| |                       |  |             | 
| | --------------------- |  | ----------- | 
| |                       |  |             | 
| | Benjamin
Kahn         |  | Benzi
Dolev | 
| | Member
  of the Board |  | CFO         | 

Date: March 22, 2007

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

-
3 -

---

---



CORAL WORLD INTERNATIONAL
LTD.

CONSOLIDATED STATEMENTS OF INCOME

|                                                 |  |                         |         |      |  |         |   |  |         |  
|------------------------------------------------ |  | ----------------------- | ------- | ---- |  | ------- | - |  | ------- | -
|                                                 |  | US dollars              |        
|                                                 |  |                         |        
|                                                 |  | Year ended December 31, |        
|(in
  thousands, except share data)              |  | 2006                    |         | 2005 |  | 2004    |  
|                                                 |  |                         |         |      |  |         |  
|                                                 |  |                         |         |      |  |         |  
|Admission fees                                   |  |                         | 17,378  |      |  | 15,475  |   |  | 14,597  |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Sales in shops and
  cafeterias                  |  |                         | 11,109  |      |  | 9,793   |   |  | 8,841   |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Commissions and others                           |  |                         | 604     |      |  | 523     |   |  | 425     |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|                                                 |  |                         | 29,091  |      |  | 25,791  |   |  | 23,863  |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Cost of sales (Note 14)                          |  |                         | (13,753 | )    |  | (13,045 | ) |  | (12,663 | )
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Gross profit                                     |  |                         | 15,338  |      |  | 12,746  |   |  | 11,200  |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Selling expenses (Note 15)                       |  |                         | (2,284  | )    |  | (2,139  | ) |  | (2,443  | )
|                                                 |  |                         |         |      |  |         |   |  |         |  
|General and administrative
  expenses (Note 16)  |  |                         | (6,900  | )    |  | (5,730  | ) |  | (6,817  | )
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Other expense, net (Note
  17)                   |  |                         | (287    | )    |  | (728    | ) |  | (28     | )
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Operating income                                 |  |                         | 5,867   |      |  | 4,149   |   |  | 1,912   |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Financing income
  (expenses), net               |  |                         | 147     |      |  | (865    | ) |  | (32     | )
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Income before taxes on
income                    |  |                         | 6,014   |      |  | 3,284   |   |  | 1,880   |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Taxes on income (Note 18)                        |  |                         | (1,677  | )    |  | (1,533  | ) |  | (78     | )
|Losses from affiliated
  company                 |  |                         | -       |      |  | (14     | ) |  | (451    | )
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Minority interest, net                           |  |                         | (407    | )    |  | (55     | ) |  | 108     |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Net income                                       |  |                         | 3,930   |      |  | 1,682   |   |  | 1,459   |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Earnings per share                               |  |                         | 655     |      |  | 280     |   |  | 243     |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|                                                 |  |                         |         |      |  |         |   |  |         |  
|Weighted average number of
  shares outstanding: |  |                         | 6,000   |      |  | 6,000   |   |  | 6,000   |  
|                                                 |  |                         |         |      |  |         |   |  |         |  

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

- 4 -

---

---



CORAL WORLD INTERNATIONAL LTD.

STATEMENTS OF
CHANGES IN SHAREHOLDERS EQUITY

|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|------------------------------------------------------------------------------ |  | ----------------------------- | -- | ------------------------------ |  | ------------------------------------------ |  | ------------------- | ------ | ------------------------------------------------- |  | ------ |  |  | ------- | ---- |  | ------- | -
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|                                                                               |  | Number &
  amount of
  shares |    | Additional
  paid-in
  capital |  | Accumulated
  other
  comprehensive
  loss |  | Retained
  earnings |        | Cost of
  company
  shares held by
  a subsidiary |  | Total  | 
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        | 
|US dollars (in thousands)                                                      |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Balance at January 1, 2004                                                     |  |                               | 12 |                                |  | 17,550                                     |  |                     | (1,019 | )                                                 |  | 7,303  |  |  | -       |      |  | 23,846  |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Changes during 2004:                                                           |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|                                                                              
|Net income                                                                     |  |                               | -  |                                |  | -                                          |  |                     | -      |                                                   |  | 1,459  |  |  | -       |      |  | 1,459   |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Translation of financial statements of
  subsidiaries and affiliated companies |  |                               | -  |                                |  | -                                          |  |                     | 413    |                                                   |  | -      |  |  | -       |      |  | 413     |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Total comprehensive income                                                     |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  | 1,872   |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Balance at December 31, 2004                                                   |  |                               | 12 |                                |  | 17,550                                     |  |                     | (606   | )                                                 |  | 8,762  |  |  | -       |      |  | 25,718  |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Changes during 2005:                                                           |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Net income                                                                     |  |                               | -  |                                |  | -                                          |  |                     | -      |                                                   |  | 1,682  |  |  | -       |      |  | 1,682   |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Translation of financial statements of
  subsidiaries and affiliated companies |  |                               | -  |                                |  | -                                          |  |                     | (536   | )                                                 |  | -      |  |  | -       |      |  | (536    | )
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Total comprehensive income                                                     |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  | 1,146   |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Balance at December 31, 2005                                                   |  |                               | 12 |                                |  | 17,550                                     |  |                     | (1,142 | )                                                 |  | 10,444 |  |  | -       |      |  | 26,864  |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Changes during 2006:                                                           |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Net income                                                                     |  |                               | -  |                                |  | -                                          |  |                     | -      |                                                   |  | 3,930  |  |  | -       |      |  | 3,930   |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Translation of financial statements of
  subsidiaries and affiliated companies |  |                               | -  |                                |  | -                                          |  |                     | 49     |                                                   |  | -      |  |  | -       |      |  | 49      |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Total comprehensive income                                                     |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  | 3,979   |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Cost of company shares held by subsidiary                                      |  |                               | -  |                                |  | -                                          |  |                     | -      |                                                   |  | -      |  |  | (21,000 | )(*) |  | (21,000 | )
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  
|Balance at December 31, 2006                                                   |  |                               | 12 |                                |  | 17,550                                     |  |                     | (1,093 | )                                                 |  | 14,374 |  |  | (21,000 | )    |  | 9,843   |  
|                                                                               |  |                               |    |                                |  |                                            |  |                     |        |                                                   |  |        |  |  |         |      |  |         |  

(*)
     See Note 1B.

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

- 5 -

---

---



CORAL WORLD INTERNATIONAL LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                             |  |                           |         |   |  |        |   |  |        |  
|---------------------------------------------------------------------------- |  | ------------------------- | ------- | - |  | ------ | - |  | ------ | -
|                                                                             |  | US dollars                |        
|                                                                             |  |                           |        
|                                                                             |  | Year ended
  December 31, |        
|(in thousands)                                                               |  |                           | 2006    |   |  | 2005   |   |  | 2004   |  
|                                                                             |  |                           |         |   |  |        |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Cash flows from operating
activities:                                        |  |                           |         |   |  |        |   |  |        |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Net income for the year                                                      |  |                           | 3,930   |   |  | 1,682  |   |  | 1,459  |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Adjustments required to reflect cash flows
  from operations:                |  |                           |         |   |  |        |   |  |        |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Depreciation and amortization                                                |  |                           | 2,849   |   |  | 2,799  |   |  | 4,075  |  
|Increase in liability for employee rights
  upon retirement                  |  |                           | 136     |   |  | 303    |   |  | 484    |  
|Deferred taxes                                                               |  |                           | 836     |   |  | 221    |   |  | (618   | )
|Loss from affiliated company                                                 |  |                           | -       |   |  | 14     |   |  | 451    |  
|Capital loss (gain) on sale of property and
  equipment, net                 |  |                           | (11     | ) |  | 1      |   |  | 28     |  
|Minority interest, net                                                       |  |                           | 407     |   |  | 55     |   |  | (108   | )
|Exchange differences of long-term loan                                       |  |                           | (1,060  | ) |  | (57    | ) |  | 223    |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Decrease (increase) in accounts
receivable:                                  |  |                           |         |   |  |        |   |  |        |  
|Trade                                                                        |  |                           | (98     | ) |  | (98    | ) |  | 191    |  
|Other                                                                        |  |                           | (574    | ) |  | (225   | ) |  | (205   | )
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Decrease (increase) in inventories                                           |  |                           | 56      |   |  | 348    |   |  | (297   | )
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Increase (decrease) in accounts payable and
  other accruals:                |  |                           |         |   |  |        |   |  |        |  
|Trade                                                                        |  |                           | 709     |   |  | 246    |   |  | (186   | )
|Other                                                                        |  |                           | (518    | ) |  | 428    |   |  | (290   | )
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Net cash flows provided by operating
  activities                            |  |                           | 6,662   |   |  | 5,717  |   |  | 5,207  |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Cash flows from investing
activities:                                        |  |                           |         |   |  |        |   |  |        |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Purchase of property and equipment                                           |  |                           | (11,345 | ) |  | (801   | ) |  | (536   | )
|Investment in projects                                                       |  |                           | -       |   |  | -      |   |  | (180   | )
|Loans to affiliated companies                                                |  |                           | 144     |   |  | (5,391 | ) |  | (1,579 | )
|Proceeds from sale of property and
  equipment                               |  |                           | 33      |   |  | 6      |   |  | 47     |  
|Decrease (increase) in funds in respect of
  employee rights upon retirement |  |                           | (110    | ) |  | 138    |   |  | (546   | )
|Acquisition of subsidiary (Appendix A)                                       |  |                           | 1,168   |   |  | -      |   |  | -      |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Net cash flows used in investing
activities                                  |  |                           | (10,110 | ) |  | (6,048 | ) |  | (2,794 | )
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Cash flows from financing
activities:                                        |  |                           |         |   |  |        |   |  |        |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Credit and short-term loans from banking
  institutions, net                 |  |                           | 7,722   |   |  | (524   | ) |  | (16    | )
|Receipt of long-term credit from banking
  institutions                      |  |                           | 20,303  |   |  | -      |   |  | -      |  
|Repayment of long-term credit from banking
  institutions                    |  |                           | (5,333  | ) |  | (1,347 | ) |  | (1,329 | )
|Cost of company shares held by subsidiary                                    |  |                           | (21,000 | ) |  | -      |   |  | -      |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Net cash flows provided by (used in)
  financing activities                  |  |                           | 1,692   |   |  | (1,871 | ) |  | (1,345 | )
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Effect of exchange rate changes on cash and
  cash equivalents               |  |                           | 446     |   |  | (160   | ) |  | 57     |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Increase in cash and cash equivalents                                        |  |                           | (1,310  | ) |  | (2,362 | ) |  | 1,125  |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Balance of cash and cash equivalents -
  beginning of the year               |  |                           | 8,742   |   |  | 11,104 |   |  | 9,979  |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  
|Balance of cash and cash equivalents - end
  of the year                     |  |                           | 7,432   |   |  | 8,742  |   |  | 11,104 |  
|                                                                             |  |                           |         |   |  |        |   |  |        |  

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

- 6 -

---

---



CORAL WORLD INTERNATIONAL LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS (cont.)

Appendix A: Acquisition of subsidiary

|                                                             |  |                           |         |      |  |      |  |  |   | 
|------------------------------------------------------------ |  | ------------------------- | ------- | ---- |  | ---- |  |  | - | 
|                                                             |  | US dollars                |        
|                                                             |  |                           |        
|                                                             |  | Year ended
  December 31, |        
|(in thousands)                                               |  | 2006                      |         | 2005 |  | 2004 | 
|                                                             |  |                           |         |      |  |      | 
|                                                             |  |                           |         |      |  |      |  |  |   | 
|Working
  capital (excluding cash and cash equivalents, net) |  |                           | (2,233  | )    |  | -    |  |  | - | 
|Property and
  equipment, net                                |  |                           | (27,384 | )    |  | -    |  |  | - | 
|Investment
  in an affiliated company                        |  |                           | 11,998  |      |  | -    |  |  | - | 
|Long-term
  bank loans                                       |  |                           | 19,285  |      |  | -    |  |  | - | 
|Minority
  interest                                          |  |                           | (498    | )    |  | -    |  |  | - | 
|                                                             |  |                           |         |      |  |      |  |  |   | 
|                                                             |  |                           | 1,168   |      |  | -    |  |  | - | 
|                                                             |  |                           |         |      |  |      |  |  |   | 

Supplementary disclosure of cash flow
information

|               |  |                           |       |      |  |      |  |  |     | 
|-------------- |  | ------------------------- | ----- | ---- |  | ---- |  |  | --- | 
|               |  | US dollars                |      
|               |  |                           |      
|               |  | Year ended
  December 31, |      
|(in thousands) |  | 2006                      |       | 2005 |  | 2004 | 
|               |  |                           |       |      |  |      | 
|               |  |                           |       |      |  |      |  |  |     | 
|Interest       |  |                           | 1,756 |      |  | 312  |  |  | 419 | 
|               |  |                           |       |      |  |      |  |  |     | 
|               |  |                           |       |      |  |      |  |  |     | 
|Income taxes   |  |                           | 1,967 |      |  | 120  |  |  | 586 | 
|               |  |                           |       |      |  |      |  |  |     | 

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

- 7 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS

|           |                                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---------- | ------------------------------- | ------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES
|           |                                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           | A.                              | General
|           |                                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                 | 1.      | Coral World
  International Ltd. (hereinafter  CWI) was incorporated on December 3,
  1987 under the laws of the Island of Guernsey, Channel Islands, for purposes
  of owning and operating marine parks in various locations. Until
  May 2006, CWI was owned 50% by Ampal-American Israel Corporation and 50%
  by Marine Parks Holding Ltd. During May 2006, the subsidiary Red Sea
  Underwater Observatory Ltd. (hereunder: RSUO), paid an amount of
  NIS 94,500 thousand (US$ 21 million) to Ampal-American Israel
  Corporation in respect of its shares.                                                                                                                                                                                                                                                                                                                             
|           |                                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                 |         | In 2005, the
  subsidiary held 40% of the shares in Palma Aquarium Holdings B.V.
  (hereinafter: Palma) during the third quarter of 2006 purchased an
  additional 15% of Palma in an amount of 852 thousand. Since that date, the
  financial statements of Palma are consolidated with those of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                 |         | As used in
  these financial statements, the term Company refers to Coral World
  International Ltd. and its subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                 |         | A list of
  the Companys investees can be found in the Appendix at the end of these
  financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                 | 2.      | Functional currency                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                 |         | The
  accompanying financial statements have been prepared in US dollars (dollars
  or $). Substantially all of the revenues of CWIs subsidiaries are
  received, and substantially all of their operating costs are incurred, in
  local currencies. The functional currency of CWI is the US dollar and the
  functional currencies of its subsidiaries are the local currencies in which
  each such entity operates. The financial statements of the subsidiaries are
  translated into US dollars in accordance with the principles set forth in
  Statement of Financial Accounting Standards (FAS) No. 52 of the
  Financial Accounting Standards Board of the United States (FASB). Assets
  and liabilities are translated from the local currencies to dollars at
  year-end exchange rates. Income and expense items are translated at average
  exchange rates during the year.
|           |                                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                 |         | Gains or
  losses resulting from translation are included under the caption accumulated
  other comprehensive loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| |  |  |                                                         |  |                           |       |      |  |       |  |  |       | 
| |  |  | ------------------------------------------------------- |  | ------------------------- | ----- | ---- |  | ----- |  |  | ----- | 
| |  |  |                                                         |  |                           |       |      |  |       |  |  |       | 
| |  |  |                                                         |  | Year ended
  December 31, |      
| |  |  |                                                         |  | 2006                      |       | 2005 |  | 2004  | 
| |  |  |                                                         |  |                           |       |      |  |       | 
|
| |  |  | Exchange rates of certain currencies to the
  US dollar |  |                           |       |      |  |       |  |  |       | 
| |  |  |                                                         |  |                           |       |      |  |       |  |  |       | 
| |  |  | -   New Israeli shekel                                  |  |                           | 0.237 |      |  | 0.217 |  |  | 0.232 | 
| |  |  |                                                         |  |                           |       |      |  |       |  |  |       | 
| |  |  | -   Australian dollar                                   |  |                           | 0.790 |      |  | 0.734 |  |  | 0.779 | 
| |  |  |                                                         |  |                           |       |      |  |       |  |  |       | 
| |  |  | -   Euro                                                |  |                           | 1.317 |      |  | 1.183 |  |  | 1.364 | 

| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 3. | Accounting principles                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |    | The
  consolidated financial statements were prepared in accordance with accounting
  principles generally accepted in the United States (US GAAP).                                                                                                                                                                                                                                                                             
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | 4. | Use of estimates in the preparation of financial statements                                                                                                                                                                                                                                                                                                                                                                     
| |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |    | The preparation of financial statements in conformity with US GAAP
  requires management to make estimates and assumptions that affect the
  reported amounts of assets and liabilities and the disclosure of contingent
  assets and liabilities at the date of the financial statements, and the
  reported amounts of revenues and expenses during the reporting periods.
  Actual results could differ from those estimates.

- 8 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (cont.)

|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|---------- | --------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           | B.                                      | Principles of consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                         | The
  consolidated financial statements include the accounts of the Company and its
  subsidiaries. In these financial statements, the term subsidiary refers to
  a company in which the Company exerts control of more than 50% and the
  financial statements of which are consolidated with those of the Company.
  Significant intercompany transactions and balances were eliminated in the
  consolidation; profits from intercompany sales, not yet realized outside the
  Group, were also eliminated.                                                                                                                                                                                                                                 
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           | C.                                      | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           |                                         | The Company
  considers all highly liquid investments to be cash equivalents. These include
  short-term (up to three month) bank deposits that are not restricted as to
  withdrawal or use, and short-term debentures, with original periods to
  maturity of not more than three months.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           | D.                                      | Concentration of credit risks  allowance for doubtful accounts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           |                                         | Most of the
  Companys revenues are earned in Israel, Australia and Hawaii, and derive
  from a large number of customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           |                                         | In general,
  the exposure to the concentration of credit risks relating to trade
  receivables is limited, due to the relatively large number of customers and
  their wide geographic distribution.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           |                                         | The
  allowance for doubtful debts is calculated specifically for each debt, the
  collection of which is considered by management to be doubtful.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           | E.                                      | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           |                                         | Inventories
  are mainly jewelry, souvenirs and other goods, and are stated at the lower of
  cost or market. Cost is determined on the first-in first-out basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           | F.                                      | Investment in affiliated company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           |                                         | Investments in companies in which the Company has
  significant influence (ownership interest of between 20% and 50%) but less
  than a controlling interest, which are not subsidiaries, are accounted for by
  the equity method. Revenues from intercompany sales, not yet realized outside
  of the Company, were eliminated.                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           | G.                                      | Property and equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           |                                         | Property and
  equipment are stated at cost, net of related investment grants. The assets
  are depreciated by the straight-line method, on the basis of their estimated
  useful life.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|           |                                         | The
  Companys property and equipment are reviewed for impairment in accordance
  with Statement of Financial Accounting Standards No. 144 Accounting for
  the Impairment or Disposal of Long-Lived Assets (SFAS No. 144)
  whenever events or changes in circumstances indicate that the carrying amount
  of an asset may not be recoverable. Recoverability of assets to be held and
  used is measured by a comparison of the carrying amount of an asset to the
  future undiscounted cash flows expected to be generated by the assets. If
  such assets are considered to be impaired, the impairment to be recognized is
  measured by the amount by which the carrying amount of the assets exceeds the
  fair value of the assets.

- 9 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (cont.)

|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                          | 
|---------- | --------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | 
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES (cont.) |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                          | 
|           | H.                                      | Deferred income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                         
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                          | 
|           |                                         | Deferred
  income taxes are determined utilizing the asset and liability method based on
  the estimated future tax effects of differences between the financial
  accounting and the tax bases of assets and liabilities under the applicable
  tax law. Deferred tax balances are computed using the tax rates expected to
  be in effect at the time when these differences reverse. Valuation allowances
  in respect of the deferred tax assets are provided if, based upon the weight
  of available evidence, it is more likely than not that all or a portion of
  the deferred income tax assets will not be realized. |                                                                                                                         
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                          | 
|           |                                         | As stated in
  Note 18D, the Israeli subsidiary has been granted approved enterprise
  status and, accordingly, upon distribution of dividends by this subsidiary to
  the Company, such dividends may be subject to tax. The Company does not
  intend on causing dividend distribution from this subsidiary. Accordingly, no
  additional tax has been taken into account in respect of such dividends.                                                                                                                                                                                                                     |                                                                                                                         
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                          | 
|           |                                         | Taxes which
  would apply in the event of disposal of investments in subsidiaries (all
  foreign subsidiaries) have not been taken into account in computing the
  deferred taxes, as it is the Companys policy to continue holding these
  investments, not to realize them.                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                         
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                          | 
|           | I.                                      | Revenue recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                          | 
|           |                                         | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Revenue from
  admission fees is recognized upon entrance of visitors to sites managed by
  the Companys subsidiaries. 
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                          | 
|           |                                         | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Revenue from
  sales of merchandise is recognized when merchandise is supplied to the
  customer.                       
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                          | 
|           |                                         | 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Revenue from
  commissions is recognized upon sale of the attraction in respect of which
  the commission is received.
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                          | 
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                          | 
|           | J.                                      | Advertising expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                         
|           |                                         | Advertising
  expenses are charged to income as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                         
|           | K.                                      | Foreign currency transactions and balances                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                         
|           |                                         | Balances
  denominated in, or linked to, foreign currency are stated on the basis of the
  exchange rates prevailing at the balance sheet date. For foreign currency
  transactions included in the statement of income, the exchange rates at transaction
  dates are used. Transaction gains or loses arising from changes in the
  exchange rates used in the translation of such balances are carried to
  financial income or expenses.                                                                                                                                                                                   
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                         
|           | L.                                      | Earnings per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                         
|           |                                         | Basic
  earnings per share are computed by dividing net income by the weighted
  average number of all management and preferred shares outstanding during the
  year.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                         
|           |                                         | Diluted
  earnings per share are not presented, since the Company has no potential
  shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                         
|           | M.                                      | Reclassifications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                         
|           |                                         | Certain
  comparative figures have been reclassified to conform to the current year
  presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

- 10 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (cont.)

|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|---------- | --------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|           | N.                                      | Comprehensive
  income (loss)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|           |                                         | Comprehensive income
  (loss), presented in shareholders equity, includes, in addition to net
  income (loss), translation adjustments of financial statements of
  subsidiaries and affiliated companies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|           | O.                                      | Recently issued accounting pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                         | FAS 155 Accounting for Certain Hybrid Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                         | In February 2006, the FASB issued FAS 155, Accounting for certain Hybrid Financial Instruments,
  an amendment of FASB statements No. 133 and 140. This statement permits fair
  value measurement for any hybrid financial instrument that contains an
  embedded derivative that otherwise would require bifurcation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|           |                                         | This statement shall be effective for all
  financial instruments acquired or issued, or subject to remeasurement (new
  basis) after the beginning of an entitys first fiscal year that begins after
  September 15, 2006. Earlier adoption is permitted as of the beginning of an
  entitys fiscal year, provided that no interim period financial statements
  have been issued for the financial year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                         | The Company does not expect the adoption of this
  Statement to have a material impact on its financial position and results of
  operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                         | FAS 156 Accounting for Servicing of Financial Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                         | In March 2006, the FASB issued FAS No. 156,
  Accounting for Servicing of Financial
  Assets (FAS 156). The statement amends FAS No. 140, Accounting for Transfers and Servicing of Financial
  Assets and Extinguishments of Liabilities, with respect to the
  accounting for separately recognized servicing assets and servicing
  liabilities. Consistent with FAS No. 140, FAS 156 requires companies to
  recognize a servicing asset or servicing liability each time it undertakes an
  obligation to service a financial asset by entering into a service contract.
  However, the Statement permits a company to choose either the amortized cost
  method or fair value measurement method for each class of separately
  recognized servicing assets. The Statement is effective as of the beginning
  of a companys first fiscal year after September 15, 2006. Earlier adoption
  is permitted as of the beginning of an entitys fiscal year, provided the
  entity has not yet issued financial statements, including interim financial
  statements. The Company plans to adopt FAS 156 at the beginning of 2007 and
  does not expect the adoption of this Statement to have a material impact on
  its financial position and results of operations.
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                         | FIN 48 Accounting for
  Uncertainty in Income Taxesan interpretation of
  FASB Statement No. 109                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                         | In July 2006, the
  FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB
  Statement No. 109 (FIN 48), which clarifies the accounting
  for uncertainty in tax positions. This Interpretation requires that the
  Company recognizes in its financial statements the impact of a tax position,
  if that position will more likely than not be sustained upon examination,
  based on the technical merits of the position. The provisions of FIN 48
  are effective as of the beginning of the 2007 calendar year, with the cumulative
  effect of the change in accounting principle recorded as an adjustment to
  opening retained earnings.
The Company does not expect the adoption of this Statement to have a
  material impact on its financial position and results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                     

- 11 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)

|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------------- | ----------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE
  1     | SIGNIFICANT
  ACCOUNTING POLICIES (cont.)
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              | O.                                        | Recently
  issued accounting pronouncements (cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              |                                           | FAS 157
  Fair Value Measurements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              |                                           | In September 2006, the FASB
  issued FAS No. 157, Fair Value
  Measurements. This statement clarifies the definition of fair
  value, establishes a framework for measuring fair value, and expands the
  disclosures on fair value measurements. FAS No. 157 is effective for fiscal
  years beginning after November 15, 2007. The Company has not determined the
  impact, if any, the adoption of this statement will have on its financial
  position and results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              |                                           | FAS 158
  Employers Accounting for Defined Benefit Pension and Other Postretirement
  Plansan amendment of FAS Statements No. 87, 88, 106 and 132(R)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              |                                           | In September 2006, the FASB
  issued FAS No. 158, Employers Accounting
  for Defined Benefit Pension and Other Postretirement Plansan amendment of
  FAS Statements No. 87, 88, 106 and 132(R). FAS No. 158 requires
  the recognition of the funded status of a defined benefit plan in the
  statement of financial position, requires that changes in the funded status
  be recognized through comprehensive income, changes the measurement date for
  defined benefit plan assets and obligations to the entitys fiscal year end
  and expands disclosures. The recognitions and disclosures under FAS No. 158
  are required as of the end of the fiscal year ending after June 15, 2007, for
  non-public entities. A non-public entity is also required to certain
  disclosures in the notes to the financial statements for a fiscal year ending
  after December 15, 2006, but before June 16, 2007. The new measurement date
  is effective for fiscal years ending after December 15, 2008. The Company is
  in the process of evaluating the impact of FAS No. 158 on its financial
  position and results of operations.
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              |                                           | FAS 159
  The Fair Value Option for Financial Assets and Financial Liabilities -
  Including an amendment of FASB Statement No. 115 (SFAS No. 159)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              |                                           | In February 2007, the FASB
  issued SFAS No. 159, The Fair Value Option for Financial Assets and
  Financial Liabilities - Including an amendment of FASB Statement No. 115
  (SFAS No. 159). This pronouncement permits all entities to choose to elect,
  at specified election dates, to measure eligible financial instruments at
  fair value. An entity shall report unrealized gains and losses on items for
  which the fair value option has been elected in earnings at each subsequent
  reporting date, and recognize upfront costs and fees related to those items
  in earnings as incurred and not deferred. SFAS No. 159 applies to fiscal
  years beginning after November 15, 2007, with early adoption permitted for an
  entity that has also elected to apply the provisions of SFAS No. 157. An
  entity is prohibited from retrospectively applying SFAS No. 159, unless it
  chooses early adoption. The company is currently assessing the impact of SFAS
  No. 159 on its consolidated financial position and results of operations.                                                                           
|              |                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|NOTE
  2     | CASH AND
  CASH EQUIVALENTS              
|              |                                          
|              | Composition:                             

| |                   |  |                |       |      |  |       | 
| | ----------------- |  | -------------- | ----- | ---- |  | ----- | 
| |                   |  | US dollars     |      
| |                   |  |                |      
| |                   |  | December
  31, |      
| | (in thousands)    |  | 2006           |       | 2005 | 
| |                   |  |                |       |      |  |       | 
| |                   |  |                |       |      |  |       | 
| | NIS               |  |                | 109   |      |  | 251   | 
| | US dollar         |  |                | 3,696 |      |  | 4,019 | 
| | Australian dollar |  |                | 1,494 |      |  | 1,858 | 
| | Euro              |  |                | 2,133 |      |  | 2,614 | 
| |                   |  |                |       |      |  |       | 
| |                   |  |                | 7,432 |      |  | 8,742 | 
| |                   |  |                |       |      |  |       | 

- 12 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)

|              |                            
|------------- | ---------------------------
|NOTE
  3     | TRADE
  ACCOUNTS RECEIVABLE
|              |                            
|              | Composition:               

| |                                       |  |                |       |      |  |       |  
| | ------------------------------------- |  | -------------- | ----- | ---- |  | ----- | -
| |                                       |  | US dollars     |      
| |                                       |  |                |      
| |                                       |  | December
  31, |      
| | (in thousands)                        |  | 2006           |       | 2005 | 
| |                                       |  |                |       |      |  |       |  
| |                                       |  |                |       |      |  |       |  
| | Open accounts                         |  |                | 682   |      |  | 540   |  
| | Credit card companies                 |  |                | 619   |      |  | 555   |  
| | Post-dated checks                     |  |                | 89    |      |  | 102   |  
| |                                       |  |                |       |      |  |       |  
| |                                       |  |                | 1,390 |      |  | 1,197 |  
|
| | Less  allowance for
  doubtful debts |  |                | (32   | )    |  | (30   | )
| |                                       |  |                |       |      |  |       |  
| |                                       |  |                | 1,358 |      |  | 1,167 |  
| |                                       |  |                |       |      |  |       |  

|              |                            
|------------- | ---------------------------
|NOTE
  4     | OTHER
  ACCOUNTS RECEIVABLE

| |                                                |  |                |       |      |  |     | 
| | ---------------------------------------------- |  | -------------- | ----- | ---- |  | --- | 
| |                                                |  | US dollars     |      
| |                                                |  |                |      
| |                                                |  | December
  31, |      
| | (in thousands)                                 |  | 2006           |       | 2005 | 
| |                                                |  |                |       |      | 
| |                                                |  |                |       |      |  |     | 
| | Employees                                      |  |                | 118   |      |  | 151 | 
| | Institutions                                   |  |                | 2,614 |      |  | 46  | 
| | Prepaid expenses                               |  |                | 698   |      |  | 459 | 
| | Deferred taxes                                 |  |                | 35    |      |  | 30  | 
| | Loan to minority in
  consolidated company (*) |  |                | 100   |      |  | -   | 
| | Others                                         |  |                | 469   |      |  | 308 | 
| |                                                |  |                |       |      |  |     | 
| |                                                |  |                | 4,034 |      |  | 994 | 
| |                                                |  |                |       |      |  |     | 

|              |                                    |                                                                                                                                                                                                                                                                        
|------------- | ---------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              | (*)                                | Represents an amount
  denominated in US dollars bearing interest at a rate of 6.63% per annum. The
  loan maturity is during fiscal year 2007.                                                                                                                        
|              |                                    |                                                                                                                                                                                                                                                                        
|NOTE
  5     | INVESTMENT
  IN AFFILIATED COMPANY
|              |                                    |                                                                                                                                                                                                                                                                        
|              | A.                                 | Palma
  Aquarium Holding B.V. (Palma)                                                                                                                                                                                                                                  
|              |                                    |                                                                                                                                                                                                                                                                        
|              |                                    | In 2005, the subsidiary
  held 40% of the shares in Palma and during the third quarter of 2006
  purchased an additional 15% of Palma in an amount of 852 thousand. Since
  that date, the financial statements of Palma are consolidated with those of
  the Company.
|              |                                    |                                                                                                                                                                                                                                                                        
|              |                                    | The balance of the
  investment in Palma as of December 31, 2005 was US$ 10,331 thousand, of which
  US$ 10,744 thousand is in respect of a loan granted to Palma in stages, from
  2002 to 2005.                                                                      
|              |                                    |                                                                                                                                                                                                                                                                        
|              |                                    | Summary financial
  information of Palma:                                                                                                                                                                                                                              

| |                        |  |                |   |      |  |        | 
| | ---------------------- |  | -------------- | - | ---- |  | ------ | 
| |                        |  | US dollars     |  
| |                        |  |                |  
| |                        |  | December
  31, |  
| | (in thousands)         |  | 2006           |   | 2005 | 
| |                        |  |                |   |      | 
| |                        |  |                |   |      |  |        | 
| | Current assets         |  |                | - |      |  | 4,811  | 
| | Property and equipment |  |                | - |      |  | 17,030 | 
| | Other assets           |  |                | - |      |  | 3,450  | 
| |                        |  |                |   |      |  |        | 
| | Total assets           |  |                | - |      |  | 25,298 | 
| |                        |  |                |   |      |  |        | 
| |                        |  |                |   |      |  |        | 
| | Total liabilities      |  |                | - |      |  | 26,328 | 
| |                        |  |                |   |      |  |        | 

| |    |                                                                               
| | -- | ------------------------------------------------------------------------------
| | B. | See Note 17 regarding an
  affiliated company held by the Company in the past.

- 13 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)

|              |                               |             
|------------- | ----------------------------- | ------------
|NOTE
  6     | PROPERTY
  AND EQUIPMENT, NET
|              |                               |             
|              | A.                            | Composition:

| |                                            |  |                |         |      |  |         |  
| | ------------------------------------------ |  | -------------- | ------- | ---- |  | ------- | -
| |                                            |  | US dollars     |        
| |                                            |  |                |        
| |                                            |  | December
  31, |        
| | (in thousands)                             |  | 2006           |         | 2005 | 
| |                                            |  |                |         |      | 
| |                                            |  |                |         |      |  |         |  
| | Buildings &
  installations                |  |                | 77,475  |      |  | 37,669  |  
| | Machinery, equipment and
  sailing vessels |  |                | 3,278   |      |  | 3,181   |  
| | Office equipment &
  furniture             |  |                | 1,870   |      |  | 1,678   |  
| | Motor vehicles                             |  |                | 213     |      |  | 207     |  
| |                                            |  |                |         |      |  |         |  
| |                                            |  |                | 82,836  |      |  | 42,735  |  
|
| | Less  accumulated
  depreciation          |  |                | (30,829 | )    |  | (27,670 | )
| |                                            |  |                |         |      |  |         |  
| |                                            |  |                | 52,007  | (*)  |  | 15,065  |  
| |                                            |  |                |         |      |  |         |  

| |    |                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                        
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | In the years ended December
  31, 2006, 2005 and 2004, depreciation expenses were US$ 2,849 thousand,
  US$ 2,799 thousand and US$ 3,052 thousand, respectively, and additional
  equipment was purchased in amounts of US$ 11,298 thousand, US$ 801 thousand and
  US$ 536 thousand, respectively.
| |    |                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                        
| |    | (*)                                                                                                                                                                                                                                                                                                 | In respect of property and
  equipment of a subsidiary acquired during 2006, see Consolidated Statements
  of Cash Flows  Appendix A.                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                        
| | B. | Leased
  lands                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                        
| |    | 1.                                                                                                                                                                                                                                                                                                  | The Eilat park is located
  on land leased by Red Sea Underwater Observatory Ltd. (RSUO), under an
  agreement with the Israel Lands Administration, for a period of 49 years,
  from October 20, 1974 until October 19, 2023, with an option for an
  additional 49 years.                            
| |    |                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                     | Under another lease
  agreement with the Israel Lands Administration, RSUO leased a plot in the
  Eilat Tourist Center for a 49 year period, from May 5, 1991 until May 4,
  2040, with an option for another 49 year period. RSUO erected a store on the
  plot, covering an area of 24 square meters.
| |    |                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                        
| |    | 2.                                                                                                                                                                                                                                                                                                  | The marine park in Perth,
  Australia is located on a parcel of land leased from the Australian
  Government for a 21-year period, beginning in 1987, with an option for an
  additional 21-year period.                                                                                               
| |    |                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                     | Exercise of the option has
  been approved by the Companys board of directors and is currently in the
  process of being implemented.                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                        
| | C. | Depreciation
  rates                                                                                                                                                                                                                                                                               

| |                                                         |         
| | ------------------------------------------------------- | --------
| |                                                         | %       
| |                                                         |         
| | Buildings and installations                             | 4       
| |                                                         |         
| | Machinery, equipment and
  sailing vessels (mainly 10%) | 6
   20
| |                                                         |         
| | Office equipment and
  furniture (mainly 20%)           | 5
   33
| |                                                         |         
| | Motor vehicles                                          | 15      

| |    |                      
| | -- | ---------------------
| | D. | Liens  See Note 12B.

- 14 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)

|              |                         |                         
|------------- | ----------------------- | ------------------------
|NOTE
  7     | DEFERRED
  INCOME TAXES
|              |                         |                         
|              | A.                      | Deferred
  income taxes:

| |                                                                                                   |  |                |        |      |  |        |  
| | ------------------------------------------------------------------------------------------------- |  | -------------- | ------ | ---- |  | ------ | -
| |                                                                                                   |  | US dollars     |       
| |                                                                                                   |  |                |       
| |                                                                                                   |  | December
  31, |       
| | (in thousands)                                                                                    |  | 2006           |        | 2005 | 
| |                                                                                                   |  |                |        |      | 
| |                                                                                                   |  |                |        |      |  |        |  
| | Short-term deferred tax
  assets  net:                                                           |  |                |        |      |  |        |  
| |                                                                                                   |  |                |        |      |  |        |  
| | Provisions for employee related
obligations                                                       |  |                | 35     |      |  | 30     |  
| | Other                                                                                             |  |                | -      |      |  | -      |  
| |                                                                                                   |  |                |        |      |  |        |  
| |                                                                                                   |  |                | 35     |      |  | 30     |  
| |                                                                                                   |  |                |        |      |  |        |  
| |                                                                                                   |  |                |        |      |  |        |  
| | Valuation allowance  in respect of carryforward
losses and deductions
  that may not be utilized |  |                | -      |      |  | -      |  
| |                                                                                                   |  |                |        |      |  |        |  
| |                                                                                                   |  |                | 35     |      |  | 30     |  
| |                                                                                                   |  |                |        |      |  |        |  
| |                                                                                                   |  |                |        |      |  |        |  
| |                                                                                                   |  |                |        |      |  |        |  
| | Long-term deferred tax assets (liabilities) 
net:                                                |  |                |        |      |  |        |  
|
| | Property, plant and
equipment                                                                     |  |                | (1,076 | )    |  | (2,435 | )
| | Provisions for employee related
obligations                                                       |  |                | 156    |      |  | 139    |  
| | Timing difference for long-term and
carryforward losses and deductions                            |  |                | 196    |      |  | 2,558  |  
| | In respect of tax losses of an
approved enterprise carried forward                              |  |                | 229    |      |  | 210    |  
| |                                                                                                   |  |                |        |      |  |        |  
| |                                                                                                   |  |                | (495   | )    |  | 472    |  
| | Valuation allowance  in respect of carryforward
losses and deductions
  that may not be utilized |  |                | -      |      |  | -      |  
| |                                                                                                   |  |                |        |      |  |        |  
| |                                                                                                   |  |                | (495   | )    |  | 472    |  
| |                                                                                                   |  |                |        |      |  |        |  
| |                                                                                                   |  |                | (460   | )    |  | 502    |  
| |                                                                                                   |  |                |        |      |  |        |  

| |    |                                             
| | -- | --------------------------------------------
| | B. | Presented
  in the balance sheet as follows:

| |                       |  |                |      |      |  |     | 
| | --------------------- |  | -------------- | ---- | ---- |  | --- | 
| |                       |  | US dollars     |     
| |                       |  |                |     
| |                       |  | December
  31, |     
| | (in thousands)        |  | 2006           |      | 2005 | 
| |                       |  |                |      |      | 
| |                       |  |                |      |      |  |     | 
| | Current assets        |  |                | 35   |      |  | 30  | 
| | Long-term assets      |  |                | 341  |      |  | 472 | 
| | Long-term liabilities |  |                | (836 | )    |  | -   | 
| |                       |  |                |      |      |  |     | 
| |                       |  |                | (460 | )    |  | 502 | 
| |                       |  |                |      |      |  |     | 

| |    |                                                                                                    
| | -- | ---------------------------------------------------------------------------------------------------
| | C. | Carryforward
  tax losses                                                                          
| |    |                                                                                                    
| |    | Carryforward tax losses of
  an Israeli subsidiary as of December 31, 2006 amount to US$ 2 million.

- 15 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)

|              |                                    |             
|------------- | ---------------------------------- | ------------
|NOTE
  8     | CREDIT
  FROM BANKING INSTITUTIONS
|              |                                    |             
|              | A.                                 | Composition:

| |                                         |  |                       |  |                |        |      |  |       | 
| | --------------------------------------- |  | --------------------- |  | -------------- | ------ | ---- |  | ----- | 
| |                                         |  |                       |  | US dollars     |       
| |                                         |  |                       |  |                |       
| |                                         |  | Interest
  rate as of |  | December
  31, |       
| | (in thousands)                          |  | 2006                  |  | 2006           |        | 2005 | 
| |                                         |  |                       |  |                |        |      | 
| |                                         |  | %                     |  |                |        |      |  |       | 
| | Bank credit  unlinked                  |  | 5.25                  |  |                | 1,397  |      |  | 566   | 
| | Short-term loans  unlinked             |  | 6.5                   |  |                | 71     |      |  | 109   | 
| | Short-term loans  dollar
  linked      |  | 5.8                   |  |                | 7,000  |      |  | -     | 
| | Current maturities of
  long-term loans |  |                       |  |                | 1,927  |      |  | 5,039 | 
| |                                         |  |                       |  |                |        |      |  |       | 
| |                                         |  |                       |  |                | 10,395 |      |  | 5,714 | 
| |                                         |  |                       |  |                |        |      |  |       | 

|              |                                         |                                                                                                                                
|------------- | --------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------
|              | B.                                      | Lines of
  credit                                                                                                              
|              |                                         |                                                                                                                                
|              |                                         | Unutilized short-term
  credit lines of the Company and its subsidiaries as of December 31, 2006,
  totaled US$ 3,023 thousand.
|              |                                         |                                                                                                                                
|              | C.                                      | Liens 
  see Note 12B.                                                                                                        
|              |                                         |                                                                                                                                
|NOTE
  9     | ACCOUNTS
  PAYABLE AND ACCRUALS  OTHER
|              |                                         |                                                                                                                                
|              | Composition:                           

| |                                                 |  |                |       |      |  |       | 
| | ----------------------------------------------- |  | -------------- | ----- | ---- |  | ----- | 
| |                                                 |  | US dollars     |      
| |                                                 |  |                |      
| |                                                 |  | December
  31, |      
| | (in thousands)                                  |  | 2006           |       | 2005 | 
| |                                                 |  |                |       |      | 
| |                                                 |  |                |       |      |  |       | 
| | Advances from customers                         |  |                | 107   |      |  | 59    | 
| | Employees and institutions
  in respect thereof |  |                | 947   |      |  | 671   | 
| | Institutions                                    |  |                | 284   |      |  | 1,118 | 
| | Accrued expenses                                |  |                | 529   |      |  | 193   | 
| | Others                                          |  |                | 159   |      |  | 267   | 
| |                                                 |  |                |       |      |  |       | 
| |                                                 |  |                | 2,026 |      |  | 2,308 | 
| |                                                 |  |                |       |      |  |       | 

|              |                   |             
|------------- | ----------------- | ------------
|NOTE
  10    | LONG-TERM
  LOANS
|              |                   |             
|              | A.                | Composition:

| |                                                 |  |                       |  |                |        |      |  |        |  
| | ----------------------------------------------- |  | --------------------- |  | -------------- | ------ | ---- |  | ------ | -
| |                                                 |  |                       |  | US dollars     |       
| |                                                 |  |                       |  |                |       
| |                                                 |  | Interest
  rate as of |  | December
  31, |       
| | (in thousands)                                  |  | 2006                  |  | 2006           |        | 2005 | 
| |                                                 |  |                       |  |                |        |      | 
| |                                                 |  | %                     |  |                |        |      |  |        |  
| |                                                 |  |                       |  |                |        |      |  |        |  
| | Banks                                          |  |                       |  |                |        |      |  |        |  
| |                                                 |  |                       |  |                |        |      |  |        |  
| | Euro
                 (1)                       |  | Euribor+1.75          |  |                | 17,748 |      |  | 239    |  
| | US dollar
       (2)                            |  | Libor+1.6             |  |                | 5,933  |      |  | 4,800  |  
| | US dollar
       (3)                            |  | Libor+2.25            |  |                | 10,000 |      |  | -      |  
| | Australian dollar                               |  | 7.65                  |  |                | 575    |      |  | 773    |  
| |                                                 |  |                       |  |                |        |      |  |        |  
| | Shareholders of
  consolidated companies  Euro |  | Libor+1.875           |  |                | 7,168  |      |  | 320    |  
| |                                                 |  |                       |  |                |        |      |  |        |  
| |                                                 |  |                       |  |                | 41,424 |      |  | 6,132  |  
| |                                                 |  |                       |  |                |        |      |  |        |  
| | Less:current maturities                         |  |                       |  |                | (1,927 | )    |  | (5,039 | )
| |                                                 |  |                       |  |                |        |      |  |        |  
| |                                                 |  |                       |  |                | 39,497 |      |  | 1,093  |  
| |                                                 |  |                       |  |                |        |      |  |        |  

- 16 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (cont.)

|            |                        
|----------- | -----------------------
|NOTE 10    | LONG-TERM LOANS (cont.)

| |    |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | ------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A. | (cont.)
| |    |        
| |    | 1.      | A Euro loan
  in an amount of  13,464 thousand, repayable in 39 equal quarterly
  installments commencing in March 2008, and one quote of 20% of the total on
  the date of expiration. In connection with this loan, a subsidiary undertook
  the following conventions: - Debt service cover ratio (RCSD):1.25 during the entire period of
  operations.                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | 2.      | A dollar loan
  in an amount of US$6,000 thousand, payable in equal monthly installments
  commencing in November 2006. The Credit Agreement requires the subsidiary to comply with certain
  financial conditions, including (a) Debt Service Coverage Ratio of not
  less than 3.0 to one; (b) Adjusted Equity of not less than $6,000,000 as of
  December 31, 2006 and $7,000,000 as of December 31, 2007 and thereafter; (c)
  Net Cash Reserve of not less than $1,000,000. As of December 31, 2006, the
  Company has complied with the financial covenants contained in the Credit
  Agreement. An ALTA-insured first mortgage and a first lien on all leases,
  rents, other income, and tangible property are pledged as collateral under
  the terms of this Agreement.
| |    |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | 3.      | A dollar loan in an amount of US$10,000 thousand, repayable in four
  equal annual installments commencing in September 2007. In connection with
  this loan, the subsidiary undertook that during the initial loan utilization
  period, its total tangible shareholders equity (as defined below) would not
  fall below NIS 100 million (US$23.7 million) and that it would not fall below
  25% of the Companys consolidated balance sheet, as presented in the
  Companys consolidated financial statements.                                                                                                                                                                                                                                                              
| |    |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |         | The term tangible shareholders equity is defined as its paid-in
  capital, plus retained earnings, plus capital notes and various capital
  reserves, plus the balance of shareholder loans to the Company and/or loans
  granted to the Company on behalf of shareholders (including loans taken by
  the Company from the bank against deposits made by shareholders or anyone on
  behalf of the shareholders), less the balance of loans granted to
  shareholders, less the value of intangible assets such as goodwill, patents,
  etc., less investments in the Company.                                                                                                                                                                                                
| |    |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |         | The subsidiary undertook that during the initial utilization period
  of the loan, it will be in possession of a shareholders loan in an amount of
  US$6 million that was placed/will be placed at the disposal of the Company,
  including funds deriving from interest and linkage on these loans. For
  purposes of this item, a loan taken by the Company against deposits made in
  Union Bank by shareholders or parties on their behalf will be considered as a
  shareholders loan.                                                                                                                                                                                                                                                                                      
| |    |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |         | As of the date of the financial statements, the subsidiary was in
  compliance with the aforementioned undertaking.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| |    |                
| | -- | ---------------
| | B. | Maturity dates:

| |                                   |  |            |                     | 
| | --------------------------------- |  | ---------- | ------------------- | 
| |                                   |  | US dollars |                    
| |                                   |  |            |                    
| |                                   |  |            | December 31,
  2006 | 
| |                                   |  |            |                     | 
|
| | First year 
  current maturities |  |            | 1,927               | 
| | Second year                       |  |            | 4,270               | 
| | Third year                        |  |            | 4,354               | 
| | Fourth year
  and thereafter      |  |            | 23,705              | 
| |                                   |  |            |                     | 
| |                                   |  |            | 34,256              | 
|
| | No repayment
  date has been set  |  |            | 7,168               | 
| |                                   |  |            |                     | 
| |                                   |  |            | 41,424              | 
| |                                   |  |            |                     | 

| |    |                      
| | -- | ---------------------
| | C. | Liens  see Note 12B.

- 17 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(cont.)

|            |                                               
|----------- | ----------------------------------------------
|NOTE 11    | LIABILITY FOR EMPLOYEE RIGHTS UPON RETIREMENTS

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A. | Israeli
  labor laws generally require payment of severance pay upon dismissal of an
  employee or upon termination by the employee of employment in certain other
  circumstances. The severance pay liability of the Company to their employees,
  which reflects the undiscounted amount of the liability, is based upon the
  number of years of service and the latest monthly salary (one months salary
  for each year worked), and is partly funded by insurance policies and by
  regular deposits with recognized severance pay funds.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | The Company
  may make withdrawals from the amounts funded only for the purpose of paying
  severance pay.                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | Consolidated
  subsidiaries in Australia deposit 8% of their employees salaries into
  recognized pension funds. This is the minimum required by Australian law.                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | B. | The
  liability for employee severance pay includes, as of December 31, 2006,
  an amount of US$ 569 thousand, which represents the liability to a former
  employee.                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | This debt is
  being paid-off in fixed monthly installments and is expected to be totally
  repaid through 2017.                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | C. | Retirement plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | On
  January 1, 2003, the Hawaiian subsidiary adopted a 401(k) retirement
  savings plan for all eligible employees who satisfy age and length of service
  requirements. Eligible employees may make annual contributions limited to the
  total amount deductible under applicable provisions of the Internal Revenue
  Code.                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | On
  January 1, 2005, the Hawaiian subsidiaries amended the 401(k) retirement
  savings plan to include a Cash or Deferred Profit Sharing Plan as authorized
  under the Internal Revenue Code. Employer contributions to this plan amounted
  to US$ 36,306 and US$ 34,597 for 2006 and 2005, respectively.                                                                                                                                                                                                                                     

|            |                                              
|----------- | ---------------------------------------------
|NOTE 12    | CONTINGENT LIABILITIES, COMMITMENTS AND LIENS

| |    |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A. | Commitments
| |    |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | 1.          | Agreement with the Israel Nature Reserve Authority                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |             | RSUO entered
  into an agreement with the Israel Nature Reserve Authority (hereafter: the
  Authority) on February 26, 1973, whereby the RSUO received sole rights
  to build a tourist site in the Eilat Nature Reserve and the right of first
  refusal should the Authority grant permission to set up another underwater
  observatory in the Red Sea. The agreement has been amended several times, in
  light of RSUOs requests to expand the park and to add additional
  attractions. The last such amendment was on December 1, 1992.                                                      
| |    |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |             | RSUOs
  agreement with the Authority is subject to the lease agreement between the
  Company and the Israel Lands Administration regarding the area in which the
  site is located (see Note 6B).                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |             | Under the
  agreement, RSUO undertook to implement reasonable steps to ensure that
  nothing would be done at the site that would cause damage to or be of a
  nuisance to the public. RSUO is responsible for any third party damage
  inflicted in the area of the site and for any damage or injury caused to the
  Authority, any of its employees or agents at the site or at any other place
  as a result of performance of RSUOs work at the site or resulting from the
  operation of the site, if the damages were caused by RSUO, its employees or
  agents or by any visitors to the site.

- 18 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(cont.)

|            |                                                      
|----------- | -----------------------------------------------------
|NOTE 12    | CONTINGENT LIABILITIES, COMMITMENTS AND LIENS (cont.)

| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| | -- | ------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | A. | Commitments (cont.)
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | 1.                  | Agreement with the Israel Nature Reserve Authority (cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                     | Under the
  agreement, RSUO has to operate a site in the Eilat park seven days a week.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                     | The
  agreement is unlimited in time and leaves no room for the Authority to
  initiate any changes in the consideration RSUO is required to pay for its
  license under the agreement. Should RSUO wish to add certain activity to its
  activities in the Eilat park, it will have to obtain permission to do so from
  the Authority.                                                                                                                                                                                                                                
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                     | In
  consideration for the license under the agreement, RSUO pays the Authority,
  as of the balance sheet date, the following:                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                     | a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 5.0% of the
  price of net admission revenue to the Eilat park.                                                                                     
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| |    |                     | b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 2.5% of the
  receipts from restaurants and souvenir sales.                                                                                         
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| |    |                     | c.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 4% of the
  receipts from cruises.                                                                                                                  
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| |    |                     | d.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | US$ 25,000
  per annum as participation in the expenses of the Authority to employ a marine
  biologist engaged in the field of nature conservation.
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| |    | 2.                  | Agreements to sell attractions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| |    |                     | A subsidiary
  entered into agreements to set up attraction counters (hereinafter  usage
  rights agreements). Under the usage rights agreements, the subsidiary rents
  space in which it will set up an attraction counter in the lobby of a hotel
  or a shopping mall, at which it will sell tickets to the Eilat Park and to
  other attractions in and around Eilat. The rental fee is computed as a percentage
  of sales, a flat fee, or some combination of the two methods. The subsidiary
  receives a commission on the sale of tickets to attractions.
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| | B. | Liens              
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| |    | 1.                  | A floating
  charge in an unlimited amount was registered by RSUO on all of its assets and
  on all income from the mortgaged assets, in favor of the State of Israel, to
  secure the repayment of investment grants received under the terms of the
  Israeli Law for the Encouragement of Capital Investment  1959.                                                                                                                                                                                                                                                 
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| |    | 2.                  | A specific
  charge was registered on all RSUOs property rights in the Oceanarium
  project within the underwater observatory in Eilat, block 40032, part of
  parcel 2, lot a, in favor of the First International Bank of Israel.                                                                                                                                                                                                                                                                                                                                
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| |    | 3.                  | A floating
  charge was registered on all the assets of Maui Ocean Center, Inc. (MOC), on
  the income from all the mortgaged assets and on all the subsidiarys rights
  under agreements and insurance policies, in favor of Bank of Hawaii, in
  respect of a loan granted by the bank to MOC. As of December 31, 2006,
  the balance of the loan secured by this charge was $ 5,933 thousand.                                                                                                                                                                       
| |    |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| |    | 4.                  | A fixed
  charge, unlimited in amount, was registered on all the equipment, documents,
  securities and intangible property rights of the Australian subsidiaries and
  a floating charge, unlimited in amount on all the assets of those companies,
  in favor of a bank, to secure the repayment of loans from that bank. As of
  December 31, 2006, the balance of the loans secured by these charges was
  $ 554 thousand.                                                                                                                                          

- 19 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (cont.)

|            |                                                      
|----------- | -----------------------------------------------------
|NOTE 12    | CONTINGENT LIABILITIES, COMMITMENTS AND LIENS (cont.)

|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- | -------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            | C.                   | Contingent liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                      | Investment grant                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                      | Certain of
  RSUOs installations have received approved enterprise status under the Law
  for the Encouragement of Capital Investment  1959. Should RSUO not be able
  to prove that the investments it made were carried out in accordance with the
  terms of the approved plans, the Israel Investment Center is entitled to demand
  repayment of the investment grants received, plus interest and linkage
  differentials from the date the grants were received. Furthermore, RSUO will
  have to repay any tax benefits it received (accelerated depreciation and
  lower tax rates). As of the date of the preparation of the financial
  statements, RSUO has not received all the final permits from the Investment
  Center. In the opinion of RSUO management, RSUO is in compliance with the
  stipulated terms.
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|NOTE 13    | SHAREHOLDERS EQUITY
|            |                     
|            | A.                   | The A and
  B management shares are the only voting shares and hold equal voting
  rights. The holders of a majority of the A management shares elect one-half
  of the Board and the holders of a majority of the B management shares elect
  the other half. The C Preference Shares have no rights except to receive
  dividends, if declared.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            | B.                   | See Note 1A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|            |              
|----------- | -------------
|NOTE 14    | COST OF SALES

| |                                                  |  |                         |        |      |  |        |  |  |        | 
| | ------------------------------------------------ |  | ----------------------- | ------ | ---- |  | ------ |  |  | ------ | 
| |                                                  |  | US dollars              |       
| |                                                  |  |                         |       
| |                                                  |  | Year ended December 31, |       
| | (in
  thousands)                                 |  | 2006                    |        | 2005 |  | 2004   | 
| |                                                  |  |                         |        |      |  |        |  |  |        | 
| |                                                  |  |                         |        |      |  |        |  |  |        | 
| | Payroll and
  related expenses                   |  |                         | 4,435  |      |  | 3,780  |  |  | 3,800  | 
| | Depreciation
  and amortization                  |  |                         | 2,464  |      |  | 2,393  |  |  | 2,644  | 
| | Consumption
  of inventory                       |  |                         | 4,317  |      |  | 4,113  |  |  | 3,354  | 
| | Royalties to
  the Nature Reserves Authority (*) |  |                         | 262    |      |  | 220    |  |  | 233    | 
| | Others                                           |  |                         | 2,275  |      |  | 2,539  |  |  | 2,632  | 
| |                                                  |  |                         |        |      |  |        |  |  |        | 
| |                                                  |  |                         | 13,753 |      |  | 13,045 |  |  | 12,663 | 
| |                                                  |  |                         |        |      |  |        |  |  |        | 

| |     |                 
| | --- | ----------------
| | (*) | See Note
  12A1.

|            |                 
|----------- | ----------------
|NOTE 15    | SELLING EXPENSES

| |                                |  |                         |       |      |  |       |  |  |       | 
| | ------------------------------ |  | ----------------------- | ----- | ---- |  | ----- |  |  | ----- | 
| |                                |  | US dollars              |      
| |                                |  |                         |      
| |                                |  | Year ended December 31, |      
| | (in
  thousands)               |  | 2006                    |       | 2005 |  | 2004  | 
| |                                |  |                         |       |      |  |       |  |  |       | 
| |                                |  |                         |       |      |  |       |  |  |       | 
| | Advertising                    |  |                         | 1,112 |      |  | 1,091 |  |  | 1,391 | 
| | Payroll and
  related expenses |  |                         | 674   |      |  | 626   |  |  | 641   | 
| | Others                         |  |                         | 498   |      |  | 422   |  |  | 411   | 
| |                                |  |                         |       |      |  |       |  |  |       | 
| |                                |  |                         | 2,284 |      |  | 2,139 |  |  | 2,443 | 
| |                                |  |                         |       |      |  |       |  |  |       | 

- 20 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (cont.)

|            |                                    
|----------- | -----------------------------------
|NOTE 16    | GENERAL AND ADMINISTRATIVE EXPENSES

| |                                 |  |                         |       |      |  |       |  |  |       | 
| | ------------------------------- |  | ----------------------- | ----- | ---- |  | ----- |  |  | ----- | 
| |                                 |  | US dollars             
| |                                
| |                                 |  | Year ended December 31,
| | (in
  thousands)                |  | 2006                    |       | 2005 |  | 2004  | 
| |                                
| |                                
| | Payroll and
  related expenses  |  |                         | 3,324 |      |  | 3,256 |  |  | 3,085 | 
| | Depreciation
  and amortization |  |                         | 399   |      |  | 406   |  |  | 1,458 | 
| | Others                          |  |                         | 3,177 |      |  | 2,068 |  |  | 2,274 | 
| |                                 |  |                         |       |      |  |       |  |  |       | 
| |                                 |  |                         | 6,900 |      |  | 5,730 |  |  | 6,817 | 
| |                                 |  |                         |       |      |  |       |  |  |       | 

|            |                    
|----------- | -------------------
|NOTE 17    | OTHER EXPENSES, NET

| |                                                                 |  |                         |      |      |  |      |   |  |     |  
| | --------------------------------------------------------------- |  | ----------------------- | ---- | ---- |  | ---- | - |  | --- | -
| |                                                                 |  | US dollars             
| |                                                                
| |                                                                 |  | Year ended December 31,
| | (in
  thousands)                                                |  | 2006                    |      | 2005 |  | 2004 |  
| |                                                                
| |                                                                
| | Gain on sale
  of fixed assets                                  |  |                         | 15   |      |  | 1    |   |  | 18  |  
| | Loss from
  disposal of investment in an affiliated company (*) |  |                         | -    |      |  | (145 | ) |  | (46 | )
| | Severance pay to a former
  employee (see Note 11B)             |  |                         | -    |      |  | (584 | ) |  | -   |  
| | Expenses for prior years                                        |  |                         | (302 | )    |  | -    |   |  | -   |  
| |                                                                 |  |                         |      |      |  |      |   |  |     |  
| |                                                                 |  |                         | (287 | )    |  | (728 | ) |  | (28 | )
| |                                                                 |  |                         |      |      |  |      |   |  |     |  

| |     |                                                                                                                                                                                                                
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (*) | In 1999,
  RSUO, together with others, established a company named Amazing World Ltd.
  (hereinafter  Amazing), which set up a tourist attraction in Eliat. RSUO
  held 33% of the share capital of Amazing.
| |     |                                                                                                                                                                                                                
| |     | During 2004,
  Amazing was liquidated. In 2005 and 2004, RSUO paid amounts of US$ 145
  thousand and US$ 46 thousand, respectively, in excess of its investment in
  Amazing.                                  
| |     |                                                                                                                                                                                                                
| |     | As at
  December 31, 2005, RSUO does not have any liabilities or guarantees in
  respect to Amazing.                                                                                                           

|            |                
|----------- | ---------------
|NOTE 18    | TAXES ON INCOME

| |    |             
| | -- | ------------
| | A. | Composition:

| |                  |  |                         |        |      |  |        |   |  |      |  
| | ---------------- |  | ----------------------- | ------ | ---- |  | ------ | - |  | ---- | -
| |                  |  | US dollars             
| |                 
| |                  |  | Year ended December 31,
| | (in
  thousands) |  | 2006                    |        | 2005 |  | 2004   |  
| |                 
| |                 
| | Current
  taxes  |  |                         | (961   | )    |  | (1,182 | ) |  | (619 | )
| | Deferred
  taxes |  |                         | (836   | )    |  | (221   | ) |  | 762  |  
| | Previous
  years |  |                         | 120    |      |  | (130   | ) |  | (221 | )
| |                  |  |                         |        |      |  |        |   |  |      |  
| |                  |  |                         | (1,677 | )    |  | (1,533 | ) |  | (78  | )
| |                  |  |                         |        |      |  |        |   |  |      |  

- 21 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (cont.)

|            |                        
|----------- | -----------------------
|NOTE 18    | TAXES ON INCOME (cont.)

| |    |                                                                                                                                                                                 
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | B. | Reconciliation
  of income tax presented in the financial statements to the theoretical tax
  computed at the average tax rate in the countries in which the Company
  operates:

| |                                                                                      |  |                         |       |      |  |       |   |  |        |  
| | ------------------------------------------------------------------------------------ |  | ----------------------- | ----- | ---- |  | ----- | - |  | ------ | -
| |                                                                                      |  | US dollars             
| |                                                                                     
| |                                                                                      |  | Year ended December 31,
| | (in
  thousands)                                                                     |  | 2006                    |       | 2005 |  | 2004  |  
| |                                                                                     
| |                                                                                     
| | Income
  before taxes on income                                                      |  |                         | 6,014 |      |  | 3,284 |   |  | 1,880  |  
|
| | Average tax
  rate                                                                   |  |                         | 0     | %    |  | 0     | % |  | 0      | %
| |                                                                                      |  |                         |       |      |  |       |   |  |        |  
| | Taxes on
  income at statutory tax rates                                             |  |                         | -     |      |  | -     |   |  | -      |  
|
| | Amounts in
  respect of which no deferred taxes were recorded                        |  |                         | -     |      |  | (139  | ) |  | (1,150 | )
| | Capitalized
  income                                                                 |  |                         | (106  | )    |  | 397   |   |  | 204    |  
| | Benefit
  granted in respect of Eilat residency                                      |  |                         | -     |      |  | (77   | ) |  | (83    | )
| | Income from
  approved enterprise                                                  |  |                         | -     |      |  | -     |   |  | -      |  
| | Capital gain                                                                         |  |                         | 5     |      |  | 51    |   |  | (6     | )
| | Non-deductible
  expenses                                                            |  |                         | 111   |      |  | 40    |   |  | 12     |  
| | Taxes in
  respect of prior years                                                    |  |                         | (120  | )    |  | 130   |   |  | 221    |  
| | Tax rate
  differentials                                                             |  |                         | 2,061 |      |  | 1,117 |   |  | 905    |  
| | Other
  differentials including those in respect of the Israeli Inflationary Tax Law |  |                         | (274  | )    |  | 14    |   |  | (25    | )
| |                                                                                      |  |                         |       |      |  |       |   |  |        |  
| |                                                                                      |  |                         | 1,677 |      |  | 1,533 |   |  | 78     |  
| |                                                                                      |  |                         |       |      |  |       |   |  |        |  

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                        |              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------
| | C. | Tax assessments                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | RSUO has
  received tax assessments that are considered final, for the years up to and
  including the 2002 tax year. The other subsidiaries have not been assessed
  since incorporation.                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | D. | The
  provision in RSUOs balance sheet was computed based on the fact that some of
  RSUOs installations were recognized as approved enterprises and are
  entitled to reduced tax rates and accelerated depreciation for stipulated
  periods of time, in accordance with the Israeli Law for the Encouragement of
  Capital Investments  1959. The following is a tabulation of the benefits
  granted under the approved plan:
|
| |    | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                     | Approved plan

| |                                           |  |                   |  |                                         |  |                     
| | ----------------------------------------- |  | ----------------- |  | --------------------------------------- |  | --------------------
| | Date of permit 
  (including 
  addendum) |  | Benefits 
  track |  | Status                                  |  | First
  benefit year
| |                                          
| |                                          
| | 20.9.95                                   |  | Grants            |  | Final
  implementation report submitted |  | Not yet begun       

| |    |                                                                                                                                                                                                                                                                         
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | Accelerated depreciation                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                         
| |    | RSUO was
  entitled to accelerated depreciation in respect of buildings and equipment of
  approved enterprises at rates of 400% and 200% of the ordinary depreciation
  rates on these assets, respectively, for the first five years of the
  operation of the assets.
| |    |                                                                                                                                                                                                                                                                         
| | 3. | Reduced tax rates                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                         
| |    | RSUO was
  liable for corporate tax at a rate of 10% (instead of 35%) on the taxable
  income attributable to the approved enterprises under the grants track for
  the entire benefits period, subject to the percentage of RSUO held by foreign
  investors.        

- 22 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (cont.)

|            |                                                 
|----------- | ------------------------------------------------
|NOTE 19    | TRANSACTIONS WITH RELATED AND INTERESTED PARTIES

| |    |         
| | -- | --------
| | A. | Balances

| |                                     |  |              |  |      |  |  | 
| | ----------------------------------- |  | ------------ |  | ---- |  |  | 
| |                                     |  | US dollars  
| |                                    
| |                                     |  | December 31,
| | (in
  thousands)                    |  | 2006         |  | 2005 | 
| |                                    
| |                                    
| | Long-term balance
   related party |  | -            |  | 914  | 

| |    |             
| | -- | ------------
| | B. | Transactions

| |                                                |  |                         |  |      |  |      |  |  |  | 
| | ---------------------------------------------- |  | ----------------------- |  | ---- |  | ---- |  |  |  | 
| |                                                |  | US dollars             
| |                                               
| |                                                |  | Year ended December 31,
| | (in
  thousands)                               |  | 2006                    |  | 2005 |  | 2004 | 
| |                                               
| |                                               
| | Participation
  of related parties in expenses |  | -                       |  | 128  |  | 138  | 

|            |                                                       
|----------- | ------------------------------------------------------
|NOTE 20    | ADDITIONAL INFORMATION REGARDING FINANCIAL INSTRUMENTS

| |    |                                                                                                                                                                                                                                                                                      
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A. | The Company
  has financial assets which include, inter alia, cash and cash equivalents and
  accounts receivable and other debit balances, and financial liabilities which
  include, inter alia, short and long-term credit from banking institutions and
  other accounts payable.
| |    |                                                                                                                                                                                                                                                                                      
| |    | The fair
  value of the financial instruments included in the financial statements of
  the Company does not materially differ from their value as presented in the
  financial statements.                                                                                          
| |    |                                                                                                                                                                                                                                                                                      
| | B. | The interest
  risk is the risk involved in changes in interest rates and the effect of such
  changes on the financial instruments presented as part of the short and
  long-term liabilities. See Notes 8 and 10.                                                                  
| |    |                                                                                                                                                                                                                                                                                      
| | C. | The Company
  operates internationally, which gives rise to exposure to risks from changes
  in foreign exchange rates in relation to the functional currencies of the
  applicable subsidiaries.                                                                                    

- 23 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (cont.)

|           |             
|---------- | ------------
|NOTE 21   | SEGMENT DATA

Geographic segments:

|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|---------------------------------- |  | ---------------------------- | ------ | -------------- |  | ------ | - | --------- | ------ | ------ |  | ----------- |  | ----- | --- | - |  | ------ | - |  | ------ | 
|                                   |  | US dollars                   |       
|                                  
|(in
  thousands)                   |  | Year ended December 31, 2006 |       
|                                  
|                                   |  | Israel                       |        | Netherlands(*) |  | U.S.A. |   | Australia |        | Others |  | Adjustments |  | Total |    
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |    
|Revenues                           |  |                              | 9,543  |                |  | -      |   |           | 13,623 |        |  | 5,925       |  |       | 400 |   |  | (400   | ) |  | 29,091 | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|Operating
  income                 |  |                              | 764    |                |  | 101    |   |           | 3,893  |        |  | 802         |  |       | 307 |   |  | -      |   |  | 5,867  | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|Financing
  income (expenses), net |  |                              | (80    | )              |  | (285   | ) |           | 345    |        |  | 172         |  |       | (5  | ) |  | -      |   |  | 147    | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|Net income
  (loss)                |  |                              | 695    |                |  | (184   | ) |           | 2,738  |        |  | 789         |  |       | 303 |   |  | (411   | ) |  | 3,930  | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|Short-term
  liabilities           |  |                              | 10,356 |                |  | 2,342  |   |           | 526    |        |  | 730         |  |       | 777 |   |  | (2,285 | ) |  | 12,446 | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|Long-term
  liabilities            |  |                              | 11,675 |                |  | 31,249 |   |           | 8,726  |        |  | 575         |  |       | 760 |   |  | (9,050 | ) |  | 43,935 | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|Capital
  investments              |  |                              | 289    |                |  | 10,389 |   |           | 371    |        |  | 296         |  |       | -   |   |  | -      |   |  | 11,345 | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 
|Depreciation
  and amortization    |  |                              | 464    |                |  | -      |   |           | 1,773  |        |  | 612         |  |       | -   |   |  | -      |   |  | 2,849  | 
|                                   |  |                              |        |                |  |        |   |           |        |        |  |             |  |       |     |   |  |        |   |  |        | 

|    |                                                            
|--- | -----------------------------------------------------------
|(*) | Including
  Palma Aquarium Holding B.V. See Notes 5 and 18.

|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|---------------------------------- |  | ---------------------------- | ----- | ----------- |  | ------ | - | --------- | ------ | ------ |  | ----------- |  | ----- | ----- | - |  | ------ | - |  | ------ | -
|                                   |  | US dollars                   |      
|                                  
|(in
  thousands)                   |  | Year ended December 31, 2005 |      
|                                  
|                                   |  | Israel                       |       | Netherlands |  | U.S.A. |   | Australia |        | Others |  | Adjustments |  | Total |      
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |      
|Revenues                           |  |                              | 8,777 |             |  | -      |   |           | 12,304 |        |  | 4,710       |  |       | 400   |   |  | (400   | ) |  | 25,791 |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Operating
  income (loss)          |  |                              | 600   |             |  | (193   | ) |           | 3,077  |        |  | 503         |  |       | 162   |   |  | -      |   |  | 4,149  |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Financing
  income (expenses), net |  |                              | (9    | )           |  | (50    | ) |           | (900   | )      |  | 127         |  |       | (33   | ) |  | -      |   |  | (865   | )
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Net income
  (loss)                |  |                              | (213  | )           |  | (243   | ) |           | 1,726  |        |  | 352         |  |       | 124   |   |  | (64    | ) |  | 1,682  |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Short-term
  liabilities           |  |                              | 2,996 |             |  | 510    |   |           | 514    |        |  | 788         |  |       | 1,415 |   |  | (2,106 | ) |  | 4,117  |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Long-term
  liabilities            |  |                              | 1,652 |             |  | 320    |   |           | 7,264  |        |  | 773         |  |       | -     |   |  | (2,464 | ) |  | 7,545  |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Capital
  investments              |  |                              | 246   |             |  | -      |   |           | 352    |        |  | 203         |  |       | -     |   |  | -      |   |  | 801    |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Depreciation
  and amortization    |  |                              | 456   |             |  | -      |   |           | 1,745  |        |  | 598         |  |       | -     |   |  | -      |   |  | 2,799  |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  

- 24 -

---

---



CORAL WORLD INTERNATIONAL LTD.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (cont.)

|           |                     
|---------- | --------------------
|NOTE 21   | SEGMENT DATA (cont.)

Geographic segments (cont.):

|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|---------------------------------- |  | ---------------------------- | ----- | ----------- |  | ------ | - | --------- | ------ | ------ |  | ----------- |  | ----- | ----- | - |  | ------ | - |  | ------ | -
|                                   |  | US dollars                   |      
|                                  
|(in
  thousands)                   |  | Year ended December 31, 2004 |      
|                                  
|                                   |  | Israel                       |       | Netherlands |  | U.S.A. |   | Australia |        | Others |  | Adjustments |  | Total |      
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |      
|Revenues                           |  |                              | 8,119 |             |  | -      |   |           | 11,049 |        |  | 4,695       |  |       | 400   |   |  | (400   | ) |  | 23,863 |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Operating
  income (loss)          |  |                              | 438   |             |  | (924   | ) |           | 2,209  |        |  | 298         |  |       | (109  | ) |  | -      |   |  | 1,912  |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Financing
  income (expenses), net |  |                              | (74   | )           |  | (30    | ) |           | 30     |        |  | 35          |  |       | 7     |   |  | -      |   |  | (32    | )
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Net income
  (loss)                |  |                              | (95   | )           |  | (954   | ) |           | 2,611  |        |  | 390         |  |       | (103  | ) |  | (387   | ) |  | 1,462  |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Short-term
  liabilities           |  |                              | 3,506 |             |  | 24     |   |           | 466    |        |  | 706         |  |       | 1,438 |   |  | (1,936 | ) |  | 4,204  |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Long-term
  liabilities            |  |                              | 2,231 |             |  | 356    |   |           | 7,909  |        |  | 1,116       |  |       | -     |   |  | (2,509 | ) |  | 9,103  |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Capital
  investments              |  |                              | 259   |             |  | 180    |   |           | 106    |        |  | 171         |  |       | -     |   |  | -      |   |  | 716    |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  
|Depreciation
  and amortization    |  |                              | 614   |             |  | 892    |   |           | 1,941  |        |  | 628         |  |       | -     |   |  | -      |   |  | 4,075  |  
|                                   |  |                              |       |             |  |        |   |           |        |        |  |             |  |       |       |   |  |        |   |  |        |  

Assets serving the segments:

|                 |  |              |        |      |  |        |   |  |        |  
|---------------- |  | ------------ | ------ | ---- |  | ------ | - |  | ------ | -
|                 |  | US dollars   |       
|                
|                 |  | December 31, |       
|(in
  thousands) |  | 2006         |        | 2005 |  | 2004   |  
|                
|                
|Israel           |  |              | 8,375  |      |  | 15,364 |   |  | 14,441 |  
|U.S.A.           |  |              | 20,700 |      |  | 21,291 |   |  | 22,982 |  
|Australia        |  |              | 6,997  |      |  | 7,038  |   |  | 7,272  |  
|Netherlands      |  |              | 42,992 |      |  | 83     |   |  | 144    |  
|Adjustments      |  |              | (9,922 | )    |  | (2,826 | ) |  | (3,714 | )
|                 |  |              |        |      |  |        |   |  |        |  
|                 |  |              | 69,142 |      |  | 40,950 |   |  | 41,125 |  
|                 |  |              |        |      |  |        |   |  |        |  

- 25 -

---

---



CORAL WORLD INTERNATIONAL LTD.

Appendix to
the Financial Statements

List of
Investee

|                                            |  |                                    |        |      |  |        | 
|------------------------------------------- |  | ---------------------------------- | ------ | ---- |  | ------ | 
|                                            |  | Percentage
  Control and ownership |       
|                                           
|List of
  Investee Companies                |  | 2006                               |        | 2005 | 
|                                           
|                                            |  | %                                  |        | %    | 
|                                            |  |                                    |        |      | 
|Subsidiary companies                        |  |                                    |        |      |  |        | 
|                                            |  |                                    |        |      |  |        | 
|Red Sea
  Underwater Observatory Ltd.       |  |                                    | 86.152 |      |  | 86.152 | 
|                                            |  |                                    |        |      |  |        | 
|Maui Ocean Center Inc.                      |  |                                    | 100    |      |  | 100    | 
|                                            |  |                                    |        |      |  |        | 
|Coral World Australia Pty Ltd.              |  |                                    | 100    |      |  | 100    | 
|                                            |  |                                    |        |      |  |        | 
|Coral World Australia Management Pty Ltd.   |  |                                    | 100    |      |  | 100    | 
|                                            |  |                                    |        |      |  |        | 
|Coral World Management Ltd.                 |  |                                    | 100    |      |  | 100    | 
|                                            |  |                                    |        |      |  |        | 
|Attractions Reservoir Ltd.                  |  |                                    | 100    |      |  | 100    | 
|                                            |  |                                    |        |      |  |        | 
|Vista Historica B.V.                        |  |                                    | 75     |      |  | 75     | 
|                                            |  |                                    |        |      |  |        | 
|Palma Aquarium Holdings B.V.                |  |                                    | 55     |      |  | 40     | 
|                                            |  |                                    |        |      |  |        | 
|Palma the Mallorca Aquarium S.A.            |  |                                    | 100    |      |  | 100    | 
|                                            |  |                                    |        |      |  |        | 
|Coral World
  Bahamas Hotels (1984) Limited |  |                                    | 100    |      |  | 100    | 
|                                            |  |                                    |        |      |  |        | 
|Red Sea
  Marineland Holding (1973) Ltd.    |  |                                    | 42.85  |      |  | 42.85  | 
|                                            |  |                                    |        |      |  |        | 
|Red Sea Underwater Observatory Ltd.         |  |                                    | 13.848 |      |  | 13.848 | 

---

---

- 26 -

---

---

OPHIR HOLDINGS LTD.(An Israeli Corporation)
2006 ANNUAL REPORT



---

---



OPHIR HOLDINGS LTD.

2006 ANNUAL REPORT

TABLE OF CONTENTS

|                                              | Page
|--------------------------------------------- | ----
|
|
|
|
|REPORT OF INDEPENDENT AUDITORS                | 2   
|CONSOLIDATED FINANCIAL STATEMENTS:           
|Balance sheets                                | 3-4 
|Statements of income (loss)                   | 5   
|Statements of changes in shareholders' equity | 6   
|Statements of cash flows                      | 7-8 
|Notes to financial statements                 | 9-29



---

---



# REPORT OF INDEPENDENT
AUDITORS

To the shareholders ofOPHIR HOLDINGS LTD.

We have audited the consolidated
financial statements of Ophir Holdings Ltd. and its subsidiaries (the Company):
balance sheets as of December 31, 2006 and 2005 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, 2006. These financial statements are the
responsibility of the Companys Board of Directors and management. Our
responsibility is to express an opinion on these financial statements based on our
audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Boards (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 provide a reasonable basis for our
opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 2006 and 2005 and the
consolidated results of operations and cash flows of the Company for each of the three
years in the period ended December 31, 2006, in conformity with accounting principles
generally accepted in Israel.

As explained in note 1b, the
financial statements referred to above are presented in new Israeli shekels, in conformity
with accounting standards issued by the Israel Accounting Standards Board.

Accounting principles generally
accepted in Israel vary in certain significant respects from accounting principles
generally accepted in the United States of America. Information relating to the nature and
effect of such differences is presented in note 13 to the consolidated financial
statements.

|                                      |                                                          
|------------------------------------- | ---------------------------------------------------------
|Tel-Aviv, Israel  
    29 March, 2007 | Kesselman & Kesselman
Certified Public Accountants (Isr.)

2

---

---



OPHIR HOLDINGS LTD.

CONSOLIDATED BALANCE SHEETS

|                           |  | December 31
|-------------------------- |  | -----------
|
|
|
|
|A s s e t s                |  |            
|CURRENT ASSETS :           |  |            
|Cash and cash equivalents  |  |            
|Short term investments     |  |            
|Accounts receivable:       |  |            
|Related parties            |  |            
|Other                      |  |            
|                           |  |            
|T o t a l   current assets |  |            
|                           |  |            
|LAND - BUSINESS INVENTORY  |  |            
|                           |  |            
|INVESTMENTS:               |  |            
|Associated companies       |  |            
|Other companies            |  |            
|Loan to related party      |  |            
|                           |  |            
|                           |  |            
|                           |  |            
|                           |  |            
|                           |  |            
|                           |  |            

|          |   |               
|--------- | - | --------------
|          | ( |               
|          |   | 
|          | ( |               
|DIRECTORS | ( |               
|          | ( |               
|          |   | 
|          | ( |               

Date
of approval of the financial statements: March 29, 2007

3

---

---



|                                             |  | December 31
|-------------------------------------------- |  | -----------
|
|
|
|
|Liabilities and shareholders' equity         |  |            
|CURRENT LIABILITIES:                         |  |            
|Bank credit and loans                        |  |            
|(mainly current maturities)                  |  |            
|Accounts payable and accruals                |  |            
|                                             |  |            
|T o t a l   current liabilities              |  |            
|                                             |  |            
|LONG-TERM LIABILITIES:                       |  |            
|Bank loans (net of current maturities)       |  |            
|Capital notes to an associated company       |  |            
|Capital note to related party                |  |            
|Payables in respect of acquisition of land - |  |            
|business inventory                           |  |            
|                                             |  |            
|T o t a l   long-term liabilities            |  |            
|                                             |  |            
|T o t a l   liabilities                      |  |            
|                                             |  |            
|                                             |  |            
|COMMITMENTS                                  |  |            
|MINORITY INTEREST                            |  |            
|SHAREHOLDERS' EQUITY                         |  |            
|                                             |  |            
|                                             |  |            
|                                             |  |            

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

4

---

---



OPHIR HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

|                                                        | Note | 2006 | 2005    | 2004
|------------------------------------------------------- | ---- | ---- | ------- | ----
|
|
|
|
|REVENUES AND GAINS:                                     |      |      |         |     
|From lease of buildings                                 |      |      |         |     
|Share in profits (losses) of associated companies - net |      |      | 3       |     
|Gain from sale and increase in value of marketable      |      |     
|securities- net                                         |      |      |         |     
|Gain from sale of other investment                      |      |      |         |     
|Dividend received from other companies                  |      |      |         |     
|Management fees from related parties                    |      |      | 10a     |     
|Financial income - net                                  |      |      | 10a;12f |     
|Others                                                  |      |      |         |     
|                                                        |      |      |         |     
|                                                        |      |      |         |     
|                                                        |      |      |         |     
|EXPENSES AND LOSSES:                                    |      |     
|Operating cost of leased buildings (including           |      |     
|depreciation)                                           |      |      |         |     
|Impairment of investments in associated companies       |      |     
|and other companies                                     |      |      | 3;4     |     
|General and administrative expenses - net               |      |      | 10a     |     
|Loss from sale of investments in associated companies   |      |      |         |     
|Loss (gain) from sale of real estate                    |      |      |         |     
|Financial expenses - net                                |      |      | 10a;12f |     
|Others                                                  |      |      |         |     
|                                                        |      |      |         |     
|                                                        |      |      |         |     
|                                                        |      |      |         |     
|INCOME (LOSS) BEFORE TAXES ON INCOME                    |      |      |         |     
|TAXES ON INCOME (TAX SAVING)                            |      |      | 9c      |     
|                                                        |      |      |         |     
|INCOME (LOSS) AFTER TAXES ON INCOME                     |      |     
|(TAX SAVING)                                            |      |      |         |     
|MINORITY INTEREST SHARE IN LOSSES OF                    |      |     
|A SUBSIDIARY                                            |      |      |         |     
|                                                        |      |      |         |     
|NET INCOME (LOSS) FOR THE YEAR                          |      |      |         |     
|                                                        |      |      |         |     

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

5

---

---



OPHIR HOLDINGS LTD.

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

|                                              | Share
capital | Capital
surplus | Appropriation
for distribution
of dividend
subsequent to
balance sheet
Date | Retained
earnings
(accumulated
deficit) | Total
|--------------------------------------------- | ------------- | --------------- | --------------------------------------------------------------------------- | --------------------------------------- | -----
|
|
|
|
|BALANCE AT JANUARY 1, 2004                    |               |                 |                                                                             | 2,832                                   |      
|CHANGES DURING 2004:                          |               |                
|Net income                                    |               |                 |                                                                             |                                         |      
|Dividend paid                                 |               |                 |                                                                             |                                         |      
|Appropriation for distribution of dividend    |               |                
|subsequent to balance sheet date              |               |                 |                                                                             |                                         |      
|                                              |               |                 |                                                                             |                                         |      
|BALANCE AT DECEMBER 31, 2004                  |               |                 |                                                                             | 2,832                                   |      
|CHANGES DURING 2005:                          |               |                
|loss                                          |               |                 |                                                                             |                                         |      
|Dividend paid                                 |               |                 |                                                                             |                                         |      
|Appropriation for distribution of dividend    |               |                
|subsequent to balance sheet date              |               |                 |                                                                             |                                         |      
|                                              |               |                 |                                                                             |                                         |      
|BALANCE AT DECEMBER 31, 2005                  |               |                 |                                                                             | 2,832                                   |      
|CHANGES DURING 2006:                          |               |                
|loss                                          |               |                 |                                                                             |                                         |      
|Dividend paid, see note 8b                    |               |                 |                                                                             |                                         |      
|Appropriation for distribution of dividend    |               |                
|subsequent to balance sheet date, see note 8c |               |                 |                                                                             |                                         |      
|                                              |               |                 |                                                                             |                                         |      
|BALANCE AT DECEMBER 31, 2006                  |               |                 |                                                                             | 2,832                                   |      
|                                              |               |                 |                                                                             |                                         |      

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

6

---

---



(Continued) - 1

OPHIR HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                   | 2006 | 2005 | 2004
|---------------------------------------------------------------------------------- | ---- | ---- | ----
|
|
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                              |      |      |     
|Net income (loss) for the year                                                     |      |      |     
|Adjustments to reconcile net income (loss) to net cash flows provided by operating |      |     
|activities (a)                                                                     |      |      |     
|                                                                                   |      |      |     
|Net cash provided by operating activities (used in operating activities)           |      |      |     
|                                                                                   |      |      |     
|CASH FLOWS FROM INVESTING ACTIVITIES:                                              |      |     
|Proceeds from sale of investments in other companies                               |      |      |     
|Proceed from sale of Associated Company                                            |      |      |     
|Proceed from sale of leased buildings, net (b)                                     |      |      |     
|Investment in associated companies (including capital notes and loans - net)       |      |      |     
|Investments in other companies                                                     |      |      |     
|Short term investments, net                                                        |      |      |     
|Other                                                                              |      |      |     
|                                                                                   |      |      |     
|Net cash provided by  investing activities                                         |      |      |     
|                                                                                   |      |      |     
|CASH FLOWS FROM FINANCING ACTIVITIES:                                              |      |     
|Repayment of long-term bank loans- net                                             |      |      |     
|Repayment of related party company loan                                            |      |      |     
|Related parties                                                                    |      |      |     
|Dividend paid (b)                                                                  |      |      |     
|Short-term bank credit and loans - net                                             |      |      |     
|                                                                                   |      |      |     
|Net cash used in financing activities                                              |      |      |     
|                                                                                   |      |      |     
|DECREASE IN CASH AND CASH EQUIVALENTS                                              |      |      |     
|BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF                               |      |     
|YEAR                                                                               |      |      |     
|                                                                                   |      |      |     
|BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR                                |      |      |     
|                                                                                   |      |      |     

7

---

---



(Concluded) - 2

OPHIR HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

|    |                                                                       | 2006 | 2005 | 2004
|--- | --------------------------------------------------------------------- | ---- | ---- | ----
|
|
|
|
|(a) | Adjustments to reconcile net income (loss) to net cash flows provided |      |      |     
|    | by operating activities:                                              |      |     
|    | Income and expenses not involving cash flows:                         |      |     
|    | Share in losses (profits) of associated companies - net               |      |      |     
|    | Depreciation                                                          |      |      |     
|    | Deferred income taxes - net                                           |      |      |     
|    | Minority interest in losses of a subsidiary                           |      |      |     
|    | Loss (gain) from sale of fixed assets - net                           |      |      |     
|    | Gain from sale and increase in value of marketable securities - net   |      |      |     
|    | Loss from sale of associated companies                                |      |      |     
|    | Gain from sale of investment  in other company                        |      |      |     
|    | Impairment (reversal of impairment) of investment in associated       |      |     
|    | companies and others - net                                            |      |      |     
|    | Linkage differences on long-term bank loans- net                      |      |      |     
|    | Linkage differences and interest on loans to associated               |      |     
|    | and others companies and accounts receivable of fixed assets          |      |      |     
|    |                                                                       |      |      |     
|    |                                                                       |      |      |     
|    |                                                                       |      |      |     
|    | Changes in operating asset and liability items:                       |      |     
|    | Decrease (increase) in accounts receivable                            |      |      |     
|    | Decrease in accounts payable and accruals                             |      |      |     
|    |                                                                       |      |      |     
|    |                                                                       |      |      |     
|    |                                                                       |      |      |     
|    |                                                                       |      |      |     
|    |                                                                       |      |      |     

|(b) | Additional
information with respect to investing and financing activities not involving
cash flows
|--- | --------------------------------------------------------------------------------------------------

| | a. | Receivables
include amounts of NIS 861,000 and NIS 515,000 that have been deposited in
trust accounts. These amounts relate to the consideration received from the
sale of buildings sold in 2005 and 2003 respectively. These amounts did not
appear in the statements of cash flows for the above-mentioned years, and will
be reflected in the statement of cash flows when the deposits are repaid.
During the course of the reported period, the respective amounts of NIS 6.128
million and NIS 3.309 million were received from the above trust accounts;
these amounts were reflected in the statement of cash flows from investing
activities.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | In
the wake of a resolution by the Board of Directors dated February 15, 2006, the
Company paid a dividend of NIS 55 million during the first quarter of 2006. The
dividend paid was offset against the shareholders outstanding debit
balances.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

8

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED 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. (the Company) is a holding and investment           company.
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.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
subsidiary, New Horizons (1993) Ltd., holds a number of real estates (designated for
sale), which were purchased from a previous related party, see also note 7(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 the Company.
| | ------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Associated company
 | a company controlled to the extent of 20% or over (which is not a subsidiary), or
a company less than 20% controlled which complies with the condition relating to 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.
| | -------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other company  | a company to which the conditions specified in the preceding paragraphs do not
apply.
| | --------------- | -------------------------------------------------------------------------------------

| | The Group
 | the Company, its subsidiaries and its associated companies.
| | ----------- | -----------------------------------------------------------

| | Related parties
 | as defined in Opinion 29 of the Israeli Institute.
| | ----------------- | --------------------------------------------------

| | 3) | Principles
of accounting
| | -- | ------------------------

| | The
consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in Israel (Israeli GAAP). Israeli GAAP vary in certain
significant respects from accounting principles generally accepted in the United States
of America. Information relating to the nature and effect of such differences is
presented in note 13.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

| | b. | Financial
statements presentation basis
| | -- | ---------------------------------------

| | The
company draws up and presents its financial statements in Israeli currency (hereafter
 shekels or NIS), in accordance with the provisions of Israel Accounting Standard
No. 12  Discontinuance of Adjusting Financial Statements for Inflation of
the IASB, which establishes principles for transition to nominal reporting, commencing
January 1, 2004 (hereafter - the transition date). Accordingly, amounts that
relate to non-monetary assets (including depreciation and amortization thereon)/
investments in associated companies / permanent investments/ and equity
items, which originate from the period that preceded the transition date, are based on
the adjusted-for-inflation data (based on the CPI for December 2003), as previously
reported. All the amounts originating from the period after the transition date are
included in the financial statements at their nominal values.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Principles
of consolidation:
| | -- | ----------------------------

| | 1) | The
consolidated financial statements include the accounts of the Company and           its
subsidiaries. The companies included in consolidation are listed in           note 2.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Intercompany
balances and transactions have been eliminated.
| | -- | ------------------------------------------------------------

| | d. | Short
term investments  marketable securities
| | -- | ----------------------------------------------

| | These
securities 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 7(2).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 1) | Associated
companies:
| | -- | ---------------------

| | (a) | The
investments in these companies are accounted for by the equity method. The
          company reviews  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 its investment in associated
companies.The balance of the investment as of December 31, 2006 is presented
net           of a provision for the impairment in value of an associated company, see i.
          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 the amount attributed to land and buildings. The amount attributed to
buildings is amortized in equal annual installments of 4% per year. The above associated
companies were sold during the course of 2005.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

| | 2) | Other
companies
| | -- | ---------------

| | The
investments in the shares of these companies, are stated at cost, net of impairment for
decrease in value, which is not of a temporary nature.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Deferred
income taxes:
| | -- | ----------------------

| | 1) | Deferred
taxes were 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 9b.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
tax balances were 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.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | Revenue
recognition
| | -- | -------------------

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

| | i. | Impairment
of assets:
| | -- | ---------------------

| | The
company reviews  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 fixed assets and identifiable intangibles, including goodwill. When such
indicators of impairment are present, the company evaluates whether the carrying value of
the asset in the companys accounts can be recovered from the cash flows anticipated
from that asset, and, if necessary, records an impairment provision up to the amount
needed to adjust the 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2006 the Company recorded an impairment charge on its investment in other companies of
NIS 452 thousand, see also note 4 (2005  NIS 4,571 thousand).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

11

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

| | j. | Cash
equivalents
| | -- | ----------------

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

| | k. | Loss
per NIS 1 of par value of shares
| | -- | -------------------------------------

| | The
financial statements do not include data regardingloss 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | l. | Format
of income statements
| | -- | ---------------------------

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

| | m. | 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 the basis of the last index published
prior to the latest balance sheet date (the index for November).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n. | 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o. | Dividend
declared subsequent to balance sheet date
| | -- | --------------------------------------------------

| | Liabilities
relating to dividends declared subsequent to balance sheet date are included in the
accounts for the period in which the declaration was made. The amount declared is
appropriated, however, from retained earnings, and reported as a separate item in the
shareholders equity  Dividend declared subsequent to balance sheet date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | p. | Recently
issued accounting pronouncements in Israel:
| | -- | ----------------------------------------------------

| | 1) | Israel
Accounting Standard No. 29  Adoption of International
          Reporting Financial Standards (IFRS)"
| | -- | --------------------------------------------------------------------------------------------------------------

| | In
July 2006, the Israel Accounting Standards Board issued Israel Accounting Standard No. 29
 Adoption of International Reporting Financial Standards (IFRS) (hereafter -
Standard 29). Standard 29 stipulates that companies, which are subject to the Securities
Law, 1968 and are required to report pursuant to regulations issued thereunder,
shall draw up their financial statements under International Financial Reporting Standards
(IFRS)
           with effect from reporting periods commencing on January 1, 2008 (i.e..
          commencing the financial statements for the first quarter of 2008). Pursuant to
          the provisions of Standard 29, such companies and other companies may elect
          early adoption of the Standard, and prepare their financial statements under
          IFRS, commencing with the financial statements that are published subsequent to
          July 31, 2006.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---

---



OPHIR HOLDINGS LTD.NOTESTO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

| | The
standard prescribes that companies, which currently do not draw up their financial
statements under IFRS, and are required or elect, as stated above, to prepare their
financial statements for the first time under IFRS, shall apply the provisions specified
in International Financial Reporting Standard No. 1 (IFRS 1) -
First-Time Adoption of International Financial Reporting Standards in making
the transition. IFRS 1, which deals with first-time transition to reporting under IFRS,
provides that, in the first annual financial statements that are drawn up under IFRS
(including the interim financial statements for that year), all the latest IFRS standards
in effect at the end of the reporting year in which the company reports under IFRS for
the first time, shall be applied retrospectively (with the exception of certain
exemptions and prohibitions, as referred to below). IFRS 1 specifies two groups of
exceptions to the principle of retrospective application: (1) exemptions from
mandatory retrospective application with regard to certain topics, while providing the
option to utilize all or part of those exemptions, and (2) prohibitions concerningmandatory
retrospective application with regard to defined topics. Pursuant to the provisions of
IFRS 1, the first financial statements drawn up under IFRS shall include at least
one years comparative data. Accordingly, a company that draws up its financial
statements under IFRS for the first time for periods commencing after January 1, 2008,
and elects to present comparative data for one year only, shall be required, pursuant to
IFRS 1, to prepare an opening balance sheet as of January 1, 2007, which shall be
drawn up under IFRS. In preparing this opening balance sheet, all the latest IFRS
standards, as referred to above, with regard to recognition, non-recognition,
classification and measurement of all the companys assets, liabilities and
shareholders equity items, shall be applied. IFRS 1 also establishes certain
disclosure requirements that apply to the annual financial statements that are drawn up
for the first time under IFRS. Pursuant to these disclosure requirements, companies
applying IFRS for the first time are required to explain what effect the transition from
the previous generally accepted accounting principles to IFRS has had on the reported
financial position, operating results and cash flows. Also, companies are required to
include notes providing reconciliations of the data reported under the previous
accounting principles, to the data reported under IFRS, in respect of their shareholders equity
and statements of income (loss) as of certain dates and for certain prior periods.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, Standard 29 requires companies, which draw up their financial statements under
IFRS for the first time for periods commencing after January 1, 2008, to disclose, in a
note to their financial statements for 2007, the balance sheet data as of December 31,
2007 and income statement data for the year ended December 31, 2007, as they would
appear after applying IFRS recognition, measurement and presentation rules.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | IFRS
differ from general accounting principles accepted in Israel and, accordingly, financial
statements drawn up under IFRS might reflect a financial position, operating results and
cash flows that are significantly different from those presented in these financial
statements. Application of IFRS requires a proper arrangement from the company,
including making certain decisions relating to the manner of determining assets and
liabilities at the transition date and with regard to setting an accounting policy for
various topics. The company is currently assessing the implications of the transition to
reporting under IFRS, including the date for first-time adoption of IFRS by the company.
At this stage, the company is unable to estimate the effect that the adoption of IFRS
will have on its financial statements
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

| | 2) | Israeli
Accounting Standard No. 23  Accounting Treatment Applied to
          Transactions between an Entity and its Controlling Shareholder.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2006, the IASB issued Accounting Standard No. 23  Accounting
Treatment Applied to Transactions between an Entity and its Controlling Shareholder
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
standard, which does not obligate entities that are not subject to the Securities Law,
1968, provides that assets and liabilities, in respect of which a transaction was carried
out between an entity and its controlling shareholder, shall be measured at the date of
transaction at their fair value, and the difference between fair value and the
consideration set in the transaction shall be carried to shareholders equity.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Those
provisions replace the requirements of the Securities Regulations (Presentation of
Transactions between an Entity and its Controlling Shareholder in Financial Statements),
1996, whereunder, assets transferred as above would be measured at their carrying amount
in the transferors accounts, while the difference between this value and the
consideration set in those transactions is carried to shareholders equity.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the provisions of the standard, in case the difference between fair value and the
consideration arises from a benefit granted by the controlling shareholder to the entity
controlled thereby, the said difference shall be credited to capital surplus within the
entitys shareholders equity; while in case the said difference arises from a
benefit granted by the entity to its controlling shareholder, such difference shall be
carried to the entitys retained earnings.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the difference between the fair value of the asset and its carrying amount in
the transferors accounts shall be recognized as a gain or loss in the transferors
accounts.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the standard, differences as above, arising in the financial statements of an entity as a
result of a transaction with its controlling shareholder, and carried to retained
earnings or capital surplus, shall constitute, from the controlling shareholders
point of view , an owners withdrawal or an owners investment, respectively,
and shall be presented accordingly in the financial statements of the controlling
shareholder.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
standard includes specific provisions pertaining to assets transfers, assuming
liabilities, indemnification and waiver and the grant or receipt of loans. The standard
also sets a hierarchy for the measurement of fair value and includes disclosure
requirements as to the nature and scope of transactions between an entity and its
controlling shareholder, occurring during the reported period, as well as to the effect
of these transactions on the entitys income or loss for the reported period and its
financial position.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

| | The
standard shall apply to all transactions taking place between an entity and its
controlling shareholder, except for a business combination under common control, that
would be carried out subsequent to January 1, 2007. In addition, the standard would apply
to a loan granted to a controlling shareholder or received therefrom, prior to the
abovementioned effective date of the standard; the standard would apply to such a loan
commencing the standards effective date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
this stage, the company is examining the effect of the application of the standard on the
financial statements. In the opinion of the company, the application of the standard is
not expected to have a material effect on the financial statements in the coming periods.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 2 |  | INVESTMENTS IN 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. During 2005
   Merkazim ceased its activity.80%-owned - New Horizons (1993) Ltd. ("New Horizons").
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 3 |  | INVESTMENTS IN ASSOCIATED COMPANIES:
|------ | - | ------------------------------------

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

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

| | (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) | As
of December 2006 the loans are linked to the Israeli CPI, bear interest at
               annual rates of 12% -6.5% and have no fixed maturity date.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | The
changes in the investments in 2006 are as follows:
| | -- | ------------------------------------------------------

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

16

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 3 |  | INVESTMENTS IN ASSOCIATED COMPANIES (continued):
|------ | - | ------------------------------------------------

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

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

| | Mivnat
was established in March 1993 by the Company, 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 NIS 1,053 million. Ophir holds 18.75%
interest in Mivnat directly, and 25% interest jointly with Merkazim.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 31, 1998, Mivnat sold its holdings in Industrial Buildings to its
shareholders (including the Company). Upon the consummation of the transaction, Mivnat
ceased to have any rights in the shares of Industrial Buildings.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2005, the Company realized all of its shares in Industrial Buildings.
| | ----------------------------------------------------------------------------

| | 2) | 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 initially, and there is an option to construct an additional 4,000 square meters at
a later stage. The Companys share in L1 is approximately 25% (its share in the
project being approximately 12.5%). The project commenced in March 2000. As of December 31,
2006 and 2005, the Company invested in L1 approximately NIS 5.5 million.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has also undertaken to provide guarantees in an amount equivalent to 25% of the
construction costs. As of December 31, 2005, the Companys share in the
guarantees refer to the loans made to BHL amounts to approximately NIS 16 million.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
auditors of L1, while not qualifying their opinion on L1s financial statements for
2005, drew attention to the financial position of BHL, whose financial statements
presented a loss of approximately NIS 3.5 million (net of financial expenses in the
amount of NIS 5.6 million) and negative working capital amounting to approximately
NIS 3.7 million at December 31, 2006.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 3 |  | INVESTMENTS IN ASSOCIATED COMPANIES (continued):
|------ | - | ------------------------------------------------

| | In
2006, Laish Coastal Road Ltd. granted Laish Freedom House Ltd. shareholders'   loans
 totaling              approximately NIS 2.6 million (2005 - approximately NIS 2 million).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the course of 2005, the bank agreed to defer the capital repayments for 2005 and to
spread these repayments over a period ending no later than March 31, 2006. The remaining
outstanding balance will become repayable over a seventeen-year period ending on December
31, 2022.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | BHLs
management believes that the execution of the aforementioned arrangements will guarantee
the continuance of BHLs regular operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------

| | In
2004, the Company wrote down its investment in BHL Company by NIS 950,000.
| | -----------------------------------------------------------------------------

|NOTE 4 |  | INVESTMENTS IN OTHER COMPANIES:
|------ | - | -------------------------------

| |                                                             | Consolidated
| | ----------------------------------------------------------- | ------------
|
|
|
|
| | Memadim Investments Ltd. ("Memadim") (a)                    |             
| | Mahalachim Investment in Technology Ltd. ("Mahalachim") (b) |             
| | Others                                                      |             
| |                                                             |             
| |                                                             |             
| |                                                             |             

| | a. | 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. see also
note 7(1).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the course of 2006, the Company recorded a provision for an impairment of investment
which has been occured this year in an amount of NIS 373,000 (2005  NIS 4.571
million).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
July 2006, the Company entered into an agreement with Industrial Structures whereby the
Company assigned to Industrial Structures for a consideration of NIS 1, all of its rights
in Maimadim, including the shareholders loans but excluding its holding in the
shares of that company. It was also agreed that Industrial Structures would take over the
obligation of the Company with respect to the guarantees provided to banks in connection
with the above investment, and would endeavor to persuade the banks to agree to the
proposed change of guarantor (see also note 7(1)). As of the date of the above financial
statements, the procedures for introducing a substitute guaranties had not yet been
completed.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18

---

---



# OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 4 |  | INVESTMENTS IN OTHER COMPANIES (continued):
|------ | - | -------------------------------------------

| | b. | Mahalachim
is a venture capital fund; the Company holds approximately 3.5% of           shares
therein. In 2004, the Company received a dividend in the amount of           NIS 3,255,000
from Mahalachim. The share of the dividend that was carried           to income amounted
to NIS 1,320,000. The balance of the amount was used to           reduce the amount
of the investment.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the reported year, Mahalachim realized its investment in Valor Ltd. for approximately NIS
59.4 million, thereby completing the sale of all its significant shareholdings. In June
2006, the Board of Directors of Mahalachim resolved upon the payment of a dividend of
approximately NIS 36.4 million. The Companys share of this dividend amounted to
approximately NIS 1.3 million, which sum was offset against the cost of the investment in
Mahalachim.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the course of the reported year, the Company made a provision for impairment of value
with respect to the balance of its investment in Mahalachim.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 5 |  | LONG-TERM BANK LOANS:
|------ | - | ---------------------

| | a. | The
loans are linked to the Israeli CPI and bear interest at the annual rate of           4%.
| | -- | ---------------------------------------------------------------------------------------------

| | b. | An early repayment of 26.3 million (the balance of the said loans) was made in
          January and February 2006.
| | -- | -------------------------------------------------------------------------------------------------------------------

|NOTE 6 |  | CAPITAL NOTES:
|------ | - | --------------

| | a. | On
December 31, 1998, the Company 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, 2005 and only on that date. After balance sheet
date, the shareholders of Mivnat decided to extend the repayment date until January 1,
2007. The balance of the capital notes, NIS 250,000 par value, is repayable annually
under the terms stipulated in the agreement.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | On
December 31, 1998 and on June 30, 2004, the Company issued capital
          notes to its subsidiary with a par value of NIS 37,769,000 and
          NIS 25,409,000, respectively. The capital notes are unlinked and
          interest-free, and are repayable at par, upon demand, on January 1, 2005
          and only on that date. After balance sheet date, the shareholders of Merkazim
          decided to extend the repayment date until January 1, 2007.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | In
2002, the subsidiary New Horizons issued capital notes with a par value of           NIS 119,000
and NIS 1,069,000 to the Company and the minority           shareholder in the
subsidiary, respectively. the Company and the minority           shareholder in the
subsidiary are entitled to receive from New Horizons the           principal of the note,
without interest or linkage, this after a period of not           less than one year.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 7 |  | COMMITMENTS, PLEDGES AND LIMITATIONS IN RESPECT OF LIABILITIES:
|------ | - | ---------------------------------------------------------------

| | 1) | The
Company has undertaken to invest in Memadim (see note 4b) approximately 10%           of
the cost of land and construction 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. As of December 31, 2006, the Company had provided guarantees totaling
          approximately NIS 9 million in respect of bank loans made available to
          Maimadim. With respect to the assignment of the rights in Maimadim, including
          the shareholders loans made to that company, to Industrial Structures,
and           the removal of the Company from the list of guarantors, see note 4b.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | In
December 1996, the subsidiary New Horizons acquired real estate (designated
               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.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 4, 2005, the subsidiary was granted an irrevocable option to sell all the rights
in the real estate inventory that it owns for a consideration of 17,330 thousands dollar.
The option period is limited to June 15, 2006. The subsidiary had not exercised the
option granted to it.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | As
to the Companys commitment to grant guarantees to BHL, see note 3c(2).
| | -- | --------------------------------------------------------------------------

| | 4) | The
Company 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 10.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 8 |  | SHARE CAPITAL:
|------ | - | --------------

| | a. | Composed
at December 31, 2006 and 2005 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.
| | - | -------------------------------------------------------------------------------------------------------------------

| | b. | In
February 2005 the Companys board of directors resolved to distribute           its
shareholders the balance of the shares of Industrial Buildings (amounting to
          NIS 80,930 thousands) as a dividend in kind. Also, the Company distributed its
          shareholders a cash dividend of NIS 9,990 thousands.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Also,
on October 16, 2005, the Companys board of directors resolved to distribute the
shareholders a dividend in the total amount of NIS 82 million. For the purpose of
distributing this dividend, the Company requested the Court to approve a deduction of
capital for the Company in an amount of up to NIS 64 million. On November 29, 2005, the
Court approved the said request.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
a later date, in order to clarify the board of directors resolution dated October
16, 2005 and the Companys shareholders resolution dated November 6, 2005 to
approve a certain amount out of which the Company would distribute its shareholders a
dividend in the total amount of up to NIS 82 million for the years 2005 and 2006 and in
light of the Tel-Aviv District Courts resolution to approve a distribution of
dividend that does not meet the criteria of the profit test as required under
Section 303 of the Companies Law, 1999 and also since in December 2005 the owners of the
Company resolved that the declaration and distribution of the dividend will take place in
2005 and 2006, the board approved in February 2006 the declaration and distribution of
dividend to the shareholders, as follows: a total of NIS 20 million paid in cash on
December 28, 2005 and a total of NIS 55 million on January 8, 2006.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | On
January 17, 2007, the Companys Board of Directors approved the payment           of
a dividend of approximately NIS 10.3 million. In connection with the payment           of
this dividend, the Company applied for the consent of the court to a capital
          reduction of approximately NIS 10 million (under Section 302 of the Companies
          Law, the Company was, in any event, entitled to pay a dividend out of capital
of           NIS 0.3 million). On February 27, 2007, the court issued its consent to the
          reduction of capital.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 9 |  | TAXES ON INCOME:
|------ | - | ----------------

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

| | Under
the inflationary adjustments law, results for tax purposes are measured in real terms,
having regard to the changes in the Israeli CPI. The Company and its Israeli subsidiaries
are taxed under the inflationary adjustments law.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| |                                             | Depreciablefixed assets
| | ------------------------------------------- | -----------------------
|
|
|
|
| | Balance at January 1, 2005                  |                        
| | Changes in 2005 - amounts carried to income |                        
| |                                             |                        
| | Balance at December31, 2005                 |                        
| |                                             |                        

| | Deferred
taxes are presented in the balance sheets as long-term liabilities.
| | ----------------------------------------------------------------------------

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

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

| |                                        | 2006 | 2005 | 2004
| | -------------------------------------- | ---- | ---- | ----
|
|
|
|
| | In respect of the reported year-       |      |      |     
| | Deferred, see also b. above            |      |      |     
| |                                        |      |      |     
| |                                        |      |     
| | In respect of previous years - current |      |      |     
| |                                        |      |      |     
| |                                        |      |      |     
| |                                        |      |      |     

| | For
tax rates amendment see (e) below.
| | --------------------------------------

22

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 9 |  | 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:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                           | 2006 | 2005 | 2004
| | ------------------------------------------------------------------------- | ---- | ---- | ----
|
|
|
|
| | Income (loss) before taxes on income as reported in the income statements |      |      |     
| | Add (less) - share in profits of associated companies - net               |      |      |     
| |                                                                           |      |      |     
| | B a l a n c e  - income (loss)                                            |      |      |     
| |                                                                           |      |      |     
| | Theoretical tax expense (tax saving)                                      |      |      |     
| | Increase (decrease) in taxes resulting from permanent                     |      |     
| | differences - the tax effect:                                             |      |     
| | Disallowable deductions (exempt income)                                   |      |      |     
| | Differences for which deferred taxes                                      |      |     
| | were not created, net                                                     |      |      |     
| | Taxes on income subject to different rates -                              |      |     
| | dividends received from other companies                                   |      |      |     
| | Taxes in respect of previous years                                        |      |      |     
| | Difference between the basis of measurement                               |      |     
| | of income reported for tax purposes and                                   |      |     
| | the basis of measurement of income for                                    |      |     
| | financial reporting purposes - net                                        |      |      |     
| | Sundry - net                                                              |      |      |     
| |                                                                           |      |      |     
| | Taxes on income (tax saving) for the reported year                        |      |      |     
| |                                                                           |      |      |     

| | d. | Tax
assessments
| | -- | ---------------

| | The
Company has received final assessments through tax year 2001.
| | -----------------------------------------------------------------

| | Subsidiaries:
| | -------------

| | Merkazim
 final assessments has been received through tax year 2003.New Horizons assessments
that are considered as final through tax year 2001.Ophir Financing Ltd.  assessments
that are considered as final through tax year 2001.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Tax
rates
| | -- | ---------

| | The
Companys income in Israel is subject to the regular corporate tax rate; until
December 31, 2003, a corporate tax rate of 36% was applied. In July 2004, an
Amendment to the Income Tax Ordinance was published, which determined, inter alia, that
the rate of corporate tax will be gradually reduced from 36% to 30%, in the following
manner: the rate for 2004 will be 35%, in 2005  34%, in 2006  32%, and in
2007 and thereafter  30%.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
August 2005, a further amendment (No. 147) was published, which makes a further
revision to the corporate tax rates prescribed by Amendment No. 140. As a result of
the aforementioned amendments, the corporate tax rates for 2004 and thereafter are as
follows: 2004  35%, 2005  34%, 2006  31%, 2007  29%, 2008 27%,
2009  26% and for 2010 and thereafter  25%.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

23

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 10 |  | TRANSACTIONS AND BALANCES WITH RELATED PARTIES:
|------- | - | -----------------------------------------------

| | a. | Transactions
with related parties:
| | -- | ----------------------------------

| |                                                | 2006 | 2005 | 2004
| | ---------------------------------------------- | ---- | ---- | ----
|
|
|
|
| | Income (expenses):                             |      |      |     
| | Linkage differences on short- term  loans to   |      |     
| | related party company                          |      |      |     
| |                                                |      |      |     
| | Financial income on loan to shareholders       |      |     
| | and associated companies                       |      |      |     
| |                                                |      |      |     
| | Management fees                                |      |      |     
| |                                                |      |      |     
| | General and administrative expenses included - |      |     
| | Management fees to shareholder                 |      |      |     
| |                                                |      |      |     

| | As
to other transactions with, and commitments to, interested parties, see note 7.
| | ----------------------------------------------------------------------------------

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

| | 1) | Receivables:
| | -- | ------------

| |                                                               | December 31
| | ------------------------------------------------------------- | -----------
|
|
|
|
| | a)  Loan to a corporate interested party (1)                  |            
| |                                                               |            
| | b)  Long-term receivables - loans to associated companies (2) |            
| |                                                               |            
| | c)  Shareholders - current accounts                           |            
| |                                                               |            

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

| | During
the reported year, the Company repaid approximately NIS 7.3 million to the interested
party.
| | ---------------------------------------------------------------------------------------------------

| | (2) | The
loans are linked to the Israeli CPI and bear annual interest at the rate of           12%
 6.5%.
| | --- | -----------------------------------------------------------------------------------------------------

| | As
to current balances with associated and other companies, see note 12a.
| | -------------------------------------------------------------------------

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

24

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 11 |  | LINKAGE OF MONETARY BALANCES:
|------- | - | -----------------------------

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

| |                                     | December 31, 2006
| | ----------------------------------- | -----------------
|
|
|
|
| | Assets:                             |                  
| | Current assets:                     |                  
| | Cash and cash equivalents           |                  
| | Accounts receivable                 |                  
| | Loan to a related party             |                  
| | Long-term loans to associated       |                  
| | companies                           |                  
| |                                     |                  
| |                                     |                  
| |                                     |                  
| | Liabilities:                        |                  
| | Current liabilities:                |                  
| | Accounts payable and accruals       |                  
| | Long-term liabilities:              |                  
| | Capital notes to associated company |                  
| | Capital note to an interested party |                  
| | Acquisition of land - business      |                  
| | inventory                           |                  
| |                                     |                  
| |                                     |                  
| |                                     |                  

| | b. | Data
regarding the exchange rate and the Israeli CPI:
| | -- | -----------------------------------------------------

| |                                      | Exchange rate
of one dollar | Israeli
CPI* 
| | ------------------------------------ | --------------------------- | -------------
|
|
|
|
| | At end of year:                      |                             |              
| | 2006                                 | NIS 4.225                   | 184.87 points
| | 2005                                 | NIS 4.603                   | 185.1 points 
| | 2004                                 | NIS 4.308                   | 180.7 points 
| |                                     
| | Increase (decrease) during the year:
| | 2006                                 | (8.2)%                      | (0.1)%       
| | 2005                                 | 6.8%                        | 2.4%         
| | 2004                                 | (1.6)%                      | 1.2%         

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

25

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 12 |  | SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:
|------- | - | ----------------------------------------------

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

| |    |  | December 31
| | -- |  | -----------
|
|
|
|
| | a. |  |            
| |    |  |            
| |    |  |            
| |    |  |            
| |    |  |            
| |    |  |            
| |    |  |            
| |    |  |            
| | b. |  |            
| |    |  |            
| |    |  |            
| |    |  |            
| |    |  |            
| |    |  |            
| |    |  |            
| | c. |  |            
| |    |  |            
| |    |  |            
| |    |  |            
| |    |  |            
| |    |  |            
| |    |  |            

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

| | The
Groups cash and cash equivalents and short-term investments at December 31,
2006 and 2005 are deposited with Israeli banks. The Company is of the opinion that the
credit risk in respect of these balances is remote.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. The
determination of the fair value of the capital notes to an associated company and a
subsidiary and long-term liabilities in respect of acquisition of land  business
inventory is not practical.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

26

---

---



OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 12 |  | SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION(continued):
|------- | - | ---------------------------------------------------------

| | f. | Financial
expenses (income)  net:
| | -- | ----------------------------------

| |                                              | 2006 | 2005 | 2004
| | -------------------------------------------- | ---- | ---- | ----
|
|
|
|
| | Financial expenses:                          |      |      |     
| | In respect of loan to a related party        |      |      |     
| | In respect of long-term loans                |      |      |     
| | In respect of short-term bank credit         |      |      |     
| | Other                                        |      |      |     
| |                                              |      |      |     
| |                                              |      |      |     
| |                                              |      |      |     
| | Financial income:                            |      |     
| | In respect of bank deposits and others       |      |      |     
| | Financial income on loan to shareholders     |      |      |     
| | In respect of loans to a related party       |      |      |     
| | In respect of short-term loans to associated |      |     
| | companies                                    |      |      |     
| | Assigned interest and linkage differences    |      |     
| | and other                                    |      |      |     
| |                                              |      |      |     
| |                                              |      |      |     
| |                                              |      |      |     
| |                                              |      |      |     
| |                                              |      |      |     
| |                                              |      |      |     

|NOTE 13 |  | 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, through December 31, 2003, the Company comprehensively
included 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 past inflation
in Israel, this was considered a more meaningful presentation than financial reporting
based on historical cost.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
US GAAP Israel is not considered to be a highly inflationary country, thus the
measurement currency should be in nominal NIS. 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

27

---

---

OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE13 |  | EFFECT OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN
ISRAEL AND IN THE U.S.A.:
|------ | - | ------------------------------------------------------------------------------------------------------------

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

| | In
accordance with Israeli GAAP, since the Companys intent was to hold some of the
investment as an investment for a long period, it was partly stated at cost, net of
impairment for decrease in value, which was other than temporary decline in their value.
During 2005 the company sold its investment.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
U.S. GAAP, this investment was classified as an investment in available for sale and was
reported at fair value with unrealized gains and losses, recorded as a separate component
of other comprehensive income (loss) in shareholders equity until realized in 2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| |                                          | 2006 | 2005 | 2004
| | ---------------------------------------- | ---- | ---- | ----
|
|
|
|
| | 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                      |      |      |     
| | Reversal of the adjustment due to        |      |     
| | Marketable securities- available         |      |     
| | for sale                                 |      |      |     
| | Other                                    |      |      |     
| |                                          |      |      |     
| | Net income under U.S. GAAP               |      |      |     
| |                                          |      |      |     

28

---

---

OPHIR HOLDINGS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 13 |  | EFFECT OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN
ISRAEL AND IN THE U.S.A.:
|------- | - | ------------------------------------------------------------------------------------------------------------

| | 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                                   |             
| | Other                                            |             
| |                                                  |             
| | Shareholders' equity under U.S. GAAP             |             
| |                                                  |             
| |                                                  |             

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

| |                                       | 2006 | 2005 | 2004
| | ------------------------------------- | ---- | ---- | ----
|
|
|
|
| | Net income as reconciled to           |      |      |     
| | U.S. GAAP, see above                  |      |      |     
| | Other comprehensive income - gains    |      |     
| | not reported (previously reported) in |      |     
| | the income statements -               |      |     
| | unrealized (realized) gains on        |      |     
| | marketable securities                 |      |      |     
| |                                       |      |      |     
| | Comprehensive income under U.S. GAAP  |      |      |     
| |                                       |      |      |     

29

---

---



OPHIRTECH LTD.(An Israeli Corporation)
2005 ANNUAL REPORT



---

---



OPHIRTECH LTD.

2005 ANNUAL REPORT

TABLE OF CONTENTS

|                                                     |     
|---------------------------------------------------- | ----
|                                                     | Page
|REPORT OF INDEPENDENT AUDITORS                       | 2   
|FINANCIAL STATEMENTS  IN 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                        | 7-19

|
|
|
|

---

---



REPORT OF
INDEPENDENT AUDITORS

To the
shareholders of

OPHIRTECH LTD.

We have audited the financial statements of Ophirtech Ltd. (hereafter -
the Company): balance sheets as of December 31, 2005 and 2004 and the related
statements of income, changes in shareholders equity and cash flows for the
three years ended December 31, 2005. 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 the standards of the Public Company Accounting
Oversight Boards (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 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,
2005 and 2004 and the results of operations and cash flows of the Company for
the three years ended December 31, 2005, in conformity with accounting
principles generally accepted in Israel.

As explained
in note 1b, the financial statements, as of dates and
for reporting periods subsequent to December 31, 2003, are presented in new
Israeli shekels, in conformity with accounting standards issued by the Israel
Accounting Standards Board. The financial statements as of dates and for
reporting periods ended prior to, or on, the above date are presented in values
that have been adjusted for the changes in the general purchasing power of the
Israeli currency through that date, 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 relating to the nature and effect of such differences is presented
in note 7 to the financial statements.

|                   |  |                                    
|------------------ |  | -----------------------------------
|Tel-Aviv,
  Israel |  | Kesselman & Kesselman              
|March 27, 2006     |  | Certified Public Accountants (Isr.)

2

---

---



OPHIRTECH LTD.

BALANCE SHEETS

|                                     |  |  |        |  |                                  |        |      |  |        | 
|------------------------------------ |  |  | ------ |  | -------------------------------- | ------ | ---- |  | ------ | 
|                                     |  |  |        |  | December 31                      |       
|                                     |  |  |        |  |                                  |       
|                                     |  |  | Note   |  | 2005                             |        | 2004 | 
|                                     |  |  |        |  |                                  |        |      | 
|                                     |  |  |        |  | NIS in thousands
  (see note 1b) |       
|                                     |  |  |        |  |                                  |       
|A s s e t s                          |  |  |        |  |                                  |        |      |  |        | 
|                                     |  |  |        |  |                                  |        |      |  |        | 
|CURRENT ASSETS:                      |  |  |        |  |                                  |        |      |  |        | 
|Cash                                 |  |  |        |  |                                  | 151    |      |  | 811    | 
|Government                           |  |  |        |  |                                  | 28     |      |  | 49     | 
|                                     |  |  |        |  |                                  |        |      |  |        | 
|T o t a l  current
  assets          |  |  |        |  |                                  | 179    |      |  | 860    | 
|                                     |  |  |        |  |                                  |        |      |  |        | 
|INVESTMENTS IN COMPANIES             |  |  | 1c ; 2 |  |                                  | 32,809 |      |  | 36,063 | 
|                                     |  |  |        |  |                                  |        |      |  |        | 
|                                     |  |  |        |  |                                  | 32,988 |      |  | 36,923 | 
|                                     |  |  |        |  |                                  |        |      |  |        | 
|Liabilities and shareholders equity |  |  |        |  |                                  |        |      |  |        | 
|                                     |  |  |        |  |                                  |        |      |  |        | 
|CURRENT LIABILITIES:                 |  |  | 6a(2)  |  |                                  |        |      |  |        | 
|Short-term credit:                   |  |  |        |  |                                  |        |      |  |        | 
|From bank credit                     |  |  | 6a     |  |                                  |        |      |  | 966    | 
|From shareholders                    |  |  |        |  |                                  | 4,125  |      |  | 4,267  | 
|Loan from a related party            |  |  | 6b     |  |                                  | 8,306  |      |  | 8,114  | 
|Accounts payable and accruals        |  |  |        |  |                                  |        |      |  | 23     | 
|                                     |  |  |        |  |                                  |        |      |  |        | 
|T o t a l  current liabilities       |  |  |        |  |                                  | 12,431 |      |  | 13,370 | 
|SHAREHOLDERS EQUITY                 |  |  | 3      |  |                                  | 20,557 |      |  | 23,553 | 
|                                     |  |  |        |  |                                  |        |      |  |        | 
|                                     |  |  |        |  |                                  | 32,988 |      |  | 36,923 | 
|                                     |  |  |        |  |                                  |        |      |  |        | 

|              |   |          
|------------- | - | ---------
|              | ) |          
|              |   |          
|Avi Israel    | ) |          
|              | ) | DIRECTORS
|              | ) |          
|              |   |          
|Shlomo Shalev | ) |          

Date
of approval of the financial statements: March 27, 2006

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

3

---

---



OPHIRTECH LTD.

STATEMENTS OF OPERATIONS

|                                              |  |                                |       |      |  |      |  |  |       | 
|--------------------------------------------- |  | ------------------------------ | ----- | ---- |  | ---- |  |  | ----- | 
|                                              |  | 2005                           |       | 2004 |  | 2003 | 
|                                              |  |                                |       |      |  |      | 
|                                              |  | NIS in thousands (see note 1b) |      
|                                              |  |                                |      
|WRITE-DOWN OF INVESTMENTS IN COMPANIES, net   |  |                                | 2,814 |      |  |      |  |  | 1,239 | 
|GENERAL AND ADMINISTRATIVE EXPENSES (note 6e) |  |                                | 34    |      |  | 3    |  |  | 251   | 
|FINANCIAL EXPENSES  net                      |  |                                | 148   |      |  | 139  |  |  | 416   | 
|CAPITAL LOSS ON SALE OF FIXED ASSETS          |  |                                |       |      |  |      |  |  | 2     | 
|                                              |  |                                |       |      |  |      |  |  |       | 
|LOSS FOR THE YEAR                             |  |                                | 2,996 |      |  | 142  |  |  | 1,908 | 
|                                              |  |                                |       |      |  |      |  |  |       | 

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

4

---

---



OPHIRTECH LTD.

STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

|                             |  |                                |   |                                                    |  |                       |  |       |          |   |  |        |  
|---------------------------- |  | ------------------------------ | - | -------------------------------------------------- |  | --------------------- |  | ----- | -------- | - |  | ------ | -
|                             |  | Share
  capital                |   | Receipts on
  account
  of shares
  to be allotted |  | Accumulated
  deficit |  | Total |         
|                             |  |                                |   |                                                    |  |                       |  |       |         
|                             |  | NIS in thousands (see note 1b) |  
|                             |  |                                |  
|                            
|BALANCE AT JANUARY 1, 2003   |  |                                | 1 |                                                    |  | 137,622               |  |       | (112,019 | ) |  | 25,603 |  
|                            
|CHANGES DURING 2003 - loss   |  |                                |   |                                                    |  |                       |  |       | (1,908   | ) |  | (1,908 | )
|                             |  |                                |   |                                                    |  |                       |  |       |          |   |  |        |  
|BALANCE AT DECEMBER 31, 2003 |  |                                | 1 |                                                    |  | 137,622               |  |       | (113,927 | ) |  | 23,695 |  
|                            
|CHANGES DURING 2004 - loss   |  |                                |   |                                                    |  |                       |  |       | (142     | ) |  | (142   | )
|                             |  |                                |   |                                                    |  |                       |  |       |          |   |  |        |  
|BALANCE AT DECEMBER 31, 2004 |  |                                | 1 |                                                    |  | 137,622               |  |       | (114,069 | ) |  | 23,553 |  
|                            
|CHANGES DURING 2005 - loss   |  |                                |   |                                                    |  |                       |  |       | (2,996   | ) |  | (2,996 | )
|                             |  |                                |   |                                                    |  |                       |  |       |          |   |  |        |  
|BALANCE AT DECEMBER 31, 2005 |  |                                | 1 |                                                    |  | 137,622               |  |       | (117,065 | ) |  | 20,557 |  
|                             |  |                                |   |                                                    |  |                       |  |       |          |   |  |        |  

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

5

---

---



OPHIRTECH LTD.

STATEMENTS OF CASH FLOWS

|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|--------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | ---- |  | ----- | - |  | ------ | -
|                                                                                              |  | 2005                           |        | 2004 |  | 2003  |  
|                                                                                              |  |                                |        |      |  |       |  
|                                                                                              |  | NIS in thousands (see note 1b) |       
|                                                                                              |  |                                |       
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                         |  |                                |        |      |  |       |   |  |        |  
|Loss for the year                                                                             |  |                                | (2,996 | )    |  | (142  | ) |  | (1,908 | )
|Adjustments to reconcile net loss to net
  cash provided by (used in) operating activities*   |  |                                | 3,004  |      |  |       |   |  | 714    |  
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|Net cash provided by (used in) operating
  activities                                         |  |                                | 8      |      |  | (142  | ) |  | (1,194 | )
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                         |  |                                |        |      |  |       |   |  |        |  
|Proceeds from disposal of investments                                                         |  |                                | 1,746  |      |  | 1,699 |   |  |        |  
|Investment in companies                                                                       |  |                                | (1,306 | )    |  |       |   |  | (3,089 | )
|Proceeds from sale of fixed assets                                                            |  |                                |        |      |  |       |   |  | 70     |  
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|Net cash provided by (used in) investing
  activities                                         |  |                                | 440    |      |  | 1,699 |   |  | (3,019 | )
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                         |  |                                |        |      |  |       |   |  |        |  
|Short-term credit loans from shareholders -
  net                                             |  |                                | (142   | )    |  | 101   |   |  | 4,166  |  
|Increase in short term loan from a related
  party                                            |  |                                |        |      |  |       |   |  | 191    |  
|Short-term bank credit                                                                        |  |                                | (966   | )    |  | (873  | ) |  | (124   | )
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|Net cash provided by (used in) financing
  activities                                         |  |                                | (1,108 | )    |  | (772  | ) |  | 4,233  |  
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                            |  |                                | (660   | )    |  | 785   |   |  | 20     |  
|BALANCE OF CASH AND CASH EQUIVALENTS AT
  BEGINNING OF YEAR                                   |  |                                | 811    |      |  | 26    |   |  | 6      |  
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|BALANCE OF CASH AND CASH EQUIVALENTS AT END
  OF YEAR                                         |  |                                | 151    |      |  | 811   |   |  | 26     |  
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|* Adjustments to reconcile net loss to net
  cash provided by (used in) operating activities: |  |                                |        |      |  |       |   |  |        |  
|Expenses not involving cash flows:                                                            |  |                                |        |      |  |       |   |  |        |  
|Depreciation                                                                                  |  |                                |        |      |  |       |   |  | 7      |  
|Write-down of investments in companies,
net                                                   |  |                                | 2,814  |      |  |       |   |  | 1,239  |  
|Capital loss on sale of fixed assets                                                          |  |                                |        |      |  |       |   |  | 2      |  
|Linkage differences of a loan from a
  related party                                          |  |                                | 192    |      |  |       |   |  | 165    |  
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|                                                                                              |  |                                | 3,006  |      |  |       |   |  | 1,413  |  
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|Changes in operating asset and liability
  items:                                             |  |                                |        |      |  |       |   |  |        |  
|Decrease (increase) in accounts
receivables                                                   |  |                                | 21     |      |  |       |   |  | (33    | )
|Decrease in accounts payable and accruals                                                     |  |                                | (23    | )    |  |       |   |  | (666   | )
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|                                                                                              |  |                                | (2     | )    |  |       |   |  | (699   | )
|                                                                                              |  |                                |        |      |  |       |   |  |        |  
|                                                                                              |  |                                | 3,004  |      |  |       |   |  | 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.                                                                                      | General:                                                                                                        
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                         | 1)                                                                                                               | Ophirtech
  Ltd. (the Company), invests in start-up companies in various stages of
  development, from newly established enterprises to companies that have reached
  advanced development stage.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                         |                                                                                                                  | On March 30,
  2000, the Company purchased investments in high-tech companies engaged in
  various fields of activity (communications, software, security, etc.) from
  Ophir Holdings Ltd. (Ophir Holdings), which at that time was a company
  under common control, for approximately adjusted NIS 76 million. The
  difference between the proceeds and the carrying value of those investments
  on the books of Ophir Holdings was carried to the Companys accumulated
  deficit, in accordance with the Israeli Securities (Presentation in Financial
  Reports of Acts between Body Corporate and its Controlling Member)
  Regulations, 1996.
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                         | 2)                                                                                                               | Related
  parties - as defined in Opinion 29 of the Israeli Institute.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                         | 3)                                                                                                               | Principles
  of accounting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                         |                                                                                                                  | The
  financial statements have been prepared in accordance with accounting
  principles generally accepted in Israel (Israeli GAAP). Israeli GAAP vary in
  certain significant respects from accounting principles generally accepted in
  the United States of America. Information relating to the nature and effect
  of such differences is presented in note 7.                                                                                                                                                                                                                                                                                   
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           | b.                                                                                      | Financial statements presentation basis:                                                                        
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                         | The company
  draws up and presents its financial statements in Israeli currency (hereafter
  - shekels or NIS).
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                         | 1)                                                                                                               | Transition
  to nominal financial reporting in 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                         |                                                                                                                  | With effect
  from January 1, 2004, the company has adopted the provisions of Israel
  Accounting Standard No. 12 Discontinuance of Adjusting Financial Statements
  for Inflation  of the Israel Accounting Standards Board (hereafter the
  IASB) and, pursuant thereto, the company has discontinued, from the aforesaid
  date, the adjustment of its financial statements for the effects of inflation
  in Israel.                                                                                                                                                                                                                            
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                         |                                                                                                                  | The amounts
  adjusted for the effects of inflation in Israel, presented in the financial
  statements as of December 31, 2003 (hereafter  the transition date), were
  used as the opening balances for the nominal financial reporting in the
  following periods. Additions made after the transition date have been
  included in the financial statements at their nominal values.                                                                                                                                                                                                                                                               
|           |                                                                                         |                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                                                                         |                                                                                                                  | Accordingly,
  the amounts reported for 2003, as well as reported amounts for subsequent                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

7

---

---



OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

|           |                                              |                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---------- | -------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES (continued):
|           |                                              |                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           | b.                                           | Financial statements presentation basis (continued):                                                                                                                                                                                                      
|           |                                              |                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                              |                                                                                                                                                                                                                                                            | periods,
  that relate to non-monetary assets including permanent investment and
  equity items,
  which originate from the period that preceded the transition date, are based
  on the adjusted-for-inflation data (based on the CPI for December 2003), as
  previously reported. All the amounts originating from the period after the
  transition date are included in the financial statements at their nominal
  values.                                                                                                                                   
|           |                                              |                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                              |                                                                                                                                                                                                                                                            | Through
  December 31, 2003, the company prepared its financial statements on the basis
  of historical cost adjusted for the changes in the general purchasing power
  of Israeli currency (NIS), based upon changes in the consumer price index
  (hereafter  the CPI), in accordance with pronouncements of the Institute of
  Certified Public Accountants in Israel (hereafter  the Israeli Institute).                                                                                                                                                     
|           |                                              |                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                              |                                                                                                                                                                                                                                                            | In 2003, the
  components of the income statements were, for the most part, adjusted as
  follows: the components relating to transactions carried out during the
  reported period 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 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 amounts
  of non-monetary assets do not necessarily represent realization value or
  current economic value, but only the reported amounts of such assets, as
  described in (1) above. In these financial statements, the term cost
  signifies cost in reported amounts.                                                                                                                                                                                                                                                                                     
|           |                                              |                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           | c.                                           | Investments in companies                                                                                                                                                                                                                                  
|           |                                              |                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                              | The
  investments in the shares of these companies are presented at cost net of
  write down for decrease in value, which is not of a temporary nature.                                                                                                   
|           |                                              |                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                              | The Company
  performs from time to time fair value evaluations of its investments in
  start-up and development companies and includes, when necessary, a write-down
  for decrease in value which is not of a temporary nature, see also d.
  hereafter.

8

---

---



OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---------- | -------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES (continued):
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           | d.                                           | Impairment of assets:                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                              | 1)                                                                                                                                                                                                                                                                                                                                                                                                                                                              | The company
  reviews - 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 fixed assets and identifiable intangibles. When
  such indicators of impairment are present, the company evaluates whether the
  carrying value of the asset in the companys accounts can be recovered from
  the cash flows anticipated from that asset, and, if necessary, records an
  impairment provision up to the amount needed to adjust the 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.                                                                                                                                                                                                                                
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                              | 2)                                                                                                                                                                                                                                                                                                                                                                                                                                                              | During 2005,
  the company has written-down its investments in companies in the total amount
  of 2,814 thousands NIS (2004- NIS 0; 2003- NIS 1,239 in thousand).                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           | e.                                           | 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.                                                                                                                                                                                                                                
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           | f.                                           | 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).                                                                                                                                                                                                                       
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           | g.                                           | 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.

9

---

---



OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

|           |                                              |                                                      
|---------- | -------------------------------------------- | -----------------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES (continued):
|           |                                              |                                                      
|           | h.                                           | Data regarding the exchange rate and the Israeli CPI:

| |                                                                                                               |  |                                      |  |                | 
| | ------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ |  | -------------- | 
| |                                                                                                               |  | Exchange
  rate of one
  U.S. dollar |  | Israeli
  CPI* | 
| |                                                                                                               |  |                                      |  |                | 
| | At end of
  year:                                                                                             |  |                                      |  |                | 
| | 2005                                                                                                          |  | NIS 4.603                            |  | 185.05 points  | 
| | 2004                                                                                                          |  | NIS 4.308                            |  | 180.74 points  | 
| | 2003                                                                                                          |  | NIS 4.379                            |  | 178.58 points  | 
|
| | Increase
  (decrease) during:                                                                                 |  |                                      |  |                | 
| | 2005                                                                                                          |  | 6.8%                                 |  | 2.4%           | 
| | 2004                                                                                                          |  | (1.6%)                               |  | 1.2%           | 
| | 2003                                                                                                          |  | (7.6%)                               |  | (1.9%)         | 
| |                                                                                                               |  |                                      |  |                | 
| | * Based on
  the index for the month ending on each balance sheet date, on the basis of 1993
  average = 100.

| |    |                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | ---------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | i. | Recently issued accounting pronouncements in Israel:
| |    |                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | 1)                                                   | In August
  2005, the Israel Accounting Standards Board issued Israel Accounting Standard
  No. 22  Financial Instruments: Disclosure and Presentation, which is based
  on International Accounting Standard No. 32. This standard prescribes the
  rules for the presentation of financial instruments and the proper disclosure
  required therefor. The standard sets forth the rules for classifying
  financial instruments, the rules for splitting and classifying compound
  financial instruments and the rules for offsetting financial assets and
  financial liabilities. The standard also prescribes the rules for classifying
  interest, dividends, losses and gains relating to financial instruments. This
  accounting standard applies to financial statements for periods commencing on
  or after January 1, 2006. The standard is to be applied prospectively and,
  accordingly, comparative data that are presented in the financial statements
  for periods commencing from the effective date of the standard will not be
  re-presented. Financial instruments issued before the standards effective
  date are to be classified and presented in conformity with the provisions of
  the standard from its effective date. Compound financial instruments (that
  include both an equity component and a liability component), which were
  issued in periods prior to the standards effective date, and which had not
  yet been converted or redeemed at that date, are to be classified according
  to their component parts and are to be presented in conformity with the
  provisions of the standard, commencing from the effective date of the
  standard.
| |    |                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                      | When the
  standard becomes effective, the Israeli institutes Opinion 48  Accounting
  Treatment of Option Warrants, and Opinion 53  Accounting Treatment of
  Convertible Liabilities will be revoked.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

10

---

---



OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

|           |                                              |                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|---------- | -------------------------------------------- | ---------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES (continued):
|           |                                              |                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           | i.                                           | Recently issued accounting pronouncements in Israel (continued):
|           |                                              |                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                              |                                                                  | In the
  Companys opinion, implementation of this standard is not expected to have a
  material effect on its financial statements in future periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                              |                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                              | 2)                                                               | In February
  2006, the IASB issued Israel Accounting Standard No. 25 - Revenue, which is
  based on International Accounting Standard No. 18. This standard prescribes
  recognition, measurement, presentation and disclosure criteria for revenues
  originating from the sale of goods purchased or manufactured by the company,
  the provision of services, as well as revenues deriving from the use of the
  companys assets by others (interest income, royalties or dividends).                                                                                                                                                                                                                                                                   
|           |                                              |                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                              |                                                                  | The
  principal issue in accounting for revenue is determining the timing of
  revenue recognition. Revenue from the sale of goods shall be recognized when
  all the following conditions have been satisfied: (a) the significant risks
  and rewards of ownership of the goods have been transferred to the buyer; (b)
  the company retains neither continuing managerial involvement to the degree
  usually associated with ownership nor effective control over the goods sold;
  (c) the amount of revenue can be measured reliably; (d) it is probable that
  the economic benefits associated with the transaction will flow to the
  company; and (e) the costs incurred or to be incurred in respect of the
  transaction can be measured reliably.
|           |                                              |                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                              |                                                                  | A
  clarification of said standard was issued by the IASB in February 2006:
  Clarification No. 8 - Reporting of Revenue on a Gross or Net Basis.
  According to the clarification, a company acting as an agent or an
  intermediary without bearing the risks and rewards resulting from the
  transaction, will present its revenue on a net basis (as profit or
  commission). However, a company that acts as a principal supplier and bears
  the risks and rewards resulting from the transaction will present its revenue
  on a gross basis, distinguishing the turnover from the related expenses.                                                                                                                                                 
|           |                                              |                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                              |                                                                  | Standard 25
  shall be applicable to financial statements for periods commencing on or
  after January 1, 2006. The standard is to be applied prospectively;
  nevertheless, in accordance with the transitional provisions of the standard,
  the classification and presentation of revenue on a gross or net basis, as
  above, shall be applied with retroactive effect, including the restatement of
  revenues and expenses appearing in the comparative figures in the financial
  statements for periods commencing on the effective date of the standard.                                                                                                                                                                                             
|           |                                              |                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                              |                                                                  | Until the
  publication of said standard and the related clarification, there were no
  accounting pronouncements in Israel concerning revenue, and the accounting
  treatment of this issue was mostly based on generally accepted accounting
  practices and foreign accounting pronouncements; nevertheless, as the
  principles applied by the company do not differ materially from the
  directives of the standard, its implementation is not expected to have a
  material effect on the financial statements of the company in future periods.                                                                                                                                                                                                        

11

---

---



OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

|           |                                                  
|---------- | -------------------------------------------------
|NOTE 2    | INVESTMENTS IN COMPANIES:                        
|           |                                                  
|           | The composition of the investments is as follows:

| |                                                        |  |                  |         |       |      |                    |            |       |      |  |  |        | 
| | ------------------------------------------------------ |  | ---------------- | ------- | ----- | ---- | ------------------ | ---------- | ----- | ---- |  |  | ------ | 
| |                                                        |  | December 31      |        
| |                                                        |  |                  |        
| |                                                        |  |                  |         |       | 2005 |                    | Percentage |       | 2004 | 
| |                                                        |  |                  |         |       |      |                    | of         |       |      | 
| |                                                        |  |                  |         |       | Book |                    | ownership/ |       | Book | 
| |                                                        |  | Cost             |         | value |      | Control*           |            | value |     
| |                                                        |  |                  |         |       |      |                    |            |       |     
| |                                                        |  | NIS in thousands |         | %     |      | NIS in
  thousands |           
| |                                                        |  |                  |         |       |      |                    |           
| | Pelican Security Ltd. - Pelican (a)                  |  |                  | 8,885   |       |      | 4                  |            |       |      |  |  | 930    | 
| |                                                        |  |                  |         |       |      |                    |            |       |      |  |  |        | 
| | Expand Networks Ltd. - Expand (b)                    |  |                  | 10,033  |       |      | 10,033             |            |       | 9.3  |  |  | 9,378  | 
| |                                                        |  |                  |         |       |      |                    |            |       |      |  |  |        | 
| | Mainsoft Corporation - Mainsoft (c)                  |  |                  | 500     |       |      | 500                |            |       | 1.9  |  |  | 500    | 
| |                                                        |  |                  |         |       |      |                    |            |       |      |  |  |        | 
| | Netformx Ltd. - Netformx (d)                         |  |                  | 9,907   |       |      | 2,322              |            |       | 6.2  |  |  | 2,322  | 
| |                                                        |  |                  |         |       |      |                    |            |       |      |  |  |        | 
| | StoreAge Networking Technologies Ltd. - StoreAge
(e) |  |                  | 13,946  |       |      | 13,946             |            |       | 10.9 |  |  | 13,292 | 
| |                                                        |  |                  |         |       |      |                    |            |       |      |  |  |        | 
| | Celvibe Ltd. - Celvibe (f)                           |  |                  | 12,278  |       |      | -,-                |            |       | 13.1 |  |  | 163    | 
| |                                                        |  |                  |         |       |      |                    |            |       |      |  |  |        | 
| | Viola Networks Ltd. - Viola (g)                      |  |                  | 14,088  |       |      | 6,004              |            |       | 5.8  |  |  | 6,004  | 
| |                                                        |  |                  |         |       |      |                    |            |       |      |  |  |        | 
| | Cerel Ceramic Technologies Ltd. - Cerel (h)          |  |                  | 4,451   |       |      | -,-                |            |       | 15.9 |  |  | 3,474  | 
| |                                                        |  |                  |         |       |      |                    |            |       |      |  |  |        | 
| | Others (i)                                             |  |                  | 57,708  |       |      | -,-                |            |       |      |  |  | -,-    | 
| |                                                        |  |                  |         |       |      |                    |            |       |      |  |  |        | 
| | T o t a l                                              |  |                  | 131,796 |       |      | 32,809             |            |       |      |  |  | 36,063 | 
| |                                                        |  |                  |         |       |      |                    |            |       |      |  |  |        | 
| | * Ownership/
  Control on a full and undiluted basis. 

| |     |                                                                                                                                                                                                                                                                               
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.Pelican was
  appointed an outside liquidator who, in 2005, had transferred to the company
  an aggregate of NIS 626,000 out of the liquidation monies.                                         
| |     |                                                                                                                                                                                                                                                                               
| | (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 an addition amount of $ 250,000 (NIS 1,084,000) in Expand.
  During April 2005, the Company gave a bridging loan to Expand in the amount
  of $ 150,000 (NIS 653,000).
| |     |                                                                                                                                                                                                                                                                               
| | (c) | Mainsoft is
  engaged in the development of software and tools for software developers.                                                                                                                                                                                       

12

---

---



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.                                                                                                               
|           |                                       |                                                                                                                                                                                                                                                                
|           |                                       | The
  investment in Netformx as of December 31, 2005 is presented net of a provision
  of NIS 7.6 million for impairment of value.                                                                                                                             
|           |                                       |                                                                                                                                                                                                                                                                
|           |                                       | Netformx is
  partly held by companies which are related 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).                                                                                    
|           |                                       |                                                                                                                                                                                                                                                                
|           |                                       | During
  February 2005, the company gave a bridging loan to Storeage ,in the amount of
  $ 150,000 (NIS 653,000).                                                                                                                                              
|           |                                       |                                                                                                                                                                                                                                                                
|           |                                       | StoreAge is
  partly held by a company which is related party.                                                                                                                                                                                                 
|           |                                       |                                                                                                                                                                                                                                                                
|           | (f)                                   | Celvibe
  develops solutions for digital video transmission for Internet broadband
  networks and mobile phone communications.                                                                                                                                 
|           |                                       |                                                                                                                                                                                                                                                                
|           |                                       | In November
  2002, Celvibe ceased its operations and entered a winding-up procedure.                                                                                                                                                                          
|           |                                       |                                                                                                                                                                                                                                                                
|           |                                       | On December
  7, 2004, an amount of $ 393,000 was received from Celvibes liquidator, and On
  June 30, 2005, an amount of $ 245,000 was received.                                                                                                             
|           |                                       |                                                                                                                                                                                                                                                                
|           |                                       | As of
  December 31, 2005, the balance of the investment is set at zero and the
  company is not expecting to receive an additional amounts from the
  liquidation of Celvibe.                                                                                 
|           |                                       |                                                                                                                                                                                                                                                                
|           | (g)                                   | 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 October
  2003, the Company invested $ 150,000 (NIS 668,000) in Viola.                                                                                                                                                                                      
|           |                                       |                                                                                                                                                                                                                                                                
|           |                                       | The
  investment in Viola as of December 31, 2005 is presented net of a provision
  of NIS 8 million for impairment of value.                                                                                                                                  
|           |                                       |                                                                                                                                                                                                                                                                
|           | (h)                                   | Cerel
  develops ceramic layering technologies for the passive electronic components
  market.                                                                                                                                                                 
|           |                                       |                                                                                                                                                                                                                                                                
|           |                                       | In 2002, the
  company recorded an impairment provision of NIS 980,000 in respect of the
  investment. In 2005, due to adverse indicators, the company wrote off the
  balance of its investment in Cerel and recorded an impairment loss of NIS 3.3
  million.

13

---

---



OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

|           |                                       |                                                                                                                                                                                |                                         
|---------- | ------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------
|NOTE 2    | INVESTMENTS IN COMPANIES (continued):
|           |                                       |                                                                                                                                                                               
|           | (i)                                   | Following is
  a list of the companies in which the Company has invested approximately NIS
  58 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;                        
|           |                                       |                                                                                                                                                                                | Indox online
  ltd.                     
|           |                                       |                                                                                                                                                                                | Iradius.Com,
  Inc;                     
|           |                                       |                                                                                                                                                                                | Trans4u Ltd;                            
|           |                                       |                                                                                                                                                                                | Praxell Inc;                            
|           |                                       |                                                                                                                                                                                | Electrochemical
  Light Switch Inc;     

|           |                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|---------- | --------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 3    | SHAREHOLDERS EQUITY:
|           |                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           | a.                    | Share capital                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                       | The share
  capital as of December 31, 2005 and 2004 is composed of ordinary shares of
  NIS 1 par value, as follows: authorized - 10,000 shares; issued and paid -
  1,000 shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           | b.                    | Receipts on account of shares to be allotted                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                       | On November
  1, 2000, the Company received a payment on account of shares in the amount of
  NIS 137,622,000 from its shareholders. The shares have not yet been allotted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|NOTE 4    | TAXES ON INCOME:     
|           |                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           | a.                    | Measurement
  of results for tax purposes under the Income Tax (Inflationary Adjustments)
  Law, 1985 (hereinafter - the Inflationary Adjustments Law)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                       | Under the
  Inflationary Adjustments Law, results for tax purposes are measured in real
  terms, having regard to the changes in the Israeli CPI. The Company is taxed
  under this law.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           | b.                    | Taxes rates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                       | The income
  of the company is taxed at the regular rate. Through December 31, 2003, the
  corporate tax was 36%. In July 2004, Amendment No. 140 to the Income Tax
  Ordinance was enacted. One of the provisions of this amendment is that the
  corporate tax rate is to be gradually reduced from 36% to 30%. In August
  2005, a further amendment (No. 147) was published, which makes a further
  revision to the corporate tax rates prescribed by Amendment No. 140. As a
  result of the aforementioned amendments, the corporate tax rates for 2004 and
  thereafter are as follows: 2004  35%, 2005  34%, 2006  31%, 2007  29%,
  2008  27%, 2009  26% and for 2010 and thereafter  25%.

14

---

---



OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

|           |                                                |                                                                                                                                                                                                                                                                                                                                                                                                      
|---------- | ---------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 4    | TAXES ON INCOME (continued):                  
|           |                                                |                                                                                                                                                                                                                                                                                                                                                                                                      
|           | c.                                             | Losses for tax purposes, carried forward to future years                                                                                                                                                                                                                                                                                                                                             
|           |                                                |                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                                | Carryforward
  losses aggregate approximately NIS 2 million at December 31, 2005. Under the
  Inflationary Adjustments Law such carryforward tax losses are linked to the
  Israeli CPI. No deferred tax asset has been included in respect of such
  losses. In addition, no deferred tax asset has been included in respect of
  the impairment provision created for the investments in companies.
|           |                                                |                                                                                                                                                                                                                                                                                                                                                                                                      
|           | d.                                             | Tax assessments                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                                |                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                                | The company
  has received final tax assessments through tax year 2001.                                                                                                                                                                                                                                                                                                                              
|           |                                                |                                                                                                                                                                                                                                                                                                                                                                                                      
|NOTE 5    | RELATED PARTIES - TRANSACTIONS AND BALANCES:
|           |                                                |                                                                                                                                                                                                                                                                                                                                                                                                      
|           | a.                                             | Transactions:                                                                                                                                                                                                                                                                                                                                                                                        

| |                                                                                            |  |                  |     |      |  |      |  |  |     | 
| | ------------------------------------------------------------------------------------------ |  | ---------------- | --- | ---- |  | ---- |  |  | --- | 
| |                                                                                            |  | 2005             |     | 2004 |  | 2003 | 
| |                                                                                            |  |                  |     |      |  |      | 
| |                                                                                            |  | NIS in thousands |    
| |                                                                                            |  |                  |    
| | Financial expenses in respect of short term
  loan from a company which is a related party |  |                  | 194 |      |  |      |  |  | 165 | 
| |                                                                                            |  |                  |     |      |  |      |  |  |     | 

| |    |          
| | -- | ---------
| | b. | Balances:

| |    |                                                                                                 |  |                  |        |      |  |        |  
| | -- | ----------------------------------------------------------------------------------------------- |  | ---------------- | ------ | ---- |  | ------ | -
| |    |                                                                                                 |  | December 31      |       
| |    |                                                                                                 |  |                  |       
| |    |                                                                                                 |  | 2005             |        | 2004 | 
| |    |                                                                                                 |  |                  |        |      | 
| |    |                                                                                                 |  | NIS in thousands |       
| |    |                                                                                                 |  |                  |       
| |    |                                                                                                 |  |                  |        |      |  |        |  
| | 1) | Short-term loan from a company which is a
  related party                                       |  |                  | (8,306 | )    |  | (8,114 | )
| |    |                                                                                                 |  |                  |        |      |  |        |  
| | 2) | Current liabilities - presented in the
  balance sheets as short-term credit from shareholders |  |                  | (4,125 | )    |  | (4,267 | )
| |    |                                                                                                 |  |                  |        |      |  |        |  

|           |                                               |                                                                |                                                                                                                                                                                                                                                                                                                        
|---------- | --------------------------------------------- | -------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 6    | SUPPLEMENTARY FINANCIAL STAEMENT INFORMATION:
|           |                                               |                                                                |                                                                                                                                                                                                                                                                                                                        
|           | Balance sheets:                              
|           |                                               |                                                                |                                                                                                                                                                                                                                                                                                                        
|           | a.                                            | Short-term bank credit:                                       
|           |                                               |                                                                |                                                                                                                                                                                                                                                                                                                        
|           |                                               | 1)                                                             | Short-term
  bank credit was unlinked and beared annual interest rate of 5.46% in 2005 and
  6.5% in 2004. During October 2005, the company had settled the bank credit in
  full.                                                                                                                                     
|           |                                               |                                                                |                                                                                                                                                                                                                                                                                                                        
|           |                                               | 2)                                                             | In February
  2001, the Company and its shareholders gave a commitment to a certain bank
  that the Company would not make any repayments or settlements to its
  shareholders on account of shareholders loans and/or sums received on
  account of shares up to an amount of approximately adjusted NIS 100 million.
|           |                                               |                                                                |                                                                                                                                                                                                                                                                                                                        
|           | b.                                            | Short-term loan from a related party                          
|           |                                               |                                                                |                                                                                                                                                                                                                                                                                                                        
|           |                                               | The loan is
  linked to the Israeli CPI and bears no interest.

15

---

---



OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

|           |                                                           |                                                                                                                                                                                     
|---------- | --------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 6    | SUPPLEMENTARY FINANCIAL STAEMENT INFORMATION (continued):
|           |                                                           |                                                                                                                                                                                     
|           | c.                                                        | Concentrations of credit risks                                                                                                                                                      
|           |                                                           |                                                                                                                                                                                     
|           |                                                           | The
  Companys cash at December 31, 2005 and 2004 were deposited with Israeli
  banks. The Company is of the opinion that the credit risk in respect of these
  balances is remote.
|           |                                                           |                                                                                                                                                                                     
|           | d.                                                        | 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.                                   
|           |                                                           |                                                                                                                                                                                     
|           | Statements of operations -                               
|           |                                                           |                                                                                                                                                                                     
|           | e.                                                        | General and administrative expenses:                                                                                                                                                

| |                                |  |                  |    |      |  |      |  |  |     | 
| | ------------------------------ |  | ---------------- | -- | ---- |  | ---- |  |  | --- | 
| |                                |  | 2005             |    | 2004 |  | 2003 | 
| |                                |  |                  |    |      |  |      | 
| |                                |  | NIS in thousands |   
| |                                |  |                  |   
| | Professional
  fees            |  |                  | 24 |      |  |      |  |  |     | 
|
| | Travel
  abroad                |  |                  | 12 |      |  |      |  |  |     | 
|
| | Payroll and
  related expenses |  |                  |    |      |  |      |  |  | 187 | 
|
| | Office rent
  and maintenance  |  |                  |    |      |  |      |  |  | 22  | 
|
| | Other                          |  |                  | (2 | )    |  | 3    |  |  | 42  | 
| |                                |  |                  |    |      |  |      |  |  |     | 
| |                                |  |                  | 34 |      |  | 3    |  |  | 251 | 
| |                                |  |                  |    |      |  |      |  |  |     | 

16

---

---



OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

|           |                                                                                                                 |          |                                                                                                                                                                                                                                                                                                                                                                                                
|---------- | --------------------------------------------------------------------------------------------------------------- | -------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 7    | 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, through December 31, 2003, the Company
  comprehensively included 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 past inflation in Israel, this was considered a more
  meaningful presentation than financial reporting based on historical cost.
|           |                                                                                                                 |          |                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                                                                                                 |          | Under US
  GAAP Israel is not considered to be a highly inflationary country, thus the
  measurement currency should be in nominal NIS.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.                                                                                   

17

---

---



OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

|           |                                                                                                                             |                                                                                                                                    |                     
|---------- | --------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | --------------------
|NOTE 8    | 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:

| |                                                                                   |  |                  |       |      |  |      |  |  |       |  
| | --------------------------------------------------------------------------------- |  | ---------------- | ----- | ---- |  | ---- |  |  | ----- | -
| |                                                                                   |  | 2005             |       | 2004 |  | 2003 | 
| |                                                                                   |  |                  |       |      |  |      | 
| |                                                                                   |  | NIS in thousands |      
| |                                                                                   |  |                  |      
|
| | Net losses as reported in these financial
  statements according to Israeli GAAP) |  |                  | 2,996 |      |  | 142  |  |  | 1,908 |  
| | Effect of the treatment of the following
  item under U.S. GAAP-                  |  |                  |       |      |  |      |  |  |       |  
| | Reversal of the adjustment due to effect of
  inflation                           |  |                  | (50   | )    |  | -,-  |  |  | (371  | )
| |                                                                                   |  |                  |       |      |  |      |  |  |       |  
| | Net losses under U.S. GAAP                                                        |  |                  | 2,946 |      |  | 142  |  |  | 1,537 |  
| |                                                                                   |  |                  |       |      |  |      |  |  |       |  

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

| |                                                                                              |  |                  |        |      |  |        |   |  |  | 
| | -------------------------------------------------------------------------------------------- |  | ---------------- | ------ | ---- |  | ------ | - |  |  | 
| |                                                                                              |  | December 31,     |        |     
| |                                                                                              |  |                  |        |     
| |                                                                                              |  | 2005             |        | 2004 |  |       
| |                                                                                              |  |                  |        |      |  |       
| |                                                                                              |  | NIS in thousands |        |     
| |                                                                                              |  |                  |        |     
|
| | Shareholders equity, as reported in these
  financial statements, according to Israeli GAAP |  |                  | 20,557 |      |  | 23,553 |   | 
| | Effect of the treatment of the above
  differences under U.S. GAAP:                          |  |                  |        |      |  |        |   | 
| | Reversal of the adjustment due To effect of
  inflation, net                                 |  |                  | (2,006 | )    |  | (2,056 | ) | 
| | Transaction with related party                                                               |  |                  | 800    |      |  | 800    |   | 
| |                                                                                              |  |                  |        |      |  |        |   | 
| | Shareholders equity under U.S. GAAP                                                         |  |                  | 19,351 |      |  | 22,297 |   | 
| |                                                                                              |  |                  |        |      |  |        |   | 

| |  |    |                                                                                                                  
| |  | -- | -----------------------------------------------------------------------------------------------------------------
| |  | 3) | The company
  has no other comprehensive income (loss) components other than net loss for
  the reported periods.

|
|
|
|

18

---

---

# REPORT  OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# INDEPENDENT
AUDITORS REPORT 
TO THE SHAREHOLDERS OF 
BAY HEART LTD.

We have audited the accompanying balance
sheets of Bay Heart Ltd. (the Company) as of December 31, 2006 and 2005, and
the consolidated balance sheets as of those dates, and the related statements of
operations, changes in shareholders deficiency and cash flows  of the Company
and on a consolidated basis  for each of the three years in the period ended
December 31, 2006. These financial statements are the responsibility of the Companys
Board of Directors and management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial
position  of the Company and on a consolidated basis  as of December 31, 2006
and 2005, and the results of operations, changes in shareholders deficiency and cash
flows  of the Company and on a consolidated basis  for each of the three years
in the period ended December 31, 2006, in conformity with accounting principles generally
accepted in Israel.

Accounting principles generally
accepted in Israel differ in certain respects from accounting principles generally
accepted in the United States. With respect to these financial statements, the difference
in the application of the latter is described in Note 19.

As described in Note 2A, the
financial statements are presented in reported amounts, in conformity with Accounting
Standards of the Israel Accounting Standards Board.



---

---



The condensed consolidated financial
information in U.S. dollars presented in Note 18 to the financial statements, prepared at
the request of an investor, represents a translation of the Companys financial
statements in nominal values, as stated in Note 18A. In our opinion, such translation into
U.S. dollars was appropriately performed on the basis stated in Note 18A.

As described in Note 1C to the
financial statements regarding the Companys business condition, the Company has
ongoing losses, a working-capital deficit, shareholders deficiency and negative cash
flows from operating activities. As stated in that note, the continuance of the
Companys operations and its ability to satisfy its short-term liabilities is
contingent upon the attainment of financing from the shareholders and/or bank financing
arrangements.

Brightman Almagor & Co.
Certified Public Accountants

Member firm of Deloitte
Touche Tohmatsu

Haifa, Israel, February
6, 2007.



---

---



| |   |                                                              |   |                                            
| | - | ------------------------------------------------------------ | - | -------------------------------------------
| | n | Kost Forer Gabbay & Kasierer2 pal-yam St.Haifa 33095, Israel | n | Phone: 972-4-8654000Fax:      972-4-8654022

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders of

# CARMEL CONTAINER
SYSTEMS LTD.

We
have audited the accompanying consolidated balance sheets of Carmel Container Systems Ltd.
(the Company) and its subsidiaries as of December 31, 2006 and 2005, and the
related consolidated statements of operations, changes in shareholders equity and
cash flows  for each of the three years in the period ended December 31, 2006. These
financial statements are the responsibility of the Companys board of directors and
management. Our responsibility is to express an opinion on these financial statements
based on our audits.

We
did not audit the financial statements of a certain subsidiary, whose assets constitute
approximately 10% of total consolidated assets as of December 31, 2005 and whose revenues
constitute approximately 10% and 9% of total consolidated revenues for the years ended
December 31, 2005 and 2004, respectively. The financial statements of this subsidiary
were audited by other auditors, whose reports have been furnished to us, and our opinion,
insofar as it relates to amounts included for this subsidiary, is based on the reports of
the other auditors.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit of the companys
internal control over financial reporting. Our audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits and
the reports of other auditors provide a reasonable basis for our opinion.

In
our opinion, based on our audits and the reports of other auditors, the consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of December 31,
2006 and 2005, and the consolidated results of their operations, changes in
shareholders equity and cash flows for each of the three years in the period ended
December 31, 2006, in conformity with Israel generally accepted accounting principles,
which differ in certain respects from those followed in the United States, as described in
Note 22 to the consolidated financial statements.

As
described in Note 2, the financial statements referred to above are presented in reported
amounts, in conformity with Accounting Standards of the Israel Accounting Standards Board.

|Haifa, Israel,
March 5, 2007 | KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
|---------------------------- | -------------------------------------------------------------



---

---



To the shareholders of

# C.D. PACKAGING SYSTEMS
LTD.

We have audited the financial
statements of C.D. Packaging Systems Ltd.  (hereafter  the Company) and
the consolidated financial statements of the Company and its consolidated subsidiary:
balance sheets as of December 31, 2005 and 2004 and statements of income (loss),
changes in shareholders equity and cash flows for each of the three years in the
period ended December 31, 2005. 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 standards of the Public
Company Accounting Oversight Board (United States), including those prescribed by the
Israeli Auditors (Mode of Performance) Regulations, 1973. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates
made by the 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 aforementioned
financial statements present fairly, in all material respects, the financial position of
the Company as of December 31, 2005 and 2004 and the results of operations, changes
in shareholders equity and cash flows  of the Company and consolidated 
for each of the three years in the period ended December 31, 2005, in conformity
with accounting principles generally accepted (GAAP) in Israel. Also, in our
opinion, except for failure to meet the requirements of the Securities Regulations
(Presentation of Transactions between a Corporation and its Controlling Shareholder in the
Financial Statements), 1996, as explained in note 11, and except for the exclusion of
certain specifications, as explained in that note, the abovementioned financial statements
have been prepared in accordance with the Securities (Preparation of Annual Financial
Statements) Regulations, 1993.

As explained in note 1b, the
financial statements, as of dates and for reporting periods subsequent to December 31,
2003, are presented in new Israeli shekels, in conformity with accounting standards issued
by the Israel Accounting Standards Board. The financial statements as of dates and for
reporting periods ended prior to, or on, the above date are presented in values that have
been adjusted for the changes in the general purchasing power of the Israeli currency
through that date, in accordance with pronouncements of the Institute of Certified Public
Accountants in Israel.

|Haifa,
    March 6, 2006
                              /s/ KESSELMAN & KESSELMAN CPAs 
                              (ISR) A member of
                              PricewaterhouseCoopers International
                              Limited
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

---



| |   |                                                                  |   |                                            
| | - | ---------------------------------------------------------------- | - | -------------------------------------------
| | n | Kost Forer Gabbay & Kasierer3 Aminadav St.Tel-Aviv 67067, Israel | n | Phone: 972-3-6232525Fax:      972-3-5622555

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM 
To the shareholders of 
EPSILON INVESTMENT
HOUSE LTD.

We
have audited the balance sheets of Epsilon Investment House Ltd.(the
Company) as of December 31, 2004 and 2003, and the consolidated balance sheets
as of such date and the related statements of income, changes in shareholders equity
and cash flows  Company and consolidated  for the years then ended expressed
in New Israeli Shekels (not presented herein). 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. The financial
statements of an investee company have been audited by other auditors whose report has
been furnished to us; insofar as our opinion on the consolidated financial statements
relates to the amounts included for the investee, it is based solely on their report. In
the consolidated financial statements, the Companys investment in the investee is
stated at NIS 331 thousand and NIS 26 thousand, respectively, at December 31, 2004 and
2003, and the Companys equity in the net income of the investee is stated at NIS 305
thousand and NIS 25 thousand for the years then ended.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States) and in accordance with auditing standards generally
accepted in Israel, including those prescribed by the Auditors Regulations
(Auditors Mode of Performance)-1973. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Companys internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by the board of directors and management,
as well as evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our opinion.

In
our opinion, based on our audits and the report of other auditors, the financial
statements referred to above present fairly, in all material respects, the financial
position  of the Company and consolidated  as of December 31, 2004 and
2003, and the results of operations, changes in shareholders equity and cash flows
 of the Company and consolidated  for the years then ended, in conformity with
generally accepted accounting principles in Israel, which differ in certain respects from
those generally accepted in the United States (see Note 20 to the financial statements).

As
described in Note 2a, the financial statements as of the dates and for the reported
periods subsequent to December 31, 2003, are presented in reported amounts, in conformity
with Accounting Standards of the Israeli Accounting Standards Board. The financial
statements as of the dates and for the reported periods until the aforementioned date are
presented in values that were adjusted until that date according to the changes in the
general purchasing power of the Israeli currency, in accordance with pronouncements of the
Institute of Certified Public Accountants in Israel.

|Tel-Aviv, Israel  
February 24 , 2005 | KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
|------------------------------------- | -------------------------------------------------------------



---

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders of

Hod Hasharon Sport Center
Limited

We have audited the consolidated
balance sheets of Hod Hasharon Sport Center Limited and its subsidiaries as of
December 31, 2006 and 2005 and the related consolidated statements of operations,
changes in shareholders equity and cash flows for each of the three years in the
period ended December 31, 2006. These financial statements are the responsibility of
the Companys Board of Directors and management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of
December 31, 2006 and 2005 and the consolidated results of operations, changes in
shareholders equity and cash flows for each of the three years in the period ended
December 31, 2006, in conformity with accounting principles generally accepted in the
United States of America.

Somekh Chaikin

Certified Public Accountants (Isr)
Tel Aviv, Israel
February 25, 2007



---

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders of

Hod Hasharon Sport Center
(1992) Limited Partnership

We have audited the consolidated
balance sheets of Hod Hasharon Sport Center (1992) Limited Partnership and its
subsidiaries as of December 31, 2006 and 2005 and the related consolidated statements
of operations, changes in shareholders equity and cash flows for each of the three
years in the period ended December 31, 2006. These financial statements are the
responsibility of the Companys Board of Directors and management. Our responsibility
is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of
December 31, 2006 and 2005 and the consolidated results of operations, changes in
shareholders equity and cash flows for each of the three years in the period ended
December 31, 2006, in conformity with accounting principles generally accepted in the
United States of America.

Somekh Chaikin

Certified Public Accountants (Isr)
Tel Aviv, Israel
February 25, 2007



---

---



| |   |                                                                  |   |                                            
| | - | ---------------------------------------------------------------- | - | -------------------------------------------
| | n | Kost Forer Gabbay & Kasierer3 Aminadav St.Tel-Aviv 67067, Israel | n | Phone: 972-3-6232525Fax:      972-3-5622555

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM 
To the shareholders of 
RENAISSANCE INVESTMENT
COMPANY LTD.

We
have audited the balance sheets of RenaissanceInvestment Company Ltd.(the Company) as of December 31, 2004 and 2003, and the consolidated
balance sheet as of December 31, 2004, and the related statements of income, changes in
shareholders equity and cash flows of the Company for the years ended December 31,
2004 and 2003 and the consolidated statements of income and cash flows for the year ended
December 31, 2004, expressed in New Israeli Shekels (not presented herein). 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. The financial statements of an investee company have been audited by
other auditors whose report has been furnished to us; insofar as our opinion on the
financial statements relates to the amounts included for the investee, it is based solely
on their report. In the financial statements, the Companys investment in the
investee is stated at NIS 3,571 thousand and NIS 1,070 thousand, respectively, at December
31, 2004 and 2003, and the Companys equity in the net income of the investee is
stated at NIS 501 thousand and NIS 70 thousand for the years then ended.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States) and in accordance with auditing standards generally
accepted in Israel, including those prescribed by the Auditors Regulations
(Auditors Mode of Performance)-1973. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Companys internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by the board of directors and management,
as well as evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our opinion.

In
our opinion, based on our audits and the report of other auditors, the financial
statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2004 and 2003, and the consolidated
financial position as of December 31, 2004 and the results of operations, changes in
shareholders equity and cash flows of the Company for the years ended December 31,
2004 and 2003 and the consolidated results of operations and cash flows for the year ended
December 31, 2004, in conformity with generally accepted accounting principles in Israel,
which differ in certain respects from those generally accepted in the United States (see
Note 15 to the financial statements).

As
described in Note 2a, the financial statements as of the dates and for the reported
periods subsequent to December 31, 2003, are presented in reported amounts, in conformity
with Accounting Standards of the Israeli Accounting Standards Board. The financial
statements as of the dates and for the reported periods until the aforementioned date are
presented in values that were adjusted until that date according to the changes in the
general purchasing power of the Israeli currency, in accordance with pronouncements of the
Institute of Certified Public Accountants in Israel.

|Tel-Aviv, Israel  
February 24 , 2005 | KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
|------------------------------------- | -------------------------------------------------------------



---

---