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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

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(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, 2002

OR

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period
from _____________ to _____________

Commission file number 0-538

AMPAL-AMERICAN ISRAEL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

|New York                                                                 |  | 13-0435685                            
|------------------------------------------------------------------------ |  | --------------------------------------
|(State or Other Jurisdiction of

 Incorporation or Organization)         |  | (I.R.S. Employer

 Identification No.)
|                                                                         |  |                                       
|555 Madison Avenue, New York, New York                                   |  | 10022                                 
|(Address of Principal Executive Offices)                                 |  | (Zip Code)                            
|                                                                         |  |                                       
|Registrants telephone number, including area code: (212)
593-9842.     
|Securities registered pursuant to Section 12(b) of the
Act:  None       
|                                                                         |  |                                       
|Securities registered pursuant to Section 12(g) of the
Act:             
|Class A Stock, par value $1.00 per share                                
|4% Cumulative Convertible Preferred Stock, par value $5.00 per
share    
|6 1/2% Cumulative Convertible Preferred Stock, par value $5.00 per
share
|(Titles of Classes)                                                     

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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
xNoo

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

The aggregate market value of
the shares of Class A Stock by non  affiliates of the registrant on June 28,2002, the last business day of the
registrants most recently completed second fiscal quarter was $29,634,053,  based upon the closing price on such stock on
that date.

As of March 9, 2003, the number
of shares outstanding of the registrants Class A Stock, its only authorized common stock, is 19,684,948 based upon the
closing price of such stock on that date.

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ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OF AMPAL-AMERICAN ISRAEL CORPORATION

PART I

ITEM 1. BUSINESS

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

For
    industry segment financial information and financial information about foreign
    and domestic operations, see Note 14 to the Companys consolidated
financial statements included elsewhere in this Report. The companies described below under  Telecommunication,
Energy, High  Technology and Capital Markets and Other Holdings are included in the Finance
segment.  The companies described under Real Estate are included in the Real Estate Rental segment.  The
companies described under Leisure-Time are included in the Leisure-Time
segment.

The
    Company primarily acquires interests in businesses located in the State of
    Israel or that are Israel-related.  An important objective of Ampal
    is to make investments in companies that operate in Israel initially and
    then expand abroad. As a general investing guideline, Ampal
seeks to acquire and maintain a sufficient interest in a company to permit it,
    on its own or with investment partners, to have a significant influence in
    the management and operation of that company. In determining whether to acquire
    an interest in a specific
company, Ampal considers quality of management, 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, Industry, Real Estate and Project Development,
    Telecommunications and High Technology. We believe that past experience,
    current opportunities and a
deep understanding of the above-referenced sectors both domestically 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.  Sometimes, the Company
participates in the investee companies daily activities by providing managerial
support.

Unless specifically
stated otherwise in this Report, the Company did not receive dividends or other payments from its investee companies.

Listed
    below by industry segment are substantially all of the investee companies
    in which the Company had ownership interests during the fiscal year ended
December 31, 2002, the principal business of each and the percentage of equity
    owned, directly or indirectly, by Ampal. The table
below also indicates whether the investees securities are listed on the New York Stock Exchange (NYSE), Nasdaq
National Market (Nasdaq), American Stock Exchange (AMEX), Tel Aviv Stock Exchange (TASE) or the
Canadian Venture Exchange (CDNX). Further information with respect
to the more significant investee companies is provided after the following table.
For additional information concerning the investee companies, annual reports
on Forms 10-K previously
filed by Ampal are herein incorporated by reference.

1

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|Industry Segment                                  |  | Principal Business                                               |  | Percentage as of

 December 31, 2002(1)
|------------------------------------------------- |  | ---------------------------------------------------------------- |  | ---------------------------------------
|                                                  |  |                                                                  |  |                                        
|Telecommunication                                 |  |                                                                  |  |                                        
|MIRS Communications Ltd.                          |  | Wireless Communications Service Provider                         |  | 25.0                                   
|Energy                                            |  |                                                                  |  |                                        
|Granite Hacarmel Investments Ltd. (TASE)          |  | Distribution of Refined Petroleum Products                       |  | 20.4                                   
|High-Technology                                   |  |                                                                  |  |                                        
|Babylon Ltd.                                      |  | Translation Software for the Internet                            |  | 1.6                                    
|BridgeWave Communications, Inc.                   |  | Broadband Wireless Technology                                    |  | 6.0                                    
|Camelot Information Technologies Ltd.             |  | Systems-Safeguarding Software                                    |  | N/A                                    
|Clalcom Ltd.                                      |  | Communications                                                   |  | 0.7                                    
|Courses Investment in Technology Ltd.             |  | Venture Capital Fund                                             |  | 3.2                                    
|CUTe Ltd.                                         |  | Designs Intellectual Property Rights                             |  | 20.0                                   
|ElephantX dot com LLC.                            |  | Software for E-Trading                                           |  | 0.5                                    
|Enbaya Ltd.                                       |  | 3D Browser/Publisher                                             |  | N/A                                    
|Identify Solutions Ltd.                           |  | Defect-Detecting Software                                        |  | 6.5                                    
|Modem Art Ltd.                                    |  | Fabless Semiconductor Company                                    |  | 5.2                                    
|mPrest Technologies Ltd.                          |  | Web-Based Applications for Cellular Phones                       |  | 9.5                                    
|Netformx Ltd.                                     |  | Network Design Tools                                             |  | 19.6                                   
|Oblicore Ltd.                                     |  | Service Performance Tracking Software                            |  | 13.9                                   
|Ophir Holdings Ltd. (Ophir)                     |  | Holding Company                                                  |  | 42.5                                   
|Ophirtech Ltd. (Ophirtech)                      |  | Holding Company                                                  |  | 42.5                                   
|Carmel Bio-Sensors Ltd.                           |  | Glucose-measuring products                                       |  | N/A                                    
|Celvibe Ltd.                                      |  | Digital Video Technologies                                       |  | 5.4                                    
|Cerel Ceramic Technologies Ltd.                   |  | Electrophoretic Deposition                                       |  | 6.1                                    
|Cipheractive Ltd.                                 |  | Video Coding Technology                                          |  | 2.8                                    
|Elpas Ltd.                                        |  | Products Using Infra-Red Based

 Data Communication Technologies |  | 5.0                                    
|Expand Networks Ltd.                              |  | Internet Data Compression                                        |  | 4.7                                    
|Indocs Online Ltd.                                |  | E-Commerce Software                                              |  | 5.0                                    
|Interlink Computer Communications
Ltd.            |  | Web-Based Application Integration Software                       |  | N/A                                    
|iRadius.com, Inc.                                 |  | Family-Friendly E-Commerce Platforms                             |  | N/A                                    
|Mainsoft Corporation                              |  | UNIX Tools                                                       |  | 0.8                                    
|Pelican Security Ltd.                             |  | Internet Data Protection Software                                |  | 6.7                                    
|Praxell, Inc.                                     |  | Prepaid Charge Card Software                                     |  | 3.5                                    
|Romidot Ltd.                                      |  | Optical Checking Instruments                                     |  | N/A                                    
|StoreAge Networking Technologies
Ltd.             |  | Data Storage Software                                            |  | 4.6                                    
|Techimage Ltd.                                    |  | Computer Animation Software                                      |  | N/A                                    
|Viola Networks                                    |  | Computer Network Software                                        |  | 6.8                                    
|Peptor Ltd.                                       |  | Pharmaceutical Products                                          |  | 0.5                                    
|PowerDsine Ltd.                                   |  | Telecommunications Components                                    |  | 8.1                                    
|Qronus Interactive Israel (1994) Ltd.             |  | Software Quality Products                                        |  | 9.5                                    
|ShellCase Ltd. (CDNX:SSD)                         |  | Packaging Process for Semiconductor Chips                        |  | 14.0                                   
|Shiron Satellite Communications (1996) Ltd.       |  | Satellite Modems and Fast Internet Access                        |  | 9.8                                    
|Smart Link Ltd.                                   |  | Software-Based Communications Products                           |  | 13.6                                   
|Star Management of Investments No. II (2000) L.P. |  | Venture Capital Fund                                             |  | 10.0                                   

2

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|Industry Segment                                             |  | Principal Business                                                   |  | Percentage as of

 December 31, 2002(1)
|------------------------------------------------------------ |  | -------------------------------------------------------------------- |  | ---------------------------------------
|                                                             |  |                                                                      |  |                                        
|High-Technology and Communications - Continued               |  |                                                                      |  |                                        
|Trinet Venture Capital Ltd.                                  |  | Venture Capital Fund                                                 |  | 50.0                                   
|VisionCare Ophthalmic Technologies Ltd.                      |  | Advanced Optical Products                                            |  | 2.5                                    
|XACCT Technologies Ltd.                                      |  | TCP/IP Network Software                                              |  | 16.9                                   
|Xpert Integrated Systems Ltd.                                |  | Software and Systems Integrator

   Specializing in Systems Security |  | 12.7                                   
|Real Estate                                                  |  |                                                                      |  |                                        
|Am-Hal Ltd.                                                  |  | Chain of Senior Citizen Facilities                                   |  | 100.0                                  
|Ampal Development (Israel) Ltd.                              |  | Holding
Company                                                      |  | 100.0                                  
|Ampal (Israel) Ltd.                                          |  | Holding Company and Real Estate                                      |  | 100.0                                  
|Bay Heart Limited                                            |  | Shopping Mall Owner/Lessor                                           |  | 37.0                                   
|Etz Vanir Ltd. and Yakhin Mataim Ltd.                        |  | Citrus Groves                                                        |  |                                        
|Nir Ltd.                                                     |  | Commercial Real Estate                                               |  | 99.9                                   
|Ophir Holdings Ltd. (Ophir Holdings)                       |  | Holding
Company                                                      |  | 42.5                                   
|Industrial Buildings Corporation Ltd. (TASE)                 |  | Industrial Real Estate                                               |  | 5.0                                    
|Lysh The Coastal High-way Ltd.                               |  | Commercial Real Estate                                               |  | 10.6                                   
|Meimadim Investments Ltd.                                    |  | Commercial Real Estate                                               |  | 4.2                                    
|New Horizons (1993) Ltd.                                     |  | Commercial Real Estate                                               |  | 34.0                                   
|Shmey-Bar Group                                              |  | Commercial Real Estate                                               |  | 9.4                                    
|Leisure-Time                                                 |  |                                                                      |  |                                        
|Coral World International Limited                            |  | Underwater Observatories and Marine Parks                            |  | 50.0                                   
|Country Club Kfar Saba Limited                               |  | Country Club Facility                                                |  | 51.0                                   
|Hod Hasharon Sport Center (1992)

     Limited Partnership   |  | Country Club Facility                                                |  | 50.0                                   
|Capital Markets and Other Holdings                           |  |                                                                      |  |                                        
|Ampal Industries (Israel) Ltd.                               |  | Holding
Company                                                      |  | 100.0                                  
|Alvarion (Nasdaq:ALVR)                                       |  | Wireless Local Area Network                                          |  | 1.5                                    
|Arel Communications and Software Ltd.

        (Nasdaq:ARLC) |  | Interactive Distance Learning Systems                                |  | 3.0                                    
|Blue Square-Israel Ltd. (NYSE:BSI and

     TASE)            |  | Supermarket Chain                                                    |  | 3.9                                    
|Carmel Container Systems Limited

     (AMEX:KML)            |  | Packaging Materials and Carton Production                            |  | 21.8                                   
|Compugen Ltd. (Nasdaq:CGEN)                                  |  | Bioinformatics                                                       |  | 1.4                                    
|Epsilon Investment House Ltd. and                            |  |                                                                      |  |                                        
|Renaissance Investment Company Ltd.                          |  | Portfolio Management and

   Underwriting Services                   |  | 20.0                                   

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

| | Carmel Bio-Sensors Ltd.                | N/A 
| | -------------------------------------- | ----
| | Celvibe Ltd.                           | 12.8
| | Cerel Ltd                              | 14.2
| | Cipheractive Ltd.                      | 6.6 
| | Elpas Ltd.                             | 11.8
| | Expand Networks Ltd.                   | 11.2
| | Indocs Online Ltd.                     | 11.9
| | Interlink Computer Communications Ltd. | N/A 
| | iRadius.com, Inc.                      | N/A 
| | Mainsoft Corporation Ltd.              | 1.9 
| | Netformx Ltd.                          | 5.5 
| | Pelican Security Ltd.                  | 15.7
| | Praxell, Inc.                          | 8.2 
| | Romidot Ltd.                           | N/A 
| | StoreAge Networking Technologies Ltd.  | 10.9
| | Techimage Ltd.                         | N/A 
| | Viola Networks                         | 16.0

The Companys percentage
interest in the above companies reflects 42.5% of Ophirtech Ltd.s ownership plus any direct holdings.

3

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| | Courses Investment in Technology Ltd.                                                           | 3.5 
| | ----------------------------------------------------------------------------------------------- | ----
| | Industrial Buildings Corporation Ltd.                                                           | 11.7
| | Lysh The Coastal High-way Ltd.                                                                  | 25.0
| | Meimadim Investments Ltd.                                                                       | 10.0
| | New Horizons (1993) Ltd.                                                                        | 80.0
| | Shmey-Bar (I.A.) 1993, Ltd., Shmey-Bar (T.H.)

 1993 Ltd. and Shmey-Bar Real Estate (1993) Ltd. | 22.2
| |                                                                                                 |     

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

(4)    Please
    refer to Legal
Proceedings.

Significant Developments Since The End of Last Fiscal Year

In
    January 2003, the Company entered into an agreement for the sale of its holdings
    in Carmel Containers Systems Ltd., a packaging manufacturer based in
Israel (Carmel), for approximately $3.5 million.  The sale of Ampals shares of Carmel is contingent upon
Carmels acquisition of another packaging company, Best Carton Ltd., as
well as obtaining other legal authorizations and
regulatory approvals.

In February 2003, the
Company made a $0.2 million loan to Netformx Ltd., a developer and marketer of network design, analysis and simulation tools.

In
    February 2003, the Company invested $0.3 million in Star Management of Investments
    No.II (2000) L.P.  Following this investment, the Companys
investment commitment is $2.825 million.

In
    March 2003, the Company invested $0.7 million in Shellcase, Ltd., the principal
    business of which is the packaging process of semiconductor
chips.  Following this investment, the Companys equity interest in
Shellcase increased to 14.1%.

4

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Telecommunications

MIRS COMMUNICATIONS LTD.
(MIRS)

MIRS
    is the largest
investment in Ampals history. On January 22, 1998, the Company completed its purchase from Motorola Israel of a one-third
interest in the assets of a new wireless communications service provider, MIRS Communications Ltd. (MIRS) for $110
million. In March 1998, the Company transferred its interest in MIRS to a limited partnership. A wholly owned Israeli subsidiary of
Ampal is the general partner of the partnership and owns 75.1% of the partnership. The limited partners of the partnership reimbursed
the Company for their pro-rata share of expenses incurred by the Company in connection with the original purchase. MIRS, which is
one-third owned
by the partnership and two-thirds owned by Motorola Israel, operates a  fully integrated wireless voice and data communication
services digital and analog public-shared two-way radio systems. The wireless communication network is based on  iDEN(TM)
integrated wireless communication technology, a unique radio technology, developed
by Motorola, and provides an integrated service platform of cellular, two-way
radio and wireless data services. These services are targeted primarily to commercial
customers.

The
    main goal of MIRS is to provide cellular service to the commercial, governmental,
    public and private sectors according to quality standards set by
Motorola, in order to give a full and satisfying solution to all wireless communications
    needs.  MIRS has over 240,000
subscribers mainly in the commercial, governmental, municipal, security and military
    sectors. MIRS has strongly positioned itself in the commercial sector, announcing
    an aggressive pricing strategy, resulting in an increase in its customer
    base. The Israeli cellular
commercial sector consists of 960,000 subscribers out of which 215,000, or more
    than 22% of the sector, are MIRS
subscribers.

On
    February 5, 2001, MIRS was granted a full general operator license by the
    Israeli Ministry of Communications for portable radio and telephone services
through its cellular system.  This license is similar to the three existing cellular licenses previously granted to other
Israeli operators.  The major advantages of this license are that MIRS can now charge for airtime usage for incoming calls and
an interconnect agreement with Bezek, Israels local telephone provider.  As part of the license, MIRS will be required to
pay royalties to the Government of Israel and be subject to certain quality of service measurements to comply with industry
standards.  In
connection with the issuance of the license, MIRS is obligated to make a preliminary payment to the Ministry of Communications in the
amount of NIS 17,600,000 ($3.8 million) plus accrued interest.  In addition, during the ten year period beginning July 1, 2001,
MIRS will make quarterly payments to the Ministry of Communications in an amount equal to 1.3% of its income which is subject to
royalties.  Subsequent to the receipt of its license, MIRS launched a new brand, AMIGO,
which mainly targets the
consumer market.

5

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Energy

GRANITE HACARMEL INVESTMENTS LTD. (GRANITE)

Granite
    Hacarmel
Investments Ltd. (Granite) is one of Israels largest holding
companies. Granite was established in 1981 and went public on the Tel Aviv Stock
Exchange in 1992.

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

Granites strategy
is to enhance the values of its assets and achieve a higher rate of return on shareholders equity by:  supporting
the growth of its existing energy business units; participation in new projects
in the energy industry, such as independent power
station, water purification and desalination plants and other infrastructure;
synergizing activities with international partners in energy, commerce and industry;
investments in specified new business areas such as income producing real estate,
industry and
commerce; developing new chemical products for sewage and other pollution treatment;
and positioning itself as the Israeli leader in
the paints and
adhesive market.

Ampals 20.4% stake
in Granite had a market value of approximately $36.5 million as of December 31, 2002 compared with a carrying value of $24.6
million.  Ampals stake in Granite as of December 31, 2001 had a market value of approximately $40.1 million compared with
a carrying value of $25 million.  Two of the Companys representatives
are members of the board of directors of Granite and one representative is a
member of the executive committee of the board of directors of Granite.

Sonol Israel
Ltd.

Sonol
    is a marketer and distributor of refined petroleum products, lubricants and
    related products.  Sonol is one of the three largest Israeli
distributors of refined petroleum products with a chain of 205 branded public service stations as of December 31, 2002, (of which
Sonol controlled companies operate 106), agencies (virtually all owned or controlled subsidiaries) and facilities located throughout
the country serving all sectors of the economy.  Sales to the largest customers are on a direct basis, while other customers are
serviced through the network of agencies and dealers.  A Sonol subsidiary
operates a fleet of tankers having a capacity of over
1 million
liters.

Sonol
    markets a full line of branded lubricants, greases and related products which
    are blended and packaged in the Companys Haifa plant based on
formulations provided by major international lubricant manufacturers.  Distribution
is by company-owned vehicles.

Sonol
    owns substantial real estate assets, some of which have significant development
    potential beyond present usage.  A 23,000 square meter, 30-story
office tower is presently under construction in Tel Aviv.

6

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Tambour Ltd.

During 2001, Granite
acquired 100% of Tambour for approximately $125,000,000. Tambour is the largest supplier of a complete range of water, solvent and
powder based paints products in Israel and serves a broad spectrum of customers including wholesalers, retailers, building
contractors, factories, workshops and government agencies.

Through Tambour Ecology
Ltd. and other invested companies, Granite is engaged in the treatment of water and sewerage, water desalination, production and
distribution of industrial lubricants, treatment of metals and the production of glues, polymer emulsions, additives for building,
printing inks and cleaning and disinfecting materials for the institutional and industrial market.

Supergas Israel Gas
Distribution Company Ltd.

Supergas
    is a leading
supplier of liquified petroleum gas in Israel.  The company sells and distributes gas to the private, commercial, agricultural,
industrial and institutional sectors, providing full solutions for the planning and supply of gas related equipment to all
sectors.  The company and its agents serve over 400,000 clients nationwide.

Granite Hacarmel
Holdings

Granite
    Hacarmel
Holdings was established in 1993 to implement Granites strategy of investing resources in real estate and development. 
The company aims to generate a steady stream of cash flow by renting prime industrial, commercial and office properties to premium
tenants and to achieve higher returns on investment and equity.  The company
has significant holdings in a number of projects that have been completed or
are still in progress.

Allied
  Oils & Chemicals

Allied
    Oils &
Chemicals owns a blending facility in Haifa operated by Sonol.  The facility produces a wide variety of automotive, marine and
industrial lubricants and greases.  Production of approximately 150 different products is based on formulations that have been
approved by Sonol for marketing in Israel and overseas.  The company has know how agreements
with international companies such as Mobil, BP, Lubrizol, Ethyl, Infinium and
others.

High Technology

BABYLON
      LTD.
(BABYLON)

Babylon-Pro,
Babylons single click translation, information & conversion tool enables users to instantly obtain translations in most
spoken languages, information from thousands of glossaries and conversions of currencies, measurements & time
zones. There are
currently 19 million registered users of Babylon-Pro.

As
    of December 31, 2002, the Company had invested a total of $0.5 million in
    Babylon and had written off $0.33 million of this investment.  As of
December 31, 2002, the Company held a 1.6% equity interest in Babylon.

7

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BRIDGEWAVE
COMMUNICATIONS, INC. (BRIDGEWAVE)

BridgeWave develops and
markets wireless access systems that extend the reach of broadband networks, allowing service providers to reach untapped subscribers
with high-margin, high-bandwidth services.

As
    of December 31, 2002, the Company had invested an aggregate of $2.8 million
    in BridgeWave, constituting a 6% equity interest.  In 2002, the Company
wrote off its investment in BridgeWave.

CUTe
      LTD.
(CUTe)

CUTe
    is a pioneer in the development and deployment of integrated wire-line/wireless/satellite
    video security systems.  CUTes solutions are ideal
for mobile emergency response in government and public safety applications, transportation
    control, remote monitoring of critical infrastructure, as well as security
  systems in airports, seaports, borders and national security facilities.

In
    June 2000, the Company entered into a share purchase agreement pursuant to
    which the Company undertook to invest $1.75 million in CUTe, in four
equal consecutive quarterly interest bearing  installments. All four installments have been paid.  The Company holds 20% of
the issued share capital of CUTe.  As of December 31, 2002, CUTes value in the Companys
books was $0 due to its
equity losses.

ENBAYA
      INC.
(ENBAYA)

During 2002, Enbaya
ceased operations and the Company wrote off its entire $2.0 million investment.

IDENTIFY
      SOLUTIONS
LTD. (IDENTIFY)

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

As
    of December 31, 2002, the Company had invested $3.7 million in Identify,
    and had written off $1.1 million of its investment.  As of December
    31, 2002,
the Company holds a 6.5% equity interest in Identify.

MODEM
      ART LTD.
(MODEM-ART)

Modem-Art
    specializes in developing system-on-a-chip solutions for wideband and broadband
    communication systems focusing on baseband processors for 3G
terminals/handsets.  As of December 31, 2002, the Company had invested $2.0 million in Modem-Art for an equity interest of
5.2%.  During 2002, the Company wrote off $1.0 million of its investment
in Modem-Art.

8

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NETFORMX,
      LTD.
(NETFORMX)

Netformx develops and
markets the award winning CANE(R) family of network design, analysis and simulation tools.

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

During 2001, Netformx
developed a new line of web-based products, which it has sold to Cisco Systems, Nortel Networks and SBC Communications. In addition,
due to slower than expected growth in its markets, Netformx reduced its work force and expenses during 2001 to adjust to current
market conditions.

As of December 31,2002,
the Company had a 19.6% equity interest in Netformx, directly and indirectly through Ophir. As of December 31, 2002, the Company had
written off all of its investment in Netformx.

OBLICORE
      INC.
(OBLICORE)

Oblicore provides
software that aligns information technology systems with business obligations and service level agreements, thereby assuring revenue
as well as reducing costs. By correlating the contractual commitments and service level agreements with real-time enterprise data,
Oblicore Guarantee(TM)  provides the operational visibility and
the peace of mind that comes with consistently meeting obligations in an efficient
and documented manner.

Oblicores products
are used by large enterprises and service providers to manage existing obligations as well as create new, profitable ones. Oblicore
is headquartered in Germantown, Md. with additional offices in Europe and the Middle East.  As
of December 31, 2002, the Company had written off all of its investment of $2.2
million.

OPHIRTECH
      LTD.
(OPHIRTECH)

Ophirtech,
    the
Companys 42.5%-owned affiliate, has invested in 20 companies in the high -technology sector. During 2002, Ophirtech invested
$0.9 million in start-up companies. In addition, in 2002, Ophirtech made provisions for impairment of the value of its start-up
investments in the amount of $7.8 million.  At December 31, 2002, the book value of Ophirtechs
start - up investments was
$7.3 million.

Included
    among
Ophirtechs investments are the following companies:

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CelvibeE Ltd.
(Celvibe)

Celvibe, which developed
video technologies for the internet and mobile users, ceased operations in 2003 and is undergoing a liquidation process.

Cerel Ceramic
Technologies Ltd. (Cerel)

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

As of December 31, 2002,
Ophirtech had invested $0.7 million in Cerel for a 14.2% equity interest.

Elpas Ltd.
(Elpas)

Elpas develops local
positioning-system solutions for hospitals and buildings. Through its patented wireless infra-red technology, Elpas is positioned to
deliver solutions that change the way personnel, patients, visitors and equipment are managed indoors.  As of December 31, 2002,
Ophirtech had written off its investment of $1.7 million.  Ophirtechs equity interest in Elpas is 11.8%.  Elpas is in
the process of merging with another company in the technology field.

Expand Networks Ltd.
(Expand)

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

As of December 31, 2002,
Ophirtech had written off $1.3 million of its $2.9 million investment in Expand.  Ophirtechs equity interest in Expand is
11.2% as of December 31, 2002.

Pelican Security Ltd.
(Pelican)

Pelican is a client-side
Internet security vendor that provides solutions that proactively protect e-businesses from Internet threats. Pelicans flagship
product line, Pelican SafeTnet(TM), protects organizations from threats such as destructive Internet viruses and hackers who attempt
to exploit the security weaknesses of the Windows client to gain unauthorized access to vital corporate resources.  As of
December 31, 2002, Ophirtech had invested $1.6 million for a 15.7% equity interest in Pelican, of which $1.4 million had been
written off.  In March 2003, Pelican ceased operations and sold its intellectual property rights to Microsoft Corporation for a
total
amount of $800,000.

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Praxell,
      Inc.
(Praxell)

Praxell has developed a
payment system (Praxicard), which provides safe, secured and anonymous online purchases. Praxicard also enables new segments like
teenagers and travelers that lack credit cards, which have been largely excluded from online purchasing, to buy online. The system,
completely based on Oracle systems, provides Internet users with comfortable, flexible and secured payment solutions.

As of December 31, 2002,
Ophitech had written off its investment of $0.7 million in Praxell.

StoreAge
      Networking
Technologies Ltd. (StoreAge)

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

As of December 31, 2002,
Ophirtech had invested $3.0 million in StoreAge for a 10.9% equity interest.

Viola
      Networks Ltd.
(Viola)

Viola, (formerly Omegon
Networks Ltd.), is developing a software system permitting quick and continuous identification of difficulties and interruptions in
various communications networks.

As
    of December 31, 2002, Ophirtech had invested $3.0 million and had written
    off $1.9 million of such investment.  Ophirtechs equity interest
    in
Viola is 16.0% as of December 31,2002.

PEPTOR
      LTD.
(PEPTOR)

Peptor
    is a biopharmaceutical company that applies proprietary rational drug design
    and combinatorial peptidomimetic technology to heat shock
protein 60 (hsp60) to develop immunotherapeutic vaccines that can
modulate the immune system and thereby treat autoimmune diseases and certain
cancers.

As
    of December 31, 2002,
the Companys equity interest in Peptor was 0.5%, and the net investment
was $0.2 million.

POWERDSINE
      LTD.
(POWERDSINE)

PowerDsine
    is the market
leader of Power over LAN, a technology that integrates data, voice and power on standard Ethernet infrastructure.  As one
of the founding members of the IEEE 802.3af Task Force, PowerDsine is at the forefront of setting the global standard for remotely
powering Ethernet devices over LAN infrastructure.  Since Power over LANs
introduction to the market in 1998, PowerDsine has established business relationships
with over nine major communications companies worldwide.

PowerDsine
    sells its products to over 100 customers in North America, Europe, Israel
    and the Asia Pacific region.  PowerDsine has established
business relationships with over nine major communications giants, including:
    Nortel Networks, Siemens, Lucent Technologies, Ericsson, Fujitsu, NEC, Proxim,
  3Com, Alcatel and Avaya.

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As
    of December 31, 2002,
the Companys total investment in PowerDsine was $6 million and its equity
interest was 8.1%.

SHELLCASE
      LTD.
(SHELLCASE)

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

In
    January 2002, the
Sanyo Corporation invested $1 million in ShellCase.  As of December 31, 2002, the Companys investment of $5.5 million in
ShellCase represented a 14.0% equity interest.  As of December 31,2002,  the
Company had written off $2.3 million of its
investment in Shellcase.

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

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

As
    of December 31, 2002, the Company had invested $1.8 million in Shiron and
    had made a $0.3 million loan to Shiron.  The Companys equity interest
in Shiron is  9.8%.  As of December 31, 2002, the Company had written
off $1.8 million of its investment in Shiron.

SMART
      LINK LTD.
(SMART LINK)

Smart
    Link is a developer and supplier of software-based communications products
    that provide Internet access to the residential markets. Its
proprietary technology enables customers to replace traditional hardware-based
    communications products with high-quality, user-friendly software-based solutions
    that are smaller and less costly. Products include software and chips that
    are easily
integrated into personal computers and information appliances. As of December
    31, 2002, the Company had invested $2.9 million in
Smart Link Constituting a 13.6% equity interest in such company.

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

As
    of December 31, 2002, the Company had invested $1.875 million in Star, a
    venture capital fund that focuses on investments in communications, Internet
infrastructure, enterprise software, industrial technologies and medical devices,
    for a 10% interest in Star.  The Company has
committed to invest an additional $3.125 million in Star. During 2002, the Company
    had written off $0.6 million of its investment
in Star.

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VISIONCARE
      OPHTHALMIC
TECHNOLOGIES LTD. (VISIONCARE)

VisionCare
    develops and markets proprietary ophthalmic implantable products that give
    patients better and more natural visual function with improved quality
of life. VisionCares products meet the growing demand for innovative devices to treat age-related eye disorders, affecting tens
of millions of people. VisionCares first product is the patented Implantable Miniaturized Telescope (IMT),
a solution for macular degeneration, a disease which destroys central vision.
As of December 31, 2002, the Company had invested $0.7
million and had written off $0.3 million, and its equity interest in VisionCare
is 2.5%.

XACCT
      TECHNOLOGIES
LTD. (XACCT)

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

As
    of December 31, 2002, XACCT had licensed its business software to approximately
    80 network service providers.  XACCTs customers include Bell
Canada (NYSE:BCE), Boeing (NYSE: BA), British Telecom (NYSE:BT), Broadwing (NYSE:BRW), Cable & Wireless (NYSE:CWP), COLT
(NASDAQ:COLT), Global One, Genuity (NASDAQ:GENU), Motorola (NYSE: MOT), Omnitel Vodafone, Siemens (NYSE:SIE), Teleglobe, 
(NYSE:BCE), TELUS (NYSE: TU), TV Cabo, and Verio (NYSE:NTT).  In addition,
XACCT has developed strategic alliances or collaborative relationships with a
group of over 100 system integrators, value-added resellers, networking infrastructure
vendors and
software applications
vendors.

As
    of December 31, 2002,
the Companys total investment in XACCT was $12.8 million and its equity
interest was 16.9%.

XPERT
      INTEGRATED
SYSTEMS LTD. (XPERT)

Xpert
    is a leader in systems and architectural design and implementation for IP-based
    service providers.  As of December 31, 2002, the Company had
invested $2.75 million in Xpert, and its equity interest is 12.7%.

Real Estate

In
    Israel, most land is owned by the Israeli government. In this Report, reference
    to ownership of land means either direct ownership of land or a long-term
lease from the Israeli Government, which is in most respects 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.

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AM-HAL
      LTD.
(AM-HAL)

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

In March 1992, the first
center was opened in Rishon LeZion, a city located approximately 10 miles south of Tel-Aviv. This center, of about 120,000 square
feet, includes 149 self-contained apartments (of which 126 were occupied on December 31, 2002), an 80-bed nursing care ward, a 24-bed
assisted-living ward (which had 100% occupancy on December 31, 2002), a swimming pool, a health care center and other recreational
facilities. The nursing care ward is leased to a non-affiliated health care provider until 2006. Rental payments are based upon the
profits of the nursing care ward, with a minimum rent of $350,000 per year.

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

Due
    to the success of this project and the increased demand for such services,
    Am-Hal has entered into a joint venture agreement with, among others, the
owner of a property consisting of 2.5 acres of land in Hod Hasharon, a city located
    approximately 7 miles north of Tel Aviv, for its
second retirement center.  This center, which is approximately 250,000 square feet, was opened in June 2000, and includes 235
self-contained apartments, a 33-bed nursing care ward and a 22-bed assisted-living ward.  As of December 31, 2002, 200 of the
apartments had been sold, the nursing care ward had a 76% occupancy, and the assisted-living ward had a 50% occupancy.  The
total cost of
the project was approximately $42 million financed principally by bank loans and refundable deposits from tenants.  See
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations  Liquidity and Capital
Resources for additional information regarding these loans.

INDUSTRIAL
      BUILDINGS
CORPORATION LTD. (INDUSTRIAL BUILDINGS)

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

Ampals ownership
interest in Industrial Buildings in held through its interest in Ophir. Ophirs interest in Industrial Buildings, as of December
31, 2002, was 11.7%.  From January through February 2002, Ophir sold an
aggregate of 1,027,653 shares of Industrial Buildings for an aggregate amount
of NIS 6.4 million ($1.5 million), which represented a pre-tax gain of $200,000.

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

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

Ampal
    (Israel), a wholly-owned subsidiary of Ampal, owns an approximately 40,000
    square foot commercial property located in Tel Aviv which houses its
principal offices.  Total rental income in 2002 was $0.3 million.  Ampal
(Israel) also acts as a holding company for other investments discussed elsewhere
in this report.

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

NIR, a wholly-owned
subsidiary of Ampal, owns commercial properties located in Israel aggregating approximately 6,000 square feet for which it received
approximately $0.3 million in rental income in 2002.

Ampal Development, a
wholly owned subsidiary of the Company, issued debentures which are publicly traded on the TASE. An aggregate of approximately $5.4
million of these debentures were outstanding as of December 31, 2002. Ampal Development has deposited funds with Bank Hapoalim
sufficient to pay all principal and interest on these debentures.

OPHIR
      HOLDINGS LTD.
(OPHIR)

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

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

Ophir
    owns two acres of land in an industrial park in Netanya, Israel together
    with an unrelated party. These parties entered into a joint venture agreement
regarding this site on which they developed a 326,000 square foot building (including
    parking) for both industrial and commercial
use. Ophirs share of the property and joint venture is 70%. Almost all of the building (95.5% of main area) is leased. 
Ophirs revenues from the lease of the building were $2.9 and $3.2 million
in 2002 and 2001, respectively.

Ophir
    owns a 22.2%
interest in the Shmey-Bar group of companies (Shmey-Bar). Shmey-Bar acquired 2.3 million square feet of real estate
properties from Hamashbir Hamerkazi, Ltd. (Hamashbir Hamerkazi) for $27.7 million. In the same transaction, Shmey-Bar
received an option to acquire, for $26.3 million, an additional 700,000 square feet of real estate properties from Hamashbir
Hamerkazi. These properties are situated in various locations in Israel. Ophirs interest in Shmey-Bar was acquired with a
nominal investment accompanied by a $2.6 million shareholders loan.

Ophir
    owns a 50%
interest equity in Lysh The Coastal High-way Ltd. (Lysh). Lysh has a 50% holding in Beit Herut-Lysh Development Company
Ltd. (BHL), which is constructing a 180,000 square foot commercial project for rental near Moshav Beit Herut on land
owned by the Israeli Land Authority.  Through December 2002, Phase A of this project, consisting of approximately 100,000 square
feet, had been constructed at a construction cost of $18 million, including the cost of the land.  Ophirs share in Lysh is
approximately 25% (its share in the project being approximately 12.5%).  As
of December 31, 2002, the investment in Lysh of $0.9
million was written off.

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Ophir
    has also undertaken to provide guarantees in an amount equivalent to 25%
    of the construction costs.  As of December 31, 2002, BHL had
taken out bank loans of approximately $15.6 million, by drawing on a credit line
    extended by a financial institution in connection
with the project.

In
    September 1995, Ophir acquired a 10% interest in a joint venture which had
    agreed to purchase 4.4 million square feet of land near Haifa for approximately
$15 million, on which the parties intend to develop a commercial real estate
    project for rent.  Ophir has obligated itself to
invest up to $1.5 million in the first stage of this project and its share of
    development costs is estimated to be as much as $17
million.

During
    December 2002, Ophir signed an agreement to sell four properties for a total
    purchase price of $5.9 million (net income $4.2 million).  The
gain will be recognized during the first quarter of 2003.

BAY
      HEART LIMITED
(BAY HEART)

Bay
    Heart was
established in 1987 to develop and lease a shopping mall (the Mall) in the Haifa Bay area. Haifa is the third largest
city in Israel.  The Mall, which opened in May 1991, is a modern three-story facility with approximately 280,000 square feet of
rentable space.  The Mall is located at the intersection of two major roads and provides a large mix of retail and entertainment
facilities including seven movie theaters.  Approximately 37,500 square feet of the Mall are occupied by Supersol Ltd., one of
the two largest Israeli supermarket chains, and the parent of a co-investor in Bay Heart.  As of December 31, 2002,
approximately 78% of the
Mall was occupied.  The total cost of the Mall was approximately $53 million, which was financed principally with debt
instruments.  See Item 7.  Managements Discussion and Analysis of Financial Condition and Results of Operations
 Liquidity and Capital Resources for additional information regarding the debt financing of Bay Heart.  A train
station on the west side of the Mall was completed on September 2001.  A transportation complex, in conjunction with a
subsidiary of Egged Bus Company, was opened in January 2002.  The Company
owns 37% of Bay Heart. Due to the slowdown in the Israeli economy, the company
is considering a financial structuring and a renovation of the Mall.

ETZ
      VANIR LTD.
(ETZ VANIR) AND YAKHIN MATAIM LTD. (YAKHIN MATAIM)

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

Ampal
    historically believed that it owned 50% of the equity of Etz Vanir and Yakhin
    Mataim and that the remaining 50% was owned by an unrelated company,
Yakhin Hakal Ltd. (Yakhin Hakal), which manages their operations.  In
February 1995, Yakhin Hakal and its affiliates commenced a legal proceeding seeking
to cause Etz Vanir and Yakhin Mataim to redeem perpetual debentures owned by
Ampal and to require
Ampal to surrender all of its preferred shares of Etz Vanir and Yakhin Mataim
for their par value, which is nominal.

On
    July 27, 1998, a Tel Aviv District Court ruled in favor of Yakhin Hakal,
    the manager and co-owner of the Companys 50%-owned affiliates Etz Vanir and
Yakhin Mataim.  The judges decision allows Etz Vanir and Yakhin Mataim to redeem debentures owned by the Company for
approximately $0.8 million and to require the Company to surrender all of its preferred shares of Etz Vanir and Yakhin Mataim for
their par value. The Company presents its investment in Etz Vanir at the par value of its debentures See Item 3. Legal
Proceedings for a description of this litigation and various appeals filed
by the Company in this regard.

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Leisure-Time

CORAL
      WORLD
INTERNATIONAL LIMITED (CORAL WORLD)

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

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

Coral
    Worlds parks
hosted approximately 925,000 visitors during 2002. Coral World has approximately
    260 full-time equivalent positions as of December
31, 2002.

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

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 1,800
    member families for the 2002 season.  The Company owns 51% of Kfar
Saba.

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

On
    December 31, 1995, the Company purchased from Kfar Saba its 50% interest
    in Hod Hasharon for $1.4 million.  Hod Hasharon operates a similar country
club facility (the H.H. Club) in Hod Hasharon, a town adjacent to Kfar Saba.  The H.H. Club, which opened in July
1994 and has a capacity of 1,600 member families, has operated at capacity for the past three years. In 2002 the H.H Club operated
above capacity with 1,880 members families.  In 2002, the H.H. Club repaid owners loans of $0.1 million to each of the
partners.  The H.H. Club is expected to continue repaying owners loans
in 2003 in the amount of $0.3 million to each of the
partners.

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Capital Markets And Other Holdings

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

Ampal
    Industries, a wholly-owned subsidiary of Ampal, holds interests in various
    investee companies described in the high-technology section in this
report. Ampal Industries also has a portfolio of marketable securities which
    was valued at approximately $18.4 million at December 31, 2002, which includes
    investments valued at approximately $11.2 million in Blue Square.  In
    addition, Ampal Industries owns 50% of a commercial building located in Migdal
    Ha'emek. In 2002, it received approximately $0.1 million in rental income
    for this
property.

ALVARION
      LTD.
(ALVARION)

Alvarion (Nasdaq: ALVR)
(formerly BreezeCOM Ltd.) is a leading provider of point-to-multipoint, wireless broadband networking infrastructure solutions, used
by telecommunication carriers, service providers and private network operators worldwide

As
    of December 31, 2002,
the Company had invested $4.9 million in Alvarion.  The Company holds 816,475
shares of Alvarion, which represent an 1.5% interest in Alvarion as of December
31, 2002.

The Company recorded
charges of $2.5 million in its statement of income as unrealized loss on investments.

AREL
      COMMUNICATIONS
AND SOFTWARE LTD. (AREL)

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

As
    of  December 31,
2002, the Company owned 398,100 and 119,674 shares of Arel and ArelNet, respectively, which had a combined market valuation of $0.1
million. The Companys equity interest in Arel and ArelNet at December 31,
2002 was 3.0%.

BLUE
      SQUARE ISRAEL
LTD. (BLUE SQUARE)

Blue
    Square is a publicly traded company on the Tel Aviv Stock Exchange and New
    York Stock Exchange.  In June 1999, the Company invested $24
million to purchase 1,500,000 shares of Blue Square, representing 3.9% of Blue
  Square, at $16 per share.

As of December 31, 2002,
the investment in Blue Square had a market value of $11.2 million. Primarily due to the length of the time and extent to which the
market value has been less than cost such decline has been accounted for as other than temporary loss. The Company recorded charges
of $12.8 million in its statement of income as unrealized loss on investments.

The largest stockholder
in the Blue Square initiated a process under which it plans to sell all of its holdings (78.1%) in the Blue Square ordinary
shares.

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The sale is carried out
through a tender which is anticipated to be completed by the end of May 2003.The Company believes that the purchase price from this
tender process will be higher than the market price.

CARMEL
      CONTAINER
SYSTEMS LIMITED (CARMEL)

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

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

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

COMPUGEN
      LTD.
(COMPUGEN)

Compugen (NASDAQ: CGEN)
is a pioneer in the merging of computational technologies with biology, chemistry and medicine to enhance drug discovery and
development. This merging of computational technologies provides high value products and services to leading biotechnology and
pharmaceutical companies and for in-house discovery. As of December 31, 2002, the Company held 357,000 shares of Compugen,
representing a 1.4% equity interest.

The Company recorded
charges of $0.5 million in its statement of income as unrealized loss on investments.

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

The Company had invested
$1.5 million for 20% of Epsilon and its affiliate, Renaissance as of December 31, 2002. Epsilon is an investment bank which provides
portfolio management services and Renaissance provides underwriting services in Israel through its subsidiaries.

EMPLOYEES

As of December 31, 2002,
Ampal had two employees, Ampal Industries (Israel) Ltd. had 16 employees, Am-Hal Ltd. (a wholly owned subsidiary of Ampal) had 165
employees and Country Club Kfar Saba Ltd. (owned 51% by the Company) had 108 employees. Relations between the Company and its
employees are satisfactory.

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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 Palestine Liberation Organization
    (the PLO).  Israel signed a peace
agreement with Egypt in 1979 and with Jordan in 1994. Since 1993, several agreements have been signed between Israel and Palestinian
representatives regarding conditions in the West Bank and Gaza.  While negotiations have taken place between Israel, its Arab
neighbors
and the PLO to end the state of hostility in the region, it is not possible to predict the outcome of these negotiations and their
eventual effect on Ampal and its investee companies.  Since September 2000, there have been increased hostilities between the
Israeli government and Palestinian groups.  In addition, any military action taken against Iraq by the United States or other
countries could further intensify hostilities between Israel and its Arab neighbors.  It is possible that the situation may
deteriorate further and may impact the value of Ampal and its investee companies.  See -Economic and Financial
Developments below and Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations for
further discussion of the possible impact of this situation on the Company.

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

Economic and Financial Developments

Israels economy
has been in a recession since 2001.  This recession resulted from, among other things, internal market weakness, the worldwide
crisis in the High-Technology industry, and on Nasdaq in particular, as well as continuing hostilities between Israel and the
Palestinians.  The terrorist attacks on the United States of September 11, 2001, and the military action taken against Iraq
by the United States and other countries have further intensified the global economic crisis, and such situations have also
negatively impacted Israels economy.

According
    to the Israeli
Central Bureau of Statistics end-of-year publication, Israels gross domestic product fell by 1% in 2002 following a
decrease of 9% in 2001.  This decrease is in contrast to the rapid growth
in the Israeli economy evidenced from the second quarter of 1999 to the third
quarter of 2000.

The
    global economic
slowdown and the growing crisis in the High  Tech industry have significantly influenced Israeli exports.  In
2002, exports of goods and services fell by 5.4% in real terms following a larger
decrease of 11.7% in 2001. In 2002, imports of goods and
services dropped by 3% in real terms after falling by 4.5% in 2001.

Exports
    of goods and services and investments in fixed assets fell by high rates:
    5.4% and 8.9%, respectively.  For the first time in many years, a
decrease of 0.6% was recorded in private consumptions due to the continued recession,
  the rise in unemployment and wage erosion.

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In 2002, unemployment in Israel
increased to 10.4%.  The rate of unemployment in 2001 averaged 9.3%, as compared to 8.8% in 2000. This increase resulted mainly
from the Hi-Tech crisis which brought about a wave of layoffs in this industry.

The inflation in 2002 was 6.5%,
a considerable upward deviation from the targeted level of inflation. In 2001, the consumer price index rose by 1.4%, compared to the
targeted inflation level of 2.5-3.5%, as determined by the government.  In 2001 and 2000, actual inflation has been
substantially lower than the target set by the government:  in 2001, actual inflation was 0.9%, compared to a target of 3.5%;
and in 2000, actual inflation was 0%, compared to a target of 3-4%.

Development in the money and
capital markets during 2002 were affected by the 2% cut in the interest rate from 5.8% to 3.8% at the end of 2001. This measure led
to a continuing depreciation of the shekel, which was accompanied by deterioration in the security situation and by a large budget
deficit.  Fears of financial instability grew in the course of the year:  inflation and inflationary expectations rose, and
bond yields reflected a crisis situation.  The monetary policy reaction to these developments was delayed.  Eventually, a
combination of a large rise in the Bank of Israel's interest rate to 9.1% and the adoption of a program for reducing the budget
deficit
succeeded in stabilizing the economic system.

The shekel - dollar exchange
rate, which averaged NIS 4.28 in December 2001, peaked to NIS 5 in June 2002. During the year as a whole, the shekel depreciated by
9.7 % against the dollar and by 14.2% against the currency basket (December average). On January 22, 2003  the exchange rate hit
the level of NIS 4.90 to the dollar.

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

| | Year Ended Dec. 31 |  |  | Israel

Annual

 Inflation

 Rate(1) |  |  | Closing

Exchange

 Rate(2) |  |  | Annual

 Devaluation(3) |   |  | U.S.

Annual

 Inflation

 Rate(4) | 
| | ------------------ |  |  | ------------------------------------ |  |  | --------------------------- |  |  | ----------------------- | - |  | ---------------------------------- | 
| |                    |  |  |                                      |  |  |                             |  |  |                         |   |  |                                    | 
| | 1994               |  |  | 14.5                                 |  |  | 3.018                       |  |  | 1.1                     |   |  | 2.6                                | 
| | 1995               |  |  | 8.1                                  |  |  | 3.135                       |  |  | 3.9                     |   |  | 2.8                                | 
| | 1996               |  |  | 10.6                                 |  |  | 3.251                       |  |  | 3.7                     |   |  | 3.3                                | 
| | 1997               |  |  | 7.0                                  |  |  | 3.536                       |  |  | 8.8                     |   |  | 1.7                                | 
| | 1998               |  |  | 8.6                                  |  |  | 4.160                       |  |  | 17.6                    |   |  | 1.6                                | 
| | 1999               |  |  | 1.3                                  |  |  | 4.153                       |  |  | (0.2                    | ) |  | 2.7                                | 
| | 2000               |  |  | 0.0                                  |  |  | 4.041                       |  |  | (2.7                    | ) |  | 3.4                                | 
| | 2001               |  |  | 1.4                                  |  |  | 4.416                       |  |  | 9.3                     |   |  | 1.6                                | 
| | 2002               |  |  | 6.5                                  |  |  | 4.737                       |  |  | 7.3                     |   |  | 2.0                                | 

---

|(1) | Israel Annual Inflation Rate is the percentage increase in the Israeli Consumer
Price Index between December of the year indicated and December of the preceding year.                                                                 
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Closing Exchange Rate is the rate of exchange of one United States  dollar
for the NIS at December 31 of the year indicated as reported by the Bank of Israel.                                                                         
|(3) | Annual Devaluation is the percentage increase in the value of the United States
dollar in relation to the NIS during the calendar year.                                                                                                
|(4) | U.S. Annual Inflation Rate is obtained by calculating the percentage change in
the United States Consumer Price Index for All Urban Consumers, as published by the Bureau of Labor Statistics of the United States
Department of Labor.

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Israeli Investment

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

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

CERTAIN UNITED STATES AND ISRAELI REGULATORY MATTERS

SEC Exemptive Order

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

TAX INFORMATION

Israeli Taxation of Ampal

Ampal (to the extent that it has
income derived in Israel) and Ampal's Israeli subsidiaries are subject to taxes imposed under the Israeli Income Tax Ordinance. 
For  2002, Israeli companies were taxed on their income at a rate of 36%.

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

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The tax reform legislation
focuses, inter alia, on the following issues:

1.   A transition
from a primarily territorial based tax system to a personal based tax system of Israeli tax residents (which mainly applies on the
Company's Israeli subsidiaries) had been introduced.  Consequently, Israeli tax residents would be taxed on their worldwide
income; and

2.   The
introduction of a reduced (25%) tax rate on capital gains. Capital gains arising from the sale of capital assets that had been
purchased prior to January 1, 2003 shall be apportioned on a linear basis to the periods before and after same date, namely - the
portion of the gain attributed to the period before January 1, 2003 shall be subject to 36% (for corporations), whereas the portion
of the gain attributed to the period after January 1, 2003 shall be taxed at the preferential rate of 25%.

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

Ampal had income from interest,
rent and dividends resulting from its investments in Israel.  Under Israeli law, Ampal has been required to file reports with
the Israeli tax authorities with respect to such income.  In addition, as noted below, Ampal is subject to a withholding tax on
dividends received from Israeli companies at a rate of either 25%, 15% or 12.5%, depending on the percentage ownership of the
investment and the type of income generated by that company (as opposed to dividends payable to Israeli companies which are exempt
from tax or subject to a tax rate of 25%, when stem from income generated out of Israel, or for the dividends paid by an approved
enterprise to
either residents or non-residents, the tax on which is withheld at a rate of 15%).  Under an arrangement with the Israeli tax
authorities, such income has been taxed based on principles generally applied in Israel to income of non-residents.  Ampal has
filed reports with the Israeli tax authorities through 2001 and has received final assessments with respect to such
reports filed through 1996 (which final assessments are, under Israeli law, subject to reconsideration by the tax authorities only in
certain limited circumstances, including fraud).  Based on the tax returns filed by Ampal through 1996, it has not been required
to make any additional tax payments in excess of the withholding on its dividends. In addition, under Ampal's arrangement with the
Israeli
tax authorities, the aggregate taxes paid by Ampal in Israel and in the United States on interest, rent and dividend income derived
from Israeli sources has not exceeded the taxation which would have been payable by Ampal in the United States had such interest,
rent and dividend income been derived by Ampal from United States sources.  There can be no assurance that this arrangement will
continue in the future.  This arrangement does not apply to taxation of Ampal's Israeli subsidiaries.

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

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

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

Individuals and companies in
Israel pay VAT at a rate of 17% of the price of assets sold and services rendered (according to a Temporary Order issued by the state
of Israel on June 5, 2002 the VAT rate was increased to 18% for the period commencing on June 15, 2002 and ending on December 31,
2003).  The Company can deduct VAT paid on goods and services acquired for the purpose of the business.  Nir, a subsidiary
of Ampal is considered a Financial Institute under the VAT Law, and as such is subject to wage and profit tax.

United States Taxation of Ampal

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

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

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

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

FORWARD-LOOKING STATEMENTS

This Report (including but not
limited to factors discussed in the Management's Discussion and Analysis of Financial Condition and Results of
Operations, as well as those discussed elsewhere in this Report on Form 10-K) includes forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) and information relating to the Company that are based on the
beliefs of management of the Company as well as assumptions made by and information currently available to the management of the
Company. When used in this Report, the words anticipate, believe, estimate, expect,
intend,
plan, and similar expressions, as they relate to the Company or the management of the Company, identify forward-looking
statements.  Such statements reflect the current views of the Company with respect to future events or future financial
performance of the Company, the outcome of which is subject to certain risks and other factors which could cause actual results to
differ materially from those anticipated by the forward-looking statements, including among others, the economic and political
conditions in Israel, the Middle East, including the situation in Iraq, and in the global business and economic conditions in the
different sectors and markets where the Company's portfolio companies operate.

Should any of those risks or
uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcome may vary from those described
therein as anticipated, believed, estimated, expected, intended or planned.  Subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary
statements in this paragraph and elsewhere described in this Report and other Reports filed with the Securities and Exchange
Commission.

ITEM 2. PROPERTY

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

Ampal currently leases an office
at 555 Madison Avenue in New York City from Rodney Company N.V., Inc. The lease period is seven years commencing on October 15, 2002.
The annual rent for this lease is $114,968.

On October 15, 2002 the 
sublease contract under which Ampal subleased an office at 660 Madison Avenue in New York City from Cavallo Capital Inc. was
terminated. In 2002, Ampal's total payments to Cavallo in connection with this sublease was $42,400.

Kfar Saba, which operates a
country club in the town of Kfar Saba, occupies a 7-1/4 acre lot which will be leased for five consecutive ten-year periods, at the
end of which the land returns to the lessor.  The lease expires on July 14, 2038, and lease payments in 2002 totaled
$147,401.

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

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ITEM 3. LEGAL PROCEEDINGS

Yakhin Hakal

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

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

On October 15, 1998, the Company
filed an appeal with the Israeli Supreme Court in Jerusalem. On September 30, 2001, the Supreme Court dismissed the appeal filed by
the Company, on the grounds that the Company failed to timely produce a guarantee to cover Yakhin Hakal's expenses in the appeal. On
November 1, 2001, the Company filed a petition to the Israeli Supreme Court, contending that the dismissal of an appeal due to a
delay in producing guarantees as part of the appeal is unreasonable and that the law allowing this should be changed. The petition
was withdrawn by the Company on October 6, 2002.

On December 30, 2001, the
Company filed a motion to allow it to file a new appeal in this case. The Supreme Court dismissed the motion on September 10,
2002.

On October 12, 2001, the Company
filed a request with the Tel-Aviv District Court for a preliminary injunction and other remedies in relation to the validity and
enforceability of Etz Vanir's and Yakhin Mataim's decisions to redeem the debentures owned by the Company and to require the Company
to surrender all of its preferred shares in Etz Vanir and Yakhin Mataim.  On January 28, 2002, the Tel Aviv  District Court
dismissed the request.  On March 12, 2002, the Company filed an appeal with regard to this decision with the Israeli Supreme
Court and the appeal is scheduled to be heard on April 9, 2003.

As of the date hereof, the
Company cannot predict the outcome of these proceedings.

Granite

In February 2000, a petition was
filed against Sonol, a wholly-owned subsidiary of Granite, Paz Oil Company Ltd. and Delek, the Israeli Fuel Company Ltd., in the
Jerusalem District Court to allow a class action suit regarding fixing the retail price of diesel fuel. The lawsuit, if certified as
a class action, will be in the amount of NIS 249.6 million ($53 million).  Sonol's share is NIS 58.6 million ($12
million).  Sonol denies the claim and, based on legal advice, Sonols management has concluded that there is a reasonable
chance that the suit will not be certified as a class action.

26

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In May 2001, a claim was filed
in the Jerusalem District Court against Sonol, its subsidiary company, Sprint Motors Ltd., and four unrelated fuel companies by
customers who purchased fuel products in filling stations, contending that the defendants charged an illegal service
charge over a period of many years.  The plaintiffs have requested the court to recognize their claim as a class
action.  The amount of the claim is NIS 5.30, however, should the court certify the class action, it will total approximately
NIS 404 million ($85 million).  From the claim, it is not clear as to what is Sonol's and its subsidiary's share of this
amount.  Granite's
management and its legal counsel have advised the Company that it is unlikely that the claim will be certified as a class
action.

In June 2001, a claim was filed
by customers against Supergas (Granite's wholly-owned consolidated subsidiary), alleging that the defendant made illegal periodic
charges to its customers.  The plaintiff applied to the Tel Aviv District Court to recognize the claim as a class action in a
total amount of NIS 133 million ($28 million).  Supergas's management, based on legal advice, is of the opinion that it is more
likely than not that Supergas will prevail in this case.

Three claims were lodged against
Granite's formerly affiliated company and its past shareholders, which included Sonol, in the Haifa District Court. The total amount
of the claims is approximately NIS 65 million ($14 million). The plaintiff's allegations concern the sale of fuel products pursuant
to restrictive trade practices among the fuel companies and their affiliates.  In the opinion of Sonol's legal counsel and the
formerly affiliated company, the companies have a sound defense against the claims.

In 1999, Sonol filed a claim
against one of its agencies for approximately NIS 40 million (approximately $8 million) in the Tel Aviv District Court, on account of
an unpaid debt and damages caused to Sonol, alleging that the agency violated the terms of the agency agreement by dealing with one
of Sonol's competitors.  The agency, in turn, filed a counterclaim in the amount of approximately NIS 62 million (approximately
$13 million), stating various causes, including a claim that the contractual agreement between it and Sonol is a restrictive
agreement.  In the opinion of Sonol's management, based primarily on the opinion of Sonol's legal counsel, the prospects of
Sonol's claim
against the agency relating to amounts owed to Sonol are good and, regarding the amount claimed for damages on account of the
violation of the agency agreement, such amount is subject to deliberation by the court.  Regarding the prospects of the agency's
counterclaim, Sonol's legal counsel are unable, at this time, to estimate its prospects, insofar as it relates to the claim of a
restrictive agreement.  Should the claim of a restrictive agreement be rejected by the court, the prospects of the counterclaim
will not be favorable.  Currently, the dispute has been referred to mediation which was unsuccessful.

A class action was filled in
April 1999 and certified by the Tel-Aviv District Court against Supergas and four other gas companies for a declaratory
judgment regarding the responsibility of the gas companies to refund to their customers payments which were paid for periodic
examinations which were not performed.  Supergas filed for permission to appeal this decision to the Israeli Supreme Court. In
the opinion of the company's management, Supergas has recorded an adequate provision in its books for any potential
exposure.

In arbitration between the
Israeli Fuel Authority and the organization of the owners of fuel stations, the arbitrator ordered the Fuel Authority to reimburse
the fuel- stations owner's for depreciation on their investments in stations.  The Arbitrator's Order was approved by the
District Court.  The Fuel Authority demanded that the fuel companies pay such payments.  As a result of the arbitration,
twenty five third-party claims were filed against Sonol (a subsidiary of Granite), in the total amount of NIS 43 million ($9
million).  All of the claims were dismissed in October 2002.  An appeal was filed to the Supreme Court.  Sonol's legal
counsel believes that
it is not likely that the appeal will be granted.

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Additional information regarding
the above described legal proceedings and other legal proceedings involving Granite may be found in Note 25 to the Granite financial
statements for the yearended December 31, 2002, a copy of which has been filed with the Securities and Exchange Commission in
connection with this Report.

Kaniel

On December 2, 1997, Kaniel, the
Israeli Company for Tin Containers Ltd. (Kaniel) filed a suit against the Company in the Tel Aviv District Court, in the
amount of NIS 3,623,058 ($0.8 million). The suit relates to eight loans given to Kaniel by the Company in 1984. Kaniel claimed that
the Company's actions in connection with the loans were forbidden under the Israeli Interest Law. On November 24, 2002, the Tel Aviv
District Court dismissed the claim.

MIRS

A petition to certify a class
action against MIRS in the amount of NIS 170 million ($36 million) was filed in the Tel Aviv District Court in September 2001. 
The claim is in connection with the change in MIRS' tariffs resulting from the implementation of MIRS' own dialing prefix, which
replaced its previous dialing prefix, the Tel-Aviv area code.  As a result, persons in the Tel Aviv area code claimed that they
are subject to higher tariffs than those they had been subject to under MIRS's previous dialing prefix. MIRS' management estimates
the maximum exposure to be substantially less than the amount claimed.

A petition to certify a class
action against MIRS and the other three cellular operators in Israel in the total amount of NIS 600 million ($127 million) was filed
in the Tel Aviv District Court in May 2002. The claim involves the inter-connect fees that were collected from the customers of the
other operators with regard to phone calls that were made to voice recorder applications through the cellular operators' dialing
numbers. At this stage, the Company cannot estimate the impact this claim will have on it.

Am-Hal

The Israeli Income Tax Authority
conducted a review of Am-Hal Ltd., the Company's wholly-owned subsidiary, in 2000 and 2001.  Following the review, the Income
Tax Authority assessed Am-Hal for additional taxes for the years 1995-1999.  Am-Hal disputed the assessment and filed an appeal
based on its disagreement with the Income Tax Authority concerning the proper methodology for calculating nursing home
revenues.  In January 2003, AM-Hal and the Tax Authority reached an agreement that was entered into court pursuant to which
income in the aggregate amount of approximately $1.4 million will be added for the years 1995  1999. The financial statements
fully reflect the
impact of this increased income reported for tax purposes.

Ampal (Israel)

In May 2002, the Israeli Income
Tax Authority issued an assessment to Ampal (Israel) Ltd., the Company's wholly-owned subsidiary, for payment of approximately NIS 34
million ($7,177,538) for the tax years 1997-2000. Ampal (Israel) filed an appeal regarding this assessment and that it is reasonably
possible that the appeal will be granted.  In addition, the Company has previously established a reserve in the amount of NIS 10
million ($2,111,040) in connection with potential tax liabilities for these tax years.

28

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Galha

On January 1, 2002, Galha (1960)
Ltd. (Galha) filed a suit against the Company and other parties, including directors of Paradise Industries Ltd.
(Paradise) appointed by the Company, in the Tel Aviv District Court, in the amount of NIS 8,974,401 ($1.9 million). 
Galha claimed that the Company,which was a shareholder
of Paradise, and another shareholder of Paradise, misused funds that were received
by Paradise from an insurance company for the purpose of reconstructing an industrial
building owned by Galha and used
by Paradise which burnt down.  Paradise is currently involved in liquidation proceedings.  Ampal issued a guarantee in
favor of
Galha for the payment of  an amount of up to NIS 4,000,000 ($844,416) if a final judgment against the Company will be
given.  At this stage, the Company cannot estimate the impact this claim
will have on it.

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

None.

PART II

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

PRICE RANGE OF CLASS A STOCK

Ampal's Class A Stock is listed
on Nasdaq under the symbol AMPL.  The following table sets forth the high and low bid prices for the Class A Stock,
by quarterly period for the fiscal years 2002 and 2001, as reported by Nasdaq and representing inter-dealer quotations which do not
include retail markups, markdowns or commissions for each period, and each calendar quarter during the periods indicated.  Such
prices do not necessarily represent actual transactions.

|               |  |  | High   |  |  | Low    | 
|-------------- |  |  | ------ |  |  | ------ | 
|               |  |  |        |  |  |        | 
|2002:          |  |  |        |  |  |        | 
|Fourth Quarter |  |  | $ 2.94 |  |  | $ 1.77 | 
|Third Quarter  |  |  | 3.63   |  |  | 2.69   | 
|Second Quarter |  |  | 4.40   |  |  | 3.49   | 
|First Quarter  |  |  | 5.70   |  |  | 4.18   | 
|2001:          |  |  |        |  |  |        | 
|Fourth Quarter |  |  | 6.42   |  |  | 3.51   | 
|Third Quarter  |  |  | 6.19   |  |  | 3.82   | 
|Second Quarter |  |  | 6.90   |  |  | 4.12   | 
|First Quarter  |  |  | 8.62   |  |  | 4.75   | 

As of March 9, 2003, there were
approximately 829 record holders of Class A Stock.

29

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VOTING RIGHTS

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

DIVIDEND POLICY

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

Dividends on all classes of
Ampal's shares of preferred stock are payable as a percentage of par value.  The holders of Ampal's presently authorized and
issued 4% Preferred Stock and 6 1/2% Preferred Stock (each having a $5.00 par value) are entitled to receive cumulative dividends at
the rates of 4% and 6 1/2% per annum, respectively, payable out of surplus or net earnings of Ampal before any dividends are paid on
the Class A Stock.  If Ampal fails to pay such dividend to the preferred stockholders in any calendar year, such deficiency must
be paid in full, without interest, before any dividends may be paid on the Class A Stock.  If, after the payment of all
cumulative
dividends on the preferred stock and a non-cumulative 4% dividend on the Class A Stock, there remains any surplus, any dividends
declared are to be participated in by the holders of 4% Preferred Stock and Class A Stock, pro rata.  On December 17, 2002,
Ampal announced that its Board of Directors had declared cash dividends on its classes of preferred stock ($0.325 per share on its 6
1/2% classes of preferred stock and $0.20 per share on its 4% Preferred Stock).

RECENT SALES OF UNREGISTERED SECURITIES

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

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

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

30

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ITEM 6.  SELECTED FINANCIAL DATA

|YEAR ENDED DECEMBER 31,                  |  |  | 2002                                          |      |  | 2001     |      |  | 2000      |     |  | 1999     |        |  | 1998     |       
|---------------------------------------- |  |  | --------------------------------------------- | ---- |  | -------- | ---- |  | --------- | --- |  | -------- | ------ |  | -------- | ------
|                                         |  |  |                                               |      |  |          |      |  |           |     |  |          |        |  |          |       
|                                         |  |  | (Dollars in thousands, except per share data) |     
|                                         |  |  |                                               |     
|Revenues                                 |  |  | $ 16,732                                      |      |  | $ 29,062 |      |  | $ 39,697  |     |  | $ 69,613 |        |  | $ 23,160 |       
|Net income (loss)                        |  |  | (44,047                                       | )    |  | (6,974   | )    |  | 813       |     |  | 28,031   | (1)    |  | 2,175    | (1)   
|Earnings (loss) per Class A share:       |  |  |                                               |      |  |          |      |  |           |     |  |          |        |  |          |       
|Basic EPS                                |  |  | $ (2.27                                       | )(2) |  | $ (0.38  | )(2) |  | $ 0.03    | (2) |  | 1.32     | (1)(2) |  | $ 0.08   | (1)(2)
|Diluted EPS                              |  |  | $ (2.27                                       | )    |  | $ (0.38  | )    |  | $ 0.03    |     |  | 1.15     | (1)    |  | $ 0.07   | (1)(3)
|Total assets                             |  |  | 323,699                                       |      |  | 383,833  |      |  | $ 446,628 |     |  | 396,780  |        |  | 324,916  |       
|Notes and loans and debentures

 Payable |  |  | 136,803                                       |      |  | 145,901  |      |  | 201,576   |     |  | 174,519  |        |  | 129,025  |       

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

|Year Ended December 31,                                      |  |  | 2002                                          |   |  | 2001     |   |  | 2000  |  |  | 1999     |   |  | 1998     |  
|------------------------------------------------------------ |  |  | --------------------------------------------- | - |  | -------- | - |  | ----- |  |  | -------- | - |  | -------- | -
|                                                             |  |  |                                               |   |  |          |   |  |       |  |  |          |   |  |          |  
|                                                             |  |  | (Dollars in thousands, except per share data) |  
|                                                             |  |  |                                               |  
|(Loss) from continued operations                             |  |  | $ (44,047                                     | ) |  | $ (6,974 | ) |  | $ 813 |  |  | $ 30,187 |   |  | $ 3,890  |  
|(Loss) from discontinued operations                          |  |  | $                                            |   |  | $       |   |  | $    |  |  | $ (2,156 | ) |  | $ (1,715 | )
|(Loss) per Class A  share from discontinued

    operations: |  |  |                                               |   |  |          |   |  |       |  |  |          |   |  |          |  
|Basic EPS                                                    |  |  | $                                            |   |  | $       |   |  | $    |  |  | $ (0.10  | ) |  | $ (0.07  | )
|Diluted EPS                                                  |  |  | $                                            |   |  | $       |   |  | $    |  |  | $ (0.09  | ) |  | $ (0.06  | )

(2)      Computation is based on net income
(loss) after deduction of preferred stock dividends of $218, $227, $234, 
           $284 and $335, respectively.

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

31

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ITEM 7.

MANAGEMENTS DISCUSSION AND ANALYSIS OF


FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Company acquires interests
in businesses located in the State of Israel or that are Israel-related.  The Company focuses on a broad cross-section of
Israeli companies engaged in various fields including Energy, Industry, Real Estate and Project Development, Telecommunications and
High-Technology.  The Company sometimes participates in the management of its investee companies through representation on
boards of directors or otherwise.

The Companys results of
operations are directly affected by the results of operations of its investee companies.  The results of investee companies
which are greater than 50%-owned are included in the consolidated financial statements of the Company.  The Company accounts for
its holdings in investees over which the Company exercises significant influence, generally 20% to 50% owned companies
(affiliates), under the equity method.  Under the equity method, the Company recognizes its proportionate share of
such companies income or loss based on its percentage of direct and indirect equity interests in earnings or losses of those
companies. The
Companys results of operations are affected by capital transactions of the affiliates.  Thus, the issuance of shares by an
affiliate at a price per share above the Companys carrying value per share for such affiliate results in the Company
recognizing income for the period in which such issuance is made, while the issuance of shares by such affiliate at a price per share
that is below the Companys carrying value per share for such affiliate results in the Company recognizing a loss for the period
in which such issuance is made.  The Company accounts for its holdings in 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, the Company reviews investments accounted for under the
cost method periodically in order to determine whether to maintain the current carrying value or to write off some or all of the
investment.  For more information as to how the Company makes these determinations, see Critical Accounting
Policies.

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

For those subsidiaries and
affiliates whose functional currency is considered to be the New Israeli Shekel (NIS), assets and liabilities are
translated at the rate of exchange at the end of the reporting period and revenues and expenses are translated at the average rates
of exchange during the reporting period.  Translation differences of those foreign companies financial statements are
included in the cumulative translation adjustment account (reflected in accumulated other comprehensive loss) of shareholders
equity.  Should the NIS be devalued against the U.S. dollar, cumulative translation adjustments are likely to result in a
reduction in
shareholders equity.  As of December 31, 2002, the effect on shareholders equity was a decrease of approximately
$20.8 million.  Upon disposition of an investment, the related cumulative translation adjustment balance will be recognized in
determining gains or losses.

32

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CRITICAL ACCOUNTING POLICIES

The preparation of Ampals
consolidated financial statements is in conformity with accounting principles generally accepted in the United States which requires
management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated
financial statements and related footnotes. Actual results may differ from these estimates.  To facilitate the understanding of
Ampals business activities, described below are certain Ampal accounting policies that are relatively more important to the
portrayal of its financial condition and results of operations and that require managements subjective judgments.  Ampal
bases its judgments on its experience and various other assumptions that it believes to be reasonable under the circumstances. 
Please refer to Note 1 to Ampals consolidated financial statements included in this Annual Report for the year ended December
31, 2002 for a summary of all of Ampals significant accounting policies.

Portfolio
Investments

The Company accounts for a
number of its investments, including many of its investments in the high-technology and communications industries, on the basis of
the cost method.  Application of this method requires the Company to periodically review these investments in order to determine
whether to maintain the current carrying value or to write off some or all of the investment.  While the Company uses some
objective measurements in its review, such as the portfolio companys liquidity, burn rate, termination of a substantial number
of employees, achievement of milestones set forth in its business plan or projections and seeks to obtain relevant information from
the company
under review, the review process involves a number of judgments on the part of the Companys management.  These judgments
include assessments of the likelihood of the company under review to obtain additional financing, to achieve future milestones, make
sales and to compete effectively in its markets.  In making these judgments the Company must also attempt to anticipate trends
in the particular companys industry as well as in the general economy.  There can be no guarantee that the Company will be
accurate in its assessments and judgments.  To the extent that the Company is not correct in its conclusion it may decide to
write down all or part of the particular investment.

Investment in
MIRS

MIRS is our largest investment
and is being accounted for at cost (our equity interest is 25%). The Cost method is applied due to preference features we have been
granted in our investment in preferred shares in Mirs. Revenues from guaranteed payments from Motorola are recognized as
income.  We perform annual tests for impairment regarding our investment.  Our assessment, based on a valuation of our
investment in MIRS as of December 31, 2002, resulted in no impairment charge.  The valuation was calculated according to the
discounted cash flow method, taking into account the preferences to which we are entitled from Motorola under the MIRS purchase
agreement.

Marketable
Securities

We determine the appropriate
classification of marketable securities at the time of purchase. To date, we hold marketable securities classified as trading
securities that are carried at fair value, and marketable securities classified as available-for-sale that are carried at fair value
with unrealized gains and losses included in the component of accumulated other comprehensive loss in stockholders equity. If
according to managements assessment it is determined that a decline in the fair value of any of the investments is other than
temporary, an impairment loss is recorded and included in the consolidated statements of income as financial expenses.

33

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Long- lived
assets

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

Accounting for Income
Taxes

As part of the process of
preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which
we operate.  This process involves us estimating our current tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.  These differences result in deferred tax assets
and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax
assets will be recovered from future taxable income, and, to the extent we believe that recovery is not likely, we must establish a
valuation
allowance.  To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations.  A valuation allowance is currently set against certain tax assets
because management believes it is more likely than not that these deferred tax assets will not be realized through the generation of
future taxable income.  We also do not provide for taxes on undistributed earnings of our foreign subsidiaries totaling $30.1
million in 2002, as it is our intention to reinvest undistributed earnings indefinitely outside the United States.  If the
earnings were not considered permanently reinvested, approximately $10.1 million of deferred income taxes would have been provided in
2002.

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.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

FAS 143 prescribes the
accounting for retirement obligations associated with tangible long-lived assets, including the timing of liability recognition and
initial measurement of the liability. FAS 143 requires that an asset retirement cost should be capitalized as part of the cost of the
related long-lived asset and subsequently allocated to expense using a systematic and rational method. FAS 143 is effective for
fiscal years beginning after June 15, 2002 (January 1, 2003 for the Company). The Company does not believe that the adoption of SFAS
143 will have any material effect on our consolidated financial statements.

In April 2002, the FASB issued
SFAS No. 145, Revision of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Connections
(SFAS 145). Among other amendments and rescissions, SFAS 145 eliminates the requirement that gains and losses from the
extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect,
unless such gains and losses meet the criteria in paragraph 20 of Accounting Principles Board Opinion No. 30, Reporting the
Results of OperationReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS 145 is partially effective for transactions occurring after May 15, 2002 and partially
effective for fiscal years beginning after May 15, 2002. The Company does not believe that the adoption of SFAS 145 will have any
material effect on our consolidated financial statements.

34

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In July 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring).  SFAS 146 requires that a liability for costs associated with an exit or disposal activity
be recognized when the liability is incurred rather than when the Company commits to such an activity and also establishes fair value
as the
objective for initial measurement of the liability.  The Company will adopt SFAS 146 for exit disposal activities that are
initiated after December 31, 2002.  Upon the adoption of SFAS 146, previously issued financial statements shall not be
restated.  The Company does not believe that the adoption of SFAS 146 will have any material effect on its consolidated
financial statements.

In November 2002, the FASB
issued FASB Interpretation No. 45 Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires the guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.  It also elaborates on the
disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued
and to be made in regard of product warranties.  The Company does not expect the adoption of FIN 45 to have a material effect on
our
consolidated financial statements.

In December 2002, the FASB
issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure.  This Statement amends SFAS No.
123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to SFAS No. 123s fair value method
of accounting for stock-based employee compensation.  This Statement also amends the disclosure provision of SFAS No. 123 and
APB No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an
entitys accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in
annual and
interim financial statements.  The Company has elected to continue accounting for employee stock option plans according to APB
No. 25, and has adopted the disclosure requirements under SFAS No. 148 commencing on December 31, 2002.

In January 2003, the FASB issued FASB Interpretation No. 46 Consolidation of Variable
Interest Entities (FIN 46).  Under this FIN entities are separated into two populations: (1) those for which voting
interests are used to determine consolidation (this is the most common situation) and (2) those for which variable interests are used
to determine consolidation.  The FIN explains how to identify Variable Interest Entities (VIE) and how to determine when a
business enterprise should include the assets, liabilities, non-controlling interests, and results of activities of a VIE in its
consolidated financial statements.  The FIN is effective as follows:  for variable interests in variable interest entities
created after
January 31, 2003 the FIN shall apply immediately, for variable interests in variable interest entities created before that date, the
FIN shall applyfor public entitiesas of the beginning of the first interim or annual reporting period beginning after
June 15, 2003.  FIN 46 is effective immediately for certain disclosure requirements and variable interest entities created after
January 31, 2003 and in fiscal 2003 for all other variable interest entities. As the Company does not have variable interest
entities, the adoption of FIN 46 will not have an effect on the Companys financial position, results of operations or cash
flows.

35

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RESULTS OF OPERATIONS

Year ended December 31, 2002
compared to Year ended December 31, 2001:

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

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

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

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

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

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

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

36

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

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

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

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

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

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

37

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SELECTED QUARTERLY FINANCIAL DATA

|                                     |  |  | First

 Quarter                               |   |  | Second

 Quarter |   |  | Third

 Quarter |   |  | Fourth

 Quarter |   |  | Total    |  
|------------------------------------ |  |  | --------------------------------------------- | - |  | ---------------- | - |  | --------------- | - |  | ---------------- | - |  | -------- | -
|                                     |  |  |                                               |   |  |                  |   |  |                 |   |  |                  |   |  |          |  
|                                     |  |  | (Dollars in thousands, except per share data) |  
|                                     |  |  |                                               |  
|Year Ended December 31, 2002         |  |  |                                               |   |  |                  |   |  |                 |   |  |                  |   |  |          |  
|Revenues(1)                          |  |  | $ 5,532                                       |   |  | $ 5,235          |   |  | $ 4,905         |   |  | $ 1,060          |   |  | $ 16,732 |  
|Net interest expense                 |  |  | (2,188                                        | ) |  | (1,376           | ) |  | (1,735          | ) |  | (2,392           | ) |  | (7,691   | )
|Net (loss)                           |  |  | (6,175                                        | ) |  | (9,158           | ) |  | (11,439         | ) |  | (17,275          | ) |  | (44,047  | )
|Basic EPS:                           |  |  |                                               |   |  |                  |   |  |                 |   |  |                  |   |  |          |  
|(Loss) per Class A share(2)          |  |  | (0.32                                         | ) |  | (0.47            | ) |  | (0.58           | ) |  | (0.9             | ) |  | (2.27    | )
|Diluted EPS:                         |  |  |                                               |   |  |                  |   |  |                 |   |  |                  |   |  |          |  
|(Loss) per Class A share             |  |  | (0.32                                         | ) |  | (0.47            | ) |  | (0.58           | ) |  | (0.9             | ) |  | (2.27    | )
|Year Ended December 31, 2001         |  |  |                                               |   |  |                  |   |  |                 |   |  |                  |   |  |          |  
|Revenues(1)                          |  |  | $ 12,711                                      |   |  | $ 7,426          |   |  | $ 3,760         |   |  | $ 5,165          |   |  | $ 29,062 |  
|Net interest expense                 |  |  | (3,983                                        | ) |  | (2,763           | ) |  | (1,930          | ) |  | (2,025           | ) |  | (10,701  | )
|Net income (loss)                    |  |  | $ 360                                         |   |  | $ (3,811         | ) |  | $ (3,067        | ) |  | $ (456           | ) |  | $ (6,974 | )
|Basic EPS:                           |  |  |                                               |   |  |                  |   |  |                 |   |  |                  |   |  |          |  
|Earnings (loss) per Class A share(2) |  |  | $ 0.01                                        |   |  | $ (0.20          | ) |  | $ (0.16         | ) |  | $ (0.03          | ) |  | $ (0.38  | )
|Diluted EPS:                         |  |  |                                               |   |  |                  |   |  |                 |   |  |                  |   |  |          |  
|Earnings (loss) per Class A share    |  |  | $ 0.01                                        |   |  | $ (0.20          | ) |  | $ (0.16         | ) |  | $ (0.03          | ) |  | $ (0.38  | )

(1)Reclassified to conform with year-end presentation.(2)After deduction of preferred stock dividends of $218 and $227,
respectively.

Year ended December 31, 2001 compared to Year ended December 31,
2000:

The Company recorded a
consolidated net loss of $7.0 million for the year ended December 31, 2001, as compared to net income of $0.8 million for the same
period in 2000. The decrease in income is primarily attributable to the decrease in equity in earnings of affiliates, lower gains on
sale of investments, higher loss from impairment of investments and a decrease in real estate income.  These decreases in income
were partially offset by the gain on sale of real estate rental property, higher other income, a lower effective income tax rate,
lower unrealized losses on investments, lower interest expense and a translation gain in 2001, as compared to a translation loss in
2000.

Equity in earnings of affiliates
decreased to a loss of $2.2 million for the year ended December 31, 2001, from income of $11.9 million for the same period in
2000.  The decrease is primarily attributable to the decreased earnings of the Companys 50%-owned affiliate, Trinet
Venture Capital Ltd. (Trinet) and Ophir Holdings Ltd. (Ophir Holdings), the Companys 42.5%-owned
affiliate.  Trinet recorded unrealized gains on its investments in Smart Link Ltd. in 2000, as compared to unrealized losses in
2001.  Ophir Holdings , recorded an unrealized gain on a trading security in 2000.  There was no similar gain in
2001.  In
addition, two of the Companys other affiliates, 42.5%-owned Ophirtech Ltd. (Ophirtech) and 37%-owned Bay Heart,
recorded higher losses in 2001.  Ophirtech, which invests in companies in the high technology sector, recorded losses from
impairment of investments in 2001.  Bay Heart, which operates a shopping mall in the Haifa Bay area, recorded losses as a result
of decreased rental revenues, increased financing expenses and a higher provision for income taxes.

In the year ended December 31,
2001, the Company recorded $1.6 million of gains on the sale of investments, which were primarily attributable to its investment in
Floware Wireless Systems Ltd. (Floware).   In the year ended December 31, 2000, the Company recorded $13.7
million of gains on the sale of investments, which were primarily attributable to its investment in BreezeCOM Ltd.
(BreezeCOM). In August 2001, BreezeCOM acquired Floware and changed the name of the combined entity to Alvarion
Ltd.

38

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The Company recorded $3.3
million of unrealized losses on investments which are classified as trading securities in the year ended December 31, 2001, as
compared to $5.9 million of unrealized losses in the same period in 2000.  The unrealized losses recorded in 2001 are primarily
attributable to the Companys investment in shares of Leumi and Arel Communications and Software Ltd. (Arel), while
the unrealized losses in 2000 are primarily attributable to the Companys investment in shares of Arel. At December 31, 2001 and
December 31, 2000, the aggregate fair value of trading securities held by the Company amounted to approximately $9.9 million and $23.8
million, respectively.

On March 28, 2001, the Company
concluded the sale of its interest in 800 Second Avenue in New York City for $33 million and recorded a pre-tax gain of approximately
$8 million ($4.3 million net of taxes).

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

The decrease in real estate
income of approximately $1.2 million in 2001, as compared to 2000, is attributable to the sale of 800 Second Avenue and Bnei
Brak.

The increase in other income of
$2.3 million in the year ended December 31, 2001 as compared to the same period in 2000, is primarily attributable to the higher
guaranteed income received from Motorola (Israel) Ltd. ($7.1 million in 2001, as compared to $3.8 million in 2000) with respect to
the level of dividends from MIRS Communications Ltd. (MIRS).  This increase was partially offset by the $1.6 million
dividend received from MIRS in 2000, which was not distributed by MIRS in 2001.  To the extent MIRS continues to seek to
penetrate the Israeli cellular market, its results of operations will be affected by the intense competition in the
market.

The decrease in interest expense
of approximately $1.4 million in the year ended December 31, 2001, as compared to the same period in 2000 is attributable to the
repayments of notes and loans payable.

In the year ended December 31,
2001, the Company recorded a $13 million loss from impairment of its investments in the following companies, all of which are in the
high-technology sector: Camelot Information Technologies Ltd.($5
million), Netformx Ltd. ($2.6 million), Enbaya Inc. ($1.4 million), Shiron Satellite
Communications (1996) Ltd. ($1.4 million), RealM Technologies Ltd.,($1.3 million)
mPrest Technologies Ltd.
($0.8 million) Babylon Ltd. ($.3 million), and Elephanx DotCom L.L.C. ($0.2 million).  In the year ended December 31, 2000, the
Company recorded an $11.1 million loss from impairment of investments attributable to the $3.5 million bank guarantees paid on behalf
of
M.D.F. Industries Ltd. and to the impairment in values of the Companys
investments in Smartlight Ltd. ($3 million), Netformx Ltd. ($2.5 million), Qronus
Interactive Israel (1994) Ltd. ($1.1 million), Zactus, Inc. ($0.5 million) and
ContactNOW, Inc. ($.5
million).

The Company recorded a
translation gain of $2.1 million in the year ended December 31, 2001, as compared to a translation loss of $1.3 million in the same
period in 2000.  The translation gain in 2001 is attributable to the devaluation of the new Israeli shekel against the U.S.
dollar in the year ended December 31, 2001, while the translation loss in 2000 was primarily attributable to foreign exchange forward
contracts executed by the Company, which were outstanding during 2000.

39

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The decrease in the effective
income tax rate in 2001, as compared to 2000, is attributable to state and local income taxes with respect to the gain on sale of 800
Second Avenue, losses of certain Israeli subsidiaries for which no tax benefits are currently available and certain expenses which
are not deductible for income tax purposes.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

On December 31, 2002, cash and
cash equivalents were $1.6 million, as compared with $8.0 million at December 31, 2001. The decrease in cash and cash equivalents is
primarily attributable to the repayments of notes and loans payable.

The Companys sources of
cash include cash and cash equivalents, marketable securities, cash from operations, cash from investing activities and amounts
available under credit facilities, as described below. The Company believes that these sources are sufficient to fund the current
requirements of operations, capital expenditures, investing activities, dividends on preferred stock and other financial commitments
of the Company for the next 12 months.  However, to the extent that contingencies and payment obligations described below and in
other parts of this Report require the Company to make unanticipated payments, the Company would need to further utilize these
sources of
cash.  To the extent that the Company intends to rely on the sale of marketable securities in order to satisfy its cash needs,
it is subject to the risk of a shortfall in the amount of proceeds from any such sale as compared with the anticipated sale proceeds
due to a decline in the market price of those securities.  In the event of a decline in the market price of its marketable
securities, the Company may need to draw upon its other sources of cash, which may include additional borrowing, refinancing of its
existing indebtedness or liquidating other assets, the value of which may also decline.  In addition, the shares of MIRS owned
by the Company have already been pledged as security for specific loans provided to the Company for the purchase of these shares and
would
therefore be unavailable if the Company wished to pledge them in order to provide an additional source of cash.

Cash flows from operating
activities

Net cash provided by operating
activities totaled approximately $3.3 million for the year ended December 31, 2002, as compared to approximately $33.9 million for
the same period in 2001.  The decrease is primarily attributable to the $27.1 million dividends from affiliates received in
2001, as compared to $0.7 million in 2002.

Cash flows from investing
activities

Net cash used in investing
activities totaled approximately $0.7 million for the year ended December 31, 2002, as compared to compered to cash provied
approximately $20.4 million for the same period in 2001.  This decrease is primarily attributable to the $34.9 million proceeds
received from the sale of 800 Second Avenue and the Bnei Brak real estate properties in 2001.  These proceeds were partially
offset by higher investments made in 2001 in the amount of $9.1 million and higher loans granted in 2001 of $6.5 million.

40

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Cash flows from financing
activities

Net cash used in financing
activities was approximately $7.3 million at December 31, 2002, as compared to approximately $51.8 million at December 31,
2001.  The decrease in the cash used in 2002 is attributable to the pay down of notes and loans repayments ($12.4 million and
$62.8 million in 2002 and 2001, respectively).  Notes and loans repayments in 2001 include the $15.0 million loan repayment with
respect to the 800 Second Avenue property.

Investments

On December 31, 2002, the
aggregate fair value of trading and available-for-sale securities was approximately $18.6 million, as compared to $40.6 million at
December 31, 2001.  The decrease in 2002 is attributable to decreases in the market prices of such securities.

On January 2, 2002, the Company
made a $0.5 million loan to Camelot.  In February 2002, the Company, together with other Camelot debtholders, initiated
liquidation proceedings with respect to Camelots assets. The Company has written off its investment in Camelot.

In 2002, the Company made the
following investments:

(1)   A
$1.3 million in ShellCase Ltd., a developer and manufacturer of chip size packaging. The Company currently holds an approximately
14.0% equity interest in ShellCase Ltd.

(2)   A
$0.7 million in PowerDsine Ltd., a leading designer and developer of software controlled power solutions.  The Company currently
holds an approximately 8.1% equity interest in PowerDsine Ltd.

(3)   A
$0.2 million in XACCT  Technologies Ltd., a developer and marketer of TCP/IP network software.  The Company currently holds
an approximately 16.9% in XACCT Technologies Ltd.

Debt

At December 31, 2002, the
Company had in place unused lines of credit in the aggregate amount $5.1 million.

In connection with its
investment in MIRS, the Company has two long-term loans from Bank Hapoalim Ltd. (Hapoalim) and Bank Leumi Le-Israel Ltd.
(Leumi) in the outstanding amount of $37.2 million and $34.9 million, respectively, as of December 31, 2002. Both loans
are due on March 31, 2008 and bear interest at a rate of LIBOR plus 0.8%.  Other than as described in this paragraph, the loans
are non-recourse to the Company and are secured by the Companys shares in MIRS.  The principal payments are due as
follows:  10% on March 31, 2004, 15% on March 31, 2005 and 25% on each of the following dates - March 31, 2006, 2007 and
2008.  Interest
will be paid annually on March 31 of each year from March 31, 2002 until and including March 31, 2008.  These loans are subject
to the compliance by MIRS with covenants regarding its operations and financial results.  In March 2002, some of the covenants
in the loan from Leumi were amended to reflect changes in MIRS business.  In connection with these amendments, the Company
agreed that Leumi will have recourse to the Company for an amount of up to $3.5 million if Motorola (Israel) Ltd. does not make a
guaranteed payment to the Company on March 31, 2003, as is required by the terms of the agreement under which the Company purchased
its interest in MIRS from Motorola (Israel) Ltd.  In addition, Leumi will have recourse to the Company for an additional $0.5
million beginning in 2006 with respect to the Companys repayment obligations under the loan.

41

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As of December 31, 2002, the
Company had $5.4 million in outstanding debentures with interest rates of 7.5%.  These debentures, which mature in 2005, are
secured by $5.6 million in cash held in a secured account.  In addition, as of December 31, 2002, the Company had $17.1 million
outstanding in 11% discount debentures, which mature in 2003.  On October 2002, there was an early redemption of $0.5
million.  The Company is borrowing additional cash from banks to repay the outstanding debentures on April 1, 2003.

The Company financed a portion
of the development of Am-Hal, a wholly-owned subsidiary which develops and operates luxury retirement centers for senior citizens,
through bank loans from Hapoalim.  At December 31, 2002 and December 31, 2001, the amounts outstanding under these loans were
$12.7 million and $14.3 million, respectively. The loans are dollar linked, mature through 2007-2010  and have interest rates of
LIBOR plus 2.25%.  The Company generally repays these loans with the proceeds received from deposits and other payments from the
apartments in Am-Hal facilities. The loans are secured by a lien on Am-Hals properties. The Company also issued guarantees in
the
amount of $ 4.8 million in favor of clients of Am-Hal in order to secure their deposits.

The Company also finances its
general operations and other financial commitments through short-term borrowings, mainly from Hapoalim.  The term of these
borrowings is up to one year.  The weighted average interest rates and the balances of these short-term borrowings at December
31, 2002 and December 31, 2001 were 4.03% on $39.8 million and 3.23% on $31.1 million, respectively.

As of December 31, 2002, the
Company had issued guarantees on certain outstanding loans to its investees and subsidiaries in the aggregate principal amount of
$15.3 million. This includes:

| |  | $4.0 million guarantee to Leumi with respect to the MIRS loan as described above ($3.5
million guarantee will expire on March 31, 2003).                                                                                                                                                                                                                                                                                                                                                                   
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | $5.7 million guarantee on indebtedness incurred by Bay Heart ($3.5 million of which was
recorded as a loss in the Companys financial statements at December 31, 2002) in connection with the development of its
property. Bay Heart recorded increased losses in 2002 as a result of decreased rental revenues. There can be no guarantee that Bay
Heart will become profitable or that it will generate sufficient cash to repay its outstanding indebtedness without relying on the
Companys guarantee.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | $4.8 million guarantee to Am- Hal tenants as described above.                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | $0.8 million guarantee to Galha 1960 Ltd as described in Item 3 of this Report.                                                                                                                                                                                                                                                                                                                                                                                                                            

In each of 2002 and 2001, 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.

42

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Subsequent
event

On January 1, 2003, the Company
entered into an agreement pursuant to which the Company will sell its shareholdings of Carmel Container Systems Limited
(Carmel). Pursuant to this agreement, the Company will sell 522,000 ordinary shares of Carmel at a price per share of
$6.75 for an aggregate purchase price of $3,523,500.

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

Other
Developments

On April 25, 2002, Rebar
Financial Corporation (Rebar), which, as of such date, owned 11,115,112 shares of Ampals Class A Stock
(representing approximately 51% of the outstanding Class A Stock on a fully-diluted basis), completed the sale of such shares of
Class A Stock to Y.M. Noy Investments Ltd., a company incorporated under the laws of Israel (Y.M. Noy) pursuant to the
terms of that certain Stock Purchase Agreement, dated as of February 26, 2002.  Rebar is controlled by Daniel Steinmetz, who, as
of such date, was the Ampals Chairman of the Board of Directors, and Raz Steinmetz, who, as of such date, was a director of
Ampal and the
Ampals President and Chief Executive Officer. Yosef A. Maiman owns 100% of the economic shares and one-third of the voting
shares of the Y.M. Noy, and holds an option to acquire the remaining two-thirds of the voting shares of the Y.M. Noy (which are
currently owned by Ohad Maiman and Noa Maiman, the son and daughter, respectively, of Mr. Maiman). Mr. Maiman, Ohad Maiman and Noa
Maiman are the sole directors of Y.M. Noy.

Also on April 25, 2002, certain
of the Ampals employees and officers sold an additional 329,000 shares of Class A Stock to the Y.M. Noy.

As a result of the purchase of
an aggregate of 11,444,112 shares of the Class A Stock by Y.M. Noy, the Company has concluded that a change in control has occurred
for purposes of the Securities Exchange Act of 1934, as amended.

The aggregate purchase price
paid by Y.M. Noy for the 11,444,112 shares of the Class A Stock was approximately $85,374,564, or $7.46013 per share.

As of March 9,2003, Y.M. Noy has
subsequently purchased 269,120 shares of Class A Stockin market transactions and Y.M. Noy owns 11,713,232 shares of Class A Stock or
59.5% of the outstanding shares of Class A Stock as of such date.

Foreign
Currency Contracts

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

43

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|ITEM 7A | QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK
|------- | ---------------------------------------------------------

MARKET RISKS AND SENSITIVITY ANALYSIS

The Company is exposed to
various market risks, including changes in interest rates, foreign currency rates and equity price changes.  The following
analysis presents the hypothetical loss in earnings, cash flows and fair values of the financial instruments which were held by the
Company at December 31, 2002, and are sensitive to the above market risks.

During the fiscal year ended
December 31, 2002, 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, 2001.

Interest Rate Risks

At December 31, 2002, the
Company had financial assets totaling $11.6 million and financial liabilities totaling $136.8 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, 2002, the
Company had fixed rate financial assets of $7.7 million and variable rate financial assets of $4.0 million.  Holding other
variables constant, a ten percent increase in interest rates would decrease the unrealized fair value of the fixed financial assets
by approximately $0.1 million.

At December 31, 2002, the
Company had fixed rate debt of $32.2 million and variable rate debt of $104.6 million.  A ten percent decrease in interest rates
would increase the unrealized fair value of the fixed rate debt by approximately $0.3 million.

The net decrease in earnings for
the next year resulting from a ten percent interest rate increase would be approximately $0.4 million, holding other variables
constant.

Exchange Rate Sensitivity Analysis

The Companys exchange rate
exposure on its financial instruments results from its investments and ongoing operations in Israel.  During 2002, the Company
entered into various foreign exchange forward purchase contracts to partially hedge this exposure. At December 31, 2002, the Company
had open foreign exchange forward purchase contracts in the amount of $22.5 million. Holding other variables constant, if there were
a ten percent devaluation of the foreign currency, the Companys cumulative translation loss reflected in the Companys
accumulated other comprehensive loss would increase by $1.5 million, and regarding the statements of income loss a ten percent
devaluation of the foreign currency would be reflected in a net decrease in earnings and would be $0.3 million.

44

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Equity Price Risk

The Companys investments
at December 31, 2002, included marketable securities (trading and available-for-sale) which are recorded at fair value of $18.6
million, including a net unrealized loss of $29.1 million.  Those securities have exposure to price risk.  The estimated
potential loss in fair value resulting from a hypothetical ten percent decrease in prices quoted on stock exchanges is approximately
$1.9 million.

45

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

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of

Ampal-American Israel Corporation:

We have audited the accompanying consolidated balance sheet of Ampal-American Israel
Corporation and subsidiaries (the Company) as of December 31, 2002, and the related consolidated statements of loss, cash
flows, changes in shareholders equity, and comprehensive loss for the year then ended.  These financial statements are the
responsibility of the Companys Board of Directors and management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial statements of certain subsidiaries, whose assets included in
consolidation constitute approximately 22.6% of total consolidated assets as of December 31, 2002, and whose revenues included in
consolidation constitute approximately 45.1% for the year then ended. We did not audit the financial statements of certain affiliated
companies, the companys interest in which as reflected in the balance sheet as of December 31, 2002 is $40,647,929, and the
companys share in excess of losses over profits of which is a net amount of $901,958 for the year then ended. The financial
statements of those subsidiaries and affiliated companies were audited by other independent auditors whose reports thereon have been
furnished to us and our opinion expressed herein, insofar as it relates to the amounts included for those companies, is based solely
on the reports of  the other independent auditors. The financial statements of Ampal-American Israel Corporation and
subsidiaries as
of December 31,2001, and for each of the two years in the period ended December 31,2001, were audited by other independent
accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those financial statements
in their report dated March 27, 2002.

We conducted our audit in accordance with auditing standards generally accepted in the
United States of America and in Israel, including those prescribed by the Israeli Auditor (Mode of performance) Regulations, 1973.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.  We believe that our audit and the reports of
other
independent auditors provide a reasonable basis for our opinion.

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

/s/ KESSELMAN & KESSELMAN CPAs ( ISR)

Tel Aviv, IsraelMarch 24, 2003

46

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

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

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

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

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

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

47

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

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

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

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

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

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

48

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AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

|                                                                                  |  |  | Year Ended December 31,                       |  
|--------------------------------------------------------------------------------- |  |  | --------------------------------------------- | -
|                                                                                  |  |  |                                               |  
|                                                                                  |  |  | 2002                                          |  
|                                                                                  |  |  |                                               |  
|                                                                                  |  |  | (Dollars in thousands, except per share data) |  
|                                                                                  |  |  |                                               |  
|REVENUES:                                                                         |  |  |                                               |  
|Equity in (losses) earnings of affiliates (Note 12)                               |  |  | $ (3,334                                      | )
|Interest:                                                                         |  |  |                                               |  
|Related parties                                                                   |  |  |                                              |  
|Others                                                                            |  |  | 962                                           |  
|Real estate income                                                                |  |  | 7,740                                         |  
|Realized and unrealized gains on

    investments (Notes 2 and 4)                 |  |  |                                              |  
|Gain on sale of real estate rental

    property (Note 2)                         |  |  | 663                                           |  
|Other (note 13)                                                                   |  |  | 10,701                                        |  
|                                                                                  |  |  |                                               |  
|Total revenues                                                                    |  |  | 16,732                                        |  
|                                                                                  |  |  |                                               |  
|EXPENSES:                                                                         |  |  |                                               |  
|Interest:                                                                         |  |  |                                               |  
|Related parties                                                                   |  |  | 51                                            |  
|Others                                                                            |  |  | 8,602                                         |  
|Real estate expenses                                                              |  |  | 7,844                                         |  
|Realized and unrealized losses on

    investments (Notes 2 and 4)                |  |  | 20,394                                        |  
|Loss from impairment of investments (Note 2)                                      |  |  | 15,078                                        |  
|Minority interests                                                                |  |  | 866                                           |  
|Translation (gain) loss                                                           |  |  | (1,577                                        | )
|Other (mainly general and administrative)                                         |  |  | 7,742                                         |  
|                                                                                  |  |  |                                               |  
|Total expenses                                                                    |  |  | 59,000                                        |  
|                                                                                  |  |  |                                               |  
|(Loss) income before income taxes (tax benefits)                                  |  |  | (42,268                                       | )
|Provision for income taxes (tax benefits) (Note 11)                               |  |  | 1,779                                         |  
|                                                                                  |  |  |                                               |  
|NET (LOSS) INCOME                                                                 |  |  | $ (44,047                                     | )
|                                                                                  |  |  |                                               |  
|Basic and diluted EPS: (Note 10)

    (Loss) Earnings per Class A share           |  |  | $ (2.27                                       | )
|                                                                                  |  |  |                                               |  
|Shares used in calculation (in thousands)

     (diluted for year 2000 -  19,057) |  |  | 19,538                                        |  
|                                                                                  |  |  |                                               |  

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

49

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AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                           |  |  | Assets As At           | 
|-------------------------------------------------------------------------- |  |  | ---------------------- | 
|                                                                           |  |  |                        | 
|                                                                           |  |  | December 31,

 2002    | 
|                                                                           |  |  |                        | 
|                                                                           |  |  | (Dollars in thousands) | 
|                                                                           |  |  |                        | 
|Cash and cash equivalents                                                  |  |  | $ 1,557                | 
|Deposits, notes and loans receivable (Note 3)                              |  |  | 10,962                 | 
|Investments (Notes 2, 4 and 12)                                            |  |  | 215,094                | 
|Real estate property, less accumulated depreciation of $9,166

 and $7,500 |  |  | 65,598                 | 
|Other assets                                                               |  |  | 30,488                 | 
|                                                                           |  |  |                        | 
|TOTAL ASSETS                                                               |  |  | $ 323,699              | 
|                                                                           |  |  |                        | 

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

50

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AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                      |  | Liabilities and Shareholders

 Equity As At |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------- | -
|                                                                                                                                                                      |  |                                              |  
|                                                                                                                                                                      |  | December 31,

 2002                          |  
|                                                                                                                                                                      |  |                                              |  
|                                                                                                                                                                      |  | (Dollars in thousands)                       |  
|                                                                                                                                                                      |  |                                              |  
|LIABILITIES                                                                                                                                                           |  |                                              |  
|Notes and loans payable (Note 5)                                                                                                                                      |  | $ 114,257                                    |  
|Debentures (Note 6)                                                                                                                                                   |  | 22,546                                       |  
|Accounts payable, accrued expenses and others (Note 7)                                                                                                                |  | 86,718                                       |  
|                                                                                                                                                                      |  |                                              |  
|Total liabilities                                                                                                                                                     |  | 223,521                                      |  
|                                                                                                                                                                      |  |                                              |  
|Commitments and Contingencies (note 16)                                                                                                                               |  |                                              |  
|                                                                                                                                                                      |  |                                              |  
|SHAREHOLDERS EQUITY (Note 8)                                                                                                                                         |  |                                              |  
|                                                                                                                                                                      |  |                                              |  
|4% Cumulative Convertible Preferred Stock, $5 par value; authorized 189,287

 shares; issued 139,391 and 146,226 shares; outstanding 136,041 and 142,876

 Shares     |  | 697                                          |  
|6-1/2% Cumulative Convertible Preferred Stock, $5 par value; authorized

 988,055 shares; issued 706,450 and 726,680 shares; outstanding 583,914

 and 604,144 shares |  | 3,532                                        |  
|Class A Stock $1 par value; authorized 60,000,000 shares; issued

 25,502,805 and 25,407,940 shares; outstanding 19,671,141 and 19,247,276

 shares                   |  | 25,503                                       |  
|Additional paid-in capital                                                                                                                                            |  | 58,125                                       |  
|Retained earnings                                                                                                                                                     |  | 67,475                                       |  
|Treasury stock, at cost                                                                                                                                               |  | (31,096                                      | )
|Accumulated other comprehensive loss                                                                                                                                  |  | (24,058                                      | )
|                                                                                                                                                                      |  |                                              |  
|Total shareholders equity                                                                                                                                            |  | 100,178                                      |  
|                                                                                                                                                                      |  |                                              |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                            |  | $ 323,699                                    |  
|                                                                                                                                                                      |  |                                              |  

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

51

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AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                              |  | Year Ended December 31, |  
|--------------------------------------------------------------------------------------------- |  | ----------------------- | -
|                                                                                              |  |                         |  
|                                                                                              |  | 2002                    |  
|                                                                                              |  |                         |  
|                                                                                              |  | (Dollars in thousands)  |  
|                                                                                              |  |                         |  
|Cash flows from operating activities                                                          |  |                         |  
|Net (loss) income                                                                             |  | $ (44,047               | )
|Adjustments to reconcile net (loss) income to net

    cash provided by operating activities: |  |                         |  
|Equity in losses (earnings) of affiliates                                                     |  | 3,334                   |  
|Realized and unrealized losses (gains) on

    investments                                    |  | 20,394                  |  
|Gain on sale of real estate rental property                                                   |  | (663                    | )
|Depreciation expense                                                                          |  | 2,014                   |  
|Amortization expense                                                                          |  | 22                      |  
|Impairment of investments                                                                     |  | 15,078                  |  
|Minority interests                                                                            |  | 866                     |  
|Translation (gain) loss                                                                       |  | (1,577                  | )
|(Increase) decrease in other assets                                                           |  | 1,174                   |  
|Increase in accounts payable, accrued expenses

    and other                                 |  | 5,043                   |  
|Investments made in trading securities                                                        |  | (5,476                  | )
|Proceeds from sale of trading securities                                                      |  | 6,475                   |  
|Dividends received from affiliates                                                            |  | 688                     |  
|                                                                                              |  |                         |  
|Net cash provided by operating activities                                                     |  | 3,325                   |  
|                                                                                              |  |                         |  
|Cash flows from investing activities:                                                         |  |                         |  
|Deposits, notes and loans receivable collected                                                |  | 3,380                   |  
|Deposits, notes and loans receivable granted                                                  |  | (1,472                  | )
|Investments made in:                                                                          |  |                         |  
|Available-for-sale securities                                                                 |  |                        |  
|Affiliates and others                                                                         |  | (2,221                  | )
|Proceeds from sale of investments:                                                            |  |                         |  
|Available-for-sale securities                                                                 |  |                        |  
|Others                                                                                        |  |                        |  
|Return of capital by partnership                                                              |  | 209                     |  
|Capital improvements                                                                          |  | (1,406                  | )
|Proceeds from sale of real estate property, net                                               |  | 818                     |  
|                                                                                              |  |                         |  
|Net cash (used in) provided by investing activities                                           |  | (692                    | )
|                                                                                              |  |                         |  

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

52

---

---

AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                  |  | Year Ended December 31, |  
|----------------------------------------------------------------- |  | ----------------------- | -
|                                                                  |  |                         |  
|                                                                  |  | 2002                    |  
|                                                                  |  |                         |  
|                                                                  |  | (Dollars in thousands)  |  
|                                                                  |  |                         |  
|Cash flows from financing activities:                             |  |                         |  
|Notes and loans payable received:                                 |  |                         |  
|Related parties                                                   |  | $                      |  
|Others                                                            |  | 5,605                   |  
|Notes and loans payable repaid:                                   |  |                         |  
|Related parties                                                   |  |                        |  
|Others                                                            |  | (12,378                 | )
|Proceeds from exercise of stock options                           |  | 1,973                   |  
|Debentures repaid                                                 |  | (2,232                  | )
|Contribution to partnership by minority interests                 |  |                        |  
|Issuance of shares to related parties and others                  |  |                        |  
|Dividends paid on preferred stock                                 |  | (218                    | )
|                                                                  |  |                         |  
|Net cash (used in) provided by financing

   activities           |  | (7,250                  | )
|                                                                  |  |                         |  
|Effect of exchange rate changes on cash and

    cash equivalents |  | (1,799                  | )
|                                                                  |  |                         |  
|Net (decrease) increase in cash and cash equivalents              |  | (6,416                  | )
|Cash and cash equivalents at beginning of year                    |  | 7,973                   |  
|                                                                  |  |                         |  
|Cash and cash equivalents at end of year                          |  | $ 1,557                 |  
|                                                                  |  |                         |  
|Supplemental Disclosure of Cash Flow Information                  |  |                         |  
|Cash paid during the year:                                        |  |                         |  
|Interest:                                                         |  |                         |  
|Related parties                                                   |  | $                      |  
|Others                                                            |  | 6,596                   |  
|                                                                  |  |                         |  
|Total interest paid                                               |  | $ 6,596                 |  
|                                                                  |  |                         |  
|Income taxes paid                                                 |  | $ 402                   |  
|                                                                  |  |                         |  
|Supplemental Disclosure of None cash Investing and                |  |                         |  
|Financing Activities:                                             |  |                         |  
|Issuance of treasury stock for charity                            |  |                        |  
|                                                                  |  |                         |  
|Investments in investees                                          |  | 1,545                   |  
|                                                                  |  |                         |  

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

53

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---

AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

|                                                                     |  | Year Ended December 31,                                       |  
|-------------------------------------------------------------------- |  | ------------------------------------------------------------- | -
|                                                                     |  |                                                               |  
|                                                                     |  | 2002                                                          |  
|                                                                     |  |                                                               |  
|                                                                     |  | (Dollars in thousands, except share

 amounts per share data) |  
|                                                                     |  |                                                               |  
|4% PREFERRED STOCK                                                   |  |                                                               |  
|Balance, beginning of year                                           |  | $ 731                                                         |  
|Conversion of 6,835, 10,175 and 9,422 shares

 into Class A Stock    |  | (34                                                           | )
|                                                                     |  |                                                               |  
|Balance, end of year                                                 |  | $ 697                                                         |  
|                                                                     |  |                                                               |  
|6-1/2% PREFERRED STOCK                                               |  |                                                               |  
|Balance, beginning of year                                           |  | $ 3,633                                                       |  
|Conversion of 20,230, 19,134 and 145,949 shares

 into Class A Stock |  | (101                                                          | )
|                                                                     |  |                                                               |  
|Balance, end of year                                                 |  | $ 3,532                                                       |  
|                                                                     |  |                                                               |  
|CLASS A STOCK                                                        |  |                                                               |  
|Balance, beginning of year                                           |  | $ 25,408                                                      |  
|Issuance of shares upon conversion of                                |  |                                                               |  
|Preferred Stock                                                      |  | 95                                                            |  
|Issuance of additional shares                                        |  |                                                              |  
|                                                                     |  |                                                               |  
|Balance, end of year                                                 |  | $ 25,503                                                      |  
|                                                                     |  |                                                               |  
|ADDITIONAL PAID-IN CAPITAL                                           |  |                                                               |  
|Balance, beginning of year                                           |  | $ 58,253                                                      |  
|Conversion of Preferred Stock                                        |  | 40                                                            |  
|Issuance of additional shares                                        |  |                                                              |  
|Exercise of stock options, including tax benefit                     |  | (168                                                          | )
|                                                                     |  |                                                               |  
|Balance, end of year                                                 |  | $ 58,125                                                      |  
|                                                                     |  |                                                               |  
|RETAINED EARNINGS                                                    |  |                                                               |  
|Balance, beginning of year                                           |  | $ 111,740                                                     |  
|Net (loss) income                                                    |  | (44,047                                                       | )
|Dividends:                                                           |  |                                                               |  
|4% Preferred Stock - $0.20 per share                                 |  | (27                                                           | )
|6-1/2% Preferred Stock - $0.325 per share                            |  | (191                                                          | )
|                                                                     |  |                                                               |  
|Balance, end of year                                                 |  | $ 67,475                                                      |  
|                                                                     |  |                                                               |  

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

54

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AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

|                                                                                  |  | Year Ended December 31,                                       |  
|--------------------------------------------------------------------------------- |  | ------------------------------------------------------------- | -
|                                                                                  |  |                                                               |  
|                                                                                  |  | 2002                                                          |  
|                                                                                  |  |                                                               |  
|                                                                                  |  | (Dollars in thousands, except share

 amounts per share data) |  
|                                                                                  |  |                                                               |  
|TREASURY STOCK                                                                    |  |                                                               |  
|4% PREFERRED STOCK                                                                |  |                                                               |  
|Balance, beginning and end of year                                                |  | $ (84                                                         | )
|                                                                                  |  |                                                               |  
|6-1/2% PREFERRED STOCK                                                            |  |                                                               |  
|Balance, beginning and end of year                                                |  | $ (1,853                                                      | )
|                                                                                  |  |                                                               |  
|CLASS A STOCK                                                                     |  |                                                               |  
|Balance, beginning of year  6,160,664,

 6,168,164 and 6,528,181 shares, at cost |  | $ (31,301                                                     | )
|Issuance of 329,000, 7,500 and 360,017 shares                                     |  | 2,142                                                         |  
|Balance, end of year  5,831,664, 6,160,664,

 and 6,168,164 shares, at cost      |  | (29,159                                                       | )
|                                                                                  |  |                                                               |  
|Balance, end of year                                                              |  | $ (31,096                                                     | )
|                                                                                  |  |                                                               |  
|ACCUMULATED OTHER COMPREHENSIVE

 LOSS                                            |  |                                                               |  
|Cumulative translation adjustments:                                               |  |                                                               |  
|Balance, beginning of year                                                        |  | $ (20,163                                                     | )
|Foreign currency translation adjustments                                          |  | (587                                                          | )
|                                                                                  |  |                                                               |  
|Balance, end of year                                                              |  | (20,750                                                       | )
|                                                                                  |  |                                                               |  
|Unrealized gain (loss) on marketable securities:                                  |  |                                                               |  
|Balance, beginning of year                                                        |  | 4,856                                                         |  
|Unrealized (loss) gain, net                                                       |  | (7,463                                                        | )
|Sale of available-for-sale securities                                             |  | (701                                                          | )
|                                                                                  |  |                                                               |  
|Balance, end of year                                                              |  | (3,308                                                        | )
|                                                                                  |  |                                                               |  
|Balance, end of year                                                              |  | $ (24,058                                                     | )
|                                                                                  |  |                                                               |  

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

55

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---

AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

|                                                                      |  | Year Ended December 31, |  
|--------------------------------------------------------------------- |  | ----------------------- | -
|                                                                      |  |                         |  
|                                                                      |  | 2002                    |  
|                                                                      |  |                         |  
|                                                                      |  | (Dollars in thousands)  |  
|                                                                      |  |                         |  
|Net (loss) income                                                     |  | $ (44,047               | )
|                                                                      |  |                         |  
|Other comprehensive (loss) income, net of tax:                        |  |                         |  
|Foreign currency translation adjustments                              |  | (587                    | )
|Unrealized (loss) gain on securities                                  |  | (7,463                  | )
|                                                                      |  |                         |  
|Other comprehensive (loss) income                                     |  | (8,050                  | )
|                                                                      |  |                         |  
|Comprehensive (loss) income                                           |  | $ (52,097               | )
|                                                                      |  |                         |  
|Related tax (expense) benefit of other comprehensive

 (loss) income: |  |                         |  
|Foreign currency translation adjustments                              |  | $ (446                  | )
|Unrealized gain on securities                                         |  | $ 3,834                 |  

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

56

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---

AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Summary of Significant Accounting Policies

(a)          General

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

(b)          Consolidation

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

(c)          Translation of Foreign
Currencies

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

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

(d)          Foreign
        Exchange Forward
Contracts

Effective
    January 1, 2001, the Company adopted Statement of Financial Accounting Standards
    (SFAS) No. 133 Accounting for Derivative
Instruments and Hedging Activities.

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

57

---

---

The
    adoption of SFAS 133
had no material impact on the companys financial position and result of
operations.

At December 31, 2002,
the open foreign exchange forward contracts totaled $22.7 million.

(e)          Investments

(i) Investments in Affiliates

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

On
    January 1, 2002, the
Company adopted SFAS No. 142, Goodwill and Other Intangible Assets.  SFAS No. 142 supersedes Accounting Principles
Board Opinion (APB) No. 17, Intangible Assets. Among
the most significant changes made by SFAS No. 142 are: (i) goodwill and intangible
assets with indefinite lives will no longer be amortized; and (ii) goodwill and
intangible assets deemed
to have an indefinite life will be tested for impairment at least annually.

The
    adoption of SFAS 142
had no material impact on the companys financial position and result of
operations.

(ii) Investments in Marketable Securities

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

(iii) Cost Basis Investments

Equity
    investments of less than 20% in non-publicly traded companies are carried
    at cost.  Changes in the value of these investments are not
recognized unless an impairment in value is deemed to be other than temporary. The investment in MIRS communications Ltd.
(MIRS) in preferred shares with preference features in the amount of $110 million
which exceeds 20% of ownership, is presented at cost. At December 31, 2002, and
December 31, 2001, the carrying value of the cost basis investments was $145
million and
$153 million, respectively.

(f)          Risk
Factors and Concentrations

Financial instruments
that subject the Company to credit risk consist primarily of cash, cash equivalents, short-term investments and notes and loans
receivable. The Company invests cash equivalents and short-term investments through high-quality financial institutions.

The company performs on
going credit evaluation of its receivables allowance for doubtful accounts.

(g)          Property
        and
Equipment

The
    Companys
policy is to record long-lived assets at cost, amortizing these costs over the
  expected useful life of the related assets.

58

---

---

The
    Company adopted
in  2002 SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived assets (SFAS 144).
SFAS 144 requires that long-lived assets, to be held and used by an entity, be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be recoverable.
Under SFAS 144, if the sum of the expected future cash flows (undiscounted and
without interest charges) of the long-lived assets is less than the carrying
amount of such
assets, an impairment loss would be recognized, and the assets are written down
to their estimated fair
values.

(h)          Income
  Taxes

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

Deferred
    income taxes are not provided on undistributed earnings of foreign subsidiaries
    adjusted for translation effect totaling approximately $30.1
million, since such earnings are currently expected to be permanently reinvested
    outside the United States.  If the earnings
were not considered permanently invested, approximately $10.1 million of deferred
  income taxes would have been provided.

Income
    taxes are provided on equity in earnings of affiliates, gains on issuance
    of shares by affiliates and unrealized gains on investments. 
Ampals foreign subsidiaries file separate tax returns and provide for taxes
accordingly.

(i)          Revenue
Recognition

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

(j)          Cash
Equivalents

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

(k)          Earning
        (loss) per share
(EPS)

Basic
    and diluted net earning (loss) per share are presented in accordance with
    SFAS No. 128 Earnings per share (SFAS No. 128), for
all periods presented. As to data used in the per share computation see note
  10.

(l)          Comprehensive
Income

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

59

---

---

(m)          Employee
      Stock Based
Compensation

The
    Company accounts for all plans under APB Opinion No. 25, under which no compensation
    costs were incurred in the years ended December 31, 2002, 2001 and
2000. If compensation cost for the options under the plans in effect been determined
    in accordance with SFAS No. 123, the
Companys net income (loss) and EPS would have been reduced as follows:

|                                                                                 |  |             |  | Year Ended December 31,               |  
|-------------------------------------------------------------------------------- |  | ----------- |  | ------------------------------------- | -
|                                                                                 |  |             |  |                                       |  
|                                                                                 |  |             |  | 2002                                  |  
|                                                                                 |  |             |  |                                       |  
|                                                                                 |  |             |  | (In thousands, except per share data) |  
|                                                                                 |  |             |  |                                       |  
|Net income (loss):                                                               |  | As reported |  | $ (44,047                             | )
|Less  stock based

 compensation expense

 determined under fair value

 method |  |             |  | (7,490                                | )
|                                                                                 |  |             |  |                                       |  
|                                                                                 |  | Pro forma   |  | (51,537                               | )
|                                                                                 |  |             |  |                                       |  
|Basic and diluted EPS:                                                           |  | As reported |  | $ (2.27                               | )
|                                                                                 |  | Pro forma   |  | (2.65                                 | )

Under
    SFAS No. 123, the fair value of each option is estimated on the date of grant
    using the Black Scholes option-pricing model with the following weighted
average assumptions for 2002, 2001 and 2000, respectively: (1) expected life
    of options of 5, 5 and 5.92 years;  (2) dividend
yield of 0%; (3) volatility of 57%, 71% and 59%; and (4) risk-free interest rate
  of 3.41%, 1.75% and 6.68%.

(n)          Treasury
stock

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

(o)          Recently Issued Accounting
Pronouncements

FAS 143 prescribes the
accounting for retirement obligations associated with tangible long-lived assets, including the timing of liability recognition and
initial measurement of the liability. FAS 143 requires that an asset retirement cost should be capitalized as part of the cost of the
related long-lived asset and subsequently allocated to expense using a systematic and rational method. FAS 143 is effective for
fiscal years beginning after June 15, 2002 (January 1, 2003 for the Company). The Company does not believe that the adoption of SFAS
143 will have any material effect on our consolidated financial statements.

In
    April 2002, the FASB
issued SFAS No. 145, Revision of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Connections (SFAS 145). Among other amendments and rescissions, SFAS 145 eliminates the requirement that gains and
losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income
tax effect, unless such gains and losses meet the criteria in paragraph 20 of Accounting Principles Board Opinion No. 30,
Reporting the Results of OperationReporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
SFAS 145 is partially effective for transactions occurring after May 15, 2002
and partially effective for fiscal years beginning after May 15, 2002. The Company
does not believe that
the adoption of SFAS 145 will have any material effect on our consolidated financial
statements.

60

---

---

In
    July 2002, the FASB
issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No.
94-3, Liability Recognition for Certain Employee Termination Benefits and other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring).  SFAS 146 requires that a liability
for costs associated with an exit or disposal activity be recognized when the
liability is incurred rather than when the Company commits to such an
activity and also establishes fair value as the objective for initial measurement
of the liability. The Company will adopt SFAS 146 for exit disposal activities
that are initiated after December 31, 2002. Upon the adoption of SFAS 146, previously
issued financial
statements shall not be restated. The Company does not believe that the adoption
of SFAS 146 will have any material effect on its
consolidated financial statements.

In
    November 2002, the
FASB issued FASB Interpretation No. 45 Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (FIN 45). FIN
45 requires the guarantor to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. It
also elaborates on
the disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued and to be made in regard
of product warranties. The Company does not expect the adoption of FIN 45 to
have a material effect on our consolidated financial statements.

In
    December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition
    and Disclosure. This Statement amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of transition
    to SFAS No. 123s fair value method of
accounting for stock-based employee compensation. This Statement also amends the disclosure provision of SFAS No. 123 and APB No. 28,
Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an
entitys accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. The Company has elected to continue accounting for employee stock
option plans according to APB No. 25, and has adopted the disclosure requirements
under SFAS No. 148 commencing on December 31,
2002.

In
    January 2003, the
FASB issued FASB Interpretation No. 46 Consolidation of Variable Interest Entities (FIN 46). Under this FIN entities are
separated into two populations: (1) those for which voting interests are used to determine consolidation (this is the most common
situation) and (2) those for which variable interests are used to determine consolidation. The FIN explains how to identify Variable
Interest Entities (VIE) and how to determine when a business enterprise should include the assets, liabilities, non-controlling
interests, and results of activities of a VIE in its consolidated financial statements. The FIN is
effective as follows: for variable interests in variable interest entities created after January 31, 2003 the FIN shall apply
immediately, for variable interests in variable interest entities created before that date, the FIN shall applyfor public
entitiesas of the beginning of the first interim or annual reporting period beginning after June 15, 2003. FIN 46 is effective
immediately for certain disclosure requirements and variable interest entities created after January 31, 2003 and in fiscal 2003 for
all other variable interest entities. As the Company does not have variable interest entities, the adoption of FIN 46 will not have
an effect on the Companys financial position, results of operations or
cash flows.

(p)          Reclassifications

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

61

---

---

Note 2  Acquisitions and Dispositions

|(a) | In 2002, the Company made investments aggregating $3 million, as follows:                                    
|--- | -------------------------------------------------------------------------------------------------------------
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|(b) | On December 2002, the Company recorded a $0.7 million pretax gain on the sale of real estate
rental property.
|    |                                                                                                              
|(c) | In 2002, the Company recorded loss from impairment of investments of $15.1 million as
follows:               
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|(d) | In 2001, the Company made investments aggregating $14 million, as follows:                                   
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              
|    |                                                                                                              

62

---

---

|    |                                                                                              | 4.  | An additional investments of an aggregrate of $0.9 million in CUTe Ltd. (CUTe),
a developer of bandwidth efficient techniques for the delivery of digital media over wireless networks. The Company holds an
approximate 20% equity interest in CUTe.                                                                                                                           
|--- | -------------------------------------------------------------------------------------------- | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                              |     |                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                              | 5.  | An additional investment of $0.6 million in the share of Breezecom Ltd. (NASDAQ:
BRZE), a developer of wireless local area network products, and $0.6 million in the share of Floware Wireless Systems Ltd.
(NASDAQ:FLRE), a developer of broadband wireless transmission solution. These two companies merged during 2001 to create
a company called Alvarion (NASDAQ: ALVR).
|    |                                                                                              |     |                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                              | 6.  | An additional investment of $0.6 million in Star Management of Investment No. II (2000)
L.P., a venture capital fund which focuses in investment in communications, Internet, software and medical devices. (total equity
interest of 10%).                                                                                                                                       
|    |                                                                                              |     |                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                              | 7.  | An additional investment of $0.5 million in PowerDsine Ltd. (total equity interest of 8.4%),
a leading developer of power supply devices for the telecommunications industry.                                                                                                                                                                                                     
|    |                                                                                              |     |                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                              | 8.  | A loan to Netformx Ltd. of $1.5 million, (net equity interest of 20%) a developer of network
design tools.                                                                                                                                                                                                                                                                        
|    |                                                                                              |     |                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                              | 9.  | A loan to Camelot Information Technologies Ltd., of $0.5 million (total equity interest of
20%), a developer of security solution for organizations.                                                                                                                                                                                                                              
|    |                                                                                              |     |                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                              | 10. | A loan to Shiron Satellite Communications (1996) Ltd. of $0.3 million, (equity interest
10%), a developer and marketer of two-way satellite communication products.                                                                                                                                                                                                               
|    |                                                                                              |     |                                                                                                                                                                                                                                                                                                                                                                                   
|(e) |                                                                                              | 1.  | On March 2001, the Company sold its interest in an office building located at 800 Second
Avenue, New York, New York, to Second 800 LLC, for $33 million and recorded a pre tax gain of approximately $8 million.                                                                                                                                                                  
|    |                                                                                              |     |                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                              | 2.  | On May 2001, the Company sold its interest in an office building in Bnei Brak for $3.1
million and recorded a pre tax gain of $2.1 million.                                                                                                                                                                                                                                       
|    |                                                                                              |     |                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                              | 3.  | On December 2001 the Company sold its interest in the Amethyst fund in Korea for $0.9
million and recorded a pre tax loss of  $0.2 million.                                                                                                                                                                                                                                       
|    |                                                                                              |     |                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                              |     | During 2001, the Company received $0.4 million as management fees from Amethyset and
reimbursed Cavallo Capital (a related party) for $0.1 million of expenses.                                                                                                                                                                                                                   
|    |                                                                                              |     |                                                                                                                                                                                                                                                                                                                                                                                   
|(f) | In 2001, the Company recorded loss from impairment of investments of $13 million as
follows:
|    |                                                                                              |     |                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                              | 1.  | Netformx Ltd. ($1.6 million investment and $1 million  loan).                                                                                                                                                                                                                                                                                                                     
|    |                                                                                              |     |                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                              | 2.  | RealM Technologies Ltd. ($1.3 million).                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                              |     |                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                              | 3.  | mPrest Technologies Ltd. ($0.8 million).                                                                                                                                                                                                                                                                                                                                          

63

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|    |                                                                               | 4.  | Shiron Satellite Communications (1996) Ltd. ($1.4 million).                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------- | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                               |     |                                                                                                                                                                                                                                                                                               
|    |                                                                               | 5.  | Enbaya Ltd. ($1.4 million).                                                                                                                                                                                                                                                                   
|    |                                                                               |     |                                                                                                                                                                                                                                                                                               
|    |                                                                               | 6.  | Camelot Information Technologies Ltd. ($4.5 million investment and $0.5 million of
loan).                                                                                                                                                                                                     
|    |                                                                               |     |                                                                                                                                                                                                                                                                                               
|    |                                                                               | 7.  | Babylon Ltd. ($0.3 million).                                                                                                                                                                                                                                                                  
|    |                                                                               |     |                                                                                                                                                                                                                                                                                               
|    |                                                                               | 8.  | ElephantX Dot Com LLC ($0.2 million).                                                                                                                                                                                                                                                         
|    |                                                                               |     |                                                                                                                                                                                                                                                                                               
|(g) | In 2000, the Company made the following investments, aggregating $37 million:
|    |                                                                               |     |                                                                                                                                                                                                                                                                                               
|    |                                                                               | 1.  | a $6.2 million investment to acquire a 4.9% interest in Arel Communications and Software
Ltd., a leading provider of interactive distance learning systems;                                                                                                                                   
|    |                                                                               |     |                                                                                                                                                                                                                                                                                               
|    |                                                                               | 2.  | an additional $3.3 million investment in Camelot Information Technologies Ltd.
(Camelot) (total equity interest is 20.7%, including net indirect equity through Ophirtech Ltd. (Ophirtech)),
a developer of innovative software solutions to secure organizational communication networks;
|    |                                                                               |     |                                                                                                                                                                                                                                                                                               
|    |                                                                               | 3.  | a $2.8 million investment to acquire a 4% interest in BridgeWave Communications Inc., a
developer of wireless solutions for cable companies;                                                                                                                                                  
|    |                                                                               |     |                                                                                                                                                                                                                                                                                               
|    |                                                                               | 4.  | an additional $2.75 million investment in Netformx Ltd. (Netformx) (net equity
interest is 20.2%, including net indirect equity through Trinet Venture Capital Ltd. (Trinet) and Ophirtech), a developer
of network design tools;                                                         
|    |                                                                               |     |                                                                                                                                                                                                                                                                                               
|    |                                                                               | 5.  | a $2.75 million investment to acquire a 16.6% interest in Xpert Integrated Systems Ltd., a
software and systems integrator specializing in systems security;                                                                                                                                  
|    |                                                                               |     |                                                                                                                                                                                                                                                                                               
|    |                                                                               | 6.  | an additional $2.2 million investment in Identify Solutions Ltd. (Identify)
(total equity interest is 6.1%), a developer and marketer of software solutions that improve the availability of business critical
software applications;                                                       
|    |                                                                               |     |                                                                                                                                                                                                                                                                                               
|    |                                                                               | 7.  | a $2.2 million investment to acquire a 17% interest in Oblicore Ltd., a provider of a unique
solution that enables businesses to track service performance relative to service targets and allocate service resources to maximize
their success;                                              
|    |                                                                               |     |                                                                                                                                                                                                                                                                                               
|    |                                                                               | 8.  | a $2 million investment to acquire a 0.4% interest in Sonic Foundry Inc., a developer of
digital media and Internet software tools, services and systems;                                                                                                                                     
|    |                                                                               |     |                                                                                                                                                                                                                                                                                               
|    |                                                                               | 9.  | an additional $1.8 million investment in PowerDsine Ltd. (PowerDsine) (total
equity interest-10.8%), a leading developer of power supply devices for the telecommunications industry;                                                                                                       
|    |                                                                               |     |                                                                                                                                                                                                                                                                                               
|    |                                                                               | 10. | a $1.65 million investment to acquire a 7.6% interest in Modem Art Ltd., a developer of
system-on-a-chip solutions for wideband and broadband communication systems;                                                                                                                          

64

---

---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          | 11. | a $1.25 million investment to acquire a 13% interest in RealM Technologies Ltd. (total
equity interest-19.2%, including net indirect equity through Ophirtech), a developer of a network of servers, which will allow the
introduction of the next generation of applicable services, while maximizing performance and optimizing bandwidth usage;
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          |     |                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          | 12. | a $1.25 million investment in Star Management of Investments No. II (2000) L.P., a venture
capital fund which focuses on investments in communications, Internet, software and medical devices;                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          |     |                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          | 13. | an additional $1.1 million investment in Compugen Ltd. (total equity interest-1.5%), a
pioneer in the field of computational genomics and proteomics;                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          |     |                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          | 14. | a $1.1 million investment to acquire a 20% interest in Ampal Cavallo Intervest Fund, a new
Korean venture capital fund.                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          |     |                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          | 15. | a $1 million investment to acquire a 0.5% interest in SeraNova, Inc., a provider of
E-business services;                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          |     |                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          | 16. | a $0.9 million investment to acquire a 20% interest in CUTe Ltd., a designer of intellectual
property rights and software modules on key components of the physical layer of wireless telecommunications systems;                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          |     |                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          | 17. | a $0.75 million investment to acquire a 9.5% equity interest in mPrest Technologies Ltd.
(formerly WapDWap Ltd), a developer of web-based applications for cellular phones;                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          |     |                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          | 18. | an additional $0.6 million investment to maintain its interest in Shiron Satellite
Communications (1996) Ltd. (total equity interest-9%), a developer and marketer of two-way multimedia satellite communication
products;                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          |     |                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          | 19. | a $0.5 million investment to acquire a 12.9% interest in Enbaya Ltd., a developer and
marketer of a 3D browser that enables fast viewing, compression and streaming of 3D models;                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          |     |                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          | 20. | a $0.5 million investment to acquire a 5.6% interest in Zactus, Inc., a developer of a web
site  for musicians;                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          |     |                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          | 21. | an additional $0.4 million investment in Shellcase Ltd., (total equity  interest
-  17.6%), a developer of the smallest packages for semiconductor chips.                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                          |     |                                                                                                                                                                                                                                                                                                                                                   
|(h) | In 2000, the Company recorded an $11.1 million loss from impairment of investments
attributable to the $3.5 million bank guarantees paid on behalf of M.D.F. Industries Ltd. (M.D.F.) and to the impairment
in values of the Companys investments in SmartLight Ltd. ($3 million), Netformx Ltd. ($2.5 million), Qronus Interactive Israel
(1994) Ltd. ($1.1 million), Zactus Inc. ($0.5 million) and ContactNOW Inc. ($0.5 million).

Note 3  Deposits, Notes and Loans Receivable

Deposits, notes and loans
receivable earn interest at varying rates depending upon their linkage provisions.  Deposits have maturities of up to 3 years
(see note 6) and notes and loans receivable have maturities of up to 6 years.  At December 31, 2002 and 2001, deposits, notes
and loans receivable from related parties were $0.7 million and $1.4 million, respectively, and such balances with others were $10.3
million and $15.8 million, respectively.  The allowance for doubtful notes receivable for 2002 and 2001was $ 3.9 million and $
2.0 million respectively.

65

---

---

Note 4  Investments in Marketable Securities

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, 2002 and 2001 are as follows:

|                         |  | Cost                   |  | Unrealized

 (Losses) |   | Market Value | 
|------------------------ |  | ---------------------- |  | --------------------- | - | ------------ | 
|                         |  |                        |  |                       |   |              | 
|                         |  | (Dollars in thousands) | 
|                         |  |                        | 
|December 31, 2002        |  |                        |  |                       |   |              | 
|Bonds                    |  | $ 1,278                |  | $ (1                  | ) | $ 1,277      | 
|Equity Securities        |  | 14,161                 |  | (10,205               | ) | 3,956        | 
|                         |  |                        |  |                       |   |              | 
|Total Trading Securities |  | $ 15,439               |  | $ (10,206             | ) | $ 5,233      | 
|                         |  |                        |  |                       |   |              | 
|December 31, 2001        |  |                        |  |                       |   |              | 
|Bonds                    |  | $ 10                   |  | $                    |   | $ 10         | 
|Equity Securities        |  | 17,311                 |  | (7,398                | ) | 9,913        | 
|                         |  |                        |  |                       |   |              | 
|Total Trading Securities |  | $ 17,321               |  | $ (7,398              | ) | $ 9,923      | 
|                         |  |                        |  |                       |   |              | 

In the years ended December 31,
2002, 2001 and 2000, the Company recorded $3.3 million, $1.7 million, and $7.8 million of realized and unrealized losses gains
respectively, on trading securities in the statements of income (loss).

During 2002, 2001 and 2000, the
Company invested approximately $5.5 million, $0.4 million, and $23.3 million, respectively, in marketable securities, which are
classified as trading securities.

(b)     Available-For-Sale Securities

The cost and market values of
available-for-sale securities at December 31, 2002 and 2001 are as follows:

|                  |  | Cost                   |  | Other than

 temporarily

 decline |   | Unrealized

 Gains (Losses) |   | Market

 Value | 
|----------------- |  | ---------------------- |  | ---------------------------------- | - | --------------------------- | - | -------------- | 
|                  |  |                        |  |                                    |   |                             |   |                | 
|                  |  | (Dollars in thousands) | 
|                  |  |                        | 
|                  |  |                        |  |                                    |   |                             |   |                | 
|December 31, 2002 |  |                        |  |                                    |   |                             |   |                | 
|Equity Securities |  | $ 32,243               |  | $ (17,687                          | ) | $ (1,176                    | ) | $ 13,380       | 
|                  |  |                        |  |                                    |   |                             |   |                | 
|December 31, 2001 |  |                        |  |                                    |   |                             |   |                | 
|Equity Securities |  | $ 31,743               |  | $                                 |   | $ (1,025                    | ) | $ 30,718       | 
|                  |  |                        |  |                                    |   |                             |   |                | 

66

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---

Note 5  Notes and Loans Payable

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

The Company has two long-term
loans from Bank Hapoalim Ltd. (Hapoalim) and Bank Leumi LeIsrael Ltd. (Leumi)in the amount of $37.2
million and $34.9 million as of December 31, 2002, (in connection with its investment in shares of MIRS.  Both loans are due on
March 31, 2008 and bear interest at a rate of LIBOR plus 0.8%. Other than as described below, the loans are non-recourse to the
Company and are secured by the Companys shares in MIRS. The principal payments are due as follows:  10% on March 31, 2004,
15% on March 31, 2005 and 25% on each of the following dates - March 31, 2006, 2007 and 2008.  Interest will be paid annually on
March 31 of each year from March 31, 2001 until and including March 31, 2008.

These loans are subject to the
compliance by MIRS with covenants regarding its operations and financial results. In March 2002, some of the covenants in the Leumi
loan were amended to reflect changes in MIRS business.  In connection with these amendments, the Company agreed that Leumi
will have recourse to the Company for an amount of up to $3.5 million if Motorola Israel does not make the guaranteed payment to the
Company on March 31, 2003 as is required by the terms of the agreement under which the Company purchased its interest in MIRS from
Motorola Israel.  In addition, Leumi will have recourse to the Company for another $0.5 million beginning in 2006 in relation to
the Companys repayment obligations under the loan. The Company anticipates that similar amendments will be required in the
Hapoalim loan.  In the event that any such amendments are made to the Hapoalim loan, the terms of the security provided by the
Company under that loan may also be changed.  Any such changes may result in the Company also directly guaranteeing part of this
loan.

At December 31, 2002 and 2001,
notes and loans payable include $12.7 million and $14.1 million of loans, respectively, attributed to Am-Hal . The loans are dollar
linked, mature through 2003 and have interest rates of zero to LIBOR plus 1%. The loans are secured by a lien on Am-Hals
properties.

The weighted average interest
rates on the balances of short-term borrowings at year-end are as follows:  4.03% on $39.8 million and 3.23% on $31.1 million in
2002 and 2001, respectively.

Note 6  Debentures

Debentures outstanding at
December 31 consist of:

| |                                                                                                                                                                                                  |  | As of December 31,     | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------- | 
| |                                                                                                                                                                                                  |  |                        | 
| |                                                                                                                                                                                                  |  | 2002                   | 
| |                                                                                                                                                                                                  |  |                        | 
| |                                                                                                                                                                                                  |  | (Dollars in thousands) | 
| | Ampal:                                                                                                                                                                                           |  |                        | 
| | Fifteen Year 11% Discount Debenture, maturing  2003                                                                                                                                              |  | $ 17,428               | 
| | Ampal Development (Israel) Ltd.:                                                                                                                                                                 |  |                        | 
| | Series with interest rate of  6.2% , linked

 to the Consumer Price Index in Israel

      maturing 2003-2005, secured by pledge on assets

      of $5.6 million and $7.5 million, respectively |  | 5,443                  | 
| |                                                                                                                                                                                                  |  |                        | 
| |                                                                                                                                                                                                  |  | 22,871                 | 
| | Less: Unamortized discounts                                                                                                                                                                      |  | 325                    | 
| |                                                                                                                                                                                                  |  |                        | 
| | Total                                                                                                                                                                                            |  | $ 22,546               | 
| |                                                                                                                                                                                                  |  |                        | 

67

---

---

Ampal Development, a wholly  owned subsidiary of the Company, issued debentures which
are publicly traded on the TASE. An aggregate of approximately $5.4 million of these debentures were outstanding as of December 31,
2002. Ampal Development has deposited funds with Bank Hapoalim sufficient to pay all principal and interest on these
debentures.

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

|2003 |  | $ 19,214 |         
|---- |  | -------- | --------
|2004 |  | 1,786    |         
|2005 |  | 1,871    |         
|     |  |          |         
|     |  |          | $ 22,871
|     |  |          |         

Note 7  Accounts payable accrued expenses and others

The balance of Accounts
payable, accrued and others as of December 31, 2002 is composed of the following: $48.7 million in respect of deposits from
tenants of retirement centers for senior citizens (2001 - $47.0 million), $16.1 million with respect to deferred tax liability (2001
- $19.5 million), $ 6.7 million in respect of minority interest (2001 - $5.7 million), $2.5 million with respect to accrued interest
(2001 - $3.6 million) and $3.7 in respect of excess of share in losses of associated company over the investment therein (2001 - $2.4
million) and $9.0 payable amounts to others (2001 - $ 8.5 million).

Note 8  Shareholders Equity

Capital Stock

The 4% and 6-1/2% preferred
shares are convertible into 5 and 3 shares of Class A Stock, respectively.  At December 31, 2002, a total of 5,283,947 shares of
Class A Stock are reserved for issuance upon the conversion of the Preferred Stock and the exercise of 2,852,000 options.

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

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

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

Preferred shares are non-voting,
unless dividends are in arrears for three successive years.  At December 31, 2002, there are no dividend in arrears.

Retained Earnings

At December 31, 2002, retained
earnings include $15.1 million for affiliates accounted for by the equity method, of which $10.0 million and an additional $47.3
million from subsidiaries is not available for the payment of dividends.  In most cases, this results from Israeli requirements
that dividends may only be paid on the basis of shekel-denominated and not dollar-denominated retained earnings.

68

---

---

Note 9  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, 2002, 204,500 options of the 1998 Plan are outstanding.

On February 15, 2000, the Stock
Option Committee approved a new Incentive Plan (2000 Plan), under which the Company has reserved 4 million shares of
class A Stock, permitting the granting of options to all employees, officers and directors. The 2000 Plan was approved by the Board
of Directors at 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, 2002 2,647,500 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 Stock Option Compensation Committee (the Committee) but not less than 100% of the fair market value of
the underlying options on the date of grant, or non-incentive stock options, at an exercise price to be determined by the Committee.
The Committee may also grant, at its discretion, restricted stock, dividend equivalent awards, which entitle
the recipient to receive dividends in the form of Class A Stock, cash or a combination of both and stock appreciation
rights, which permit the recipient to receive an amount in the form of Class A Stock, cash or a combination of both, equal to
the number of shares of Class A Stock with respect to which the rights are exercised multiplied by the excess of the fair market
value of the Class A Stock on the exercise date over the exercise price. The options granted under the plants were granted either at
market value or above.

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

As of December 31, 2002,
1,548,000 options under both plans are available for future grant.

Transactions under both Stock
Option Plans were as follows:

|                                               |  | Year Ended December 31,

 2002          |  
|---------------------------------------------- |  | --------------------------------------- | -
|                                               |  |                                         |  
|                                               |  |                                         |  
|                                               |  |                                         |  
|                                               |  | Options                                 |  
|                                               |  |                                         |  
|                                               |  | (In thousands, except per

 share data) |  
|                                               |  |                                         |  
|Outstanding at beginning of year               |  | 2,815                                   |  
|Granted                                        |  | 1,298                                   |  
|Exercised                                      |  | (329                                    | )
|Forfeited/Expired                              |  | (932                                    | )
|                                               |  |                                         |  
|Outstanding at end of year                     |  | 2,852                                   |  
|                                               |  |                                         |  
|Exercisable at end of year                     |  | 1,630                                   |  
|                                               |  |                                         |  
|Weighted average fair value of options granted |  |                                         |  
|                                               |  |                                         |  

69

---

---

|                                               |  | Year Ended December 31,

 2001          |  
|---------------------------------------------- |  | --------------------------------------- | -
|                                               |  |                                         |  
|                                               |  |                                         |  
|                                               |  |                                         |  
|                                               |  | Options                                 |  
|                                               |  |                                         |  
|                                               |  | (In thousands, except per

 share data) |  
|                                               |  |                                         |  
|                                               |  |                                         |  
|Outstanding at beginning of year               |  | 3,161                                   |  
|Granted                                        |  | 205                                     |  
|Exercised                                      |  |                                        |  
|Forfeited/Expired                              |  | (551                                    | )
|                                               |  |                                         |  
|Outstanding at end of year                     |  | 2,815                                   |  
|                                               |  |                                         |  
|Exercisable at end of year                     |  | 912                                     |  
|                                               |  |                                         |  
|Weighted average fair value of options granted |  |                                         |  
|                                               |  |                                         |  

|                                               |  | Year Ended December 31,

 2000          |  
|---------------------------------------------- |  | --------------------------------------- | -
|                                               |  |                                         |  
|                                               |  |                                         |  
|                                               |  |                                         |  
|                                               |  | Options                                 |  
|                                               |  |                                         |  
|                                               |  | (In thousands, except per

 share data) |  
|                                               |  |                                         |  
|Outstanding at beginning of year               |  | 762                                     |  
|Granted                                        |  | 2,972                                   |  
|Exercised                                      |  | (511                                    | )
|Forfeited/Expired                              |  | (62                                     | )
|                                               |  |                                         |  
|Outstanding at end of year                     |  | 3,161                                   |  
|                                               |  |                                         |  
|Exercisable at end of year                     |  | 884                                     |  
|                                               |  |                                         |  
|Weighted average fair value of options granted |  |                                         |  
|                                               |  |                                         |  

70

---

---

Note 9  Stock Options  Continued

The 2,852,000 options
outstanding as of December 31, 2002 have exercise prices between $3.12 and $32 with a weighted average exercise price of $14.77 and a
weighted average remaining contractual life of 8.4 years. Of these 2,852,000 options, 1,630,000 are exercisable as of December 31,
2002; their weighted average exercise price is $23.51.

The 2,815,000 options
outstanding as of December 31, 2001 had exercise prices between $5.94 and $32 with a weighted average exercise price of $23.03 and a
weighted average remaining contractual life of 4.8 years.  Of these 2,815,000 options, 912,000 are exercisable as of December
31, 2001; their weighted average exercise price is $16.78.

Note 10  Earnings (Loss) Per Class A Share

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

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

|                                         |  | Year Ended December 31, 2002          |     
|---------------------------------------- |  | ------------------------------------- | ----
|                                         |  |                                       |     
|                                         |  | Income

 (Loss)                       |     
|                                         |  |                                       |     
|                                         |  | (In thousands, except per share data) |     
|                                         |  |                                       |     
|Basic and diluted EPS:                   |  |                                       |     
|Net (loss) attributable to Class A Stock |  | $ (44,265                             | )(1)
|                                         |  |                                       |     

|                                         |  | Year Ended December 31, 2001          |     
|---------------------------------------- |  | ------------------------------------- | ----
|                                         |  |                                       |     
|                                         |  | Income

 (Loss)                       |     
|                                         |  |                                       |     
|                                         |  | (In thousands, except per share data) |     
|                                         |  |                                       |     
|Basic and diluted EPS:                   |  |                                       |     
|Net (loss) attributable to Class A Stock |  | $ (7,201                              | )(1)
|                                         |  |                                       |     

71

---

---

|                                         |  | Year Ended December 31, 2000          |    
|---------------------------------------- |  | ------------------------------------- | ---
|                                         |  |                                       |    
|                                         |  | Income

 (Loss)                       |    
|                                         |  |                                       |    
|                                         |  | (In thousands, except per share data) |    
|                                         |  |                                       |    
|Basic EPS:                               |  |                                       |    
|Net income attributable to Class A Stock |  | $ 579                                 | (1)
|                                         |  |                                       |    
|Effect of Dilutive Securities:           |  |                                       |    
|Exercise of stock options                |  |                                       |    
|                                         |  |                                       |    
|Diluted EPS:                             |  |                                       |    
|Net income attributable to Class A Stock |  | $ 579                                 |    
|                                         |  |                                       |    

|(1) | After deduction of Preferred Stock dividends of $218, $227 and $234 in 2002, 2001 and 2000
respectively.                                         
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | In 2002 and 2001, the conversion of the 4% and 61⁄2% Preferred Stocks was excluded from
the diluted EPS calculation due to the antidilutive effect.

Options to purchase 2,852,000,
2,815,000 and 3,161,000 shares of common stock were outstanding as of December 31, 2002, 2001 and 2000, respectively, of which
2,852,000, 2,815,000 and 2,957,000 options were not included in the computation of diluted EPS because of their anti-dilutive
effect.

72

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Note 11  Income Taxes

|                                                                                              |  | Year Ended December 31, |  
|--------------------------------------------------------------------------------------------- |  | ----------------------- | -
|                                                                                              |  |                         |  
|                                                                                              |  | 2002                    |  
|                                                                                              |  |                         |  
|                                                                                              |  | (Dollars in thousands)  |  
|The components of current and deferred income tax

     expense (benefit) are:                |  |                         |  
|Current:                                                                                      |  |                         |  
|State and local                                                                               |  | $                      |  
|Federal                                                                                       |  |                        |  
|Foreign                                                                                       |  | 274                     |  
|Deferred:                                                                                     |  |                         |  
|State and local                                                                               |  | (22                     | )
|Federal                                                                                       |  | (4,687                  | )
|Foreign                                                                                       |  | 6,214                   |  
|                                                                                              |  |                         |  
|Total                                                                                         |  | $ 1,779                 |  
|                                                                                              |  |                         |  
|The components of deferred income tax expense

     (benefit) are:                            |  |                         |  
|Unrealized (losses)                                                                           |  | $ (467                  | )
|Cost basis adjustment                                                                         |  | 1,547                   |  
|Equity in earnings (losses) of affiliates                                                     |  | (3,337                  | )
|Loss from impairment of investments                                                           |  | (11,616                 | )
|Net operating loss carryforwards                                                              |  | (4,456                  | )
|Deferred income                                                                               |  | 2,221                   |  
|Valuation Allowance (*)                                                                       |  | 17,614                  |  
|Other                                                                                         |  | (1                      | )
|                                                                                              |  |                         |  
|Total                                                                                         |  | $ 1,505                 |  
|                                                                                              |  |                         |  
|The domestic and foreign components of (loss)

     income before income

     taxes are:     |  |                         |  
|Domestic                                                                                      |  | $ (7,150                | )
|Foreign                                                                                       |  | (35,118                 | )
|                                                                                              |  |                         |  
|Total                                                                                         |  | $ (42,268               | )
|                                                                                              |  |                         |  
|A reconciliation of income taxes between the

     statutory and effective tax is as follows: |  |                         |  
|Federal income tax (benefit) at 34%, 35% and 35%                                              |  | $ (14,371               | )
|Taxes on foreign income (below) U.S. rate,

     net of tax credits                           |  | (1,181                  | )
|State and local taxes

     net of federal effect                                             |  |                        |  
|Unbenefitted losses and impairment of investments *                                           |  | 17,614                  |  
|Other                                                                                         |  | (283                    | )
|                                                                                              |  |                         |  
|Total effective tax: (4%),
39%,and 159%                                                       |  | $ 1,779                 |  
|                                                                                              |  |                         |  

|* | Valuation allowance is composed of tax benefits on foreign net operating loss carryforwards
of $6.6 million, realized and unrealized loss of investment in securities of $6.3 million and of loss from impairment of investment
of $4.7 million.                                                                                                                                                                                                                                                                   
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  | As of December 31, 2002, the Company has U.S. federal net operating loss carryforwards of
approximately $32 million that will expire in the years 2020 through 2022. 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.

Other assets include
approximately $5.6 million ($11million in 2001) of deferred tax assets which primarily represent the tax benefit of the
temporary differences between the carrying values of the investments in the financial statements and their income tax bases and a
$10.9  million asset ($6.5 million in 2001) representing a tax benefit with respect to the net operating loss
carryforwards.  Accounts and income taxes payable and accrued expenses include approximately $16.1million ($19.5 million in
2001) of deferred tax liability which primarily consists of tax liability provided on undistributed earnings of affiliates of
approximately $6.3 million ($13.7 million
in 2001).

73

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---

Note 12  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, | 
|----------------------------------------------------------- |  | ------------------ | 
|                                                            |  |                    | 
|                                                            |  | 2002               | 
|                                                            |  |                    | 
|Bay Heart Limited (a)                                       |  | 37                 | 
|Carmel Containers Systems Limited                           |  | 21.8               | 
|Coral World International Limited                           |  | 50                 | 
|CUTe Ltd                                                    |  | 20                 | 
|Epsilon Investment House Ltd.                               |  | 20                 | 
|Granite Hacarmel Investments Limited (Granite)            |  | 20.4               | 
|Hod Hasharon Sport Center (1992) Limited

      Partnership |  | 50                 | 
|Ophir Holdings Ltd.                                         |  | 42.5               | 
|Ophirtech Ltd.                                              |  | 42.5               | 
|Renaissance Investment Company Ltd.                         |  | 20                 | 
|Trinet Investment in High-Tech Ltd.                         |  | 37.5               | 
|Trinet Venture Capital Ltd.(b) (c)                          |  | 50                 | 

74

---

---

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

|                                             |  |  | Year Ended December 31, |  
|-------------------------------------------- |  |  | ----------------------- | -
|                                             |  |  |                         |  
|                                             |  |  | 2002                    |  
|                                             |  |  |                         |  
|                                             |  |  | (Dollars in thousands)  |  
|Revenues                                     |  |  | $ 718,831               |  
|Gross profit                                 |  |  | 174,404                 |  
|Net income (loss)                            |  |  | (6,338                  | )
|                                             |  |  |                         |  
|Property and equipment                       |  |  | $ 344,573               |  
|Other assets                                 |  |  | 563,359                 |  
|                                             |  |  |                         |  
|Total assets                                 |  |  | $ 907,932               |  
|                                             |  |  |                         |  
|Total liabilities, including bank borrowings |  |  | $ 718,295               |  
|                                             |  |  |                         |  

|(a) | At December 31, 2002, 2001 and 2000, the Company had a note receivable from Bay Heart
Limited in the amount of $0.4 million.                                                                                                      
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                   
|(b) | At December 31, 2001 and 2000, the Company had a non-interest bearing note receivable from
Trinet Venture Capital Ltd. in the amount of $2.3 million and $2.5 million, respectively.                                              
|    |                                                                                                                                                                                                                                   
|(c) | On December 31, 2001, the Company acquired 50% of the holdings of Trinet Venture Capital Ltd
(Trinet) in Smart Link Ltd., Peptor Ltd and Netformx Ltd  for consideration of Capital notes, in the total amount of
$ 2.3 million.

The carrying value of the Companys investments in shares of its publicly traded
affiliates at December 31, 2002, amounted to $28.1 million and had a market value of $38.4 million, based upon quoted market prices
of shares traded on the American Stock Exchange and the Tel Aviv Stock Exchange.  There is no assurance that any of these
investments could be realized at the quoted market price.

Note 13  Other Income.

Other revenues for the years
ended December 31, 2002, 2001 and 2000 include accrual of guaranteed payments from Motorola relating to the investment in MIRS of $
7.1 million, $7.1 million   and $ 3.8 million respectively. In the year ended December 31, 2000, it includes also dividends
received from MIRS amounting to $ 1.6 million.

75

---

---

Note 14  Segment Information

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

|                                  |  |  | Year Ended December 31, |  
|--------------------------------- |  |  | ----------------------- | -
|                                  |  |  |                         |  
|                                  |  |  | 2002                    |  
|                                  |  |  |                         |  
|                                  |  |  | (Dollars in thousands)  |  
|Revenues:                         |  |  |                         |  
|Finance                           |  |  | $ 10,543                |  
|Real estate income                |  |  | 7,871                   |  
|Leisure-time                      |  |  | 1,724                   |  
|Intercompany adjustments          |  |  | (72                     | )
|                                  |  |  |                         |  
|Total                             |  |  | $ 20,066                |  
|                                  |  |  |                         |  
|Equity in Earnings of Affiliates: |  |  |                         |  
|Finance(b)                        |  |  | $ 54                    |  
|Real estate rental(b)             |  |  | (533                    | )
|Leisure-time(a)                   |  |  | 570                     |  
|                                  |  |  |                         |  
|Total                             |  |  | $ 91                    |  
|                                  |  |  |                         |  
|Interest Income:                  |  |  |                         |  
|Finance                           |  |  | $ 994                   |  
|Real estate rental                |  |  |                        |  
|Intercompany adjustments          |  |  | (32                     | )
|                                  |  |  |                         |  
|Total                             |  |  | $ 962                   |  
|                                  |  |  |                         |  
|Interest Expense:                 |  |  |                         |  
|Finance                           |  |  | $ 7,658                 |  
|Real estate rental                |  |  | 761                     |  
|Leisure-time                      |  |  | 264                     |  
|Intercompany adjustments          |  |  | (30                     | )
|                                  |  |  |                         |  
|Total                             |  |  | $ 8,653                 |  
|                                  |  |  |                         |  
|Pretax Operating (Loss) Income:   |  |  |                         |  
|Finance                           |  |  | $ (37,448               | )
|Real estate rental                |  |  | (549                    | )
|Leisure-time                      |  |  | (71                     | )
|                                  |  |  |                         |  
|Total                             |  |  | $ (38,068               | )
|                                  |  |  |                         |  
|Income Tax (Benefit) Expense:     |  |  |                         |  
|Finance                           |  |  | $ 1,591                 |  
|Real estate rental                |  |  | 153                     |  
|Leisure-time                      |  |  | 35                      |  
|                                  |  |  |                         |  
|Total                             |  |  | $ 1,779                 |  
|                                  |  |  |                         |  
|Total Assets for year end:        |  |  |                         |  
|Finance                           |  |  | $ 243,031               |  
|Real estate rental                |  |  | 69,196                  |  
|Leisure-time                      |  |  | 14,986                  |  
|Intercompany adjustments          |  |  | (3,514                  | )
|                                  |  |  |                         |  
|Total                             |  |  | $ 323,699               |  
|                                  |  |  |                         |  

76

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---

Note 14  Segment Information  Continued

|                                        |  |  | Year Ended December 31, |  
|--------------------------------------- |  |  | ----------------------- | -
|                                        |  |  |                         |  
|                                        |  |  | 2002                    |  
|                                        |  |  |                         |  
|                                        |  |  | (Dollars in thousands)  |  
|Investments in Affiliates for year end: |  |  |                         |  
|Finance(b)                              |  |  | $ 2,431                 |  
|Real estate rental(b)                   |  |  | 1,337                   |  
|Leisure-time(a)                         |  |  | 12,573                  |  
|                                        |  |  |                         |  
|Total                                   |  |  | $ 16,341                |  
|                                        |  |  |                         |  
|Capital Expenditures:                   |  |  |                         |  
|Finance                                 |  |  | $ 52                    |  
|Real estate rental                      |  |  | 899                     |  
|Leisure-time                            |  |  | 455                     |  
|                                        |  |  |                         |  
|Total                                   |  |  | $ 1,406                 |  
|                                        |  |  |                         |  
|Depreciation and Amortization:          |  |  |                         |  
|Finance                                 |  |  | $ 1,951                 |  
|Real estate rental                      |  |  | (10                     | )
|Leisure-time                            |  |  | 95                      |  
|                                        |  |  |                         |  
|Total                                   |  |  | $ 2,036                 |  
|                                        |  |  |                         |  

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

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

(b)     Operations in Israel.

The real estate rental segment
consists of rental property owned in Israel and the United States leased to related and unrelated parties. The leisure-time segment
consists Coral World International Limited (marine parks located around the world) and Country Club Kfar Saba (the Companys
51%-owned subsidiary located in Israel).

Note 15  Disclosures about Fair Value of Financial Instruments

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

(a)     Cash and Cash Equivalents

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

77

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(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)      Commitments

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

(e)      Deposits, Notes and Loans Payable and
Debentures

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

|                                     |  |  | Year Ended December 31, | 
|------------------------------------ |  |  | ----------------------- | 
|                                     |  |  |                         | 
|                                     |  |  | 2002                    | 
|                                     |  |  |                         | 
|                                     |  |  | Carrying

 Amount       | 
|                                     |  |  |                         | 
|                                     |  |  | (Dollars in thousands)  | 
|Financial assets:                    |  |  |                         | 
|                                     |  |  |                         | 
|Cash and cash equivalents            |  |  | $ 1,557                 | 
|Deposits, notes and loans receivable |  |  | 10,962                  | 
|Investments                          |  |  | 18,612                  | 
|                                     |  |  |                         | 
|                                     |  |  | $ 31,131                | 
|                                     |  |  |                         | 
|Financial liabilities:               |  |  |                         | 
|                                     |  |  |                         | 
|Notes and loans payable              |  |  | $ 114,257               | 
|Debentures outstanding               |  |  | 22,546                  | 
|                                     |  |  |                         | 
|                                     |  |  | $ 136,803               | 
|                                     |  |  |                         | 

Note 16 Commitments and Contingencies

(a)     The combined minimum annual lease
payments on Ampals corporate offices and Country Club Kfar Saba, in 2002 were $ 0.2 million.  In the years
2003-2007, the combined annual lease payments on those premises, without giving effect to future escalations, will be in an aggregate
amount of $ 1.3 million, and thereafter, an amount totaling $ 5 million. The lease of the corporate offices
expires in 2009 and the Kfar Saba lease expires in 2037.

(b)     AM-Hal provided a lien to Bank
Hapoalim on AM- Hal properties in Rishon  Le Zion and Hod Hashron to guarantee a loan of $12.7 million.

78

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(c)     The Company has issued guarantees
on bank loans to its investees and subsidiaries totaling $15.3 million as follows:

| | (1) | The Company provided a $4.8 million guarantee to AM  Hal  tenants .                                                                                                                                                                                                                             
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                  
| | (2) | The Company provided a $5.7 million guarantee on indebtness incurred by Bay Heart.                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                  
| | (3) | The Company provided a $4 million guarantee to Leumi with respect to the MIRS loan ($3.5
million if Motorola (Israel) Ltd. does not make a guaranteed payment to the Company in March 2003 and $0.5 million beginning in 2006
with respect to the Companys repayment obligation under the loan).
| |     |                                                                                                                                                                                                                                                                                                  
| | (4) | The Company provided a $0.8 million guarantee to Galha (1960) Ltd, for the payment of the
Companys subsidiary of a final judgment, if entered against the Companys subsidiary.                                                                                                                 

(d)     At December 31, 2002, the Company
had in place unused lines of credit in the aggregate amount of $ 5.1 million.

(e)     The Company made a commitment to
invest $3.2 million in Star II (2000 L.P.).

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

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

On October 15, 1998, the Company
filed an appeal with the Israeli Supreme Court in Jerusalem. On September 30, 2001, the Supreme Court dismissed the appeal filed by
the Company, on the grounds that the Company failed to timely produce a guarantee to cover Yakhin Hakals expenses in the
appeal. On November 1, 2001, the Company filed a petition to the Israeli Supreme Court, contending that the dismissal of an appeal
due to a delay in producing guarantees as part of the appeal is unreasonable and that the law allowing this should be changed. The
petition was withdrawn by the Company on October 6, 2002.

On December 30, 2001, the
Company filed a motion to allow it to file a new appeal in this case. The Supreme Court dismissed the motion on September 10,
2002.

On October 12, 2001, the Company
filed a request with the Tel-Aviv District Court for a preliminary injunction and other remedies in relation to the validity and
enforceability of Etz Vanirs and Yakhin Mataims decisions to redeem the debentures owned by the Company and to require
the Company to surrender all of its preferred shares in Etz Vanir and Yakhin Mataim. On January 28, 2002, the Tel Aviv  District
Court dismissed the request. On March 12, 2002, the Company filed an appeal with regard to this decision with the Israeli Supreme
Court and the appeal is scheduled to be heard on April 9 ,2003.

As of the date hereof, the Company cannot predict the outcome of these proceedings.

79

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(g)     In February 2000, a petition was
filed against Sonol, a wholly-owned subsidiary of Granite, Paz Oil Company Ltd. and Delek, the Israeli Fuel Company Ltd., in the
Jerusalem District Court to allow a class action suit regarding fixing the retail price of diesel fuel. The lawsuit, if certified as
a class action, will be in the amount of NIS 249.6 million ($53 million).  Sonols share is NIS 58.6 million ($12
million).  Sonol denies the claim and, based on legal advice, Sonols management has concluded that there is a reasonable
chance that the suit will not be certified as a class action.

(h)     In May 2001, a claim was filed in
the Jerusalem District Court against Sonol, its subsidiary company, Sprint Motors Ltd., and four unrelated fuel companies by
customers who purchased fuel products in filling stations, contending that the defendants charged an illegal service
charge over a period of many years.  The plaintiffs have requested the court to recognize their claim as a class
action.  The amount of the claim is NIS 5.30 however, should the court certify the class action, it will total approximately NIS
404 million ($85 million).  From the claim, it is not clear as to what is Sonols and its subsidiarys
share of this amount.  Granites management and its legal counsel have advised the Company  that it is unlikely that
the claim will be certified as a class action.

(i)     In June 2001, a claim was filed
by customers against Supergas (Granites wholly-owned consolidated subsidiary), alleging that the defendant made illegal
periodic charges to its customers.  The plaintiff applied to the Tel Aviv District Court to recognize the claim as a class
action in a total amount of NIS 133 million ($28 million).  Supergass management, based on legal advice, is of the opinion
that it is more likely than not that Supergas will prevail in this case.

(j)     Three claims were lodged against
Granites formerly affiliated company and its past shareholders, which included Sonol, in the Haifa District Court.  The
total amount of the claims is approximately NIS 65 million ($14 million). The plaintiffs allegations concern the sale of fuel
products pursuant to restrictive trade practices among the fuel companies and their affiliates. In the opinion of Sonols legal
counsel and the formerly affiliated company, the companies have a sound defense against the claims.

(k)     In 1999, Sonol filed a claim
against one of its agencies for approximately NIS 40 million (approximately $8 million) in the Tel Aviv District Court, on account of
an unpaid debt and damages caused to Sonol, alleging that the agency violated the terms of the agency agreement by dealing with one
of Sonols competitors. The agency, in turn, filed a counterclaim in the amount of approximately NIS 62 million (approximately
$13 million), stating various causes, including a claim that the contractual agreement between it and Sonol is a restrictive
agreement.  In the opinion of Sonols management, based primarily on the opinion of Sonols
legal counsel, the prospects of Sonols claim against the agency relating to amounts owed to Sonol are good and, regarding the
amount claimed for damages on account of the violation of the agency agreement, such amount is subject to deliberation by the
court.  Regarding the prospects of the agencys counterclaim, Sonols legal counsel are unable, at this time, to
estimate its prospects, insofar as it relates to the claim of a restrictive agreement.  Should the claim of a restrictive
agreement be rejected by the court, the prospects of the counterclaim will not be favorable.  Currently, the dispute has been
referred to mediation which was unsuccessful.

(l)     
A class action was filed in april 1999 and was certified by
the Tel-Aviv District Court against Supergas and four other gas companies for a declaratory judgment regarding the responsibility of
the gas companies to refund to their customers payments which were paid for periodic examinations which were not performed. 
Supergas filed for permission to appeal this decision to the Israeli Supreme Court.  In the opinion of the companys
management, Supergas has recorded an adequate provision in its books for any potential exposure.

80

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(m)     In arbitration between the
Israeli Fuel Authority and the organization of the owners of fuel stations, the arbitrator ordered the Fuel Authority to reimburse
the fuel- stations owner's for depreciation on their investments in stations.  The Arbitrator's Order was approved by the
District Court.  The Fuel Authority demanded that the fuel companies pay such payments. As a result of the arbitration, twenty
five third-party claims were filed against Sonol (a subsidiary of Granite), in the total amount of NIS 43 million ($9 million). 
All of the claims were dismissed in October 2002.  An appeal was filed to the Supreme Court.  Sonol's
legal counsel believes that it is not likely that the appeal will be granted.

(n)     On December 2, 1997, Kaniel, the
Israeli Company for Tin Containers Ltd. (Kaniel) filed a suit against the Company in the Tel Aviv District Court, in the
amount of NIS 3,623,058 ($0.8 million). The suit relates to eight loans given to Kaniel by the Company in 1984. Kaniel claimed that
the Company's actions in connection with the loans were forbidden under the Israeli Interest Law. On November 24, 2002, the Tel Aviv
District Court dismissed the claim.

(o)     A petition to certify a class
action against MIRS in the amount of NIS 170 million ($36 million) was filed in the Tel Aviv District Court in September 2001. 
The claim is in connection with the change in MIRS tariffs resulting from the implementation of MIRS own dialing prefix, which
replaced its previous dialing prefix, the Tel-Aviv area code.  As a result, persons in the Tel Aviv area code claimed that they
are subject to higher tariffs than those they had been subject to under MIRS's previous dialing prefix.  MIRS' management
estimates the maximum exposure to be substantially less than the amount claimed.

(p)     A petition to certify a class
action against MIRS and the other three cellular operators in Israel in the total amount of NIS 600 million ($127 million) was filed
in the Tel Aviv District Court in May 2002.  The claim involves the inter-connect fees that were collected from the customers of
the other operators with regard to phone calls that were made to voice recorder applications through the cellular operators' dialing
numbers.  At this stage, the Company cannot estimate the impact this claim will have on it.

(q)     The Israeli Income Tax Authority
conducted a review of Am-Hal Ltd., the Company's wholly-owned subsidiary, in 2000 and 2001.  Following the review, the Income
Tax Authority assessed Am-Hal for additional taxes for the years 1995-1999.  Am-Hal disputed the assessment and filed an appeal,
based on its disagreement with the Income Tax Authority concerning the proper methodology for calculating nursing home
revenues.  In January 2003, AM-Hal and the Tax Authority reached an agreement that was approved as a Court ruling pursuant to
which income in the aggregate amount of approximately $1.4 million will be added for the years 1995  1999. The
financial statements fully reflect the impact of this increased income reported for tax purposes.

(r)     In May 2002, the Israeli Income
Tax Authority issued an assessment to Ampal (Israel) Ltd., the Company's wholly-owned subsidiary, for payment of approximately NIS 34
million ( $7,177,538) for the tax years 1997-2000. Ampal (Israel) filed an appeal regarding this assessment and that it is reasonably
possible that the appeal will be granted.  In addition, the Company has previously established a reserve in the amount of NIS 10
million ($2,111,040) in connection with potential tax liabilities for these tax years.

81

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(s)     On January 1, 2002, Galha (1960)
Ltd. (Galha) filed a suit against the Company and other parties, including directors of Paradise Industries Ltd.
(Paradise) appointed by the Company, in the Tel Aviv District Court, in the amount of NIS 8.9 million ($1.9 million).
Galha claimed that the Company, which was a shareholder of Paradise, and another shareholder of Paradise, misused funds that were
received by Paradise from an insurance company for the purpose of reconstructing an industrial building owned by Galha and used by
Paradise which burnt down.  Paradise is currently involved in liquidation proceedings. Ampal issued a
guarantee in favor of Galha for the payment of an amount of up to NIS 4.0 million ($8.4 million) if a final judgment against the
Company will be given. At this stage, the Company cannot estimate the impact this claim will have on it.

(t)     Legal claims arising in the
normal course of business have been filed against subsidiaries and affiliates of the Company. Based upon the opinions of legal
counsel, the Company's management believes that all provisions made are sufficient.

Note 17  Subsequent Events

In January 2003, the Company
entered into an agreement for the sale of its holdings in Carmel Containers Systems Ltd., a packaging manufacturer based in Israel
(Carmel), for approximately $3.5 million.  The sale of Ampal's shares of Carmel is contingent upon Carmel's
acquisition of another packaging company, Best Carton Ltd., as well as obtaining other legal authorizations and regulatory
approvals.

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

None

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

MANAGEMENT

The following table sets forth
certain information regarding Ampal's directors and executive officers as of March 9, 2003:

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

---

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

| | (1) | Member of the Executive Committee of the Board which meets as necessary between regularly
scheduled Board meetings and, consistent with certain statutory limitations, exercises all the authority of the
Board.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                 
| | (2) | Member of the Audit Committee of the Board which reviews functions of the outside auditors,
auditors' fees and related matters.  Mr. Arnon is the Chairman of the Audit Committee.                              
| |     |                                                                                                                                                                                                                 
| | (3) | Member of the Stock Option and Compensation Committee                                                                                                                                                           
| |     |                                                                                                                                                                                                                 
| | (4) | Mr. Mantzur was appointed Vice President  Investments of Ampal on March 24,
2003.                                                                                                                              

In 2002, the Board of Directors
met eight times and acted once by written consent; the Executive Committee did not meet and did not act by written consent; and the
Audit Committee met six times and did not act by written consent. The Stock Option and Compensation Committee met two times and did
not act by written consent and the Stock Option Committee, the predecessor committee to the Stock Option and Compensation Committee,
met once during the fiscal year and did not act by written consent. All directors attended more than 75% of the aggregate of (1) the
total number of Board of Directors' meetings held during the period in 2002 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 2002 (during the period of such
service).

83

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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, 57, has been
the Chairman of the Board of Ampal since April 25, 2002.  Mr. Maiman has been President and Chief Executive Officer of Merhav
Mnf. 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, 37, has been the
President and Chief Executive Officer of Ampal since April 25, 2002, and a director of Ampal since March 2002.  From 1998 until
April 2002, Mr. Bigio held various officer positions at Merhav, most recently as the Senior Vice President - Operations and
Finance.  Mr. Bigio is also a director of Eltek.  He has been a director of Ampal since March 6, 2002.

LEO MALAMUD, 51,  has been
a director of Ampal since March 2002.  Since 1996, Mr. Malamud was the Senior Vice President of Merhav.  Mr. Malamud is
also a director of Eltek.  He has been a director of Ampal since March 6, 2002.

MICHAEL ARNON, 77, was Chairman
of the Board of Directors of Ampal from November 1990 until July 1994, when he retired.  Mr. Arnon has been a director of Ampal
since 1986.  From July 1986 until November 1990, Mr. Arnon was President and Chief Executive Officer of Ampal.

Dr. JOSEPH YERUSHALMI, 65, has
been Senior Vice President - Head of Energy and Infrastructure Projects of Merhav since 1995.  He has been a director of Ampal
since August 16, 2002.

YEHUDA KARNI, 74, 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, 63, was the Head of
Bureau for the former Prime Minister of Israel, Yitzhak Rabin, from July 1993 until November 1995.  Since 1996, Mr. Haber has
been the President and Chief Executive Officer of Geopol Ltd., which represents the Korean conglomerate Samsung in Israel and the
Middle East; Kavim Ltd., a production and project development company; and Adar Real Estate Ltd., a real estate company.  Mr.
Haber is also a member of various non-profit organizations.  He has been a director of Ampal since August 16, 2002.

SHLOMO SHALEV, 41, has been
Senior Vice President - Investments since May 2002.  From August 1997 through April 2002, Mr. Shalev was Vice President in Ampal
Industries (Israel) Ltd, a wholly owned subsidiary of the Company.  From August 1994 through July 1997, Mr. Shalev was the
Israeli Consul for Economic Affairs in the northwest region of the Unites States.

DAFNA SHARIR, 34, has been
Senior Vice President - Investments since May 2002.  From March 1999 through April 2002, Ms. Sharir was a Director of Mergers
and Acquisitions of Amdocs Limited.  From July 1998 through February 1999, Ms. Sharir was an international tax consultant at
Kost Forer & Gabay, a member of Ernst & Young International.

84

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IRIT ELUZ, 36, has been the
Chief Financial Officer, Vice President - Finance and Treasurer since May 2002.  From January 2000 through April 2002, Ms. Eluz
was the Associate Chief Financial Officer of Merhav.  From June 1995 through December 1999, Ms. Eluz was the Chief Financial
Officer of Kamor Group.

YORAM  FIRON, 34, 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, 33, 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, 46, has been the
Controller since March 2002.  During the preceding five years, Mr. Bar-Nir was the Controller of the Israeli subsidiaries of
Ampal.

ALLA KANTER, 45, has been Vice
President-Accounting since September 1995.  Ms. Kanter was the Controller from August 1990 until March 2002.

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.

Nitsan Yanovski, the Vice
President - Business Development of Ampal from May 21, 2002 until his retirement at December 31, 2002, did not file a Form 3
reporting his initial beneficial ownership of equity securities of Ampal nor did he file a Form 4 reporting the grant of stock
options by Ampal to him on August 16, 2002.  Each of Giora Bar-Nir, Shlomo Shalev, Dafna Sharir and Yoram Firon did not timely
file a Form 3 reporting their respective initial beneficial ownership of equity securities of Ampal.

85

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ITEM 11.  EXECUTIVE COMPENSATION

Summary Compensation Table

The table below presents
information regarding remuneration paid or accrued for services to Ampal and its subsidiaries by the executive officers named below
during the three fiscal years ended December 31, 2002, 2001 and 2000.

|                            |  |      |      |          |  |         |     |                               |        |                                                                                       | Annual Compensation |                               
|--------------------------- |  | ---- | ---- | -------- |  | ------- | --- | ----------------------------- | ------ | ------------------------------------------------------------------------------------- | ------------------- | ------------------------------
|                            |  |      |      |          |  |         |     |                               |        |                                                                                       |                     |                               
|Name and Principal Position |  | Year |      | Salaries |  | Bonus   |     | Other Annual Compensation(10) |        | Long-Term

Compensation

 Awards

 Number of

 Securities

 Underlying

 Options (11) |                     | All

 Other

 Compensation(16)
|                            |  |      |      |          |  |         |     |                               |        |                                                                                       |                     |                               
|                            |  |      |      | $        |  | $       |     | $                             |        |                                                                                       |                     | $                             
|Yosef A. Maiman(1)          |  |      |      |          |  |         |     |                               |        |                                                                                       |                     |                               
|Chairman of the Board       |  |      | 2002 |          |  | 324,376 |     |                               |       |                                                                                       |                     | 15,765                        
|Jack Bigio (2)              |  |      |      |          |  |         |     |                               |        |                                                                                       |                     |                               
|President and CEO           |  |      | 2002 |          |  | 280,130 | (8) |                               |       |                                                                                       |                     | 43,498                        
|Nitsan Yanovski (3)         |  |      | 2002 |          |  | 194,975 |     |                               | 77,712 |                                                                                       |                     | 27,526                        
|(Former Vice President     |  |      | 2001 |          |  | 142,691 |     |                               | 75,634 |                                                                                       |                     | 17,984                        
|Business                    |  |      | 2000 |          |  | 132,187 |     |                               | 60,000 |                                                                                       |                     | 13,048                        
|Development)                |  |      |      |          |  |         |     |                               |        |                                                                                       |                     |                               
|Shlomo Shalev (4)           |  |      | 2002 |          |  | 149,225 |     |                               | 63,240 |                                                                                       |                     | 27,815                        
|Senior Vice President       |  |      | 2001 |          |  | 143,093 |     |                               | 61,406 |                                                                                       |                     | 17,408                        
|Investments                 |  |      | 2000 |          |  | 146,873 |     |                               | 65,000 |                                                                                       |                     | 14,178                        
|Alla Kanter (5)             |  |      | 2002 |          |  | 133,598 |     |                               | 11,105 |                                                                                       |                     |                               
|(Vice President-            |  |      | 2001 |          |  | 133,538 |     |                               | 11,105 |                                                                                       |                     |                               
|Accounting and              |  |      | 2000 |          |  | 126,036 |     |                               | 10,476 |                                                                                       |                     |                               
|Controller)                 |  |      |      |          |  |         |     |                               |        |                                                                                       |                     |                               
|Raz Steinmetz (6)           |  |      | 2002 |          |  | 82,993  |     |                               |       |                                                                                       |                     | 9,792                         
|(Former CEO and             |  |      | 2001 |          |  | 318,344 |     |                               | 98,459 |                                                                                       |                     | 24,859                        
|President)                  |  |      | 2000 |          |  | 175,369 |     |                               | 49,822 |                                                                                       |                     | 20,555                        
|Shlomo Meichor(7)           |  |      | 2002 |          |  | 170,525 |     |                               | 48,427 |                                                                                       |                     | 28,784                        
|(FormerVice President-      |  |      | 2001 |          |  | 169,567 |     |                               | 53,578 |                                                                                       |                     | 15,205                        
|Finance and Treasurer)      |  |      | 2000 |          |  | 156,150 |     |                               | 44,056 |                                                                                       |                     | 14,849                        

---

|(1) |  | Mr. Maiman has been employed by Ampal since April 25, 2002 as Chairman of the Board. 
Mr. Maiman is entitled to receive a base salary of $420,000 (payable in NIS) per annum (plus benefits).        
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                                                                                                                      
|(2) |  | Mr. Bigio has been employed by Ampal since April 25, 2002 as President and CEO.  Mr.
Bigio is entitled to receive a base salary of $250,000 (payable in NIS) per annum (plus benefits).              
|    |  |                                                                                                                                                                                                      
|(3) |  | Mr. Yanovski was appointed Vice President Business Development since May 21, 2002.  Mr.
Yanovski retired from Ampal on December 31, 2002 (the amounts include salary for an additional three months).

86

---

---

|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4)  |  | Mr. Shalev was appointed Senior Vice President of Investments since May 21, 2002.  Mr.
Shalev is entitled to receive a base salary of $150,000 (payable in NIS) per annum (plus benefits).                                                                                                                                                                                                                                                                                                                                                                                                                    
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(5)  |  | Ms. Kanter has been Vice President  Accounting of Ampal since September 1995 and
Controller of Ampal since August 1990.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(6)  |  | Mr. Steinmetz was employed by Ampal since January 1, 1997 untill April 25 ,2002 and was
appointed CEO and President effective July 1, 1999.  Mr. Steinmetz was entitled to receive a base salary of $250,000 (payable in
NIS) per annum (plus benefits).  Mr. Steinmetz resigned from all positions he held in Ampal on April 25, 2002.                                                                                                                                                                                                                                                                       
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(7)  |  | Mr. Meichor had been employed by Ampal since March 1, 1998, and served as Vice
President-Finance and Treasurer of Ampal from April 1, 1998 until May 21, 2002.  Mr. Meichor receives a base salary of $164,000
per annum, adjusted annually in accordance with the United States Consumer Price Index (payable in NIS) plus benefits and use of a
car. Based on his agreement with Ampal, Mr. Meichor received an additional 8 months of salary (2 months notice and 6 months as the
result of a change in control of Ampal).  Mr. Meichor ceased to receive additional salary from Ampal on January 19,
2003.
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(8)  |  | Including $86,481 payment advance that have been returned on February 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(9)  |  | Consists of payment for accrued vacation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(10) |  | Consists of amounts reimbursed for the payment of taxes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(11) |  | Represents the number of shares of Class A Stock underlying options granted to the named
executive officers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(12) |  | Expired on April 25, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(13) |  | Expired on January 26, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(14) |  | Expired on February 20, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(15) |  | Expired on January 7, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(16) |  | Comprised of Ampal (Israel)'s contribution pursuant to: (i) Ampal (Israel)'s pension plan,
(ii) Ampal's (Israel)'s education fund, (iii) use of car and (iv) use of automobile.                                                                                                                                                                                                                                                                                                                                                                                                                               

Fiscal Year-End Option Values

|                |  | Shares

 Acquired on

 Exercise |        | Value

 Realized |  | Number of Securities

 Underlying Unexercised

 Options at Fiscal Year-End(1) |         
|--------------- |  | ------------------------------- | ------ | ---------------- |  | ----------------------------------------------------------------------------- | --------
|                |  |                                 |        |                  |  |                                                                               |         
|Name            |  |                                 |        | Exercisable      |  | Unexercisable                                                                 |         
|                |  |                                 |        |                  |  |                                                                               |         
|Yosef A. Maiman |  |                                 |       |                  |  |                                                                               |        
|Jack Bigio      |  |                                 |       |                  |  |                                                                               |        
|Nitsan Yanovski |  |                                 | 40,000 |                  |  |                                                                               | $240,000
|Shlomo Shalev   |  |                                 | 40,000 |                  |  |                                                                               | $240,000
|Alla Kanter     |  |                                 | 30,000 |                  |  |                                                                               | $180,000
|Raz Steinmetz   |  |                                 | 60,000 |                  |  |                                                                               | $360,000
|Shlomo Meichor  |  |                                 | 48,000 |                  |  |                                                                               | $288,000

---

|(1) | This table represents the total number of shares of Class A Stock subject to stock options
held by each of the named executive officers as of December 31, 2002.  None of the outstanding options are
in-the-money.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

87

---

---

Option Grants In Last Fiscal Year

The following table sets forth
certain information regarding stock options granted to purchase our Class A Stock to our named executive officers during fiscal year
2002:

Annual Compensation

|Name            |  | Option

 Plan |      | Number of

 Securities

 Underlying

 Option

 Granted |  | % of Total

 Options

 Granted to

 Employees in

 Fiscal Year |         | Exercise

 Price Per

 Share |  | Market

 Price on

 Date of

 Grant |    | Expiration

 Date |  | Potential Realizable Value at

 Assumed Annual Rates of Stock Price Appreciation For Option Term |     
|--------------- |  | ------------- | ---- | ------------------------------------------------------ |  | -------------------------------------------------------------- | ------- | ---------------------------- |  | ----------------------------------- | -- | ----------------- |  | ------------------------------------------------------------------------------------------------ | ----
|                |  |               |      |                                                        |  |                                                                |         |                              |  |                                     |    |                   |  |                                                                                                  |     
|                |  |               |      |                                                        |  |                                                                |         |                              |  |                                     |    |                   |  |                                                                                                  |     
|                |  |               |      |                                                        |  |                                                                |         |                              |  |                                     |    |                   |  |                                                                                                  |     
|Yosef A. Maiman |  |               | 2000 |                                                        |  |                                                                | 250,000 |                              |  |                                     | 19 | %                 |  | $                                                                                                | 3.12
|Jack Bigio      |  |               | 2000 |                                                        |  |                                                                | 150,000 |                              |  |                                     | 12 | %                 |  | $                                                                                                | 3.12
|Nitsan Yanovski |  |               | 2000 |                                                        |  |                                                                | 78,500  |                              |  |                                     | 6  | %                 |  | $                                                                                                | 3.12
|Shlomo Shalev   |  |               | 2000 |                                                        |  |                                                                | 90,000  |                              |  |                                     | 7  | %                 |  | $                                                                                                | 3.12
|Alla Kanter     |  |               | 2000 |                                                        |  |                                                                | 78,500  |                              |  |                                     | 6  | %                 |  | $                                                                                                | 3.12

Other Benefits

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

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

|Years of Service        |  | Vested

 Percentage |    
|----------------------- |  | ------------------- | ---
|                        |  |                     |    
|less than 2 years       |  |                     | 0  
|2 but less than 3 years |  |                     | 20 
|3 but less than 4 years |  |                     | 40 
|4 but less than 5 years |  |                     | 60 
|5 but less than 6 years |  |                     | 80 
|6 or more years         |  |                     | 100

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

Ampal maintains a savings plan
(the Savings Plan) for its eligible employees pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended
(the Code). Eligible employees are all employees of Ampal except non-resident aliens, night-shift employees and employees
represented by a collective bargaining unit. Participation by employees in the Savings Plan is voluntary. Participating employees may
direct that a specific percentage of their annual compensation (up to 15%) be contributed to a self-directed 401(k) savings account.
The amount which any employee could contribute to his or her 401(k)savings account in 2002 was limited under the Code to
$11,000. Effective January 1, 1996, the Savings Plan was amended so that Ampal matches 50% of each employee's contribution up to a
maximum of 3% of the employee's compensation.  Employees who were eligible to participate in the Savings Plan as of December 31,
1995, are 100% vested at all times in the account balances maintained in their 401(k) savings account.  Employees who became
eligible to participate in the Savings Plan on or after January 1, 1996, become vested in amounts contributed by Ampal depending on
the number of years of service, as provided in the following table:

88

---

---

|Years of Service        |  | Vested Percentage |    
|----------------------- |  | ----------------- | ---
|                        |  |                   |    
|less than 2 years       |  |                   | 0  
|2 but less than 3 years |  |                   | 20 
|3 but less than 4 years |  |                   | 40 
|4 but less than 5 years |  |                   | 60 
|5 but less than 6 years |  |                   | 80 
|6 or more years         |  |                   | 100

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

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

Compensation of Directors

Directors of Ampal (other than
Mr. Maiman and Mr. Bigio) received $500 per Board meeting attended until December 16, 2002.  Thereafter, directors of Ampal
shall receive $750 per Board meeting attended.  The Chairman of the Board receives $2,000. Such persons also receive the same
amount for attendance at meetings of committees of the Board, provided that such committee meetings are on separate days and on a day
other than the day of a regularly scheduled Board meeting.

The following table sets forth
certain information regarding stock options granted to purchase our Class A Stock to our directors during the three fiscal years
ended December 2002, 2001 and 2000.

| | Year                      |  | 2002 |         | 2001 |  | 2000   | 
| | ------------------------- |  | ---- | ------- | ---- |  | ------ | 
| |                           |  |      |         |      |  |        | 
| | Yosef A.Maiman (3)        |  |      | 250,000 |      |  |       | 
| | Jack Bigio (5)            |  |      | 150,000 |      |  |       | 
| | Leo Malmud (5)            |  |      | 150,000 |      |  |       | 
| | Dr. Joseph Yerushalmi (4) |  |      | 100,000 |      |  |       | 
| | Eitan Haber (4)           |  |      | 15,000  |      |  |       | 
| | Michael Arnon             |  |      | 15,000  |      |  | 5,000  | 
| | Yehuda Karni (4)          |  |      | 15,000  |      |  |       | 
| | Daniel Steinmetz (1)      |  |      |        |      |  | 10,000 | 
| | Raz Steinmetz (1)         |  |      |        |      |  | 30,000 | 
| | Yaacov Elinav (1)         |  |      |        |      |  | 5,000  | 
| | Kenneth L. Henderson (1)  |  |      |        |      |  | 5,000  | 
| | Hillel Peled (2)          |  |      |        |      |  | 5,000  | 
| | Avi A. Vigder (1)         |  |      |        |      |  | 5,000  | 
| | Eliyahu Wagner (2)        |  |      |        |      |  | 5,000  | 
| | Benzion Benbassat (1)     |  |      |        |      |  | 5,000  | 

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

89

---

---

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 plan remains in effect for a period of ten
years.  As of December 31, 2002, 204,500 options of the 1998 Plan are outstanding.

On February 15, 2000, the Stock
Option Committee approved a new Incentive Plan (2000 Plan), under which the Company has reserved 4 million shares of
class A Stock, permitting the granting of options to all employees, officers and directors.  The 2000 Plan was approved by the
Board of Directors at a meeting held on March 27, 2000 and was approved by a majority of the Company's shareholders at the June 29,
2000 annual meeting of shareholders. The plan remains in effect for a period of ten years. As of December 31, 2002,  2,647,500
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 Stock Option and Compensation Committee (the Committee) but not less than 100% of the fair market value
of the underlying options on the date of grant, or non-incentive stock options, at an exercise price to be determined by the
Committee. The Committee may also grant, at its discretion, restricted stock, dividend equivalent awards,
which entitle the recipient to receive dividends in the form of Class A Stock, cash or a combination of both and stock
appreciation
rights, which permit the recipient to receive an amount in the form of Class A Stock, cash or a combination of both, equal to
the number of shares of Class A Stock with respect to which the rights are exercised multiplied by the excess of the fair market
value of the Class A Stock on the exercise date over the exercise price.  The options granted under the Plans were granted
either at market value or above.

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

The Company accounts for all
plans under APB Opinion No. 25, under which no compensation costs were incurred in the years ended December 31, 2000, 2001 and
2002.  If compensation cost for the options under the above Plans had been determined in accordance with SFAS No. 123, the
Company's net income (loss) and EPS would have been reduced Beneficial Owners and Management for additional information
regarding the effect of the proposed stock sale on some outstanding options.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Until April 25, 2002, members of
the Executive Committee of the Board of Directors, which functioned as the compensation committee of Ampal, included:  Mr.
Daniel Steinmetz Chairman of the Board of Directors of Ampal; Mr. Hillel Peled; President of Inveco International Inc., and Mr. Raz
Steinmetz; Chief Executive Officer and President of Ampal.  Additionally, until August 16, 2002, Ampals Stock Option
Committee of the Board of Directors, which administered Ampals stock option plans, was composed of the following board members
who also served as members of the Audit Committee of the Board of Directors until August 16, 2002:  Mr. Michael Arnon, Mr.
Hillel Peled
and Mr. Eliyahu Wagner.  Since August 16, 2002, the newly formed Stock Option and Compensation Committee functions as both the
compensation and stock option committee of Ampal.  The members of this Committee include Mr. Michael Arnon, Mr. Yehuda Karni and
Mr. Eitan Haber.  Since August 16, 2002, the members of the Stock Option and Compensation Committee also serve as members of the
Audit Committee of Ampal.

90

---

---

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

|                                                                         |  | Equity Compensation Plan Information(1)                                                             |          
|------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------- | ---------
|                                                                         |  |                                                                                                     |          
|Plan category                                                            |  | Number of securities

 to be issued

 upon exercise of

 outstanding options,

 warrants and rights |          
|                                                                         |  |                                                                                                     |          
|                                                                         |  | (a)                                                                                                 |          
|Equity compensation

      plans approved by

      security holders     |  |                                                                                                     | 2,852,000
|Equity compensation

      plans not approved

      by security holders |  |                                                                                                     | N/A      
|Total                                                                    |  |                                                                                                     | 2,852,000

(1) All information provided as of December 31, 2002.

PRINCIPAL SHAREHOLDERS OF AMPAL

The following table sets forth
information as of March 9, 2003, as to the holders known to Ampal who beneficially own more than 5% of the Class A Stock, the only
outstanding series of voting securities of Ampal. For purposes of computation of the percentage ownership of Class A Stock set forth
in the table, conversion of any 4% Cumulative Convertible Preferred Stock (the 4% Preferred Stock) and 6 1/2% Cumulative
Convertible Preferred Stock (the 6 1/2% Preferred Stock) owned by such beneficial owner has been assumed, without
increasing the number of shares of Class A Stock outstanding by amounts arising from possible conversions of convertible securities
held by
shareholders other than such beneficial owner.  As of March 9, 2003, there were 19,684,948 (not including treasury shares)
shares of Class A Stock of Ampal outstanding.  In addition, as of March 9, 2003, there were 583,530 non-voting shares of 6 1/2%
Preferred Stock outstanding (each convertible into 3 shares of Class A Stock) outstanding and 133,510 non-voting shares of 4%
Preferred Stock outstanding (each convertible into 5 shares of Class A Stock).

91

---

---

Security Ownership of Certain Beneficial Owners

|Name and Address

 of Beneficial Owner                                                         |  | Title of Class |               | Number of Shares

 and Nature

 of Beneficial Ownership |  | Percent

 of Outstanding

 Shares of

 Class A Stock |           
|---------------------------------------------------------------------------------------------- |  | -------------- | ------------- | ------------------------------------------------------- |  | ---------------------------------------------------- | ----------
|                                                                                               |  |                |               |                                                         |  |                                                      |           
|Y.M Noy Investments Ltd., of 33

 Havazelet Hasharon st.,

 Herzliya, Israel                   |  |                | Class A Stock |                                                         |  |                                                      | 11,713,232
|                                                                                               |  |                |               |                                                         |  |                                                      |           
|Yosef A. Maiman

 Y.M Noy Investments Ltd., of 33

 Havazelet Hasharon st.,

 Herzliya, Israel |  |                | Class A Stock |                                                         |  |                                                      | 11,744,482
|                                                                                               |  |                |               |                                                         |  |                                                      |           
|Ohad. Maiman

 Y.M Noy Investments Ltd., of 33

 Havazelet Hasharon st.,

 Herzliya, Israel    |  |                | Class A Stock |                                                         |  |                                                      | 11,713,232
|                                                                                               |  |                |               |                                                         |  |                                                      |           
|Noa. Maiman

 Y.M Noy Investments Ltd., of 33

 Havazelet Hasharon st.,

 Herzliya, Israel     |  |                | Class A Stock |                                                         |  |                                                      | 11,713,232

---

| | (1) | Consists of 11,713,232 shares of Class A Stock held directly by Y.M Noy Investments Ltd.
Yosef A. Maiman  owns 100% of the economic shares and one-third of the voting shares of Noy.  In addition, Mr. Maiman holds
an option to acquire the remaining two-thirds of the voting shares of Noy (which are currently owned by Ohad Maiman and Noa Maiman,
the son and daughter, respectively, of Mr. Maiman).
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                             
| | (2) | Includes 31,250 shares of Class A Stock underlying options which are currently exercisable
by Mr. Maiman.                                                                                                                                                                                                                                                                                                   

92

---

---

Security Ownership of Management

| | The following table sets forth information as of March 9, 2003 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                                    |  |                                                                            | 11,744,482 | (1)                                                | 
|Jack Bigio                                      |  |                                                                            | 18,750     | (2)                                                | 
|Shlomo Shalev                                   |  |                                                                            | 11,250     | (2)                                                | 
|Alla Kanter                                     |  |                                                                            | 9,812      | (2)                                                | 
|Leo Malamud                                     |  |                                                                            | 18,750     | (2)                                                | 
|Dr. Josef Yerushalmi                            |  |                                                                            | 12,500     | (2)                                                | 
|Eitan Haber                                     |  |                                                                            | 1,876      | (2)                                                | 
|Yehuda Karni                                    |  |                                                                            | 1,876      | (2)                                                | 
|Michael Arnon                                   |  |                                                                            | 16,876     | (2)                                                | 
|Raz Steinmetz                                   |  |                                                                            | 0          |                                                    | 
|Shlomo Meichor                                  |  |                                                                            | 0          |                                                    | 
|Nitsan Yanovsky                                 |  |                                                                            | 0          |                                                    | 
|All Directors and Executive Officers as a Group |  |                                                                            | 11,836,172 |                                                    | 

---

| | *   | Represents less than 1% of the class of securities.                                                                                                                                                                                                                   
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                       
| | (1) | Attributable to 11,713,232 shares of Class A Stock held directly by Y.M Noy Investments
Ltd..  See Security Ownership of Certain Beneficial Owners.  In addition, this represents 31,250 shares
underlying options for Yosef Maiman which are presently exercisable.
| |     |                                                                                                                                                                                                                                                                       
| | (2) | Represents shares underlying options which are presently exercisable or exercisable in 60
days..                                                                                                                                                                      

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Audit Committee of Ampal has
the duty and responsibility of approving all transactions between Ampal, on the one hand, and any officer, director, or affiliate
thereof, on the other hand, or in which any officer, director or affiliate has a material interest. The Audit Committee reviews and
passes upon the fairness of any business dealings and arrangements between Ampal and any such affiliated party. With certain
exceptions, Ampal may not enter into transactions with any officer, director or principal shareholder of Ampal, without first
obtaining the approval of the Audit Committee or a majority of the disinterested members of the Board of Directors or the
shareholders.

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

Until October 15, 2002 Ampal
subleased an office at 660 Madison Avenue in New York City from Cavallo. The annual rent for this sublease was $50,000.  Avi
Vigder, a former member of the Board of Directors of Ampal, is a controlling person of Cavallo.

93

---

---

ITEM 14.  CONTROLS AND PROCEDURES

Within the 90-day period prior
to the date of this Report, the Company carried out an evaluation, under the supervision and with the participation of management,
including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Ampal's
disclosure controls and procedures.  Based upon that evaluation, Ampal's management, including its Chief Executive Officer and
Chief Financial Officer, concluded that these controls and procedures are effective.

There have been no significant
changes in Ampal's internal controls or in other factors that could significantly affect internal controls subsequent to the date
that the Company carried out its evaluation.

94

---

---

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON

 FORM 8-K

|                                                                                                                    |                                      | (a)  The following documents are filed as a part of this
report: |                                                                                                                      
|------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ---------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------
|                                                                                                                    |                                      |                                                                  |                                                                                                                      
|                                                                                                                    |                                      |                                                                  |                                                                                                                      
|                                                                                                                    |                                      |                                                                  |                                                                                                                      
|                                                                                                                    | (1)                                  | Financial Statements and Supplementary Data                      |                                                                                                                      
|                                                                                                                    |                                      |                                                                  |                                                                                                                      
|                                                                                                                    |                                      | Ampal-American Israel Corporation and Subsidiaries               |                                                                                                                      
|                                                                                                                    |                                      |                                                                  | Report of Independent Auditors                                                                                       
|                                                                                                                    |                                      |                                                                  | Consolidated Statements of Income for the years ended December 31,

     2002, 2001 and 2000                         
|                                                                                                                    |                                      |                                                                  | Consolidated Balance Sheets as at December 31, 2002 and 2001                                                         
|                                                                                                                    |                                      |                                                                  | Consolidated Statements of Cash Flows for the years ended December

     31, 2002, 2001 and 2000                     
|                                                                                                                    |                                      |                                                                  | Consolidated Statements of Changes in Shareholders' Equity for the

     years ended December 31, 2002, 2001 and 2000
|                                                                                                                    |                                      |                                                                  | Consolidated Statements of Comprehensive Income for the years

     ended December 31, 2002, 2001 and 2000           
|                                                                                                                    |                                      |                                                                  | Notes to Consolidated Financial Statements                                                                           
|                                                                                                                    |                                      | Supplementary Data:                                              |                                                                                                                      
|                                                                                                                    |                                      |                                                                  | Selected quarterly financial data for the years ended December 31,

     2002 and 2001                               
|                                                                                                                    | (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,
2002                                                                                                    
|                                                                                                                    |                                      |                                                                  |                                                                                                                      
|                                                                                                                    |                                      |                                                                  | Representative Rates of Exchange                                                                                     
|                                                                                                                    |                                      |                                                                  | Between the U.S. Dollar and the New Israeli Shekel                                                                   
|                                                                                                                    |                                      |                                                                  | For the Three Years Ended December 31, 2002                                                                          
|                                                                                                                    |                                      |                                                                  |                                                                                                                      
|The following table shows the
amount of New Israeli Shekels

 equivalent to one U.S. Dollar on the dates indicated: |                                     
|                                                                                                                    |                                      |                                                                  |                                                                                                                      
|                                                                                                                    | 2002                                 |                                                                  | 2001                                                                                                                 
|                                                                                                                    |                                      |                                                                  |                                                                                                                      
|March 31                                                                                                            | 4.668                                |                                                                  | 4.192                                                                                                                
|June 30                                                                                                             | 4.769                                |                                                                  | 4.165                                                                                                                
|September 30                                                                                                        | 4.871                                |                                                                  | 4.355                                                                                                                
|December 31                                                                                                         | 4.737                                |                                                                  | 4.416                                                                                                                
|                                                                                                                    |                                      |                                                                  |                                                                                                                      
|                                                                                                                    |                                      |                                                                  | (ii)  Consolidated financial statements filed pursuant to Rule 3-09 of Regulation

          S-X                     
|                                                                                                                    |                                      |                                                                  |                                                                                                                      
|                                                                                                                    |                                      |                                                                  |                                                                                                                      

95

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---

| |  | Granite Hacarmel Investments Limited and Subsidiaries | Page                                                                                                                 
| |  | ----------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------
| |  |                                                       | Report of Certified Public Accountants                                                                               
| |  |                                                       | Consolidated Balance Sheets as at December 31, 2002 and 2001                                                         
| |  |                                                       | Consolidated Statements of Income for the years ended December

     31, 2002, 2001 and 2000                         
| |  |                                                       | Consolidated Statements of Shareholders' Equity for the years

     ended December 31, 2002, 2001 and 2000           
| |  |                                                       | Consolidated Statements of Cash Flows for the years ended

     December 31, 2002, 2001 and 2000                     
| |  |                                                       | Notes to Consolidated Financial Statements                                                                           
| |  |                                                       |                                                                                                                      
| |  | OphirTech Ltd.                                        |                                                                                                                      
| |  |                                                       | Report of Certified Public Accountants                                                                               
| |  |                                                       | Consolidated Balance Sheets as at December 31, 2002 and 2001                                                         
| |  |                                                       | Consolidated Statements of Income for the years ended December 31,

     2002, 2001 and 2000                         
| |  |                                                       | Consolidated Statements of Changes in Shareholders' Equity for the

     years ended December 31, 2002, 2001 and 2000
| |  |                                                       | Consolidated Statements of Cash Flows for the years ended December

     31, 2002, 2001 and 2000                     
| |  |                                                       | Notes to Consolidated Financial Statements                                                                           
| |  |                                                       |                                                                                                                      
| |  | Trinet Venture Capital Ltd.                           |                                                                                                                      
| |  |                                                       | Report of Certified Public Accountants                                                                               
| |  |                                                       | Consolidated Balance Sheets as at December 31, 2001 and 2000                                                         
| |  |                                                       | Consolidated Statements of Income for the years ended December

     31, 2001, 2000 and 1999                         
| |  |                                                       | Consolidated Statements of Shareholders' Equity for the years

     ended December 31, 2001, 2000 and 1999           
| |  |                                                       |                                                                                                                      
| |  |                                                       | (iii)  Reports of Other Certified Public Accountants filed pursuant

         to Rule 2-05 of Regulation S-X:        
| |  |                                                       |                                                                                                                      
| |  |                                                       |                                                                                                                      
| |  |                                                       |                                                                                                                      
| |  |                                                       |                                                                                                                      
| |  |                                                       |                                                                                                                      
| |  |                                                       |                                                                                                                      
| |  |                                                       |                                                                                                                      
| |  |                                                       |                                                                                                                      
| |  |                                                       |                                                                                                                      
| |  |                                                       |                                                                                                                      
| |  |                                                       |                                                                                                                      
| |  |                                                       |                                                                                                                      
| |  |                                                       |                                                                                                                      
| |  |                                                       |                                                                                                                      
| |  |                                                       |                                                                                                                      

96

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---

| | (3)                                                                                     | Exhibits Required by Item 601 of Regulation S-K |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------- | ----------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Exhibit 2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation or
Succession |                                                
| |                                                                                         |                                                
| |                                                                                         | 2a.                                             | Purchase and Sale Agreement, dated January 5, 1998, between Ampal Communications, Inc. and
Motorola Communications Israel Ltd.  (Includes as Exhibit A the form of Partnership Agreement between Ampal Communications, Inc.
and Motorola Communications Israel Ltd. and as Exhibit B the form of Shareholders' Agreement between Ampal Communications, Inc. and
Motorola Communications Israel Ltd.)  (Filed as Exhibit 2 to a Current Report on Form 8-K, dated February 5, 1998, and
incorporated herein by reference, File No. 0-538.) 
| |                                                                                         | 2b.                                             | Amendment, dated January 22, 1998, to (i) Purchase and Sale Agreement, dated January 5,
1998, between Ampal Communications, Inc. and Motorola Communications Israel Ltd., (ii) Partnership Agreement between Ampal
Communications, Inc. and Motorola Communications Israel Ltd. and (iii) form of Shareholders' Agreement between Ampal Communications,
Inc. and Motorola Communications Israel Ltd.  (Filed as Exhibit 2a to a Current Report on Form 8-K, dated February 5, 1998, and
incorporated herein by reference, File No. 0-538.)
| |                                                                                         |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 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.                                             | 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).                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                         |                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 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).                                                                                                                                                                                                                                                            

97

---

---

| |                                                          | 10c.                                                      | Loan Agreement, dated April 27, 1998, between Bank Hapoalim Ltd. and Ampal Communications
Limited Partnership (Filed as Exhibit 10.1 to Report on Form 10-Q for the quarter ended June 30, 1998, File No. 0-538). | 
| | -------------------------------------------------------- | --------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |                                                          | 10d.                                                      | Form of Loan Agreement between Ampal Communications Limited Partnership and Bank Leumi
Le-Israel B.M. Filed as Exhibit 10.2 to Report on Form 10-Q for the quarter ended June 30, 1998, File No. 0-538).          | 
| |                                                          | 10e.                                                      | Sale and Purchase Agreement, dated November 8, 2000, between Ampal Realty Corporation and
Second 800 LLC. (filed as Exhibit 10I to Form 10-K for the fiscal year ended December 31, 2002, File No. 000-00538).    | 
| |                                                          | 10f.                                                      | The Company's 1998 Long-Term Incentive Plan (filed as Exhibit A to the Company's Proxy
Statement for the 1998 Annual Meeting of Shareholders).*                                                                   | 
| |                                                          | 10g.                                                      | The Company's 2000 Incentive Plan (filed as an exhibit to the Company's Proxy Statement for
the 2000 Annual Meeting of Shareholders).*                                                                            | 
| |                                                          | 10h.                                                      | Amendment to the Company's 1998 Long Term Incentive Plan adopted by the Board of Directors
on February 14, 2002.*                                                                                                 | 
| |                                                          | 10i                                                       | Amendment to the Company's 2000 Incentive Plan adopted by the Board of Directors on February
14, 2002*.                                                                                                           | 
| |                                                          |                                                           |                                                                                                                                                                                                                   | 
| | * Management contract, compensatory plan or arrangement. |                                                          
| |                                                          |                                                           |                                                                                                                                                                                                                   | 
| | Exhibit 11  Computation of Earning per Share.           |                                                          
| |                                                          |                                                           |                                                                                                                                                                                                                   | 
| | Exhibit 12  Statement re Computation of Ratios.         |                                                          
| |                                                          |                                                           |                                                                                                                                                                                                                   | 
| | Exhibit 21  List of Subsidiaries.                       |                                                          
| |                                                          |                                                           |                                                                                                                                                                                                                   | 
| | Exhibit 23 - Consents of Auditors:                       |                                                          
| |                                                         
| |                                                          | 23.1    AM-HAL Ltd.                                       | E-23.1                                                                                                                                                                                                           
| |                                                          | 23.2    Ampal-American Israel Corporation                 | E-23.2                                                                                                                                                                                                           
| |                                                          | 23.3    Bay Heart, Ltd                                    | E-23.3                                                                                                                                                                                                           
| |                                                          | 23.4    Carmel Container Systems Ltd                      | E-23.4                                                                                                                                                                                                           
| |                                                          | 23.5    Coral World International Ltd                     | E-23.5                                                                                                                                                                                                           
| |                                                          | 23.6    Country Club Kfar Saba Limited                    | E-23.6                                                                                                                                                                                                           
| |                                                          | 23.7    Epsilon Investment House Ltd.                     | E-23.7                                                                                                                                                                                                           
| |                                                          | 23.8    Granite Hacarmel Investments Ltd.                 | E-23.8                                                                                                                                                                                                           
| |                                                          | 23.9    Hod Hasharon Sport Center Ltd.                    | E-23.9                                                                                                                                                                                                           
| |                                                          | 23.10   Hod Hasharon Sport Center (1992) Ltd. Partnership | E-23.10                                                                                                                                                                                                          
| |                                                          | 23.11   Ophir Holdings Ltd.                               | E-23.11                                                                                                                                                                                                          
| |                                                          | 23.12   Ophirtech Ltd.                                    | E-23.12                                                                                                                                                                                                          
| |                                                          | 23.13   Renaissance Investment Co. Ltd.                   | E-23.13                                                                                                                                                                                                          
| |                                                          | 23.14   Shmey-Bar Real Estate 1993 Ltd.                   | E-23.14                                                                                                                                                                                                          
| |                                                          | 23.15   Shmey-Bar (T.H.) 1993 Ltd.                        | E-23.15                                                                                                                                                                                                          
| |                                                          | 23.16   Shmey-Bar (I.A.) 1993 Ltd.                        | E-23.16                                                                                                                                                                                                          
| |                                                          | 23.17   Trinet Investment in High-Tech Ltd.               | E-23.17                                                                                                                                                                                                          
| |                                                          | 23.18   Trinet Venture Capital Ltd.                       | E-23.18                                                                                                                                                                                                          

98

---

---

| | Exhibit 99  Additional Exhibits |                                                                                                                                                     
| | ------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |                                 |                                                                                                                                                     
| |                                 | Exhibit 99.1 Certification of Jack Bigio pursuant to 18 U.S.C. Section 1350,

 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| |                                 |                                                                                                                                                     
| |                                 | Exhibit 99.2 Certification of Irit Eluz pursuant to 18 U.S.C. Section 1350,

 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 
| |                                 |                                                                                                                                                     
| |                                 |                                                                                                                                                     
| |                                 |                                                                                                                                                     
| |                                 |                                                                                                                                                     

99

---

---

INDEPENDENT
AUDITORS REPORT TO THE SHAREHOLDERS OFGRANITE HACARMEL INVESTMENTS LIMITED

We have audited the accompanying
consolidated balance sheets of Granite Hacarmel Investments Limited and its subsidiaries
(the Company) as of December 31, 2002 and 2001, and the related consolidated statements of
income, shareholders equity and cash flows for each of the years in the three-year
period ended December 31, 2002. These consolidated financial statements are the
responsibility of the Companys Board of Directors and of its Management. Our
responsibility is to express an opinion on these consolidated financial statements based
on our audits. We did not audit the financial statements of certain subsidiaries, whose
assets constitute 2% and 1.7% of the total consolidated assets as of December 31, 2002 and
2001 respectively, and whose revenues constitute 3.6%, 3.2% and 3.4% of the total
consolidated revenues for the years ended December 31, 2002, 2001 and 2000, respectively.
The financial statements of those subsidiaries were audited by other auditors whose
reports thereon were furnished to us, and our opinion, insofar as it relates to amounts
included for such subsidiaries, is based solely on the said reports of the other auditors.
Furthermore, the data included in the financial statements relating to the net asset value
of the Companys investments in affiliates and to its equity in their operating
results is based on the financial statements of such affiliates, some of which were
audited by other auditors.

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



---

---

In our opinion, based upon our audits
and the reports of the other auditors, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 2002 and 2001, and the results of their operations, changes in
the shareholders equity and their cash flows for each of the years, in the three
year period ended December 31, 2002 in conformity with generally accepted accounting
principles in Israel. Furthermore, these statements have, in our opinion, been prepared in
accordance with the Securities Regulation (Preparation of Annual Financial Statements)
1993.

Accounting principles generally
accepted in Israel vary in certain significant respects from accounting principles
generally accepted in the United States of America. Application of accounting principles
generally accepted in the United States of America would have affected results of
operations and shareholders equity for each of the years in the three-year period
ended December 31, 2002, to the extent summarized in Note 32 to the consolidated financial
statements, as included in U.S. Dollars.

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

Without qualifying our opinion, we
would like to bring attention to Note 28 in the financial statements regarding four claims
against consolidated companies which the court has been asked to recognize as class
actions and other claims against a consolidated company claiming that its agreements with
its customers are restrictive trade arrangements.

Somekh Chaikin Certified Public
Accountants (Israel)

Haifa Israel,

March 12, 2003



---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# Consolidated Balance
Sheets

---

# Adjusted to the Index of December
2002

|                                     | Note | December 31,
|------------------------------------ | ---- | ------------
|
|
|Current Assets                       |      |             
|                                     |      |             
|Cash and cash equivalents            | 5    | 33,647      
|Marketable securities                |      | 17,598      
|Trade receivables, net               | 6    | 1,061,268   
|Other receivables and current assets | 6    | 118,900     
|Receivables on account of projects  
|in progress                          | 6    | 17,397      
|Inventories                          | 7    | 217,693     
|                                     |      |             
|                                     |      | 1,466,503   
|                                     |      |             
|Non-current inventories              | 7    | 120,055     
|                                     |      |             
|Investments, long-term loans and    
|Receivables                         
|Affiliated companies and others      | 8    | 166,003     
|Long-term loans and receivables      | 9    | 130,373     
|                                     |      |             
|                                     |      | 296,376     
|                                     |      |             
|Fixed assets                         | 10   |             
|                                     |      |             
|Cost                                 |      | 2,919,502   
|Less: Accumulated depreciation       |      | 1,675,483   
|                                     |      |             
|                                     |      | 1,244,019   
|                                     |      |             
|Intangible assets and deferred      
|charges, net                         | 11   | 150,172     
|                                     |      |             
|                                     |      | 3,277,125   
|                                     |      |             

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

1

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# Consolidated Balance
Sheets

---

# Adjusted to the Index of December
2002

|                                          | Note  | December 31,
|----------------------------------------- | ----- | ------------
|
|
|Current liabilities                       |       |             
|                                          |       |             
|Credit from banks and others              | 12    | 1,147,471   
|Current portion of convertible debentures | 15.B. | -           
|Trade payables                            | 13    | 202,262     
|Other payables                            | 14    | 183,503     
|                                          |       |             
|                                          |       | 1,533,236   
|                                          |       |             
|Long-term liabilities                    
|Long-term loans                           | 15.A. | 941,529     
|Customers' deposits                       | 16    | 62,226      
|Liabilities for employee rights          
|upon retirement, net                      | 17    | 29,417      
|Capital notes issued by a consolidated   
|company                                   |       | 215         
|Deferred taxes                            | 26    | 64,846      
|                                          |       |             
|                                          |       | 1,098,233   
|                                          |       |             
|                                          |       |             
|Minority interest                         |       | 7,924       
|                                          |       |             
|Collateral, commitments and              
|contingent liabilities                    | 28    |             
|Shareholders' equity                      | 19    | 637,732     
|                                          |       |             
|                                          |       | 3,277,125   
|                                          |       |             

---

Prof.
          I. Borovich  Chairman of the Board

---

A.
Silberberg  Director

---

M. Erez  President
and Chief Executive Officer

Date: March 12, 2003

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

2

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# Consolidated Statements
of Income

---

# Adjusted to the Index of December
2002

|                                    | Note | Year ended December 31,
|----------------------------------- | ---- | -----------------------
|
|
|Sales                               |      |                        
|Less: Government imposts            |      |                        
|                                    |      |                        
|Net sales                           |      | 20                     
|Cost of sales                       |      | 21                     
|                                    |      |                        
|Gross profit                        |      |                        
|                                    |      |                        
|Selling and marketing expenses      |      | 22                     
|General and administrative expenses |      | 23                     
|                                    |      |                        
|                                    |      |                        
|                                    |      |                        
|Income from operations              |      |                        
|                                    |      |                        
|Financing expenses, net             |      | 24                     
|Other (expenses) income, net        |      | 25                     
|                                    |      |                        
|                                    |      |                        
|                                    |      |                        
|Income before income taxes          |      |                        
|Income tax expense                  |      | 26                     
|                                    |      |                        
|Income after taxes on income        |      |                        
|(Losses) Income of affiliates, net  |      |                        
|Minority interest in consolidated   |     
|subsidiaries,  net                  |      |                        
|                                    |      |                        
|Net income                          |      |                        
|                                    |      |                        
|                                    |      |                        
|                                    |      |                        
|Earnings  per ordinary share        |      | 19                     
|Primary                             |      |                        
|                                    |      |                        
|Fully diluted                       |      |                        
|                                    |      |                        

*Reclassified

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

3

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# Consolidated Statements
of Shareholders Equity

---

# Adjusted to the Index of
December 2002

|                              | Capital | Premium | Company's
shares held by
a consolidated
company | Retained
Earnings | Dividend
declared
subsequent to
balance sheet
date | Total    
|----------------------------- | ------- | ------- | ----------------------------------------------- | ----------------- | -------------------------------------------------- | ---------
|
|Balance as at January 1, 2000 | 274,054 | 276,314 | (639)                                           | 69,332            | -                                                  | 619,061  
|                              |         |         |                                                 |                   |                                                    |          
|Changes in 2000:             
|                              |         |         |                                                 |                   |                                                    |          
|Net income for the year       | -       | -       | -                                               | 76,423            | -                                                  | 76,423   
|Conversion of debentures     
|into shares                   | 429     | 3,336   | -                                               | -                 | -                                                  | 3,765    
|Acquisition of the           
|Company's shares             
|by a consolidated company     | -       | -       | (3,034)                                         | -                 | -                                                  | (3,034)  
|                              |         |         |                                                 |                   |                                                    |          
|Balance as at December 31,   
|2000                          | 274,483 | 279,650 | (3,673)                                         | 145,755           | -                                                  | 696,215  
|                              |         |         |                                                 |                   |                                                    |          
|Changes in 2001:             
|Net income for the year       | -       | -       | -                                               | 50,470            | -                                                  | 50,470   
|Divided paid                  | -       | -       | -                                               | (127,351)         | -                                                  | (127,351)
|Acquisition of the           
|Company's shares             
|by a consolidated company     | -       | -       | (285)                                           | -                 | -                                                  | (285)    
|                              |         |         |                                                 |                   |                                                    |          
|Balance as at December 31,   
|2001                          | 274,483 | 279,650 | (3,958)                                         | 68,874            | -                                                  | 619,049  
|                              |         |         |                                                 |                   |                                                    |          
|Changes in 2002:             
|Net income for the year       | -       | -       | -                                               | 24,633            | -                                                  | 24,633   
|Acquisition of the           
|Company's shares             
|by a consolidated company     | -       | -       | (5,950)                                         | -                 | -                                                  | (5,950)  
|Dividend declared            
|subsequent to balance        
|sheet date                    | -       | -       | -                                               | (79,101)          | 79,101                                             | -        
|                              |         |         |                                                 |                   |                                                    |          
|Balance as at December 31,   
|2002                          | 274,483 | 279,650 | (9,908)                                         | 14,406            | 79,101                                             | 637,732  
|                              |         |         |                                                 |                   |                                                    |          

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

4

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# Consolidated Statements
of Cash Flows

---

# Adjusted to the Index of
December 2002

|                                                      | Year ended December 31,
|----------------------------------------------------- | -----------------------
|
|
|Cash flows from operating activities                  |                        
|                                                      |                        
|Net income                                            | 24,633                 
|Adjustments to reconcile net income to operating     
|cash flows (A):                                       | 120,644                
|                                                      |                        
|Net cash provided by  operating activities            | 145,277                
|                                                      |                        
|Cash flows from investing activities                 
|                                                      |                        
|Acquisition of fixed assets                           | (115,065)              
|Proceeds from sale of fixed assets and other assets   | 12,996                 
|Proceeds from the sale of investments in affiliated  
|companies                                             | 20                     
|Dividend received from affiliated companies          
|from prior years' income                              | -                      
|Investment in long-term loans                         | (52,035)               
|Collection of long-term loans                         | 30,144                 
|Investment in intangible and deferred charges         | (34,008)               
|Acquisition of shares of an affiliated company        | (4,148)                
|Proceeds from marketable securities, net              | 2,644                  
|Investment in companies carried on the cost basis     | (73)                   
|Acquisition of shares in a consolidated company       | (17,759)               
|Realization of investment in capital notes            | -                      
|Investment in a capital note in an affiliated company | (6,232)                
|Acquisition of initially consolidated                
|companies (B)                                         | (2,482)                
|                                                      |                        
|Proceeds from the sale of a previously consolidated  
|company (C)                                           | (5,587)                
|                                                      |                        
|Net cash used in investing activities                 | (191,585)              
|                                                      |                        

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

5

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# Consolidated Statements
of Cash Flows (continued)

---

# Adjusted to the Index of
December 2002

|                                                     | Year ended December 31,
|---------------------------------------------------- | -----------------------
|
|
|Cash flows from financing activities                 |                        
|                                                     |                        
|Dividend paid                                        | -                      
|Dividend paid to minority shareholders in           
|consolidated subsidiaries                            | (910)                  
|Short-term credit from banks and others,  net        | (226,083)              
|Long-term loans received                             | 378,429                
|Long-term loans repaid                               | (87,279)               
|Customers' deposits received                         | 1,480                  
|Customers' deposits repaid                           | (890)                  
|Redemption of debentures                             | (14,523)               
|Acquisition of Company's shares by a                
|consolidated company                                 | (5,950)                
|Proceeds from the (redemption) issuance             
|of capital notes                                     | (627)                  
|                                                     |                        
|Net cash provided by (used for) financing activities | 43,647                 
|                                                     |                        
|(Decrease) Increase  in cash and cash equivalents    | (2,661)                
|Cash and cash equivalents at beginning of year       | 36,308                 
|                                                     |                        
|Cash and cash equivalents at end of year             | 33,647                 
|                                                     |                        

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

6

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# Consolidated Statements
of Cash Flows (continued)

---

# Adjusted to the Index of
December 2002

|                                                   | Year ended December 31,
|-------------------------------------------------- | -----------------------
|
|
|(A) Adjustments to reconcile net income to         |                        
|operating cash flows:                             
|                                                   |                        
|Income and expenses not requiring cash flows:     
|                                                   |                        
|Depreciation and amortization, net                 | 121,061                
|Deferred taxes, net                                | (8,996)                
|(Decrease) Increase in liabilities for employee   
|rights upon retirement, net                        | (8,691)                
|Minority interest in income of consolidated       
|Companies                                          | 2,312                  
|Company's share in undistributed losses (profits) 
|of affiliates, net                                 | 6,724                  
|Capital losses (gains)                             | 9,585                  
|Erosion of investments in capital notes, net       | -                      
|Erosion of long-term loans, debentures and        
|capital notes issued                               | (9,156)                
|Erosion of loans granted                           | (5,449)                
|Decrease (Increase) in value of marketable        
|securities, net                                    | 8,300                  
|Erosion of customers' deposits                     | (3,909)                
|Decrease  in affiliated company and               
|other investments                                  | 20,400                 
|Write-off of loan to an affiliated company         | -                      
|Profit from the realization of investments in     
|companies carried on equity basis                  | -                      
|Gain from decrease in percent                     
|ownership of an affiliated company                 | (641)                  
|Loss (profit) from sale of investment consolidated
|company                                            | 21                     
|Changes in assets and liabilities:                
|(Increase) Decrease in trade receivables, net      | (89,955)               
|(Increase) Decrease in other receivables          
|and current assets                                 | (23,914)               
|Decrease (Increase) in inventories                
|and in non-current inventories                     | 69,660                 
|Increase (Decrease) in trade payables              | 32,722                 
|Increase (Decrease) in other payables              | 570                    
|                                                   |                        
|                                                   | 120,644                
|                                                   |                        

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

7

---

---

# Consolidated Statements
of Cash Flows (continued)

---

# Adjusted to the Index of
December 2002

|                                                    | Year ended December 31,
|--------------------------------------------------- | -----------------------
|
|
|(B)Acquisition of initially consolidated companies: |                        
|                                                    |                        
|Working capital (not including cash and cash        |                        
|equivalents)                                        |                        
|Fixed assets and intangible, net                    |                        
|Long-term debt, net                                 |                        
|Investment in an affiliated company                 |                        
|Goodwill created at acquisition                     |                        
|Minority interests as of the acquisition date       |                        
|                                                    |                        
|                                                    |                        
|                                                    |                        
|(C)Proceeds from the sale of an investment          |                        
|in a previously consolidated company:               |                        
|                                                    |                        
|                                                    |                        
|                                                    |                        
|Working capital (not including cash and             |                        
|cash equivalents)                                   |                        
|Fixed and intangible assets                         |                        
|Long-term (liabilities) receivables, net            |                        
|Investment in an affiliated company                 |                        
|Goodwill                                            |                        
|Minority interests on date of sale                  |                        
|Capital gain (loss) from the realization of         |                        
|investment in a consolidated company                |                        
|                                                    |                        
|Proceeds from sale of consolidated company          |                        
|Less proceeds not yet received                      |                        
|                                                    |                        
|                                                    |                        
|                                                    |                        
|(D)Non-cash items:                                  |                        
|                                                    |                        
|                                                    |                        
|                                                    |                        
|Conversion of customers debt into long-term loans   |                        
|                                                    |                        
|Conversion of debentures to shares                  |                        
|                                                    |                        
|Fixed assets acquired with suppliers credit         |                        
|                                                    |                        
|Other assets acquired with suppliers credit         |                        
|                                                    |                        
|Minority interest in dividend declared by a         |                        
|consolidated company                                |                        
|                                                    |                        

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

8

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 1  General

|A. | Granite
Hacarmel Investments Ltd.(the Company) (P.C.520037177) and                its
subsidiaries are engaged in the following activities:
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------

| | 1. | Purchasing
locally and importing fuel products and liquified propane gas,           marketing and
distributing them among public fuel filling stations and to           others.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Production
and marketing of paints, chemicals and other related products.
| | -- | -------------------------------------------------------------------------

| | 3. | Planning,
construction and operating water enhancement and desalination plants           and
systems.
| | -- | -----------------------------------------------------------------------------------------------------

| | 4. | Real
estate investments and rentals.
| | -- | ------------------------------------

| | 5. | Participation
in oil and gas exploration.
| | -- | -----------------------------------------

|B. | In
1999, the Company initiated a restructuring of companies within the group,
               with the intention of creating a suitable commercial framework for its
               consolidated companies which will distinguish between current and future
areas                of operations. The restructuring will allow for the possibility of
the                subsidiary companies raising capital from the public or enlisting a
strategic                investor for the separate operations of the specific assets of a
given company.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Within
the framework of the restructuring of the Granite group and after appropriate discussions
in the authorized forums within the Company and its subsidiary, Sonol Israel Ltd. ( Sonol),
it was decided to divide the subsidiary, Sonol, into two corporations:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1. | Sonol
Israel Ltd. (Sonol)  which will continue its commercial
          activities and marketing operations of products to its customers.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Sonol
Trading Ltd. (Sonol Trading)  which will engage in           other
activities, which do not include the marketing of fuel products, including
          developing new business in filling stations, new business ventures, providing
          infrastructure services and land development.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Both
of the above mentioned companies are wholly owned and controlled by the Company.
| | -------------------------------------------------------------------------------------

| | As
part of the division, Sonol will transfer to Sonol Trading assets and rights as
determined by the division, including land and shareholdings. Concurrently, Sonol Trading
will assume a portion of Sonols liabilities to be split from Sonol in proportion to
the book value of the assets to be transferred to Sonol Trading under the division.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Within
the framework of the restructuring arrangement and after deliberations by the authorized
forums of the Company and its subsidiaries, Sonol, Supergas Israel Gas Distribution
Company Ltd. (Supergas) and Granite Hacarmel Holdings (1993) Ltd. (Granite
Holdings), it was decided that Sonol will transfer, without consideration, its
shares in Supergas (50%) to the Company and, in addition, certain real assets will be
transferred without payment from Sonol and Supergas to Granite Holdings.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
division and reorganization being made under the provisions of paragraphs 104B(1), 104C
and 105 of the Israel Income Tax Code are subject to the approval of the income tax
authorities, Sonols main creditors and the district court. As of the balance sheet
date the reorganization has not yet been completed.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 1  General
(continued)

| | C. | Definitions
| | -- | -----------

| | 1. | Consolidated
companies companies, including partnerships, whose                financial
statements are directly or directly consolidated with the financial
               statements of the Company.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Affiliated
companies  companies including partnerships, but not                including
consolidated companies, whose investment in by the Company, directly                or
indirectly, is included in the Companys financial statements the basis
               of the equity method.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Subsidiaries  companies
in which the Company holds more than 50% of                their shares.
| | -- | -------------------------------------------------------------------------------------------------

| | 4. | Related
parties as defined in Opinion No. 29 of the Israel                Institute of
Certified Public Accountants.
| | -- | ---------------------------------------------------------------------------------------------------------------------

| | 5. | Interested
party as defined in Section 1 of the Israel Securities                Law.
| | -- | --------------------------------------------------------------------------------------

| | 6. | Controlling
party in accordance with the Securities Regulations
               (Presentation of Transactions between the Company and a Controlling Party
in the                Financial Statements) 1996.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 2  Summary of
significant accounting policies and practices

|A. | Principles
of adjustment and consolidation in the financial statements
|-- | ----------------------------------------------------------------------

| | 1. | Financial
statements in adjusted values
| | -- | ---------------------------------------

| | a. | The
Company and the other companies in the group prepared their financial
          statements on the basis of historical cost which was adjusted to the changes in
          the general purchasing power of the shekel.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | The
adjusted values presented do not necessarily reflect realizable value or
          current economic value, but rather the cost, adjusted for the changes in the
          general purchasing power of the shekel.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | The
term cost used in the adjusted statements means cost in           adjusted
shekels unless otherwise stated.
| | -- | -----------------------------------------------------------------------------------------------------------------

| | d. | The
comparative figures (including the monetary items) are stated in shekels
               adjusted to the December 2002 Index.
| | -- | --------------------------------------------------------------------------------------------------------------------------------

10

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 2  Summary of
significant accounting policies and practices

|A. | Principles
of adjustment and consolidation in the financial statements
|-- | ----------------------------------------------------------------------

| | 1. | Financial
statements in adjusted values (continued)
| | -- | ---------------------------------------------------

| | e. | The
adjusted amounts are expressed in New Israel Shekels, the purchasing power           of
which reflects the price level of the month of December 2002, based on the
          consumer price index published by the Central Bureau of Statistics           (Index),
on January 15, 2003 (see note 2.G.).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Balance
sheet
| | -- | -------------

| | a. | The
non-monetary items were adjusted for the changes in the Index since their
          acquisition or creation and until the balance sheet date. The following items
          are the main items that were treated as non-monetary items: fixed assets and
          related accumulated depreciation, investments carried at cost, inventories,
          except for inventories of crude oil and refined products, (see note 2.C.2)
          deferred charges and the related accumulated amortization, and
          shareholders equity.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | The
value of the investments in affiliated companies carried on the equity           basis
was computed on the basis of the adjusted statements of the affiliated
          companies.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Deferred
taxes, net were computed on the basis of the adjusted data.
| | -- | --------------------------------------------------------------------

| | d. | Monetary
items are stated in the adjusted statements at their nominal value.
| | -- | ----------------------------------------------------------------------------

| | 3. | Statement
of income
| | -- | -------------------

| | The
items of the statement of income were adjusted in accordance with the changes in the
Index as follows:
| | ----------------------------------------------------------------------------------------------------------

| | a. | Amounts
relating to non-monetary items in the balance sheet (e.g. depreciation           and
amortization), or provisions included in the balance sheet (e.g. severance
          indemnities, vacation pay) were adjusted in accordance with the changes in the
          corresponding balance sheet items.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Other
amounts in the statement of income (e.g. sales, purchases, other current
          expenses), except for financing expenses, net, are stated at their adjusted
          amounts based on the index for the month of the related transactions.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | The
net financing item reflects financing income and expenses in real terms,
          erosion of monetary items during the year, profit and loss arising from
          realization and valuation of marketable securities and profit and loss from
          financial instruments.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | The
Companys equity in the operating results of the affiliated companies           and
the minority interest in the results of consolidated subsidiaries were
          determined on the basis of the adjusted statements of the investee companies.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 2  Summary of
significant accounting policies and practices (continued)

|A. | Principles
of adjustment and consolidation in the financial statements           (continued)
|-- | --------------------------------------------------------------------------------------------

| | e. | Current
taxes are comprised of payments on account during the year, in addition           to
amounts payable as of the balance sheet date (or net of refunds claimed). The
          payments on account were adjusted based on the prevailing Index on the date of
          each payment, while the amounts payable (or claimed as refund) are included
          without adjustment. Accordingly, the current taxes include the expenses arising
          from the erosion of the payments on account of taxes from the date of such
          payments to the balance sheet date. Deferred taxes  see note 2.J.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Statement
of shareholders equity
| | -- | ---------------------------------

| | Dividend
declared and paid during the year has been adjusted on the basis of the Index at the time
of payment. Dividend declared but not yet paid at the balance sheet date is included
without adjustment.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | Principles
of consolidation
| | -- | ---------------------------

| | a. | The
consolidated financial statements of the Company include the consolidated
          financial statements of the Company and its wholly-owned and over 50% owned
          subsidiaries. A list of the main subsidiaries, whose financial statements are
          included in the consolidated financial statements and the percent ownership and
          control therein, are included in a separate schedule at the end of the
financial           statements. Regarding initially consolidated companies and those
consolidated in           the past, which are not included in the current years
financial statements            see note 3.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Intercompany
balances and transactions of consolidated companies and unrealized           gains on
sales among companies in the group have been eliminated.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Shares
of the Company, acquired by a consolidated company, have been recorded           using
the treasury stock method.
| | -- | --------------------------------------------------------------------------------------------------------------------------

| | B. | Investments
in subsidiary and affiliated companies
| | -- | --------------------------------------------------

| | 1. | The
investments in subsidiaries and affiliated companies are reflected in the
               financial statements on the equity basis, net of a provision for a
decrease in                value, if required. Other investments are stated at cost
which, in the opinion                of the Companys management, does not exceed
market value. Subsidiary                companies own several other inactive and/or
insignificant subsidiaries that are                not consolidated and are carried at
cost.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company periodically reviews its investments to determine whether any of them have
suffered a decline in value which is other than temporary. This review is made when there
are indications, including such factors as share prices on the stock exchange, ongoing
losses in the investee companies, the business sector in which it operates, the value of
goodwill included in the investment and other factors, which indicate that the value of
such investments may have been adversely affected. Writedowns of such investments to
their adjusted values which, according to the Companys management,
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 2  Summary of
significant accounting policies and practices (continued)

|B. | Investments
in subsidiary and affiliated companies (continued)
|-- | --------------------------------------------------------------

| | is
based on a review of the relevant factors, their importance, and their not being of a
temporary nature, is reflected in the statement of income in other expenses (income),
net.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | a.
The excess of cost of the Companys investments in consolidated
          subsidiaries which is not related to identifiable assets and liabilities
          (Goodwill), is included in Intangible assets and deferred
          charges, net and is amortized by the straight-line method over a period
of           ten years.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
excess net value of net assets acquired over cost of investments in affiliated companies,
is first netted against identifiable assets of the acquired company, and the balance is
netted against Intangible assets and deferred charges, net and is amortized
by the straight line method over a period of ten years.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b.
                   The excess of cost of
investments allocated was apportioned to assets and           liabilities, to relevant
items in the balance sheet.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | The
investments of the Company in capital notes of affiliated companies are
               presented in the financial statements of the Company in accordance with
the                requirements of the Israel Securities Authority regulations
(Transactions                between the Company and its Interested Parties in Financial
Statements) 1996.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | A
list of affiliated companies is included in a schedule attached to the
          financial statements.
| | -- | --------------------------------------------------------------------------------------------------------

|C. | Valuation
of inventories
|-- | ------------------------

| | 1. | Inventories
of crude oil and refined products
| | -- | ---------------------------------------------

| | The
major part of the crude oil and refined product inventories consists of Security
inventories. The Security inventories, stored in separate sealed tanks, are stated as
Non-current inventories. The Security inventories are valued at cost in accordance with
the exchange rate of the dollar (current rate) or, at the dollar exchange rate as
determined by the Fuel Authority, when such rate is less than the current rate, on the
balance of inventories against which there are no dollar liabilities. Regardless, the
recovery of the value of the inventories is guaranteed by the State by determining its
recovery value based on the dollar exchange rate at the time of the sale.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Commercial
inventories are stated at the lower of cost or market. The cost is determined by the
first-in, first-out method.
| | ---------------------------------------------------------------------------------------------------------------------------

| | 2. | Other
inventories
| | -- | -----------------

| | a. | The
inventories of luboils, spare parts and others are stated at the lower of           cost
or market. Cost is determined by the moving average method.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------

13

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 2  Summary of
significant accounting policies and practices (continued)

|C. | Valuation
of inventories (continued)
|-- | ------------------------------------

| | b. | Inventories
of paints are stated at the lower of cost or market. Cost is mainly           determined
as follows: Raw and Packaging materials  moving average method.Finished productsbased
on standard production costs which include raw materials, packaging materials, salaries
and related expenses and other production costs.Work in progress  on the basis of
raw materials and standard production costs. Purchased products  moving average
method.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|D. | Fixed
assets
|-- | ------------

| | Fixed
assets are stated at cost, net of accumulated depreciation or at cost together with the
addition of excess of cost related to specific assets. Improvements are capitalized and
included in the cost of the asset while maintenance and repair expenses are charged as
incurred to the statement of income.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Depreciation
is computed by the straight-line method at annual rates considered to be sufficient for
depreciating the assets over their estimated useful lives. The annual rates of
depreciation are as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                     | %                                  
|---------------------------------------------------- | -----------------------------------
|Buildings (including temporary and rental buildings) | 2-10                               
|Machinery and equipment                              | 5-33 (mainly 10-15)                
|Vehicles                                             | 15-20                              
|Computers                                            | 20-33                              
|Furniture and office equipment                       | 6-20                               
|Leasehold improvements                               | depreciated over the lesser of     
|                                                     | estimated useful life or lease term

| | The
excess of cost related to specific assets is depreciated over the remaining useful life
as determined at the time the excess of cost was related to those assets. Leasehold
rights are amortized over the terms of their leases. Buildings on leased land are
depreciated over the terms of their leases.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|E. | Intangible
assets and deferred charges, net
|-- | -------------------------------------------

| | 1. | Intangible
assets
| | -- | -----------------

| | Intangible
assets are stated at cost and were amortized in equal annual rates over their estimated
useful lives:
| | ----------------------------------------------------------------------------------------------------------------

| | Goodwill
- see note 2.B.2 Oil and gas exploration rights  based on output Distribution
rights and others-over a period of 20 years or in accordance with the period stated in
the agreement. Delivery rights  over a period of 10 years or in accordance with the
period stated in the agreement. Others  based on the benefit period.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 2  Summary of
significant accounting policies and practices (continued)

|E. | Intangible
assets and deferred charges, net (continued)
|-- | -------------------------------------------------------

| | 2. | Deferred
charges
| | -- | ----------------

| | Expenses
related to the issuance of debentures were amortized using the straight-line method over
the period of the debentures. The debentures were included in the financial statements in
accordance with their liability value.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
rents  over the rental term, at equal annual rates.
| | -------------------------------------------------------------

|F. | Debentures
convertible into shares
|-- | ----------------------------------

| | Convertible
debentures were presented in accordance with the Opinion No.53 of the Institute of
Certified Public Accountants in Israel on the basis of the probability of their
conversion into shares. Debentures were reflected in the financial statements at their
liability value.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|G. | Foreign
currency and linkage basis
|-- | ----------------------------------

| | Assets
(other than securities) and liabilities in foreign currencies or linked thereto are
stated at the exchange rates in effect on the balance sheet date. Assets (other than
securities) and liabilities linked to the Index, are stated according to the linkage
terms applying to each balance. The Index, the exchange rates and the rate of changes
therein were as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     | December 31 | Changes in %
|-------------------- | ----------- | ------------
|
|Index                | 115.12      | 108.1       
|Exchange rate of the
|U.S. dollar          | 4.737       | 4.416       

|H. | Marketable
securities
|-- | ---------------------

| | Marketable
securities held as a short term investments are carried at their market value on the
balance sheet date. Marketable securities which are permanent investments are carried at
cost, except when there is an other than temporary decline in their value. (See also note
B.1. above). The changes in the value of the securities are reflected in the statement of
income.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|I. | Provision
for doubtful receivables
|-- | ----------------------------------

| | The
financial statements include provisions for doubtful receivables which, in the opinion of
the Companys management, adequately provide for the loss on receivables whose
collection is doubtful. The amount of the provision includes specific provisions. In the
past, in the paint and and chemical segment, the amount of the provision was calculated
mainly at the rate of 8.5%. As a result of the change in 2002, the provision was reduced
by NIS. 3,500 thousand and net income increased by NIS. 2,200 thousand.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 2  Summary of
significant accounting policies and practices (continued)

|J. | Deferred
taxes
|-- | --------------

| | The
companies in the group apportion taxes as a result of temporary differences between the
values of assets and liabilities for book and tax purposes. The said apportionment is
made on account of differences relating to assets whose usage or expense are recognized
for tax purposes. The balance of deferred taxes is calculated according to the liability
method at tax rates which will be in effect when the deferred taxes will be utilized,
using tax rates that are known at the time of publication of the financial statements
(36%).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
main factors in respect of which deferred taxes have not been computed:
| | ---------------------------------------------------------------------------

| | a. | Amounts
of adjustment for the change in the purchasing power of the New Israel           Shekel
relating primarily to buildings and automobiles, in accordance with rules
          determined by the Institute of Certified Public Accounts in Israel. (the
          Institute).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Investments
in subsidiaries and affiliates, where it is the Companys           intention to
hold these investments rather than to sell them.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Tax
benefit receivable on account of timing differences where realization of           the
benefit is uncertain.
| | -- | ----------------------------------------------------------------------------------------------------------------

|K. | Recognition
of income
|-- | ---------------------

| | 1. | Product
sales  Income from the sale of products is recorded upon receipt           of the
products by the customer.
| | -- | --------------------------------------------------------------------------------------------------------------------

| | 2. | Rental
income  Rental income is recorded over the period of the rental
          agreement.
| | -- | --------------------------------------------------------------------------------------------

| | 3. | Income
from projects in progress  In accordance with Standard No. 4,           income from
projects in progress is recognized using the percentage of           completion method
(based on actual work completed as of the balance sheet date).           The periodic
reporting of income and expenses from building projects covers all           the
projects, including those which the company is unable to estimate their
          expected profit, but for which it is possible to determine the anticipated
          repayment of the costs already incurred. In such instances, the full amount of
          such costs, and income, to the extent of those costs, are reflected in the
          statement of income (zero profit margin).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If
there is an expected loss on a project, a provision is recorded for the full amount of
the loss expected until the projects completion.
| | -------------------------------------------------------------------------------------------------------------------------------------------

16

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---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 2  Summary of
significant accounting policies and practices (continued)

|L. | Provision
for linkage increments on customers deposits
|-- | -------------------------------------------------------

| | Supergas,
a consolidated company, is obligated under a Government decree to pay customers
terminating their gas purchasing agreement an amount equal to the latest approved deposit
authorized by the Ministry of Trade and Industry, linked to the change in the Index from
the date of the last approval to the date of payment. The computation of the liability is
based on the actual liability as mentioned above. Supergas provides for the liability on
a discounted present value basis.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|M. | Earnings
per share
|-- | ------------------

| | The
earnings per share are computed in accordance with Opinion No.55 of the Institute.
| | --------------------------------------------------------------------------------------

| | In
computing primary earnings per share, consideration is given to whether there is a
reasonable chance of conversion or realization of convertible securities in accordance
with the tests prescribed by the Opinion.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
computation of diluted earnings per share takes into account convertible securities
issued by the Company that were not included in the calculation of primary earnings per
share, provided that their conversion or realization does not result in an increase in
earnings per share (anti-dilutive effect).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|N. | Use
of estimates
|-- | ----------------

| | The
preparation of financial statements in accordance with generally accepted accounting
principles in Israel and the United States requires management to use estimates and
valuations which affect the reported amounts of assets and liabilities, the disclosure
regarding contingent assets and liabilities, and also, the amounts of income and expenses
recorded in the reporting period. Actual results may differ from these estimates.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|O. | Presentation
of transactions between the Company and a controlling party
|-- | ------------------------------------------------------------------------

| | Transactions
between the Company and a controlling party are presented in accordance with the
Securities Regulations (Presentation of Transactions between the Company and a
Controlling Party in the Financial Statements)  1996.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|P. | Financial
instruments
|-- | ---------------------

| | Currency
futures transaction which are not for hedging purposes are stated at their fair value.
Changes in the fair value are recorded in the statement of income in the period incurred.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17

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---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 2  Summary of
significant accounting policies and practices (continued)

|Q. | Implementation
of recently issued accounting standards
|-- | ------------------------------------------------------

| | 1. | In May
2001, the Israeli Accounting Standards Board published Accounting           Standard No.
7  Subsequent Events. The new standard determines when a           company must
make an adjustment in its financial statements for events occurring           after the
balance sheet date, and the disclosure required for a company with           respect to
the date on which the financial statements are approved for           publication and
regarding events occurring after the balance sheet date. This           standard
supersedes Sections 1, 2(1) and 3-7 of Opinion No. 11 of the Institute           of
Certified Public Accountants in Israel. This accounting standard applies to
          financial statements for periods ending on or after December 31, 2001.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | In
July 2001, the Israeli Accounting Standards Board published Accounting           Standard
No.11  Segment Reporting. The new standard applies to companies           whose
securities are registered or in the process of being registered for           trading on
any stock exchange, or where a full set of their financial statements           is
published to the public under any law. The standard requires the inclusion of
          data with respect to business segments and geographic segments, and also
          provides detailed guidance for identifying business and geographic segments.
          This accounting standard applies to financial statements for periods beginning
          on or after January 1, 2002. The Company has applied this standard in its
          financial statements as of December 31, 2001.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|R. | Effect
of new accounting standards not yet implemented
|-- | ------------------------------------------------------

| | 1. | In
July 2001, the Israel Accounting Standard Board (The Board)
               published the following two Standards:
| | -- | ----------------------------------------------------------------------------------------------------------------------

| | (a) | Accounting
Standard No. 12  Discontinuance of Adjustment of Financial
               Statements. Pursuant to this standard, the adjustment of financial
statements                was to have been discontinued as of January 1, 2003. In
December, 2002, the                Israel Accounting Standards Board published Standard
No. 17 which postponed the                implementation of Standard No. 12 until January
1, 2004. Therefore, the                adjustment of the financial statements will be
discontinued as of January 1,                2004.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company will continue preparing adjusted financial statements in accordance with Opinion
36 of the Institute of Certified Public Accountants in Israel until December 31, 2003.
The adjusted amounts to be included the financial statements as of December 31, 2003 will
constitute the starting point for the nominal financial statements as of January 1, 2004.
Implementation of Standard No. 12 may have a significant effect on the Companys
financial statements. The extent of the effect will depend upon the rate of inflation,
the composition of the assets and the Companys sources of financing.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Accounting
Standard No.13 Effect of Changes in the Rates of                Exchange of
ForeignCurrency. This standard deals with translation of
               transactions in foreign currency and translation of financial statements
of                outside activities for the purpose of their inclusion in the financial
               statements of the reporting entity, and supersedes the provisions of
               Clarifications 8 and 9 to Opinion 36 which will be discontinued upon the
entry                into effect of Accounting Standard No. 12 described above.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18

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GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 2  Summary of
significant accounting policies and practices (continued)

|R. | Effect
of New Accounting Standards not yet implemented (continued)
|-- | ------------------------------------------------------------------

| | 2. | In
August 2002, The Board published accounting Standard No. 14  Financial
          Reports for Interim Periods. The standard provides the minimum content of
          financial reports for interim periods, including the required disclosures in
the           notes, and also, details the accounting rules for recognition and
measurement           which are to be applied in interim financial statements. This
accounting           standard applies to financial statements for periods beginning on
January 1,           2003.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
restatement of comparative figures for interim periods prior to the effective date of the
standard in not required. Nevertheless, if the financial statements include comparative
figures for prior interim periods, which are not in accordance with the terms of this
standard, the main differences between the guidelines in this standard and those
reflected in the comparative figures should be included in the notes to the financial
statements. In the Companys opinion, the effect of the new Standard on its
operating results, its financial condition and on its cash flow will be insignificant.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | In
February 2003, the Israeli Accounting Standards Board published Accounting
          Standard No. 15  Decline in the Value of Assets. The standard provides
          procedures which a company must apply in order to ensure that its assets in the
          consolidated balance sheet, are not presented at an amount which is in excess
of           their recoverable value, which is the higher of the net selling price or the
          present value of the estimated future cash flows expected to be derived from
use           and disposal of the asset. In addition, the standard provides rules for
          presentation and disclosure with respect to assets whose value has declined.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Standard applies to financial statements for periods beginning January 1, 2003. The
standard provides that in most cases the transition will be effected by means of the
from here on method, however a loss from decline in value of an assets, in
the amount of the difference between the book value on the commencement date of the
standard and the recoverable amount as at that date, shall be charged to the statement of
operations in the category cumulative effect as at beginning of the year of change
in accounting method if and only if, the said loss was not recognized in the past
solely due to the fact that the net non-discounted future cash flows were greater than
the books value. The Company is evaluating the new standard, whose provisions may have a
significant effect on the financial statements. At this time, the Company is unable to
determine the final outcome.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 3  The
consolidated financial statements

| | A. | Initially consolidated
companies
| | -- | --------------------------------

| | 1. | The
financial statements of Texma Chemicals Ltd. were initially consolidated as
               of December 31, 2002, the date at which the Company acquired control.
Prior to                December 31, 2002, Texma Chemicals Ltd. was accounted for on the
equity basis.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 2  Summary of
significant accounting policies and practices (continued)

# NOTE 3  The
consolidated financial statements (continued)

| | A. | Initially consolidated
companies (continued)
| | -- | --------------------------------------------

| | 2. | Following
are the amounts included in the consolidated financial statements:
| | -- | ----------------------------------------------------------------------------

|Balance sheet                           | At December 31, 2002
the acquisition date
|--------------------------------------- | -----------------------------------------
|Cash and cash equivalents               | 39                                       
|Working capital (not including cash and
|cash equivalents)                       | 3,428                                    
|Fixed assets, net of accumulated       
|depreciation                            | 1,411                                    
|Goodwill resulting from acquisition     | 524                                      
|Long-term debt, net of current portion  | (15)                                     
|Investment in affiliated company        | (2,866)                                  

| | 3. | In
2001, the financial statements of Tambour Ltd. were initially consolidated.
| | -- | ------------------------------------------------------------------------------

|B. | Previously consolidated
company not included in the current years consolidation:
|-- | ---------------------------------------------------------------------------------

| | 1. | As
of January 12, 2002 the consolidated financial statements do not include the
               financial statements of S.D.L. thechnologies (Sol) Ltd. which was sold.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | On
July 1, 2002 a subsidiary company sold its share in Sonokal (1999) Limited
          Partnership.
| | -- | ----------------------------------------------------------------------------------------------------

| | 3. | Following
are amounts relating to the above previously consolidated companies:
| | -- | ------------------------------------------------------------------------------

|                                        | As of the date
nolonger
consolidated | At December 31, 2001
and for the year then
ended
|--------------------------------------- | ------------------------------------ | ------------------------------------------------
|
|Cash and cash equivalents               | 6,452                                | 263                                             
|Working capital (not including cash and
|cash equivalents)                       | (7,457)                              | (2,238)                                         
|ixed assets, net of accumulated        
|depreciation                            | 2,575                                | 2,841                                           
|Minority interest as of date no-longer 
|consolidated                            | (334)                                | 58                                              
|Long-term debt, net of current portion  | (350)                                | (435)                                           
|                                        |                                      |                                                 
|Statements of Income                   
|Sales                                   | 34,312                               | 76,893                                          
|Net profit (loss)                       | 784                                  | (91)                                            
|Net income consolidated companies       | 400                                  | 470                                             
|Loss from the sale of a previously     
|consolidated company                    | 21                                   | -                                               

20

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---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

|NOTE 4  | Accounting with the Fuel Authority and government controlin the energy
sector  Sonol
|-------- | -------------------------------------------------------------------------------------

| | 1. | Amounts
due to or from the Fuel Authority, the government agency responsible           for
supervising the fuel market in Israel, to the extent still provisional, are
          included each year in the accounts according to estimates prepared by Sonol
          based on past experience. Differences which subsequently arise as a result of
          change in estimates, are reflected in the results of the year in which such
          differences are determined.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | All
costs and expenses related to the holding of Security inventories are fully
          recoverable from the government while the costs of holding Commercial
          inventories are on account of Sonol, with all the attending risks.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | The
prices of 95 and 96 octane gasoline continue to be subject to government           price
controls.
| | -- | ------------------------------------------------------------------------------------------------------

# NOTE 5  Cash and
cash equivalents

|Consist of:          | December 31,
|-------------------- | ------------
|
|
|In local currency    |             
|In foreign currency* |             
|                     |             
|                     |             
|                     |             

| | Cash
equivalents  bank deposits whose maturities, at the time of the deposit, did not
exceed three months.
| | -----------------------------------------------------------------------------------------------------------

| | *Mainly
in U.S. Dollars
| | -----------------------

21

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 6  Trade
receivables and Other receivables and debit balances

| | A. | Trade
receivables:
| | -- | ------------------

|                              | December 31,
|----------------------------- | ------------
|
|
|Customers - open accounts     |             
|Checks and notes receivable   |             
|Credit cards companies        |             
|Current portion of long-term  |             
|loans granted                 |             
|Less - provision for doubtful |             
|receivables                   |             
|                              |             
|                              |             
|                              |             

| | B. | Other
receivables and debit balances:
| | -- | -------------------------------------

|                                   | December 31,
|---------------------------------- | ------------
|
|
|Fuel Authority                     |             
|Government institutions            |             
|Income receivable                  |             
|Income tax receivable              |             
|Employees                          |             
|Prepaid expenses                   |             
|Future tax benefits, net*          |             
|Current portion of other long-term |             
|receivables                        |             
|Others                             |             
|                                   |             
|                                   |             
|                                   |             

| | C. | Receivables
on account of projects in progress
| | -- | ----------------------------------------------

|                            | December 31,
|--------------------------- | ------------
|
|
|Income receivable           |             
|Less payments on account of |             
|projects in progress        |             
|                            |             
|                            |             
|                            |             

| | D. | Regarding
credit risks see note 28.E.
| | -- | -------------------------------------

| | *see
note 26
| | ------------

22

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---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 7  Inventories

|                                | December 31,
|------------------------------- | ------------
|
|
|Consist of:                     |             
|                                |             
|Crude oil and raw materials     |             
|Finished products               |             
|Materials and supplies          |             
|Work in process                 |             
|Projects in progress(1)         |             
|                                |             
|                                |             
|Less non-current inventories(2) |             
|                                |             
|                                |             
|                                |             
|                                |             
|(1) Projects in progress        |             
|Less the amount reflected in    |             
|the statement of income         |             
|                                |             
|                                |             
|                                |             

| | (2)
see note 2.C.
| | -----------------

23

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---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002

---

NOTE 8 - Affiliated companies and others

|                                              | December 31,
|--------------------------------------------- | ------------
|
|
|Investments in affiliated companies*:         |             
|                                              |             
|Balance as at December 31,1991                |             
|                                              |             
|Changes, beginning January 1, 1992:           |             
|Cost of shares acquired**                     |             
|Accumulated losses, net                       |             
|Amortization of investment                    |             
|Other changes                                 |             
|                                              |             
|                                              |             
|Other investments:                            |             
|                                              |             
|Long-term loans to affiliated companies       |             
|less accumulated losses (1)                   |             
|Investment in capital note to affiliated      |             
|company (3)                                   |             
|Investments in shares at cost less other than |             
|temporary impairment(2)                       |             
|                                              |             
|                                              |             
|                                              |             
|*List of main companies - see schedule        |             
|at end of consolidated financial statements   |             
|**Includes unamortized goodwill               |             
|                                              |             
|Securities registered for trading on the      |             
|Tel-Aviv stock exchange:                      |             
|                                              |             
|Affiliated companies:                         |             
|Book value                                    |             
|                                              |             
|Market value                                  |             
|                                              |             
|Companies at cost:                            |             
|Book value                                    |             
|                                              |             
|Market value                                  |             
|                                              |             

24

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---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 8  Affiliated
companies and others (continued)

| | (1) | The
loans were granted by the Company and consolidated companies to affiliated
          companies and partnerships. The amount of NIS. 10,375 thousand (2001  NIS.
          7,894 thousand) is index linked and bears interest at the rate of 10% p.a. The
          loans are repayable at a time to be determined by the parties.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The
Company, through one of its subsidiaries, invested in two venture capital
               funds, Jerusalem Venture Partners (Israel) LP and Eucalyptus Ventures LP,
both                of whom invested in shares of Chromatis Networks Ltd. (Chromatis).
               Lucent Technologies Inc.(Lucent), an American company,
acquired the                remaining unowned balance of Chromatis shares, in
exchange for Lucent                shares. The closing took place on June 29, 2000. The
gain on the transaction was                recorded in the year 2001 in other income in
the statement of income, upon                receipt of the shares, based on the value of
the shares on date received.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | The
capital note, issued by a limited partnership, has no maturity date, is not
          linked and is non-interest bearing.
| | --- | -----------------------------------------------------------------------------------------------------------------------------

| | Changes
in investments in affiliated companies and others:
| | ----------------------------------------------------------

|                                                 | NIS.(thousands)
|------------------------------------------------ | ---------------
|Balance as at January 1, 2002                    |                
|Changes during the year:                         |                
|Investment in shares                             |                
|Investment in loans                              |                
|Investment in capital note                       |                
|Sale of shares                                   |                
|Initial consolidation of previously affiliated   |                
|Company (see note 3)                             |                
|Share of losses, net                             |                
|Dividend receivable and received in current year |                
|Amortization of companies carried at cost        |                
|Amortization of investment                       |                
|Other changes                                    |                
|                                                 |                
|Balance as at December 31,2002                   |                
|                                                 |                

25

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---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 9 -Long-term loans
and receivables

|                                      | December 31,
|------------------------------------- | ------------
|
|
|a. Consist of:                        |             
|Loans to customers                    |             
|Loans to employees                    |             
|                                      |             
|                                      |             
|Less: current portion                 |             
|                                      |             
|                                      |             
|                                      |             
|Other receivables (1)                 |             
|Less: current portion                 |             
|                                      |             
|                                      |             
|                                      |             
|                                      |             
|                                      |             
|The years of maturity of the loans:   |             
|First year - current portion          |             
|Second year                           |             
|Third year                            |             
|Fourth year                           |             
|Fifth year                            |             
|Sixth year and thereafter and without |             
|maturity date                         |             
|                                      |             
|                                      |             
|                                      |             

| | (1) | Includes
mainly an amount of NIS. 39,088 thousand long term receivable in the           Company
from the sale of a previously consolidated company. (2001  NIS.           36,812
thousand). In accordance with the sale agreement, the balance due is           index
linked, will be repaid no later than April 22, 2003, and is secured by           bank
guarantees. The loan balance has been discounted at the rate of 6%.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

26

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---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 9 Long-term
loans and receivables (continued)

|b. | Breakdown
of loans by level of borrowers balances:
|-- | ---------------------------------------------------

|              | December 31, 2002 | December 31, 2001
|------------- | ----------------- | -----------------
|
|Less than 100 |                   | 74               
|100 - 500     |                   | 35               
|500 - 1,000   |                   | 11               
|Above 1,000   |                   | 38               
|              |                   |                  
|              |                   | 158              
|              |                   |                  

|c. | Linkage
terms and interest rates for loans:
|-- | -------------------------------------------

|                | December 31, 2002
|--------------- | -----------------
|
|
|
|Loans to:       |                  
|Customers       |                  
|Employees       |                  
|                |                  
|                |                  
|                |                  
|Less:           |                  
|Current portion |                  
|                |                  
|                |                  
|                |                  

|                | December 31, 2001
|--------------- | -----------------
|
|
|
|Loans to:       |                  
|Customers       |                  
|Employees       |                  
|                |                  
|                |                  
|                |                  
|Less:           |                  
|Current portion |                  
|                |                  
|                |                  
|                |                  

|d. | Regarding
credit risks see note 28.E.
|-- | -------------------------------------

27

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GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 10  Fixed
assets

|A. | Consist
of:
|-- | -----------

|                                | Land and
Buildings* | Machineryand 
Equipment | Furniture,
office equip-
ment and
computers | Vehicles  | Total
|------------------------------- | ------------------- | ----------------------- | ------------------------------------------- | --------- | -----
|
|Cost:                           |                     |                         |                                             |           |      
|Balance at beginning of year    |                     | 1,215,548               |                                             | 1,390,191 |      
|Additions**                     |                     | 44,945                  |                                             | 41,229    |      
|Disposals**                     |                     | (2,174                  | )                                           | (19,892   | )    
|                                |                     |                         |                                             |           |      
|Balance at end of year          |                     | 1,258,319               |                                             | 1,411,528 |      
|                                |                     |                         |                                             |           |      
|Accumulated depreciation:       |                    
|Balance at beginning of year    |                     | 436,497                 |                                             | 998,542   |      
|Depreciation and amortization** |                     | 28,592                  |                                             | 53,271    |      
|Depreciation in respect         |                    
|of disposals**                  |                     | (914                    | )                                           | (11,866   | )    
|                                |                     |                         |                                             |           |      
|Balance at end of year          |                     | 464,175                 |                                             | 1,039,947 |      
|                                |                     |                         |                                             |           |      
|Depreciated balance as of       |                    
|December 31,2002                |                     | 794,144                 |                                             | 371,581   |      
|                                |                     |                         |                                             |           |      
|Depreciated balance as of       |                    
|December 31,2001                |                     | 779,051                 |                                             | 391,649   |      
|                                |                     |                         |                                             |           |      

* Includes leasehold improvements.

**Includes companies initially consolidated and those no longer consolidated (see note 3).

|B. | Land
and buildings include buildings on leasehold lands, the cost of which is
               NIS. 336,397 thousand, leased for various original periods of 49-98 years,
               ending in the years 2003-2072. Land and buildings costing of NIS. 286,220
               thousand have not yet been registered in the name of the Company or the
               consolidated subsidiaries in the Land Registry Office. The main reason for
the                lack of registration is that the land settlement and sub-division
process has                not yet been completed.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Land
and buildings, include building and leasehold improvements on leased land in the original
cost of NIS 27,218 thousand, and depreciated cost of NIS. 15,016 thousand, leased for
various original periods from 4 to 25 years.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|C. | Commitments
and contingent liabilities  see note 28.
|-- | -----------------------------------------------------

28

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---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 11 
Intangible assets and deferred charges, net

|Balance to be amortized             
|------------------------------------
|
|
|
|Intangible assets:                  
|Deferred rent                       
|Goodwill in consolidated companies  
|Oil and gas exploration licenses(1) 
|Delivery rights                     
|Distribution rights                 
|Others                              
|                                    
|                                    
|Deferred charges:                   
|Expenses incurred in the issuance of
|debentures by the Company           
|                                    
|                                    
|Long-term deferred taxes, net       
|(see note 26)                       
|                                    
|                                    
|                                    

| | (1) | see
also notes 25 and 31.A.
| | --- | ---------------------------

| | *Reclassified
| | -------------

29

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---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 12  Credit
from banks and others

| | Linkage
terms and interest rates:
| | ---------------------------------

|                                   | December 31, 2002
|---------------------------------- | -----------------
|Interest rates:                   
|
|Overdrafts                         |                  
|Short-term loans                   |                  
|Current portion of long-term loans |                  
|                                   |                  
|Total credit from banks            |                  
|Credit from others                 |                  
|                                   |                  
|                                   |                  
|                                   |                  

|                                   | December 31, 2001
|---------------------------------- | -----------------
|Interest rates:                   
|
|Overdrafts                         |                  
|Short-term loans                   |                  
|Current portion of long-term loans |                  
|                                   |                  
|Total credit from banks            |                  
|Credit from others                 |                  
|                                   |                  
|                                   |                  
|                                   |                  

Note 13 Trade payables

| | The
 liabilities  include  NIS.  37,139  thousand  (2001 - NIS.  31,545  thousand)  balances
 of related  and          interested parties.
| | ------------------------------------------------------------------------------------------------------------------------------------------

| | Linkage
terms  see note 18
| | ---------------------------

30

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---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 14  Other
payables

|December 31,                      
|----------------------------------
|
|
|Liabilities to employees and other
|Salary related liabilities        
|Institutions                      
|Accrued expenses                  
|Income tax payable                
|Deferred taxes                    
|Others                            
|                                  
|                                  
|                                  

# NOTE 15  Long-term
liabilities

| | A.(1) | Long-term loans
| | ----- | ---------------

|                                   | Rate of | December 31, | December 31
|---------------------------------- | ------- | ------------ | -----------
|Consist of                        
|
|Index linked loans from banks      |         | 5.0-6.5      |            
|Unlinked loans from banks          |         | 7.6          |            
|Customers' deposit -  Index linked |         | -            |            
|Customers' deposit - linked to     |        
|foreign currency                   |         | -            |            
|U.S. dollar loans from banks       |         | 3.6-4.6      |            
|Other loans - Index linked         |         | 4.5          |            
|                                   |         |              |            
|                                   |         |              |            
|Less: current portion              |         |              |            
|                                   |         |              |            
|                                   |         |              |            
|                                   |         |              |            

31

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---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 15  Long-term
liabilities (continued)

| | A.1. | Long-term
loans (continued)
| | ---- | ---------------------------

| | Yearly
Installments:
| | --------------------

|                             | December 31,
|---------------------------- | ------------
|
|
|First year - current portion |             
|                             |             
|Second year                  |             
|Third year                   |             
|Fourth year                  |             
|Fifth year                   |             
|Sixth year and thereafter    |             
|Without maturity date        |             
|                             |             
|                             |             
|                             |             
|                             |             
|                             |             

| | Accrued
interest is included in Accounts payable in current liabilities.
| | --------------------------------------------------------------------------

| | A.2. | The
Company has fulfilled the conditions of agreements signed with banks           regarding
long-term loans to the Company and Sonol (Sonols loans are           guaranteed by
the Company).
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (1) | Shareholders equity,
together with customer deposits, will not be less           than NIS 450 million. The
amount is linked to the Index of July 1998.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The
ratio of shareholders equity, including customer deposits divided by
          total assets, net of Security inventories, will exceed 20%. As of the balance
          sheet date, the ratio was 22.2%. The increase in world fuel prices will affect
          the value of the inventories and accounts receivable, thus causing a temporary
          reduction in the ratio.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | The
level of consolidated liabilities to banks and other financial institutions
          (net of liabilities on account of the Security inventories) will not exceed 10
          times EBITDA (earnings before interest, taxes, depreciation and amortization),
          at any time.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Not
to create specific charge on the Companys assets (with the exception
               of a specific existing collateral and with the exception of collateral to
               finance, acquire and develop those assets).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

32

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 15  Long-term
liabilities (continued)

| | B. | Debentures
convertible into shares of the Company
| | -- | -------------------------------------------------

|                           | December 31,
|-------------------------- | ------------
|
|
|Debentures (series 1) (*)  |             
|Debentures (series 2) (**) |             
|                           |             
|                           |             
|Less - current portion     |             
|                           |             
|                           |             
|                           |             

| | Yearly
installments:
| | --------------------

|                             | December 31, 2002 | December 31,2001
|---------------------------- | ----------------- | ----------------
|
|
|First year - current portion |                   | -               
|                             |                   |                 

| | * | Registered
 debentures  (Series  1) NIS.  1.- par  value  each.  Every  NIS.  55.-  par  value  of
                    debentures are  convertible  into 10 ordinary  shares NIS. 1.- par
value each. The debentures bear                     interest at an annual rate of 0.1%.
 The  principal,  interest and the price for  conversion  into
                    ordinary shares are linked to the representative  rate of exchange of
the U.S. dollar. The balance                     of the debentures was redeemed on
November 30, 2002.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ** | Registered
debentures (Series 2) NIS. 1.- par value each. Every NIS. 5.- par value of debentures are
convertible into an ordinary shares NIS. 1.- par value each. The debentures bear interest
at an annual rate of 2.5%. The principal, interest and the price for conversion into
ordinary shares are linked to the representative rate of exchange of the U.S. dollar. The
balance of the debentures was redeemed on November 30, 2002.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2001  accrued interest is included in Accounts payable in Current
liabilities.
| | ------------------------------------------------------------------------------------

| | See
Note 28 regarding collateral.
| | ---------------------------------

| | The
above debentures were traded on the Tel-Aviv Stock Exchange.
| | ----------------------------------------------------------------

33

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 16 
Customers deposits

| | a. | The
deposits are calculated on the basis of their present value at an annual
          discount rate of 4%.
| | -- | -----------------------------------------------------------------------------------------------------------

| | b. | Customers deposits
include NIS. 37,605 thousand (2001  NIS. 38,518           thousand) of linkage
increments accrued on the deposits.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------

# NOTE 17 
Liabilities for employee rights upon retirement, net

|December 31,                                          
|------------------------------------------------------
|
|
|Provision for severance pay (a)*                      
|Less: deposits in approved funds**                    
|                                                      
|                                                      
|Provision for early retirement pension(b)*            
|Provision for redemption of unutilized sick  leave (c)
|                                                      
|                                                      
|                                                      

| | * | Not
including NIS. 9,068 thousand (2001  NIS. 14,922 thousand) current portion of
liabilities for employee rights upon retirement, net which is included in Accounts
payable.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ** | The
deposits can be withdrawn subject to law. Accrued income on the deposits is included in
the statements of income.
| | -- | ---------------------------------------------------------------------------------------------------------------------

| | (a) | The
liabilities of the Company and its subsidiaries in respect of pension and
          severance indemnities are fully covered by provisions for severance
indemnities,           by deposits in approved funds and in managers insurance
policies. The           deposits in approved funds and in managers insurance plans
are not           included in the financial statements as they are not under the control
of the           Company.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | The
provision for pension benefits in case of early retirement of employees is
          computed at the discounted present value of the future liabilities of the
          Company for such retired employees. The Companys liability for early
          retirement is generally up to the time when the employee reaches retirement age
          and is measured as a fixed percentage of the maximum amount due to the employee
          from the pension fund. The rate of capitalization for computing the provision
is           6% per annum, (previous year 4%).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

34

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 17 
Liabilities for employee rights upon retirement, net (continued)

| | (c) | In
accordance with the labor agreements between subsidiaries and their           employees,
(men at age 65 and women at age 60-65) are entitled to receive a           partial
redemption of unutilized sick leave, subject to a ceiling of working           days. A
provision based on an actuarial calculation has been made in the           financial
statements for covering the aforesaid liability. The provision is           partly based
on an actuarial calculation and partly on past experience based           inter-alia, on
a net capitalization rate of 3%.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 18  Linkage
of monetary balances

|                      | December 31, 2002 | December 31, 2001
|--------------------- | ----------------- | -----------------
|
|
|Assets:               |                   |                  
|Cash and cash         |                  
|equivalents           |                   | -                
|Trade receivables and |                  
|Receivables on        |                  
|Account of projects   |                  
|in progress           |                   | 13,912           
|Accounts receivable   |                   | 39,925           
|Investment in capital |                  
|notes and loans       |                   | 7,336            
|Long-term loans       |                   | 72,727           
|                      |                   |                  
|                      |                   | 133,900          
|                      |                   |                  
|Liabilities:          |                  
|Credit from banks and |                  
|others(not including  |                  
|Current portion)      |                   | 1,160            
|Trade payables        |                   | -                
|Accounts payable      |                   | 27,188           
|Long-term liabilities |                  
|and debentures        |                  
|(including current    |                  
|portion)              |                   | 847,791          
|Customers' deposits   |                   | 62,226           
|Capital notes         |                   | -                
|                      |                   |                  
|                      |                   | 938,365          
|                      |                   |                  

*Primarily U.S.
dollars

**Part
of these unlinked balances are non-interest bearing.

Against the excess of foreign
currency linked liabilities over assets in the amount of approximately NIS. 155,000
thousand (2001-approximately NIS. 166,200 thousand). Sonol holds fuel and refined products
inventories amounting to approximately NIS. 185,400 thousand, (2001-approximately NIS.
257,400 thousand) which are mainly Security inventories valued according to the changes in
the rate of exchange of the US dollar as explained in Note 2.C.1

35

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 19  Capital

| | a. | Nominal
values
| | -- | --------------

|Authorized
December 31,        | Issued and Paid *
December 31,
|------------------------------ | ------------------------------
|
|
|225,000,000 Ordinary shares of |                               
|NIS 1.- each                   |                               
|                               |                               

| | *139,335,657
ordinary shares.
| | -----------------------------

| | As
of December 31, 2002 a consolidated company holds 1,565,540 ordinary shares of the
Company. (December 31, 2001  626,912).
| | -----------------------------------------------------------------------------------------------------------------------------

| | b. | Earnings
per share
| | -- | ------------------

| | 1. | The
adjusted net income used in computing earnings per share is           as follows:
| | -- | -------------------------------------------------------------------------------------

|                                     | Year ended December 31,
|------------------------------------ | -----------------------
|
|
|Net income per statement of income   |                        
|Less loss resulting from conversion  |                        
|of debentures  (series 1 and 2)*     |                        
|                                     |                        
|Net income used in computing         |                        
|primary earnings per share           |                        
|                                     |                        
|Add (deduct) theoretical income      |                        
|deriving from:                       |                        
|Conversion of debentures (series 1)* |                        
|Conversion of debentures (series 2)* |                        
|                                     |                        
|Net income used in computing         |                        
|the diluted earnings per share       |                        
|                                     |                        

36

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 19  Capital
(continued)

|b. | Earnings per
share (continued)
|-- | ------------------------------

| | 2. | Weighted
number of ordinary shares (NIS. 1 par value) used in the computation of
          earnings per share:
| | -- | --------------------------------------------------------------------------------------------------------------

|                                        | Year ended December 31,
|--------------------------------------- | -----------------------
|
|
|Share capital used in computing primary |                        
|Earnings per share                      |                        
|                                        |                        
|Add - theoretical share capital         |                        
|that may derive from:                   |                        
|Conversion of debentures (series 1)*    |                        
|Conversion of debentures (series 2)*    |                        
|The share capital used in computing the |                        
|                                        |                        
|diluted earnings per share              |                        
|                                        |                        

| | 3. | For
examining the probability of conversion or exercise of convertible
               securities, the present value was computed using a discount rate of 2.5%
in 2001                and 6% in 2000, for securities linked to the exchange rate of the
U.S. dollar.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | *The
balance of convertible debentures was redeemed on November 30, 2002.
| | -------------------------------------------------------------------------

# NOTE 20  Net sales

|                         | Year ended December 31,
|------------------------ | -----------------------
|
|
|Commercial activities    |                        
|Manufacturing activities |                        
|Other activities         |                        
|                         |                        
|                         |                        
|                         |                        

| | *Reclassified
| | -------------

NOTE 21 - Cost of sales

|Year ended December 31,           
|----------------------------------
|
|
|Petroleum products and other      
|                                  
|Materials used**                  
|Labor and sub-contract work       
|Production costs                  
|Depreciation                      
|Batteries                         
|                                  
|Total cost of sales               
|                                  
|Decrease (Increase) in inventories
|                                  

| | * | Reclassified
| | - | ------------

| | ** | Financing
income (expenses) deriving from the erosion of dollar linked credit used as a source for
financing purchases of oil inventories is included in cost of sales. (see also note 2.C.)
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

37

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 21  Cost of
sales (continued)

|Year ended December 31, 
|------------------------
|
|
|Commercial activities   
|Manufacturing activities
|Other activities        
|                        
|                        
|                        

| | *Reclassified
| | -------------

# NOTE 22  Selling and
marketing expenses

|Year ended December 31,             
|------------------------------------
|
|
|Salaries                            
|Advertising and promotion           
|Depreciation and amortization       
|Maintenance of buildings, plants and
|filling stations                    
|Rent and taxes                      
|Transport and vehicle maintenance   
|Other expenses                      
|                                    
|                                    
|                                    

| | *Reclassified
| | -------------

# NOTE 23  General and
administrative expenses

|Year ended December 31,            
|-----------------------------------
|
|
|Salaries                           
|Depreciation and amortization      
|Consulting, legal and audit        
|Provision for doubtful accounts and
|bad debts                          
|Other expenses                     
|                                   
|                                   
|                                   

38

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# Note 24  Financing
expenses, net

| | Income
(Expenses) are derived from:
| | -----------------------------------

|                                            | Year ended December 31,
|------------------------------------------- | -----------------------
|
|
|Long-term debt                              |                        
|Negotiable securities, net                  |                        
|Other receivables and payables              |                        
|Short term loans received                   |                        
|Dollar linked convertible debentures        |                        
|Others, including erosion of other monetary |                        
|assets and  liabilities, net                |                        
|                                            |                        
|                                            |                        
|                                            |                        

| | *Reclassified
| | -------------

# NOTE 25 Other
(expenses) income, net

| | Consists
of:
| | ------------

|                                            | Year ended December 31,
|------------------------------------------- | -----------------------
|
|
|(Loss)gain on sale of investment in         |                        
|affiliated companies                        |                        
|Rent                                        |                        
|Dividends and shares received               |                        
|Management fees                             |                        
|Write-off of investments in an a affiliated |                        
|company carried at cost, and loan to        |                        
|affiliated companies                        |                        
|Write-off of oil and gas exploration        |                        
|rights(a)                                   |                        
|Others                                      |                        
|                                            |                        
|                                            |                        
|                                            |                        

| | (a)
          see also note 31.A.
| | ---------------------------------

| | *Reclassified
| | -------------

39

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 26  Income
tax expense

| | a. | The
Company and most of its subsidiaries are taxed under the Income Tax Law
               (Inflationary Adjustments)  1985, effective as of the tax year 1985,
which                introduced the measurement of results for income tax purposes in
real terms. The                various adjustments required by the above mentioned law
are made in order to                align taxation to a real income basis. Nevertheless,
the adjustments of the                nominal income according to the Income Tax Law are
not always identical to the                inflationary adjustments made in the financial
statements in accordance with the                opinion of the Institute of Certified
Public Accountants in Israel. As a result,                differences arise between the
adjusted income in the statement of income and the                adjusted income for
income tax purposes. Regarding deferred taxes for these                differences, see
Note. 2.J.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Deferred
taxes
| | -- | --------------

| | The
deferred taxes are regarding:
| | ---------------------------------

|                              | Depreciable
fixed assets | Deductions
and losses
carried for-
ward for tax
Purposes | Liabilities for
employee
rights upon
retirement | Others | Total
|----------------------------- | ------------------------ | -------------------------------------------------------- | ----------------------------------------------- | ------ | -----
|
|
|Balance as of January 1, 2001 |                          | (7,079                                                   | )                                               | 578    |      
|Changes in 2001:              |                         
|Current                       |                          | (1,271                                                   | )                                               | (209   | )    
|Reduction on account of       |                         
|a company no longer           |                         
|consolidated                  |                          | -                                                        |                                                 | (272   | )    
|Addition on  account of       |                         
|investment in a consolidated  |                         
|company                       |                          | (62,348                                                  | )                                               | 204    |      
|                              |                          |                                                          |                                                 |        |      
|Balance as of                 |                         
|December 31, 2001             |                          | (70,698                                                  | )                                               | 301    |      
|Changes in 2002:              |                         
|Current                       |                          | (446                                                     | )                                               | 3,119  |      
|Addition for investment in a  |                         
|new consolidated company      |                          | -                                                        |                                                 | 471    |      
|                              |                          |                                                          |                                                 |        |      
|Balance as of                 |                         
|December 31,2002              |                          | (71,144                                                  | )                                               | 3,891  |      
|                              |                          |                                                          |                                                 |        |      

40

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 26  Income
tax expense (continued)

| | The
deferred taxes are presented in the balance sheet as follows:
| | -----------------------------------------------------------------

|                                               | Year ended December 31,
|---------------------------------------------- | -----------------------
|
|
|In current assets                              |                        
|In current liabilities                         |                        
|In intangible assets and deferred charges, net |                        
|In long-term liabilities                       |                        
|                                               |                        
|                                               |                        
|                                               |                        

| | c. | The
provision for taxes on income in the statements of income consists of:
| | -- | --------------------------------------------------------------------------

|                                 | Year ended December 31,
|-------------------------------- | -----------------------
|
|
|Current taxes, including erosion |                        
|of advance tax payments          |                        
|Deferred taxes, net              |                        
|                                 |                        
|                                 |                        
|Taxes on account of prior years  |                        
|                                 |                        
|                                 |                        
|                                 |                        

| | d. | Final
tax assessments:
| | -- | ----------------------

| | The
Company and Sonol reached a compromise agreement with the income tax authorities
regarding tax assessments for the years 1998-1999 for the Company and for the years
1997-1999 for Sonol. As part of the assessment, the companies paid NIS. 9 million,
including interest and linkage differences. The net effect of the compromise agreement
which, in part, results from timing differences in the recognition of expenses, and for
which the Company provided for in previous years, was included in this years third
quarter financial statements. Supergas reached a compromise assessment with the income
tax authorities regarding tax assessments for the year 1995-1999. The cost of the
agreement, which is immaterial to the Company, was included in this years first
quarter financial statements. Sprint Motors Ltd. received final tax assessments through
the year 1998. All other companies in the group, have final tax assessments through the
years 1997 1998 pursuant to the terms of Paragraph 145 (a)(2) of the Israel Income
Tax Ordinance (statute of limitations).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

41

---

---

GRANITE HACARMEL INVESTMENTS
LIMITED AND SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002

---

# NOTE 26  Income
tax expense (continued)

| | e. | Reconciliation
between the theoretical tax on the reported income and the tax on                incomeincluded
in the statements of income:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------

|                                               | Year ended December 31,
|---------------------------------------------- | -----------------------
|
|
|Statutory rate of tax                          |                        
|                                               |                        
|The theoretical tax at the applicable tax rate |                        
|Erosion of advanced tax payments               |                        
|Differences in the definition of capital,      |                        
|assets and expenses for tax purposes,          |                        
|and others, net                                |                        
|Provision in respect of prior years            |                        
|                                               |                        
|                                               |                        
|                                               |                        

42

---

---

GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002 
 NOTE 27  Segment reporting Segment reporting by products and services:The accounting principles applied in the Segment reporting are in accordance with those
used for preparing the consolidated financial statements of the Company.  Year ended December 31, 2002Fuel and
       
        Gas
     
     
     Paints and
       
        Chemicals
     
     
     Others
     
     
     ConsolidatedNIS. (thousands)Profit and loss data:
       
        IncomeExternal sales
     
     
     2,436,459
     
     
     403,271
     
     
     110,127
     
     
     2,949,857Sales within segments
     
     
     -
     
     
     -
     
     
     -
     
     
     -Net Sales
     
     
     2,436,459
     
     
     403,271
     
     
     110,127
     
     
     2,949,857ResultsSegment results
     
     
     145,908
     
     
     43,030
     
     
     (537
     )
     
     188,401Unallocated expenses
     
     
     
     
     
     
     
     
     
     
     
     (14,254
     )Income from operations
     
     
     
     
     
     
     
     
     
     
     
     174,147Financing expenses
     
     
     
     
     
     
     
     
     
     
     
     (90,988
     )Financing income
     
     
     
     
     
     
     
     
     
     
     
     4,212Other expenses, net
     
     
     
     
     
     
     
     
     
     
     
     (24,289
     )Taxes on income
     
     
     
     
     
     
     
     
     
     
     
     (30,853
     )Minority interests in consolidated
       
         Companies
     
     
     
     
     
     
     
     
     
     
     
     (2,312
     )Equity income (loss) of affiliated
       
         companies, net
     
     
     (324
     )
     
     764
     
     
     (5,724
     )
     
     (5,284
     )Net income
     
     
     
     
     
     
     
     
     
     
     
     24,633Additional informationSegment assets
     
     
     2,124,701
     
     
     643,080
     
     
     229,620
     
     
     2,997,401Investments on equity basis
     
     
     9,155
     
     
     12,756
     
     
     97,724
     
     
     119,635Unallocated assets
     
     
     
     
     
     
     
     
     
     
     
     160,089Total consolidated assets
     
     
     
     
     
     
     
     
     
     
     
     3,277,125Segment liabilities
     
     
     271,576
     
     
     85,022
     
     
     46,403
     
     
     403,001Unallocated liabilities
     
     
     
     
     
     
     
     
     
     
     
     2,228,468Total consolidated liabilities
     
     
     
     
     
     
     
     
     
     
     
     2,631,469Capital investments
     
     
     101,291
     
     
     16,487
     
     
     32,527Depreciation
     
     
     90,397
     
     
     22,579
     
     
     7,426 43 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002 
 NOTE 27  Segment reporting (continued) Segment reporting by products and services Year ended December 31, 2001*Fuel and
       
        Gas
     
     
     Paints and
       
        Chemicals
     
     
     Others
     
     
     ConsolidatedNIS. (thousands)Profit and loss data:IncomeExternal sales
     
     
     2,493,313
     
     
     191,017
     
     
     58,616
     
     
     2,742,946Sales within segments
     
     
     -
     
     
     -
     
     
     -
     
     
     -Net Sales
     
     
     2,493,313
     
     
     191,017
     
     
     58,616
     
     
     2,742,946ResultsSegment results
     
     
     143,077
     *
     
     14,302
     
     
     10,310
     
     
     167,689Unallocated expenses
     
     
     
     
     
     
     
     
     
     
     
     (9,551
     )Income from operations
     
     
     
     
     
     
     
     
     
     
     
     158,138Financing expenses
     
     
     
     
     
     
     
     
     
     
     
     (80,146
     )*Financing income
     
     
     
     
     
     
     
     
     
     
     
     3,067Other expenses, net
     
     
     
     
     
     
     
     
     
     
     
     10,014Taxes on income
     
     
     
     
     
     
     
     
     
     
     
     (38,813
     )Minority interests in consolidated
       
         Companies
     
     
     
     
     
     
     
     
     
     
     
     (1,795
     )Equity income (loss) of affiliated
       
         companies, net
     
     
     (946
     )
     
     -
     
     
     951
     
     
     5Net income
     
     
     
     
     
     
     
     
     
     
     
     50,470Additional informationSegment assets
     
     
     2,069,850
     *
     
     639,037
     
     
     194,580
     *
     
     2,903,467Investments on equity basis
     
     
     12,689
     
     
     12,148
     
     
     112,401
     
     
     137,238Unallocated assets
     
     
     
     
     
     
     
     
     
     
     
     168,593Total consolidated assets
     
     
     
     
     
     
     
     
     
     
     
     3,209,298Segment liabilities
     
     
     244,758
     
     
     101,154
     
     
     33,512
     
     
     379,424Unallocated liabilities
     
     
     
     
     
     
     
     
     
     
     
     2,197,126Total consolidated liabilities
     
     
     
     
     
     
     
     
     
     
     
     2,576,550Capital investments
     
     
     123,128
     *
     
     11,023
     
     
     7,503
     *Depreciation
     
     
     77,130
     
     
     9,255
     
     
     3,896* Reclassified**The results of Tambour and its consolidated subsidiaries have been included as of
their acquisition date.  44 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002 
 NOTE 28 - Collateral, commitments and contingent liabilities A.
     Floating and fixed chargesDecember 31,
       
        2002
       
        NIS.(thousands)
     
     Collateralized byBank overdrafts
     
     13,185
     
     
     Floating charges on current assets of the main  subsidiaries.Short-term loans from
       
         Banks
     
     994,805
     
     
     Floating charges on the assets of the Company and its main subsidiariesAccrued interest on short-
       
         term bank loans is included
       
         in Other payables
     
     9,536
     
     
     Floating charges on the assets of the Company and of the main subsidiariesLong-term bank loans (a)
     
     1,076,143
     
     
     A charge on the shares of a subsidiary company and floating charges on the assets of the
main subsidiaries and fixed charges on portions of the fixed assets of some of the Companys main subsidiaries.(see note 15.A.2, 28.C.2.a and note (a) below)Investment grants
     
     705
     
     
     Floating charges on part of the fixed assets of consolidated companiesConvertible debentures
     
     -
     
     
     The balance of convertible debentures was redeemed on November 30, 2002. A floating
charge subordinated to other floating charges on all the assets of the Company has not yet been canceled.  (a)
     At the end of the second quarter of 2001, the Company acquired 87% of Tambours
shares for approximately NIS. 488 million and in the third quarter acquired the remaining shares through a public tender offer for an
amount of approximately NIS. 73 million. As a result of the acquisition, Tambours shares were de-listed from the Tel-Aviv Stock
Exchange. The acquisition was financed by long-term index linked and unlinked bank loans. The acquired shares were collateralized to
the bank. 50% (2001-80%) of the loans are non-recourse. 45 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002 
 NOTE 28 - Collateral, commitments and contingent liabilities (continued) B.
     Liabilities and contingencies1.
     Indemnification exemption and Insurance of directors and senior officersIn September 2002, a special general meeting of the Company approved the following
resolutions:a.
     To indemnify eligible directors and senior officers of the Company and its subsidiaries,
in the past, present and future, beginning as of January 1, 1995. This indemnificantion is limited to the events and to the amounts
stated in the resolution.b.
     To exempt eligible directors and senior officers of the Company and its subsidiaries
from all liabilities on account of their obligation to act judiciously in regard to the Company.c.
     To provide liability insurance for eligible directors and officers of the Company and
its subsidiaries, in the past, present and future, beginning as of January 1, 1995. Pursuant the above, the Company insured its
directors and senior officers in a total amount of $ 10 million.2.
     Pending litigationa.
     Claims (mostly legal claims) arising in the normal course of business have been lodged
against consolidated and affiliated companies. In the opinion of the management, based on the opinions of their legal counsel,
litigation costs which are both probable and estimable have been accrued.  In certain cases, it is not possible to determine the
final outcome of such claims.b.
     As a result of arbitration proceedings between the Fuel Authority and the agents
and station owners organization, to which Sonol was not a party, the arbitrator ruled that the Fuel Authority is to reimburse
the station owners for the depreciation on their investments in stations. The arbitrators award was confirmed by the district
court. The Fuel Authority, in turn, demanded that the oil marketing companies reimburse the station owners for the depreciation (to
the extent payable) since it claims that the depreciation component was previously recognized by the Fuel Authority within the
framework of the Price Structure. In the opinion of Sonols legal counsel, there is no basis for the fuel Authoritys
demand. By virtue of the award, twenty five third party proceedings have been filed by the Government against Sonol regarding claims
filed against the Government by station owners for the reimbursement of the
       investment in the construction of stations. The total of these proceedings amounts to NIS. 43 million. In a ruling dated
October 4, 2002, the Jerusalem district court rejected all the claims made by the various station owners against Sonol in third party
proceedings, for the reimbursement of their investments in stations. This ruling was appealed to the supreme court. In the opinion of
the companys legal counsel, the appeals prospects are not favorable. 46 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002 
 NOTE 28- Collateral, commitments and contingent liabilities (continued) B.
     Liabilities and contingencies (continued)2.
     Pending litigation (continued)c.
     In the years 1993-1995, three claims were lodged against a formerly affiliated
company and against its shareholders, which included Sonol. The total amount of the claims is approximately NIS 65 million relating
to the sale of fuel products pursuant to restrictive trade practices (as the plaintiffs allege) among the fuel companies. In the
opinion of  Sonols and the formerly affiliated companys legal counsels, the companies have a sound defense against
the claims.d.
     In 1999, a filling station operator, who received operating rights within the
framework of an agreement between war invalids and the rehabilitation department of the Ministry of Defense, the Israel Land
Authority and the fuel marketing companies, filed an action in the district court for a ruling declaring the cancellation of
agreements between him and Sonol, claiming them to be illegal restrictive trade agreements in accordance with the Law for Restrictive
Trade Practices.  The operators claim was rejected by the Court.  The operator filed an appeal with the Supreme Court
contesting the facts of the case and the courts conclusions. The appeal was referred to mediation which was unsuccessful.
Therefore the appeal will be heard. In the opinion of Sonols legal counsel it is impossible to predict  the outcome of the
appeal.In two separate divergent rulings by district courts dealing with similar cases against
another oil company, two divergent decisions were handed down. In one case the claimants claim was rejected, and in another case, the
claimants claim was accepted. Appeals were filed against the two rulings with the Supreme Court who will hear both appeals.Another war invalid operating a different filling station has also submitted a claim to
the court for a declarative judgement claiming  that agreements between him and Sonol are restrictive trade arrangements and,
therefore, void.  In addition, the claimant  is asking for a  declaration that the operating agreement includes
discriminatory provisions in a standard contract, and that Sonol  be ordered to pay him approximately NIS. 2.1 million as a
result of inflated prices which he claims Sonol charged him over the years. The case is at the hearing stage. It can be assumed, the
ruling regarding this claim, as far as it concerns that of a restrictive trade agreement, will be the same as the above claim. If the
arguments for the nullification of the agreements, as a result of their being restrictive arrangements, will be rejected by the
court, Sonols defenses against the station operators financial claims
       have a reasonable to good chance of succeeding. 47 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002 
 NOTE 28 - Collateral, commitments and contingent liabilities (continued) B.
     Liabilities and contingencies (continued)2.
     Pending litigation (continued)e.
     In 2000, the operators of one of Sonols filling stations, against whom Sonol filed
a claim in the district court in Tel-Aviv, instituted legal proceedings against Sonol. In one proceeding, they requested a
declarative judgement stating that inasmuch as a filling station operated by them was to be freed under the terms of the
arrangement reached between the fuel companies and the Controller of Restrictive Trade Practices, the contractual relationships
between them and Sonol should be related to as having been terminated. It was also claimed that all agreements between the plaintiffs
and Sonol be considered restrictive agreements and, thereby, cancelled. In another proceeding, the above operators are claiming an
amount of  approximately NIS 16 million, alleging having paid exorbitant prices on account of the fuel products they purchased
from Sonol, and maintaining that inasmuch as the contractual arrangements between
       them and Sonol have been terminated as claimed in the other proceeding, Sonol  had no right to charge such prices. In the
opinion of Sonols legal counsel defense prospects are good, even though they are unable to determine the defense prospects
regarding the claim of a restrictive agreement. See also sub-paragraph (d) above.  If this claim is accepted there is a risk
that the financial claim against Sonol will also be accepted (even though, in such a case, the amount of the claim is exaggerated).
Should the above claim regarding a restrictive agreement not be accepted, the prospects of the financial claim against Sonol will be
weak.f.
     In the year 2000, former operators of a filling station filed a monetary claim against
Sonol in the amount of approximately NIS 4.5 million on account of alleged exorbitant prices paid for of fuel products purchased from
Sonol, maintaining that the contractual arrangements between them and Sonol have been cancelled and/or terminated, being restrictive
arrangements. At this time, Sonols legal counsel are of the opinion that Sonols defense claims, although difficult to
assess, are not insignificant. The matter was referred to mediation which was unsuccessful and, therefore, the case will be heard
before the court.g.
     Sonol filed a claim against one of its agencies for approximately NIS 40 million in the
Tel Aviv district court on account of an unpaid balance and damages caused to the Company, alleging that the agency violated the
terms of the agency agreement by dealing with one of Sonols competitors. The agency, in turn, filed a counterclaim in the
amount of approximately NIS 62 million, stating various causes, including a claim that the contractual agreement between it and Sonol
is a restrictive agreement. 48 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002 
 NOTE 28 - Collateral, commitments and contingent liabilities (continued) B.  Liabilities and contingencies (continued)2.
     Pending litigation (continued)In the opinion of Sonols management, based on opinion of the companys legal
counsel, the prospects of Sonols claim against the agency relating to amounts owed to Sonol are good and, regarding the amount
claimed for compensation on account of the violation of the agency agreement, such amount is subject to deliberation by the court.
Regarding the prospects of the agencys counterclaim, Sonols legal counsel are unable, at this time, to estimate its
prospects, insofar as it relates to the claim of a restrictive agreement.  Should the claim of a restrictive arrangement be
rejected by the court, the prospects of the counterclaim will not be favorable.  At this time, the dispute has been referred to
mediation.h.
     In 1999, an agency of Sonol, which also operates stations on Sonols behalf, filed
a claim against Sonol asking for declarative and monetary relief.  The agency claims that the agreement in effect with Sonol, in
regard to one of the stations is a restrictive trade arrangement, and is also a uniform contract with discriminatory provisions and
is thus void.  In addition the agency is asking that the station be freed under the terms of  the arrangement
with the Controller of Restrictive Trade Practices, and is, therefore, requesting declaratory relief from the court regarding the
cancellation of rights granted Sonol to the land on which the station is located, including leasehold and other proprietary rights.
The agency is also asking that Sonol be required to pay approximately NIS. 16 million on account of the inflated prices which Sonol
is alleged to have charged over the years. It should be noted that
       Sonol filed a monetary counterclaim against the same agency in the amount of approximately NIS. 20 million on account of
amounts due from the agency from the purchase of fuel products from Sonol. A date has been set for pre-trial deliberations.At this time, legal counsel is unable to assess the defense prospects in regard to the
alleged restrictive agreement. See also note (d). Should the district court rule in favor of this claim, there is also a risk that
the court will accept the monetary claim against Sonol (which, even in such case, the amount of claim is by all accounts
exaggerated). If the agencys claim of a restrictive agreement is not accepted by the court, the prospects of the monetary claim
against Sonol, are weak.i.
     In May 1997 a filling station owner filed a claim against Sonol in the amount of
approximately NIS. 7 million, claiming that the company owes him commission differentials on account of
prior years. In addition, the station owner is asking the court to declare the contracts signed between him and Sonol as void,
claiming, inter-alia, that they are a restrictive arrangement .At this time, legal counsel is unable to estimate the defense
prospects regarding the claim of a restrictive trade agreement. If the claim regarding a restrictive agreement is not accepted,
Sonols prospects for a favorable decision are reasonable. 49 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002  
 NOTE 28 - Collateral, commitments and contingent liabilities (continued) B.  Liabilities and contingencies (continued)2.
     Pending litigation (continued)Two additional claims were submitted by two filling station operators in the amount of
approximately NIS  4.3 million, for commission differentials they claim, are due them. These were submitted subsequent to
Sonols demand that the station operators relinquish the operation of Sonols stations. In one claim, in the amount of NIS.
1.2, million, Sonol reached an agreement subsequent to the balance sheet date, whereby the parties would rescind their claims against
one another.  In the opinion of Sonols legal counsel, the second claims prospects against Sonol are weak.j.
     In April 2001 Sonol filed legal claims four of its station operators for their eviction
from all four stations and also for the recovery of a debt in the amount of NIS. 9.6 million. Regarding the eviction claim, the
defendants claimed that Sonol entered into a new agreement with them which granted them the right to continue operating the stations
for an additional period, and simultaneously, the station operators filed a counter claim for damages in the amount of NIS. 10
million. In November 2002, the Tel-Aviv magistrates court ruled in favor of Sonol for the defendants eviction, and the
stations were returned to Sonol. The mutual financial claims have not yet been heard by the court. In the opinion of the Sonols
management, based on its legal counsel, the prospects in regard to the claim against Sonol are weak, while, on the other hand, Sonol
has a sound basis for its claim against the station operators.k.
     In December, 2001 filling station operators filed a claim in court against Sonol asking
for declarative relief, by granting them rights in the station, preventing Sonol from terminating the agreement appointing them as
the station operators and integrally connecting theirs and Sonols rights to the station. Furthermore, they asked the court to
be recognized as protected tenants regarding the station. In addition, they asked the court to declare the agreements between
them and Sonol to be a restrictive trade arrangement and to order Sonol to sell them fuel products at free market
conditions and prices. The station operators are also claiming an amount of approximately NIS. 4.7 million, claiming that as a result
of a restrictive trade arrangement, Sonol charged them prices in excess of those they would have paid under free market
conditions, and, also, claiming that Sonol acted in a prejudiced way
       against them by charging them higher prices than those which Sonol sells to other operators and agents. Sonol submitted its
defense and, also filed a counterclaim for the eviction of the station operators.In the opinion of the companys legal counsel, Sonol has a sound defense albeit, at
this time, they are unable to predict the defense prospects regarding the claim of a restrictive trade  arrangement. 50 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002  
 NOTE 28  Collateral, commitments and contingent liabilities (continued) B.  Liabilities and contingencies (continued)3.
     Pending litigation (continued)If the claim to nulify the agreements on the grounds that they are a restrictive trade
arrangement is not accepted, then according to the estimate of the companys legal counsel, on the basis of the facts submitted
to them stating, inter-alia, that the station and agency in question purchase fuel products at similar prices as those paid by other
filling stations of the same type within the Sonol network of stations and other agencies, then Sonols defense prospects as
they relate to the financial claim are reasonable.l.
     In February 2000 a motion was filed against Sonol, together with Paz Oil Company Ltd.
and Delek the Israel Fuel Corporation Ltd. to allow a class action relating to the alleged collusion in the fixing of the
price of gasoil to consumers.  This claim, after being updated and if allowed as a class action, will amount to approximately
NIS. 249.6 million against all the companies, of which Sonols share is approximately to NIS. 58.6 million, Sonol denies the
claim and, according to its legal counsel, chances are good that it will not be allowed as a class action.m.
     In May, 2001 a motion was filed in the Jerusalem district court against Sonol and its
subsidiary company, Sprint Motors Ltd. (Sprint) and four additional companies by customers who purchased fuel products in
filling stations, contending that the defendants charged an illegal service charge from their customers over a period of
many years. The plaintiffs have asked the court to recognize their claim as a class action. The amount of the claim is NIS. 5.30 and,
should the court allow a class action, it will total approximately NIS. 404 million. From the claim, it is not clear as to what is
Sonols and Sprints share of this amount. In the opinion of the Companys management and its legal counsel, the
chances of the claim to be recognized as a class action are weak.n.
     In April 1999, a claim in the amount of approximately NIS 8 thousand was filed in the
Tel-Aviv district court against Supergas and four other gas companies by several consumers claiming non performance of periodic
inspection of gas systems used by the consumers, the sale of a product by deception causing damages, loss of comfort and damage to
their safety, thus endangering the lives of consumers.  The claim was subsequently amended to NIS. 4.9 thousand.  The
plaintiffs have asked that the court order the gas companies to make the periodic inspections, to pay damages in the amount mentioned
above of approximately NIS 0.8 thousand per plaintiff, and/or issue a declarative order stating that the plaintiffs are entitled to a
refund of the amount paid to the defendants from the time agreements were entered into and, also, other orders. Concurrently, the
plaintiffs asked that the court consider the claim as a class action. 51 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002  
 NOTE 28  Collateral, commitments and contingent liabilities (continued) B.  Liabilities and contingencies (continued)2.
     Pending litigation (continued)The court ruled only partially in favor of the class action, allowing the claim to be
submitted as a class action for declaratory relief only, in accordance with the Consumer Protection Law, regarding the gas
companies obligation to refund to their customers amounts actually paid for periodic inspections which did not take place,
retroactive to the date of agreements entered into with each customer.  The court rejected the claim for financial and other
remedies against the gas companies.  Supergas has requested permission from the Supreme Court to appeal the above ruling and, in
the opinion of its legal counsel, has valid causes for appeal, both factually and legally. In the opinion of the Companys
management, Supergas has recorded an adequate provision in its books for any potential exposure.o.
     In June, 2001, a claim was filed in the Tel Aviv district court against Supergas,
together with a request that the claim be recognized as a class action, in the amount of NIS. 133 million. In addition, Supergas was
informed of two additional claims filed against two other gas companies and to which Supergas was included on a formal basis only.
The plaintiffs claim to be Supergas customers of central gas and contend, inter-alia, that Supergas and other gas companies
unlawfully charge their customers a periodic fixed  charge which was not agreed upon in contracts signed between them and
Supergas.  Therefore, they contend that Supergas should refund the amounts paid and, in addition, should make an
appropriate compensatory payment in a manner as to be determined by the court. In the opinion of Supergass legal
counsel, based on the data presently available, Supergas prospects of success are greater
       than those of the plaintiffs.p.
     In August, 2001 Petroleum and Energy Infrastructures Ltd. and Oil Products Pipeline Ltd.
(plaintiffs) filed a claim in the amount of NIS. 6.7 million against Sonol and two other fuel companies. According to the
plaintiffs, who are engaged in the pumpover of fuel products through a network of pipelines, they also serve as a clearing
house for the defendants whereby the defendants sell and buy through the plaintiffs the excess/shortage of amounts of fuel that
have accumulated. The plaintiffs claim that Sonol and others unlawfully netted amounts from payments due to them, thus causing
financial losses to the plaintiffs. The amount claimed from Sonol is approximately NIS. 1.3 million. Sonol has not yet submitted its
defense. In the opinion of its legal counsel, inasmuch as the claim is at an early stage, it is difficult to assess its prospects.
Nevertheless Sonol has good defense claims. 52 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002  
 NOTE 28  Collateral, commitments and contingent liabilities (continued) B.  Liabilities and contingencies (continued)2.
     Pending litigation (continued)q.
     A group of greenhouse owners, claiming damage caused to them in the amount of
approximately NIS. 9.6 million as a result of the use of defective light fuel oil produced by Oil Refineries Ltd. and sold to them by
the oil marketing companies, has filed a claim against, Sonol, Oil Refineries Ltd., Paz Oil company Ltd., Delek the
Israel  Fuel Corporation Ltd. and  Alon Israel Fuel Company Ltd. Sonols share of this claim amounts to
approximately  NIS. 3.4 million. In the opinion of Sonols management, Sonol has a sound defense against this claim and, in
addition, has insurance coverage included in a product liability policy.r.
     Pi-Gliloth Petroleum Terminals and Pipeline Ltd. filed a financial claim against
Petroleum Products Pipeline Ltd. and the fuel marketing companies Sonol Paz Delek and
Dor in the amount of approximately NIS. 8.1 million. The plaintiff claims that it was entitled by law to payment from the
defendants on account of storage of fuel products in storage transfer tanks it owns in its Ashdod installation. The amount claimed
from Sonol is approximately NIS. 1.2 million. The claim has been forwarded to arbitration. In the opinion of the Sonols legal
counsel, its prospects for receiving a favorable ruling are good.s.
     Petroleum Infrastructures Ltd. filed a financial claim in a summary procedure in the
amount of approximately NIS. 2.8 million against Sonol  Paz, and Delek on account of the
netting of the said amount by the defendants from payments, under the pretext that gasoil stored by the plaintiff on their behalf was
deleted, at some stage, from its records. The amount claimed from Sonol is NIS. 0.7 million. To date, no reply has been received. The
prospects of  Sonols defense claims are good.t.
     Following the filing of a claim against DanCooperative for Public Transportation
Ltd (Dan) in the amount of NIS. 1.6 million for the return of equipment loaned to Dan by Sonol for the construction of an
internal filling station, in accordance with an agreement signed between Dan, Sonol, Paz Oil Company Ltd., Delek the
Israel Fuel Corporation Ltd. and Sonol. Dan, in June 2002, submitted a counterclaim in the magistrates court in Tel-Aviv in the
amount of NIS. 10 million.In its counterclaim, Dan contends that the agreement signed with the three  fuel
companies is illegal and, being a restrictive arrangement entered into as a result of the companies taking advantage of their
monopolistic power, is therefore, null and void. Dan maintains that during the period between 1980-1989 when it purchased fuel
products from the fuel companies, it paid exorbitant prices in amounts totalling NIS. 15 million. However, due to the cost of the
court fee, its counterclaim was submitted in an amount of NIS. 10 million. Sonols share of this claim amounts to approximately
NIS. 2 million. The company has submitted its defense. In the opinion of Sonols legal counsel, the defense prospects are more
favorable than these of the plantiffs. 53 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002  
 NOTE 28  Collateral, commitments and contingent liabilities (continued) B.  Liabilities and contingencies (continued)2.
     Pending litigation (continued)u.
     Two investigations have been instituted by the Israel Police and the Ministry of Energy
against Supergas regarding two instances  of deaths of customers from leaks of poisonous gas from gas heaters. In one instance,
the prosecution decided to prosecute a Supergas technician and not to prosecute Supergas or any of its managers. In the second, no
recommendation has yet been received from the police or from the prosecution.v.
     In August 2000, Bank Hapoalim filed a claim against Supergas for the payment of an
amount of NIS. 3.6 million they claim is owed to the bank by Etzion Gas Products (1998) Ltd. (50% ownership). No date has yet been
set for deliberations. Supergas filed for the total cancellation of this claim inasmuch as it did not provide any guarantees for
amounts owed by Etzion Gas Products (1998) Ltd. Supergas request was denied and it has appealed the decision. In the opinion of
the Companys management and its legal counsel, Supergas defense prospects are good.w.
     In November, 2002, a claim for declaratory relief was filed against Mini Israel Limited
Partnership, (Mini Israel) in which the Company holds a 35% interest, claiming that project built and managed by Mini
Israel was illegally taken from a resource project written by two students working on their masters degree in business
administration. According to the claimants, the research project included a business plan and feasibility studies to be used in
constructing a similar project and that use of the claimants research  project in building the project constitutes unjust
enrichment, the theft of proprietary secrets, breach of trust and breach of contractual liability. As of the date of the financial
statements, Mini Israel has not yet submitted its defense. In the opinion, of the Mini Israels management, based on the opinion
of its legal counsel, the defense prospects are good.x.
     Concerning an additional claim against Sonol  see note 31(E). 54 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002  
  NOTE 28 - Collateral, commitments and contingent liabilities (continued)C.
     The consolidated companies are committed as of  balance sheet date as
follows:(1)     Commitments:
     NIS. thousandsAcquisition of fixed assets
     186,624Suppliers of fuel, luboils and equipment(delivery January-December 2003)
     711,432Completion of projects
     78,421Rental leases and obligations regarding stations, facilities andbuildings in accordance with signed agreements (*)
     1,313,843Lease obligation for a computer and other equipment fora period of up to one year
     1,065Automobile operating lease agreements (**)
     8,566Amounts payable on account of management services (see note 30b)
     6,821(*)  Rental and leasing liabilities:2003
     107,0112004
     106,6512005
     96,9202006
     88,9902007
     102,1652008 and thereafter
     812,1061,313,843(**)Liability in respect of automobile operating lease agreements:2003
     3,7412004
     3,1702005
     1,6558,566(2)      Commitments for investments:a.
     In 1998, a consolidated company entered into a joint venture to construct a building
project on jointly owned land. Construction which began in September 2000, will include a 23 story office building covering an area
of approximately 23,000 square meters and underground parking facilities. In addition, the company signed an agreement whereby it
agreed to pay the city of Tel Aviv an amount of NIS. 12.2 million, linked to the Index, for betterment taxes.  As of the balance
sheet date, the balance of the liability payable amounted to NIS. 9.2 million. The partners in the joint venture, also entered into
an agreement with a bank whereby the bank will provide construction financing throughout the construction period.  In return,
the consolidated company collateralized its rights to the land and future payments from the project to the bank.b.
     Should the restructuring of the companies in the group be realized (see note 1), it is
expected that the Company will incur costs, primarily professional fees, taxes on the transfer of assets between companies and other
fees.  At this time, the extent of these costs is not known. 55 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002  
  NOTE 28 - Collateral, commitments and contingent liabilities (continued)C.
     (2)
     Commitments for investments: (continued)c.
     In the year 2000, The Controller of Oil Interests in the Ministry of National
Infrastructures (Controller) granted a license to Granite  Sonol Oil and Gas Drilling Limited Partnership for oil
exploration on a tract of land of over 400,000 dunam located between Or Yehuda in the north, Kiryat Malachi in the south and Mishmar
Ayalon in the east and known as License No. 302/ Modiin. Under the terms of the license, the Limited Partnership was
obligated to carry out certain preliminary activities by October 1, 2001. A dispute has arisen between the Controller and the
Partnership in regard to carrying out the preliminary activities. On January 9, 2002 the Controller issued a warning to the Company
informing it of his intention to revoke its license, due to the non-fulfillment by the company of the agreed upon work plan, with a
recommendation that the Company make all the necessary corrections within 60 days in
       order to prevent the revocation of the rights granted to the Limited Partnership under the terms of the license. The Company
appealed the decision. Subsequently, on March 3, 2002, the Company received a notice in accordance with Paragraph 55(c) of Oil Law,
stating that the license will not be revoked prior to a ruling by the Minister.d.
     On September 30, 2001 an agreement was signed between the Company and  Naspen Ltd.
of the Baran group, whereby the parties to the agreement will invest in equal shares in Oganim Beyarok Ltd. which has been assigned
to deal in the country and abroad with leasing land and masts for constructing antennas for communication equipment (TM-Tower
Management). According to the terms of the agreement, the Company will invest up to approximately 5 million U.S. dollars. As of the
balance sheet date, the Company invested NIS. 2.2 million.e.
     A consolidated company constructed a water purification plant which it has agreed to
operate for a period of 10 years beginning January 2000.f.
     Agreements have been signed by consolidated companies to pay royalties on account of
knowhow they have acquired. The royalties, paid as a percentage of the sales of certain products, amounted to approximately NIS. 1
million over each of the past three years.g.
     On December 9, 2002 a consolidated company signed a licensing agreement with the German
company, Henkel KGaG whereby Henkel granted the company an exclusive license to manufacture and sell various chemical products, glues
and sealants  in Israel, Jordan and the Occupied territories.  In accordance with the agreement, the company is entitled to
import the products or to manufacture them according to the knowhow and planning of Henkel. 56 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002  
  NOTE 28 - Collateral, commitments and contingent liabilities (continued)C.
     (2)
     Commitments for investments: (continued)h.
     A consortium companies, of which the Company through a consolidated company is a member,
was awarded a tender for the desalination of sea water. For this purpose, the consortium formed a company, Via Maris Desalination
Ltd.(Derech Hayam), of which the Company holds 26.5%.On October 28, 2002 Derech Hayam signed an agreement with the State
of Israel (Rights agreement) whereby it will plan, finance, construct, operate and maintain a sea water desalination
plant having an annual capacity of 30 million cubic meters under the BOO (Build, Own and Operate) method
(Project). The agreement is subject to the approval of the finance committee of the Knesset. Until such approval is
guaranted each party is entitled to cancel the agreement within a period of a half year from the date the rights agreement was
signed. The Rights agreement is for a period of 24 years and 11 months (Rights
       period), during which time, within a period of 21⁄2 years, Derech Hayam is obligated to construct a desalination
plant having a yearly capacity of 30 million cubic meters. In return for constructing and operating the plant, Derech Hayam will be
entitled to receive a fixed amount for providing available desalination capacity and, also, a variable amount for quantities of sea
water actually desalinated. The amount of water to be desalinated yearly will be determined jointly, in advance annually, by Derech
Hayam and the Desalination Authority.The shareholders and Derech Hayam have jointly and individually guaranteed to the State
of Israel the fulfillment of the terms of the Rights agreement signed with Derech Hayam and other agreements signed among 
themselves.The shareholders of Derech Hayam provided a performance guarantee to the State of Israel
in amounts totaling NIS. 35 million of which the Companys share is approximately NIS. 9.3 million. At the beginning of
construction, the shareholders guarantees will be increased to a total of approximately NIS. 92.5 million of which the
Companys share will be NIS. 24.5 million. Each of the shareholders of Derech Hayam provided a guarantee for its share of a loan
taken from a bank based on its proportionate share in the Company. The Companys share of the guarantee amounted to
approximately NIS. 500 thousand. As of the date of the financial statements, the Company provided guarantees on behalf of Derech
Hayam totaling approximately NIS. 9.8 million.Derech Hayam and its shareholders also signed an agreement to form a partnership for the
construction of the desalination plant. The shareholders will most likely be required to provide a performance bond to Derech Hayam
for an amount equal to approximately 12.5% of the estimated NIS. 380-400 million construction cost based on their proportionate
ownership share of the Company.  The Companys share of this bond, if required, will amount to approximately NIS. 13
million. Derech Hayam intends to finance the construction of the plant through outside source and through capital provided by its
shareholders for 12-15% of the requirements. The Companys share of 57 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002  
  NOTE 28 - Collateral, commitments and contingent liabilities (continued)C.
     (2)
     Commitments for investments: (continued)this capital amounts to approximately NIS. 21 million. The consolidated companys
portion of the shareholders loans to Derech Hayam amounts to NIS. 778 thousand. The loans are index linked. As of the balance
sheet date, the consolidated Company recorded an investment of NIS. 950 thousand which includes the shareholders loan and
various capitalized costs.i.
     In October 2002, a group in which a consolidated company is a member won a tender
published by Mekorot Water Company Ltd. for the planning, construction and initial operation of a water desalination plant in Ashod
having an annual capacity of 45 million cubic meters. The total cost of the project, approximately NIS. 426 million, will be financed
through a bank loan within the framework of a financing agreement which will be in effect throughout the construction period. The
construction is expected to continue for approximately 11⁄2  years and the plant is expected to be operational in the
summer of 2004. The consolidated Companys share in the project is 24%.On October 31, 2002 a protest was filed in the Tel-Aviv district court by one of the
tender participants against the decision to award the tender to the group and was rejected. The matter is pending in the supreme
court, together with a temporary restraining order preventing any additional agreements and work on the project until a decision is
handed down by the court.j.
     On November 4, 2002 a joint venture agreement was signed in equal parts between a
consolidated Company and Hefer Ecologies Aguda Shitufit Agricultural Cooperative Ltd. to construct and operate a plant for treating
agricultural and other residues in the Emek Hefer area. The agreement is for a period of 18 years and its estimated cost will
be approximately NIS. 20 million. In accordance with the terms of the agreement, the consolidated company will provide capital and
financing of up to NIS. 10 million to the partnership. As of the balance sheet date, another consolidated company has committed
itself to providing guarantees amounting to approximately NIS. 6.5 million to a consortium of banks on behalf of a consolidated
company. As of the balance sheet date, the consolidated company has recorded an investment of approximately NIS. 2.8 million. 58 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002  
  NOTE 28 - Collateral, commitments and contingent liabilities (continued)D.
     The consolidated companies have contingent liabilities as of the balance sheet date
as follows:NIS.(thousands)1.   Open letters of credit for purchase of equipment
     
     2,0432.   Bank guarantees in respect of customersand an affiliated
company
     
     42,9323.   Performance guarantees to customers and others
     
     32,4054.   Guarantees to municipalities and tax authorities
     
     11,8715.   Guarantees to banks for credit and other liabilities ofaffiliated
companies
     
     2,0316.   Other guarantees
     
     3,4087.   Guarantees given to a government agency on account ofthe liabilities of a
consolidated company regarding its
     
     Unlimitedshare in an oil and
gas exploration agreement
     
     Amount8.   Guarantee on account of the liabilities of a consolidated
     
     Unlimitedcompany in regard to a
tender
     
     AmountE.
     Credit Risks1.
     The maximum credit risks of the Company regarding its financial assets do not exceed the
book value of the financial assets less the existing collateral held by the Company.2.
     The concentration of credit risks results from the consolidated companys customers
and long-term receivables (long-term loans granted) being of a similar character (independent fuel agencies).  The highest
balance is that of an agent whose current balance (included in trade receivables) and whose long-term balance (included in long-term
loans) total approximately NIS. 36.2 million. A portion of amounts due from customers are collateralized as is customary in the
industry.  The financial statements include specific provisions for receivables, whose the collection in the opinion of the
management, is questionable.F.
     Currency Future TransactionsCurrency futures
     
     
     Currency
     
     
     Currency
     
     
     Date of
     
     
     Amount
     
     
     AmountContracts
     
     
     Receivable
     
     
     Payable
     
     
     expiration
     
     
     receivable
     
     
     Payable
     
     
     Fair valueNIS.thousands
     
     
     NIS.thousands
     
     
     NIS.thousandsFutures transaction
     
     
     U.S.dollars
     
     
     NIS.
     
     
     (1)
     
     
     3,647
     
     
     3,522
     
     
     125Euro
     
     
     NIS.
     
     
     (2)
     
     
     10,995
     
     
     10,435
     
     
     56014,642
     
     
     13,957
     
     
     685(1)
     February 3, 2003 to April 2, 2003(2)
     January 7, 2003  to February 27, 2003 59 
   GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002  
 NOTE 29  Events in the fuel sectorIn accordance with the Law for Arrangements in the State Economy (2001) and the
regulations thereto, changes have been enacted regarding the holding of Emergency stocks of fuel products. The new regulations
established two categories of Emergency stocks: Security inventories and Civilian inventories (see note 2.C.1). The Security
inventories are stored in separate tanks at specified locations and are designated to be used in case of an emergency. The Security
stocks are therefore included in the financial statements as Non-current inventories. The government will continue to finance and
guarantee the value of inventories defined as Security inventories.Regarding the Civilian inventories, fuel companies selling gasoil to the civilian market
were required to hold gasoil stocks as determined by the Law for Arrangements in the State Economy (2001) and its regulations. These
regulations were suspended following an interim order by the supreme court on August 26, 2002 canceling the requirement that the fuel
companies hold Civilian inventories. As a result, in November and December 2002, Sonol sold its Civilian inventories. It continued
holding Security inventories and Commercial inventories to meet its current needs. As a result of the above changes, the commercial
inventories increased as did its exposure to fluctuations in the value of its inventories, due to fluctuations in the market prices
of petroleum products.  Price fluctuations of petroleum products may materially affect the periodic operating results of
the Company. The Company is exploring ways to minimize those effects. It
       is not possible to predict the effects of these changes on the Companys  financial results.NOTE 30 - Transactions and balances with interested and related partiesa.
     Income and expenses from interested and related parties.1.
     Consist of:Year ended December 31,2002
     
     
     2001
     
     
     2000NIS. (thousands)Interested
     
     
     Related
     
     
     Interested
     
     
     Related
     
     
     Interested
     
     
     Relatedparties
     
     
     parties
     
     
     Parties
     
     
     Parties
     
     
     parties
     
     
     partiesFinancing income
     
     
     -
     
     
     943
     
     
     -
     
     
     862
     
     
     -
     
     
     1,128Income frommanagementservices
     
     
     -
     
     
     811
     
     
     -
     
     
     466
     
     
     -
     
     
     1,668Purchases of fuelproducts
     
     
     347,715
     
     
     -
     
     
     408,717
     
     
     -
     
     
     454,035
     
     
     -Servicespurchased
     
     
     443
     
     
     -
     
     
     701
     
     
     -
     
     
     849
     
     
     - 60 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002  
 NOTE 30 - Transactions and balances with interested and related parties
(continued)a.
     Income and expenses from interested and related parties (continued)2.
     The decision as to the price at which purchases of fuel products are made from an
interested party is determined by comparison to the price at the gate of the Oil Refineries Ltd. and the prices charged by other
competing suppliers a that time.  The price paid by Sonol at any given time was lower than any other alternative
available.  Credit terms were not less than those available from the Oil Refineries Ltd. or from any other supplier.3.
     Other transactions with interested and related parties are conducted in the normal
course of business and according to normal credit terms and do not exceed 10% of the Companys transactions.  The Company
has been granted an exemption in accordance with paragraph 64(3) D of the Securities Regulations (Preparation of Annual Financial

        Statements (correction)  1995) from the requirement to disclose transactions with interested parties and affiliated
companies made during the normal course of business of the Company.4.
     Sonol purchases most of its fuel products from Oil Refineries Ltd. which is obligated to
supply its products to the fuel marketing companies at the refinery gate price which is under government control.b.
     Benefits to interested partiesNumber
       
        Of
       
        Persons
     
     Year ended December 31,2002
     
     2001
     
     2000NIS. (thousands)1.   Interested party employedby the Company
     
     
     1
     
     
     
     3,699
     
     
     
     3,232
     
     
     
     3,3912.   Directors
     
     
     13
     
     
     
     1,064
     
     
     
     1,093
     
     
     
     1,0283.   Management services*
     
     
     
     
     
     
     2,132
     
     
     
     -
     
     
     
     -*
     The Company has a commitment to pay $ 40,000 per month to an interested party for
management services for a period of 36 months commencing on January 1, 2003. The expenses for management services are contingent upon
the approval of the General Meeting of the Company. 61 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002  
  NOTE 30 - Transactions and balances with interested and related parties
(continued)c.
     Balances with interested and related parties  Year ended December 31,2002
     
     2001NIS. (thousands)Interested
     
     Related
     
     Interested
     
     RelatedParties
     
     Parties
     
     Parties
     
     PartiesCurrent assets:Trade receivables
     
     
     1,079
     
     
     
     13,907
     
     
     
     1,125
     
     
     
     27,639Other receivables
     
     
     -
     
     
     
     203
     
     
     
     -
     
     
     
     2161,079
     
     
     
     14,110
     
     
     
     1,125
     
     
     
     27,855Loans and capital notesto subsidiary companies
     
     
     
     
     
     
     20,740
     
     
     
     
     
     
     
     10,079The highest balance withInterested parties duringthe year
     
     
     3,921
     
     
     
     
     
     
     
     2,984Current liabilities:Trade payables
     
     
     33,475
     
     
     
     3,664
     
     
     
     24,298
     
     
     
     7,247Other payables
     
     
     -
     
     
     
     5
     
     
     
     -
     
     
     
     53933,475
     
     
     
     3,669
     
     
     
     24,298
     
     
     
     7,786The highest balance withInterested parties duringthe year
     
     
     47,909
     
     
     
     
     
     
     
     46,699Commitment to purchaseproducts from an interestedparty
     
     
     108,951
     
     
     
     
     
     
     
     20,055  NOTE 31 - Subsequent eventsA.
     On February 4, 2003 Granite-Sonol Oil and Gas Drilling Limited Partnership notified
licence owners Matan and Michal in the Gal A and B exploration sites, that it will not participate in the
drilling at Tamar 1. As a result, the Limited Partnership relinquished .its rights in the Gal A + B exploration sites.
The Partnerships investment in these exploration sites, was written off in the current years financial  
statements. (See notes 11,25 ).B.
     In anticipation of the expiration of the chief executive officers employment
contract with the Company on June 30, 2003, a contract which provided for an automatic extension in the absence of notification
otherwise, by the parties to the agreement, the chief executive officer notified the chairman of the board of the company that he
will end his term on the above date. His announcement to the chairman of the board was  made for personal reasons. A new chief
executive officer was appointed in his place. 62 
   GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002  
  NOTE 31 - Subsequent events (continued)C.
     On January 21, 2003 the Pi-Gliloth Petroleum Terminals and Pipelines Ltd.
(Pi-Gliloth) fuel dispensing installation, situated north of Tel-Aviv, was closed. The Company holds approximately 13.21%
of the shares of Pi-Gliloth. The remaining installations of Pi-Gliloth throughout the country continue to operate as usual.On January 21, 2003 an agreement between Israel Lands Authority (Lands
Authority) and Pi-Gliloth was approved.Following are the main terms of the agreement:(1)
     The supplying of fuel products at the Pi-Gliloth installation will terminate upon the
approval of the agreement by the Lands Authority, at which time, the agreement takes effect.(2)
     Pi-Gliloth will absorb all the costs related to the cessation of the dispensing of fuel
products.(3)
     The leasing agreement for the land at the Gliloth site by Pi-Gliloth will remain in
effect. The Lands Authority will initiate a plan for redesignating the land at the site (Authority plan). Pi-Gliloth will
be entitled to use the newly designated land, subject to the conditions provided for under Ruling No. 933 of the Lands Authority
which requires the lessee, using the land for a purpose other than that previously designated, to pay a permit fee.(4)
     If as a result of a judiciary ruling the Lands Authority will be prevented from
utilizing the newly designated land, or if the Authority plan is not approved by February 1, 2018, Pi-Gliloth will be entitled to a
reimbursement of the costs related to vacating and relocating the installations to an alternate site. The reimbursement for the costs
of vacating the site will be paid in full to Pi-Gliloth by the Lands Authority, no later than 15 years from the date of the
agreement, and subject to the cancellation of the leasing agreement.(5)
     If required, the Land Authority will absorb the land reclaiming costs.(6)
     Pi-Gliloth will withdraw its alternate plan for redesignating the land (The 
Safdie  plan) and will withdraw its objection to the plan presented by the Lands Authority.D.
     Following an offering by Nitzba Hevra Le-Hitnahalut (Nitsba Hitnahalut) to
sell the shares of Nitsba Hinahalut held by its owners, the company, on February 2, 2003, submitted an offer to purchase the shares.
On March 5, 2003, Nitsba Hitnahalut notified the Company, without providing any reason, that it is terminating the negotiations with
the Company and is continuing negotiations with another party. The Company is considering actions to be taken. 63 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002  
  NOTE 31 - Subsequent events (continued)E.
     On February 16, 2003, a filling station operator filed a counterclaim against Sonol and
another oil company for NIS. 2.9 million, claiming restrictive and discriminatory provisions in a standard contract.The counterclaim was filed following a claim filed by Sonol for the eviction of the
filling station operator due to non payment of his debts. The company has not yet submitted its defense and in unable, at this time,
to estimate the counter claims prospects.F.
     The Board of Directors of the company decided to propose the declaration of a dividend
in the amount of NIS. 80 million at General Meeting of the Company which will take place on April 3, 2003. Assuming the proposal will
be approved, the determination date will be April 4, 2003, the ex-dividend date April 6, 2003 and the dividend will be paid on April
15, 2003.NOTE 32  Financial statements translated into U.S. dollarsThe financial records of the Company and its consolidated companies are maintained on a
current basis in historical nominal New Israel Shekels and U.S. dollars.The translated consolidated financial statements, stated in U.S. dollars, have been
prepared in accordance with generally accepted accounting principles for use in connection with the preparation of the financial
statements of a U.S. shareholder.The functional currency of the Company is the U.S. dollar. The consolidated financial
statements in U.S. dollars are prepared in accordance with translation principles identical to those prescribed by Statement of
Financial Accounting Standards No. 52 (F.A.S.B. 52), based on the historical nominal amounts.The financial statements of subsidiaries, whose functional currency is NIS., were
translated into U.S. dollars according to the exchange rate in effect on the balance sheet date. Differences arising from the
Companys investment in its subsidiaries based on the U.S. dollars, and the Companys share in the equity of these
subsidiaries, translated to U.S. dollars at the current exchange rate, are included in Accumulated foreign currency translation
adjustments in shareholders equity. Exchange rate differences arising from loans taken in NIS. for the financing of
investments in subsidiaries, have also been included in that component of shareholders equity. 64 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002  
 NOTE 32  Financial statements translated into U.S. dollars (continued) CONSOLIDATED BALANCE SHEETS(In thousands)Translated to U.S. DollarsDecember 31,2002
     
     2001Current assetsCash and cash equivalents
     
     
     7,103
     
     
     
     7,717Marketable securities
     
     
     3,716
     
     
     
     6,070Trade receivables, net
     
     
     222,744
     
     
     
     194,229
     *Other receivables and current assets
     
     
     26,973
     
     
     
     23,769
     *Receivables on account of projectsin progress
     
     
     3,672
     
     
     
     4,213Inventories
     
     
     46,055
     
     
     
     58,620310,263
     
     
     
     294,618Non-current inventories
     
     
     25,344
     
     
     
     28,578Investments, long-term loans andreceivablesAffiliated companiesand others
     
     
     32,804
     
     
     
     40,377Long-term loans
     
     
     27,521
     
     
     
     27,750Deferred taxes, net
     
     
     3,627
     
     
     
     3,25963,952
     
     
     
     71,386Fixed assets net of accumulatedDepreciation
     
     
     246,240
     
     
     
     253,309Intangible assets and deferredcharges,  net
     
     
     30,040
     
     
     
     27,406675,839
     
     
     
     675,297*Reclassified 65 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002  
 NOTE 32  Financial statements translated into U.S. dollars (continued) CONSOLIDATED BALANCE SHEETS(In thousands)Translated to U.S. DollarsDecember  31,2002
     
     2001Current liabilitiesCredit from banks and others
     
     
     242,237
     
     
     
     281,311Current portion of convertibleDebentures
     
     
     -
     
     
     
     3,047Trade payables
     
     
     42,532
     
     
     
     36,390Other payables
     
     
     38,464
     
     
     
     41,512323,233
     
     
     
     362,260Long-term liabilitiesLong-term loans
     
     
     198,762
     
     
     
     150,571Customers deposits
     
     
     13,136
     
     
     
     13,936Liabilities for employee rights uponretirement, net
     
     
     6,210
     
     
     
     6,892Deferred taxes
     
     
     14,614
     
     
     
     16,161Capital notes issued by a consolidatedcompany
     
     
     45
     
     
     
     191232,767
     
     
     
     187,751Minority interest
     
     
     1,740
     
     
     
     2,938Shareholders equity
     
     
     118,099
     
     
     
     122,348675,839
     
     
     
     675,297 66 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002 
 NOTE 32  Financial statements translated into U.S. dollars (continued) CONSOLIDATED STATEMENT OF INCOME(In thousands except per share data) 
 Translated to U.S. DollarsYear ended December 31,2002
     
     2001
     
     2000Sales
     
     
     902,737
     
     
     906,300
     *
     
     980,292
     *Less: Government imposts
     
     
     291,354
     
     
     301,286
     
     
     313,010Net sales
     
     
     611,383
     
     
     605,014
     
     
     667,282Cost of sales
     
     
     450,659
     
     
     461,856
     *
     
     537,696
     *Gross profit
     
     
     160,724
     
     
     143,158
     
     
     129,586Selling, general andadministrative  expenses
     
     
     103,722
     
     
     88,816
     *
     
     79,941
     *Depreciation and amortization
     
     
     20,432
     
     
     18,653
     
     
     19,115124,154
     
     
     107,469
     
     
     99,056Income from operations
     
     
     36,570
     
     
     35,689
     
     
     30,530Financing expenses, net
     
     
     (19,892
     )
     
     (9,074
     )*
     
     (20,883
     )*Other (expenses) income, net
     
     
     (9,844
     )
     
     2,011
     
     
     13,383(29,736
     )
     
     (7,063
     )
     
     (7,500
     )Income before income taxesand other items
     
     
     6,834
     
     
     28,626
     
     
     23,030Income tax expense
     
     
     6,453
     
     
     6,506
     
     
     9,791Income before other items
     
     
     381
     
     
     22,120
     
     
     13,239(Losses) Income of affiliates, net
     
     
     (995
     )
     
     2,687
     
     
     2,375Minority interest in consolidatedsubsidiaries, net
     
     
     (545
     )
     
     (476
     )
     
     (605
     )Net  (loss) income
     
     
     (1,159
     )
     
     24,331
     
     
     15,009Earnings per ordinary share(in U.S. dollars):Basic and diluted
     
     
     (0.01
     )
     
     0.18
     
     
     0.11 *Reclassified 67 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002 
 NOTE 32  Financial statements translated into U.S. dollars (continued) CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
    
    (In thousands)
    
    Translated to U.S. Dollars 
  Common
       
        Stock
     
     Capital
       
        reserves
     
     Companys
       
        Shares held
       
        by a
       
        consolidated
       
        company
     
     Retained
       
        earnings
     
     Accumulated
       
        other
       
        comprehensive
       
        income*
     
     Cumulative
       
        foreign
       
        currency
       
        translation
       
        adjustment
     
     TotalBalance as at January 1, 2000
     
     
     59,599
     
     
     64,328
     
     
     (141
     )
     
     (13,436
     )
     
     585
     
     
     -
     
     
     110,935Changes in 2000:Net income for the year
     
     
     
     
     
     
     
     
     
     
     
     15,009
     
     
     
     
     
     -
     
     
     15,009Acquisition of the Companysshares held by a consolidatedcompany
     
     
     -
     
     
     -
     
     
     (669
     )
     
     -
     
     
     -
     
     
     -
     
     
     (669
     )Conversion of debentures toshare
     
     
     97
     
     
     714
     
     
     -
     
     
     -
     
     
     -
     
     
     -
     
     
     811Reclassification adjustment forgains included in net income
     
     
     -
     
     
     -
     
     
     -
     
     
     -
     
     
     280
     
     
     
     
     
     280Balance as at December 31, 2000
     
     
     59,696
     
     
     65,042
     
     
     (810
     )
     
     1,573
     
     
     865
     
     
     -
     
     
     126,366Changes in 2001:Net income for the year
     
     
     -
     
     
     -
     
     
     -
     
     
     24,331
     
     
     -
     
     
     -
     
     
     24,331Divided paid
     
     
     -
     
     
     -
     
     
     -
     
     
     (27,934
     )
     
     -
     
     
     -
     
     
     (27,934
     )Acquisition of the Companysshares held by a consolidatedcompany
     
     
     -
     
     
     -
     
     
     (62
     )
     
     -
     
     
     -
     
     
     -
     
     
     (62
     )Reclassification adjustment forgains included in net income
     
     
     -
     
     
     -
     
     
     -
     
     
     -
     
     
     (353
     )
     
     -
     
     
     (353
     )Balance as December 31, 2001
     
     
     59,696
     
     
     65,042
     
     
     (872
     )
     
     (2,030
     )
     
     512
     
     
     -
     
     
     122,348Changes in 2002:Net loss for the year
     
     
     -
     
     
     -
     
     
     -
     
     
     (1,159
     )
     
     -
     
     
     -
     
     
     (1,159
     )Acquisition of the Companysshares held by a consolidatedcompany
     
     
     -
     
     
     -
     
     
     (1,234
     )
     
     -
     
     
     -
     
     
     -
     
     
     (1,234
     )Unrealized losses on securities
     
     
     -
     
     
     -
     
     
     -
     
     
     -
     
     
     (1,198
     )
     
     -
     
     
     (1,198
     )Foreign currency translationadjustment
     
     
     -
     
     
     -
     
     
     -
     
     
     -
     
     
     -
     
     
     (235
     )
     
     (235
     )Reclassification adjustment forgains included in net income
     
     
     -
     
     
     -
     
     
     -
     
     
     -
     
     
     (423
     )
     
     -
     
     
     (423
     )Balance as December 31, 2002
     
     
     59,696
     
     
     65,042
     
     
     (2,106
     )
     
     (3,189
     )
     
     (1,109
     )
     
     (235
     )
     
     118,099 *      Deriving from unrealized gains (losses) on marketable
securities, net of tax effect. 68 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002  
 NOTE 32  Financial statements translated Into U.S. dollars (continued) The material differences between Israeli GAAP and U.S. GAAP as applicable to the
financial statements are:a)
     Deferred taxes in respect of differences in measuring non-monetary items:Deferred taxes in respect of differences in the measuring of non-monetary items (mainly
fixed assets and inventories) for accounting purposes (U.S. dollar) and for tax purposes (Adjusted NIS).In accordance with Israeli GAAP:Companies record deferred taxes in respect of all such differences.In accordance with U.S. GAAP:According to paragraph 9(f) of FAS No. 109, deferred taxes should not be provided in
respect of such differences.b)
     Marketable securitiesIn accordance with Israeli GAAP:Israeli GAAP divides marketable securities into two categories:Marketable securities that constitute a current investment are stated at
market value.Marketable securities, that constitute a permanent investment are stated at
cost (and in respect to debentures  include accumulated interest), except where their market value is lower, and the decline in
value is not considered to be temporary. Changes in value are charged to the statement of income. See also note 2F above.In accordance with U.S. GAAP:FAS No. 115 divides marketable securities into three categories:(1)
     Marketable securities that are acquired and held principally for the purpose of selling
them in the near future, are classified as trading securities and are reported at their fair value. Unrealized gains and
losses are included in the statement of income.(2)
     Debt securities that the company intends hold to maturity are classified as
held-to-maturity securities are reported at their amortized cost. 69 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002  
 NOTE 32  Financial statements translated Into U.S. dollars (continued) (3)
     Marketable securities, not  classified as either held-to-maturity
securities or trading securities, are classified as available-for-sale securities and are reported at their
fair value. Unrealized gains and losses are included in a separate item within the shareholders equity, and reported as other
comprehensive income.c)
     Amortization of goodwillIn accordance with Israeli GAAP:Under Israeli GAAP goodwill is amortized over the estimated benefit period, but usually
no longer than 10 years.In accordance with U.S. GAAP:Under US GAAP, commencing January 1, 2002, goodwill is no longer amortized but is
reviewed annually (or more frequently if impairment indicators arise) for impairment.Goodwill represents the excess of costs over fair value of assets of businesses
acquired. The Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002.
Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not
amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets.In connection with SFAS No. 142s transitional goodwill impairment evaluation,
the Statement required the Company to perform an assessment of whether there was an indication that goodwill is impaired as of the
date of adoption. The implied fair value of this reporting unit exceeded its carrying amount and the Company was not required to
recognize an impairment loss.Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line
basis over the expected periods to be benefited, generally 10 years, and assessed for recoverability by determining whether the
amortization of the goodwill balance over its remaining life could be recovered through undiscounted future operating cash flows of
the acquired operation.d)
     Other disclosuresGovernment imposts  consist of excise taxes imposed on fuel products
mainly gasoline and gasoil 70 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002 
 List of the main subsidiaries and affiliates Holdings and

Control as of
December 31,2002
%Consolidated Subsidiaries:Sonol Israel Ltd.
      
      
      100Sprint Motors Ltd.
      
      
      100Sprint Motors Transport (1999) Ltd.
      
      
      100Milchen Sonol Agency Ltd.
      
      
      66
      .67Sonol J-M Ltd.
      
      
      70Sonol Dan (1992) Ltd.
      
      
      100Sonol Darom Ltd.
      
      
      100Sonol Cnaan Ltd
      
      
      51Sonol Shani Agencies Ltd.
      
      
      51Sonor Ltd.
      
      
      100After Holdings Ltd.
      
      
      100Granita Holdings Ltd.
      
      
      51Granite-Sonol Oil and Gas Drilling-Limited Partnership
      
      
      100Tambour Ltd.
      
      
      100Tambour Ecology Ltd.
      
      
      100Tambourechev 1997 Ltd.
      
      
      100Safety Kleen (Israel) Ltd.
      
      
      77Tzach Serafon Ltd.
      
      
      100Serafon Trading 1997 Ltd.
      
      
      100Tambour Distribution Ltd.
      
      
      100Texma Chemicals Ltd.
      
      
      100Supergas Israel Gas Distribution Company Ltd.
      
      
      100Supergas Hanegev Ltd.
      
      
      65Supergas Rehovot (1989) Ltd.
      
      
      100M. Solomon & Co. Gas Agencies Ashkelon Ltd.
      
      
      51Supergas Hagalil Ltd.
      
      
      100Rav Gas Ltd.
      
      
      55Allied Oils and Chemicals Ltd.
      
      
      100Granite Hacarmel Holdings (1993) Ltd.
      
      
      100Granite Hacarmel Properties (1993) Ltd.
      
      
      100Granite Hacarmel Development Holdings Ltd
      
      
      100Granite Hacarmel Industries Ltd.
      
      
      100Granite Hacarmel Y.A. Holdings Ltd.
      
      
      100Granite Hacarmel NZV Holdings Ltd.
      
      
      100Granite Hacarmel Energy (1997) Ltd.
      
      
      100Granite Hacarmel Tourism Ltd.
      
      
      100Otzem Promotion and Investments (1991) Ltd.
      
      
      100
 71 
  GRANITE HACARMEL INVESTMENTS LIMITED AND SUBSIDIARIES
    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2002 
 List of the main subsidiaries and  affiliates (cont.) Holdings and

Control as of
December 31, 2002
%Affiliated Companies (accounted for by the equity   method):Kleesson Holdings (1999)  Ltd.
      
      
      50International Ilios Cotachem S.A.
      
      
      43Derech Hayam Desalination  Joint Venture
      
      
      24Derech Hayam Ltd.
      
      
      26
      .5Tambour  Hefer Ecolgy  Partnership
      
      
      50Yarok Az Ltd.
      
      
      22
      .9Nitzba Holdings 1995 Ltd.
      
      
      9
      .82Orpak Industries (1983)Ltd.
      
      
      10
      .1Park Mini Israel  Limited Partnership
      
      
      35L.D.I.-Leasing Dynamics International Ltd.
      
      
      25
      .1Green Anchors Ltd.
      
      
      50The above list does not include inactive and/orimmaterial affiliated companies and others
 72


# OPHIRTECH LTD.

(An Israeli Corporation)

2002 ANNUAL REPORT



---

---

# OPHIRTECH LTD.

2002 ANNUAL REPORT

TABLE OF CONTENTS

|                                              | Page
|--------------------------------------------- | ----
|REPORT OF INDEPENDENT AUDITORS                | 2   
|FINANCIAL STATEMENTS - IN ADJUSTED           
|NEW ISRAELI SHEKELS (NIS):                   
|Balance sheets                                | 3   
|Statements of operations                      | 4   
|Statements of changes in shareholders' equity | 5   
|Statements of cash flows                      | 6   
|Notes to financial statements                 | 7-26



---

---

| | Kesselman & Kesselman
Certified Public Accountants (Isr.)
Trade Tower, 25 Hamered Street
Tel Aviv 68125 Israel
P.O Box 452 Tel Aviv 61003
Telephone +972-3-7954555
Facsimile +972-3-7954556
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# REPORT OF INDEPENDENT
AUDITORS

To the shareholders of

# OPHIRTECH LTD.

We have audited the balance sheets of
Ophirtech Ltd. (the Company) as of December 31, 2002 and 2001 and the
statements of operations, changes in shareholders equity and cash flows for each of
the years ended on those dates and for the period from March 29, 2000 (date of
incorporation, see note 1a(1)) to December 31, 2000. These financial statements are
the responsibility of the Companys Board of Directors and management. Our
responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2002 and 2001 and the results of its
operations, the changes in its shareholders equity and its cash flows for each of
the years ended on those dates and for the period from March 29, 2000 to December 31,
2000, in conformity with accounting principles generally accepted in Israel. Furthermore,
in our opinion, the financial statements referred to above are prepared in accordance with
the Israeli Securities (Preparation of Annual Financial Statements) Regulations, 1993.

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

Accounting principles generally
accepted in Israel differ in certain respects from accounting principles generally
accepted in the United States of America. The application of the latter would have
affected the determination of nominal historical loss and shareholders equity to the
extent summarized in note 11.

|Tel-Aviv, Israel     March 20, 2003 | Kesselman & KesselmanCertified Public Accountants (Isr.)
|----------------------------------- | --------------------------------------------------------

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

2

---

---

# OPHIRTECH LTD.

BALANCE SHEETS

IN ADJUSTED NEW ISRAELI
SHEKELS

|                                                            |  | December 31
|----------------------------------------------------------- |  | -----------
|
|
|A s s e t s                                                 |  |            
|CURRENT ASSETS:                                             |  |            
|Cash and cash equivalents                                   |  |            
|Accountants receivable                                      |  |            
|                                                            |  |            
|T o t a l current assets                                    |  |            
|                                                            |  |            
|INVESTMENTS IN COMPANIES                                    |  |            
|                                                            |  |            
|FIXED ASSETS:                                               |  |            
|Cost                                                        |  |            
|L e s s - accumulated depreciation                          |  |            
|                                                            |  |            
|                                                            |  |            
|                                                            |  |            
|                                                            |  |            
|                                                            |  |            
|                                                            |  |            
|Liabilities and shareholders' equity                        |  |            
|CURRENT LIABILITIES :                                       |  |            
|Short-term bank credit                                      |  |            
|Short-term loan from a company which is an interested party |  |            
|Accounts payable and accruals                               |  |            
|                                                            |  |            
|T o t a l current liabilities                               |  |            
|LIABILITIES FOR EMPLOYEE RIGHTS UPON                        |  |            
|RETIREMENT, net of amount funded                            |  |            
|COMMITMENT                                                  |  |            
|                                                            |  |            
|T o t a l liabilities                                       |  |            
|SHAREHOLDERS' EQUITY                                        |  |            
|                                                            |  |            
|                                                            |  |            
|                                                            |  |            
|                                                            |  |            

|_______________
Eldad Ben Moshe
_______________
Shlomo Shalev | )
)
)
)
) | DIRECTORS
|------------------------------------------------------------- | --------- | ---------

Date
of approval of the financial statements: March 20, 2003

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

3

---

---

# OPHIRTECH LTD.

STATEMENTS OF OPERATIONS

IN ADJUSTED NEW ISRAELI
SHEKELS

|                                 |  |  |    | Period from
March 29, 2000 (dateof
incorporation, see
|-------------------------------- |  |  | -- | -----------------------------------------------------
|
|
|WRITE-DOWN OF INVESTMENTS IN     |  |  |    |                                                      
|COMPANIES                        |  |  | 2  |                                                      
|GENERAL AND ADMINISTRATIVE       |  | 
|EXPENSES                         |  |  | 9g |                                                      
|FINANCIAL EXPENSES (INCOME)- net |  |  |    |                                                      
|CAPITAL LOSS ON SALE OF FIXED    |  | 
|ASSETS                           |  |  |    |                                                      
|                                 |  |  |    |                                                      
|LOSS FOR THE PERIOD              |  |  |    |                                                      
|                                 |  |  |    |                                                      
|                                 |  |  |    |                                                      

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

4

---

---

# OPHIRTECH LTD.

STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITYIN

ADJUSTED NEW ISRAELI SHEKELS

|                                               | Share
capital | Receipts on
account
of shares
to be allotted | Accumulated
deficit | Total
|---------------------------------------------- | ------------- | -------------------------------------------- | ------------------- | -----
|
|PERIOD FROM MARCH 29, 2000 (DATE OF            |               |                                              |                     |      
|INCORPORATION, SEE NOTE 1a(1)) TO              |               |                                             
|DECEMBER 31, 2000:                             |               |                                             
|Issuance of share capital                      |               |                                              |                     | *    
|Receipts on account of shares to be allotted,  |               |                                             
|see note 6b                                    |               |                                              |                     |      
|Difference between cost of acquisition of      |               |                                             
|investments in companies from a company        |               |                                             
|under common control and the carrying value of |               |                                             
|those investments on the books of that         |               |                                             
|company, see note 1a(1)                        |               |                                              |                     |      
|Loss                                           |               |                                              |                     |      
|                                               |               |                                              |                     |      
|BALANCE AT DECEMBER 31, 2000                   |               |                                              |                     | *    
|CHANGES DURING 2001- loss                      |               |                                              |                     |      
|                                               |               |                                              |                     |      
|BALANCE AT DECEMBER 31, 2001                   |               |                                              |                     | *    
|CHANGES DURING 2002- loss                      |               |                                              |                     |      
|                                               |               |                                              |                     |      
|BALANCE AT DECEMBER 31, 2002                   |               |                                              |                     | *    
|                                               |               |                                              |                     |      
|                                               |               |                                              |                     |      

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

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

5

---

---

# OPHIRTECH LTD.

STATEMENTS OF CASH FLOWS

IN ADJUSTED NEW ISRAELI
SHEKELS

|                                                          |  |  | Period from
March 29, 2000(date 
of incorporation, see
|--------------------------------------------------------- |  |  | ------------------------------------------------------
|
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                     |  |  |                                                       
|Loss for the period                                       |  |  |                                                       
|Adjustments required to reflect the cash flows from       |  | 
|operating activities*                                     |  |  |                                                       
|                                                          |  |  |                                                       
|Net cash provided by (used in) operating activities       |  |  |                                                       
|                                                          |  |  |                                                       
|CASH FLOWS FROM INVESTING ACTIVITIES:                     |  | 
|Purchase of fixed assets                                  |  |  |                                                       
|Investment in companies (2000 - including acquisition     |  | 
|from a company which is an interested party)              |  |  |                                                       
|Proceeds from sale of fixed assets                        |  |  |                                                       
|Decrease (increase) in short-term loan to a company which |  | 
|is an interested party                                    |  |  |                                                       
|                                                          |  |  |                                                       
|Net cash provided by (used in) investing activities       |  |  |                                                       
|                                                          |  |  |                                                       
|CASH FLOWS FROM FINANCING ACTIVITIES:                     |  | 
|Receipts on account of shares to be allotted              |  |  |                                                       
|Increase in short term loan from a company which is an    |  | 
|interested party                                          |  |  |                                                       
|Short-term bank credit                                    |  |  |                                                       
|                                                          |  |  |                                                       
|Net cash provided by financing activities                 |  |  |                                                       
|                                                          |  |  |                                                       
|INCREASE (DECREASE) IN CASH AND CASH                      |  | 
|EQUIVALENTS                                               |  |  |                                                       
|BALANCE OF CASH AND CASH EQUIVALENTS AT                   |  | 
|BEGINNING OF PERIOD                                       |  |  |                                                       
|                                                          |  |  |                                                       
|BALANCE OF CASH AND CASH EQUIVALENTS AT                   |  | 
|END OF PERIOD                                             |  |  |                                                       
|                                                          |  |  |                                                       
|                                                          |  |  |                                                       
|* Adjustments required to reflect cash flows from         |  | 
|operating activities:                                     |  | 
|Expenses not involving cash flows:                        |  | 
|Depreciation                                              |  |  |                                                       
|Write-down of investments in companies                    |  |  |                                                       
|Capital loss on sale of fixed assets                      |  |  |                                                       
|Liabilities for employee rights upon retirement - net     |  |  |                                                       
|Erosion of (linkage differences on) a loan with a         |  | 
|company which is an interested party                      |  |  |                                                       
|                                                          |  |  |                                                       
|                                                          |  |  |                                                       
|                                                          |  |  |                                                       
|Changes in operating asset and liability items:           |  | 
|Decrease (increase) in accounts receivable                |  |  |                                                       
|Increase (decrease) in accounts payable and accruals      |  |  |                                                       
|                                                          |  |  |                                                       
|                                                          |  |  |                                                       
|                                                          |  |  |                                                       
|                                                          |  |  |                                                       
|                                                          |  |  |                                                       
|                                                          |  |  |                                                       

**Reclassified.

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), which is owned by Polar Investments           Ltd. (42.5%),
Ampal (Israel) Ltd. and Ampal Industries (Israel) Ltd. (42.5%) and           Gmul
Investment CompanyLtd. (15%), was incorporated on March 29, 2000.           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 77.5 million, an amount representing the fair value of the
said investments. 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On January 1, 2001, the employees of
Ophir Holdings and one of its subsidiaries were transferred to the Company.Ophir Holdings
and its subsidiary participated in the employees payroll costs, as well as the
Companys general and administrative expenses  see note 9g.

| | 2) | Interested parties
 as defined in the Israeli Securities (Preparation of           Annual Financial
Statements) Regulations, 1993.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------

| | b. | Adjusted
financial statements:
| | -- | ------------------------------

| | 1) | The
financial statements have been prepared on the basis of historical cost
          adjusted for the changes in the general purchasing power of Israeli currency,
in           accordance with pronouncements of the Institute of Certified Public
Accountants           in Israel (the Israeli Institute(. All figures in the
financial           statements are presented in adjusted new Israeli shekels (NIS) which
have a           uniform purchasing power (December 2002 adjusted NIS)  based upon
the           changes in the Israeli consumer price index (the Israeli CPI,
see           also h. below).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
adjustment of the financial statements is based on the accounts of the Company,
maintained in nominal NIS. Condensed nominal Israeli currency data, on the basis of which
the adjusted financial statements were prepared, are presented in note 10.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
components of the statements of operations were, for the most part, adjusted as follows:
the components relating to transactions carried out during the 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 (mainly depreciation and write-down)
were adjusted on the same basis as the related balance sheet item. The financing
component represents financial income and expenses in real terms and the erosion of
balances of monetary items during the period.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7

---

---

# OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | 2) | The
adjusted amounts of non-monetary assets do not necessarily represent
               realization value or current economic value, but only the original
historical                values, adjusted to reflect the changes in the general
purchasing power of                Israeli currency. In these financial statements, the
term cost               signifies cost in adjusted Israeli currency.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | In
October 2001, the Israel Accounting Standards Board (the IASB)
               issued Accounting Standard No. 12, Discontinuance of Adjusting
Financial                Statements for Inflation, which provided for the
discontinuance of                adjusting financial statements for the effects of
inflation, as of                January 1, 2003. In December 2002, Accounting
Standard No. 17 was                issued that postponed the date from which
Accounting Standard No. 12 is to be                applied until January 1, 2004.
The inflation-adjusted amounts as of                December 31, 2003 will be the
base for the nominal-historical financial                reporting in the following
periods.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
implementation of this standard will mainly affect the financial expenses item.
| | -----------------------------------------------------------------------------------

| | c. | Investments
in companies
| | -- | ------------------------

| | The
investments in the shares of these companies are presented at cost.
| | -----------------------------------------------------------------------

| | The
Company reviews for impairment its investments in these companies from time to time.
Impairment losses, not of a temporary nature, that are revealed by such revenues are
included in the Companys accounts, see note e.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
to the investments transferred from Ophir Holdings, see a(1) above.
| | ----------------------------------------------------------------------

| | d. | Fixed assets:
| | -- | -------------

| | 1) | These
assets are stated at cost.
| | -- | --------------------------------

| | 2) | The
assets are depreciated by the straight-line method, on basis of their           estimated
useful life.
| | -- | ----------------------------------------------------------------------------------------------------------

| | Annual
rates of depreciation are as follows:
| | --------------------------------------------

|                               | %
|------------------------------ | -
|Vehicles                       |  
|Office furniture and equipment |  
|(including computers and       |  
|peripheral equipment)          |  

8

---

---

# OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | e. | Impairment
of assets
| | -- | --------------------

| | In
February 2003, Accounting Standard No. 15 of the IASB, Impairment of Assets,
became effective. This standard which is based on International Accounting standard No. 36.
requires a periodic review to evaluate the need for a provision for the impairment of the
Companys non-monetary assets  fixed assets and identifiable intangibles,
including goodwill, as well as investments in associated companies.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has opted for early adoption of the standard and accordingly, commencing from
December 31, 2002, the Company assess  at each balance sheet date whether
any events have occurred or changes in circumstances have taken place, which might
indicate that there has been an impairment of one or more of the above assets. When such
indicators of impairment are present, the Company evaluates whether the carrying value of
the investment in the asset is recoverable from the cash flows anticipated from that
asset, and, if necessary, records an impairment provision up to the amount needed to
adjust carrying amount to the recoverable amount.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
recoverable value of an asset is determined according to the higher of the net selling
price of the asset or its value in use to the Company. The value in use is determined
according to the present value of anticipated cash flows from the continued use of the
asset, including those expected at the time of its future retirement and disposal.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
review of an asset for impairment, is performed in relation to the recoverable value of
the cash-generating unit to which the asset belongs. A cash-generating unit includes
goodwill allocated to that unit, and any impairment loss relating to that unit is
initially allocated to the goodwill and then to the other assets.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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
2002, the company has written-down its investments in companies in the total amount of
adjusted NIS 42,795,000.
| | ----------------------------------------------------------------------------------------------------------------------

| | f. | Cash
equivalents
| | -- | ----------------

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

9

---

---

# OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | g. | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|                            | Exchange 
rate of one
U.S. dollar | Israeli CPI*
|--------------------------- | --------------------------------- | ------------
|At end of year:             |                                   |             
|2002                        |                                   |             
|2001                        |                                   |             
|2000                        |                                   |             
|At March 29,2000            |                                   |             
|Increase during:            |                                   |             
|Year ended December 31,2002 |                                   |             
|Year ended December 31,2001 |                                   |             
|Period from March 29,2000   |                                   |             
|(date of incorporation)to   |                                   |             
|December 31,2000            |                                   |             

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

| | j. | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

---

---

# OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

# NOTE 2 
INVESTMENTS IN COMPANIES:

| | a. | As
stated in Note 1a(1), on March 30, 2000, the Company purchased investments           in
high-tech companies from Ophir Holdings.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of the investments upon acquisition was adjusted NIS 77,487,000 and their
book value as recorded in the accounts of Ophir Holdings was adjusted NIS 57,198,000.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | The
rate of shareholding in the companies (fully diluted) and their book value           at
December 31, 2002 is as follows:
| | -- | ----------------------------------------------------------------------------------------------------------------------------

|                                                      | Percentage
of control | Percentage
of control
(fully
Diluted) | Book
value
|----------------------------------------------------- | --------------------- | ------------------------------------- | ----------
|StoreAge Networking Technologies Ltd.-"StoreAge"(a)   | 10.9                  | 8.3                                   | 13,547    
|Celvibe Ltd.-"Celvibe"(b)                             | 13.1                  | 11.2                                  | 1,899     
|Trans4u Ltd-"Trans4u"(c)                              | 10.2                  | 9.1                                   | -,-       
|Electrochemical Light Switch Inc.-"Electro"(d)        | 15.0                  | 15.0                                  | -,-       
|Indocs Online Ltd.-"Indocs"(e)                        | 11.9                  | 13.7                                  | 1,035     
|Expand Networks Ltd.-"Expand"(f)                      | 11.2                  | 9.2                                   | 8,453     
|Netformx Ltd.-"Netformx"(g)                           | 5.5                   | 3.6                                   | 2,367     
|Interlink Computer Communications Ltd.-"Interlink"(h) | 13.1                  | 12.0                                  | -,-       
|Carmel Biosensors Ltd.-"Carmel"(i)                    | 13.7                  | 9.4                                   | -,-       
|Camelot Information Technologies Ltd.-"Camelot"(j)    | 13.1                  | 11.8                                  | -,-       
|Pelican Security Ltd.-"Pelican"(k)                    | 17.0                  | 13.1                                  | 948       
|Praxell Inc.-"Praxell"(l)                             | 8.2                   | 5.5                                   | -,-       
|Viola Networks Ltd.-"Viola"(m)                        | 16.1                  | 11.2                                  | 5,442     
|Mainsoft Corporation-"Mainsoft"(n)                    | 1.9                   | 1.3                                   | 510       
|Romidot Ltd.-"Romidot"(o)                             | 10.6                  | 7.8                                   | -,-       
|Iradius.Com,Inc.-"Iradius"(p)                         | 9.5                   | 8.6                                   | -,-       
|Elpas Electro-Optic Systems Ltd.-"Elpas"(q)           | 11.7                  | 9.3                                   | -,-       
|Techimage Ltd.-"Techimage"(r)                         | 2.6                   | 2.2                                   | -,-       
|RealM Technologies Ltd.-"RealM"(s)                    | 14.5                  | 13.6                                  | -,-       
|Cipheractive Ltd.-"Cipheractive"(t)                   | 6.6                   | 6.6                                   | -,-       
|Cerel Ceramic Technologies Ltd.-"Cerel"(u)            | 14.2                  | 16.8                                  | 2,401     
|                                                      |                       |                                       |           
|                                                      |                       |                                       | 36,602    
|                                                      |                       |                                       |           

| | (a) | StoreAge
is engaged in the development and marketing of a software solution and
          innovative data storage solutions for communications networks (Storage Area
          Network).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
January 2001, StoreAge completed a financing round and raised approximately $ 11
million (bringing the total amount raised to $ 25 million) from various investors
(including a strategic investor) based on a company value of $ 40 million before the
money.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | StoreAge
is partly held by a company which is an interested party.
| | ------------------------------------------------------------------

11

---

---

# OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 2  INVESTMENTS IN
COMPANIES (continued):

| | (b) | Celvibe
develops solutions for digital video transmission for Internet           broadband
networks and mobile phone communications.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------

| | In
November 2002, Celvibe ceased its operations and it is currently undergoing a winding-up
procedure.
| | ------------------------------------------------------------------------------------------------------

| | The
investment in Celvibe as of December 31, 2002 is presented net of a provision for
impairment of value of adjusted NIS 10.6 million. The balance of the investment
reflects the consideration that the Company expects to receive upon the winding-up of
Celvibe.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | Trans4u
Ltd. develops software for arranging land transport of goods in Europe           over the
Internet.
| | --- | -----------------------------------------------------------------------------------------------------------

| | As
of December 31, 2002, the investment in Trans4u had been fully written-down.
| | -------------------------------------------------------------------------------

| | (d) | Electro which
is incorporated in the United States develops an electrochemical           optic
switching system.
| | --- | ----------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2002, the investment in Electro had been fully written-down.
| | -------------------------------------------------------------------------------

| | (e) | Indocs
is engaged in the development of software for E-commerce technological
          applications in the printing field, via the Internet and web uses.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March and August 2001, Indocs raised bridging loans of $ 450,000 and $ 174,000,
respectively, from its shareholders. The loans are convertible into Indocs shares.
The Companys share in these loans was approximately $ 208,000 (approximately
adjusted NIS 932,000).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2002, Indocs raised approximately $ 115,000 from its shareholders, in
consideration for the allotment of approximately 6.4% of its share capital. In addition,
Indocs converted all of the bridging loans that it had received from its shareholders,
aggregating approximately $ 1.1 million, into shares constituting approximately
60.5% of its share capital (fully diluted).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company invested $ 35,000 (adjusted NIS 175,000) in this round, this in
addition to the bridging loans of approximately $ 331,000 that it had granted in
previous years.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
October 2002, the Company invested approximately adjusted NIS 75,000 in a loan which
is convertible into shares of Indocs.
| | -----------------------------------------------------------------------------------------------------------------------------

| | The
investment in Indocs as of December 31, 2002 is presented net of a provision of adjusted
NIS 6.4 million for impairment of value.
| | -------------------------------------------------------------------------------------------------------------------------------------

| | (f) | 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.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
to the commitment of the Company to invest in Expand, see note 5a.
| | ---------------------------------------------------------------------

12

---

---

# OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 2  INVESTMENTS IN
COMPANIES (continued):

| | (g) | Netformx
is engaged in development, marketing and support of software designed           for
planning, operation and maintenance of computer networks.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2001, Netformx raised bridging loans of $ 4.8 million from its shareholders.
The Companys share in these loans was approximately $ 250,000 (adjusted NIS 1,116,000).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
January 2003, Netformx raised $ 750,000. The Company did not participate in this
round.
| | ------------------------------------------------------------------------------------------

| | The
investment in Netformx as of December 31, 2002 is presented net of a provision of
adjusted NIS 8.8 million for impairment of value.
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | Netformx
is partly held by companies which are interested parties.
| | ------------------------------------------------------------------

| | (h) | Interlink
is engaged in the development of an integration software facilitating           interface
between operating systems in an E-commerce environment on the           Internet.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2002, the investment in Interlink had been fully written-down.
| | ---------------------------------------------------------------------------------

| | (i) | Carmel
develops products to measure the concentration of glucose in blood           without
using the mechanical instruments currently available.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2002, the investment in Carmel had been fully written-down.
| | ------------------------------------------------------------------------------

| | (j) | Camelot
is engaged in development of security software designed to           automatically
control access to computer networks within enterprises and           real-time detection
and response to security breaches by unauthorized users.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2002, a temporary receiver was appointed for Camelot.
| | -----------------------------------------------------------------

| | As
of December 31, 2002, the investment in Camelot had been fully written-down.
| | -------------------------------------------------------------------------------

| | (k) | Pelican
is engaged in the development of solutions to the problem of           safeguarding
information on the Internet against viruses and hackers.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2003, Pelican sold the know-how that it had developed and owned. The investment
in Pelican as of December 31, 2002 is presented net of a provision of adjusted NIS 8.1
million for impairment of value. The balance of the investments reflects the
consideration that the Company expects to receive from the sale of the know-how.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (l) | Praxell
is engaged in the development of a prepaid secured charge card for           E-commerce
transactions.
| | --- | -------------------------------------------------------------------------------------------------------------

| | Pursuant
to an agreement signed in July 2001, Praxell raised $ 2.5 million at a company value
of $ 13.5 million before the money.
| | ---------------------------------------------------------------------------------------------------------------------------------

| | In
August 2002, the Company invested adjusted NIS 235,000 in Praxell. As of December
31, 2002, the investment in Praxell had been fully written-down.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

13

---

---

# OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 2  INVESTMENTS IN
COMPANIES (continued):

| | (m) | 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
December 2001, Viola raised approximately $ 5.1 million in bridging loans, which are
convertible into shares, at a company value of $ 9 million before the money. The
Companys share in these bridging loans was $ 1 million (adjusted NIS
4,501,000).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
January 2002, Viola converted the bridging loans that it had raised in December 2001 into
shares constituting approximately 36.2% of its share capital (fully diluted).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
investment in Viola as of December 31, 2002 is presented net of a provision of
adjusted NIS 8.2 million for impairment of value.
| | ------------------------------------------------------------------------------------------------------------------------------------

| | (n) | Mainsoft
is engaged in the development of software and tools for software           developers.
| | --- | -----------------------------------------------------------------------------------------------

| | (o) | Romidot
is engaged in development, production and marketing of precision           measurement
systems for the non-ferrous metal and plastic industries.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2002, the investment in Romidot had been fully written-down.
| | -------------------------------------------------------------------------------

| | (p) | Iradius
is developing a family and community service website on the Internet.
| | --- | -----------------------------------------------------------------------------

| | As
of December 31, 2002, the investment in Iradius had been fully written-down.
| | -------------------------------------------------------------------------------

| | (q) | Elpas
is engaged in the development, production and marketing of products and
          solutions for asset and personnel tracking in hospitals and other buildings
          using infrared technology.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2002, the Company granted Elpas a bridging loan of $ 130,000 (approximately
adjusted NIS 639,000).
| | --------------------------------------------------------------------------------------------------------------

| | The
bridging loan entitles the Company to a discount of 25%, with an additional discount of
1.5% per month, up to a ceiling of 40% discount on the price per share under the next
financing round. If until October 15, 2003 a financing round of at least $ 2.5
million does not take place, the bridging loan would be converted into shares at a price
per share of $ 1.85.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2002, Elpas raised bridging loans of $ 511,000 from its shareholders. In
addition, a bank has agreed to postpone, subject to certain conditions, the repayment of
loans in the amount of approximately $ 1.1 million that it had granted Elpas, until
September 30, 2003.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2002, the investment in Elpas had been fully written-down.
| | -----------------------------------------------------------------------------

| | (r) | Techimage
is engaged in the development of algorithm-based software for           computerized
animation for use in Internet advertising.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2002, the investment in Techimage had been fully written-down.
| | ---------------------------------------------------------------------------------

14

---

---

# OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 2  INVESTMENTS IN
COMPANIES (continued):

| | (s) | RealM
is engaged in development of video broadcasting equipment allowing           interaction
between the viewers and the master of           ceremonies using
the Internet infrastructure.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2001, the Tel-Aviv-Jaffa District Court appointed a temporary receiver for RealM.
| | ----------------------------------------------------------------------------------------

| | As
of December 31, 2002, the investment in RealM had been fully written-down.
| | -----------------------------------------------------------------------------

| | (t) | Cipheractive
is engaged in the development of algorithms and software for video           encryption
and recovery of data and for speeding up of data.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | in
the first quarter of 2002, following the issuance of rights and the raising of $ 100,000
from the shareholders of Cipheractive, the Companys holding in Cipheractive
decreased to 6.6% (fully diluted).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2002, the investment in Cipheractive had been fully written-down.
| | ------------------------------------------------------------------------------------

| | (u) | Cerel
develops ceramic layering technologies for the passive electronic           components
market.
| | --- | ----------------------------------------------------------------------------------------------------

| | In
February 2002, the Company invested $ 700,000 (adjusted NIS 3,401,000) in Cerel.
| | -----------------------------------------------------------------------------------

| | Cerel
has completed a financing round of approximately $ 1.5 million in February 2002,
based on a company value of $ 6.5 million after the money. As part of the
investment, the Company acquired 47,405 preferred shares of NIS 0.1 par value each,
at a price per share of $ 14.77, as well as warrants for the purchase of Cerel
shares at an exercise price of $ 1 million, based on a company value of $ 10.7
million before the money. The warrants are exercisable until September 30, 2003.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
investment in Cerel as of December 31, 2002 is presented net of a provision of
adjusted NIS 1.0 million for impairment of value.
| | ------------------------------------------------------------------------------------------------------------------------------------

15

---

---

# OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

# NOTE 3  FIXED
ASSETS:

| | Composition
of assets, grouped by major classifications, and changes therein in 2002, are as follows:
| | -----------------------------------------------------------------------------------------------------

|                                   | Cost | Accumulated depreciation | Depreciated
|---------------------------------- | ---- | ------------------------ | -----------
|
|
|
|
|Vehicles                           | 162  | 48                       | 114        
|Office furniture and equipment     | 100  | 100                      |            
|Computers and peripheral equipment | 136  | 136                      |            
|                                   |      |                          |            
|                                   | 398  | 284                      | 114        
|                                   |      |                          |            
|                                   |      |                          |            

# NOTE 4  EMPLOYEE
RIGHTS UPON RETIREMENT:

| | a. | Israeli
labor laws and agreements requires the Company to pay severance pay to
          employees dismissed or retiring from their employ in certain other
          circumstances.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys severance pay liability to its employees is covered mainly by regular
deposits with recognized pension and severance pay funds in the employees names
and/or by purchase of insurance policies. The amounts funded as above are not reflected
in the balance sheets since they are not under the control and management of the Company.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | The
amount of liability for severance pay presented in the balance sheets           reflects
that part of the liability not covered by the funds and/or insurance           policies
mentioned in a. above, in accordance with labor agreements in           force,/and based
on salary components which, in managements opinion,           create entitlement to
severance pay.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | In
2002, all the Companys employees were dismissed. The balance of the
          liability for employee rights upon retirement of adjusted NIS 577,000 was
          carried to current liabilities and represents the Companys liability
          towards its managing director, who terminated his office in the beginning of
          2003.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16

---

---

# OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

|NOTE 5 | COMMITMENT AND RESTRICTIONS IMPOSED WITH REGARD TO LIABILITIES:
|------- | ---------------------------------------------------------------

| | a. | Commitment
| | -- | ----------

| | During
2002, the Company has undertaken to invest $ 450,000 in Expand, see note 2b.
| | -----------------------------------------------------------------------------------

| | b. | Restrictions
imposed in respect of liabilities
| | -- | ----------------------------------------------

| | In
February 2001, the Company and its shareholders gave a commitment to certain banks 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. Also, the grant of credit by these
banks in excess of $ 5 million is conditional on the Company increasing its
shareholders equity  at the time the credit is granted  by at least
double the amount of the aforementioned credit. The maximum amount of the credit to be
granted is limited to $ 15 million.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 6 
SHAREHOLDERS EQUITY:

| | a. | Share
capital
| | -- | -------------

| | The
share capital as of December 31, 2002 and 2001 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
adjusted NIS 140,265,000 from its shareholders. The shares have not yet been
allotted.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 7  TAXES ON
INCOME:

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

| | Under
this 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. | Losses
for tax purposes, carried forward to future years
| | -- | --------------------------------------------------------

| | Carryforward
losses aggregate approximately adjusted NIS 1 million at December 31, 2002.
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 write-down in
investments in companies.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Tax
assessments
| | -- | ---------------

| | The
Company has not been assessed for tax purposes since incorporation (March 29, 2000).
| | ----------------------------------------------------------------------------------------

17

---

---

# OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

# NOTE 8  INTERESTED
PARTY TRANSACTIONS AND BALANCES:

| | a. | Transactions:
| | -- | -------------

|                                                 |  |  | Period from
March 29, 2000(date 
of incorporation, see
|------------------------------------------------ |  |  | ------------------------------------------------------
|
|
|
|
|Income (expenses):                               |  |  |                                                       
|Participation in expenses from companies         |  | 
|which are interested parties, see note 1a        |  |  |                                                       
|                                                 |  |  |                                                       
|                                                 |  |  |                                                       
|Payroll and related expenses of an interested    |  | 
|party employed by the Company                    |  |  |                                                       
|                                                 |  |  |                                                       
|Financial income (expenses) in respect of short- |  | 
|term loan with a company which is an             |  | 
|Interested party                                 |  |  |                                                       
|                                                 |  |  |                                                       

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

|                                            | December 31
|------------------------------------------- | -----------
|
|
|
|
|Short-term loan from a company which is an  |            
|interested party                            |            
|                                            |            
|Interested party - current account:         |            
|                                            |            
|Balance at balance sheet date - the highest |            
|balance during the year                     |            
|                                            |            

# NOTE 9 
SUPPLEMENTARY FINANCIAL STAEMENT INFORMATION:

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

| | a. | Accounts
receivable:
| | -- | --------------------

|                                    | December 31
|----------------------------------- | -----------
|
|
|
|
|Institutions                        |            
|Interested party - current accounts |            
|Others                              |            
|                                    |            
|                                    |            
|                                    |            

| | b. | Short-term
bank credit
| | -- | ----------------------

| | bank
credit is unlinked and bears annual interest rate of 10.5%.
| | ----------------------------------------------------------------

| | c. | Short-term
loan from a company which is an interested party
| | -- | -----------------------------------------------------------

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

18

---

---

# OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 9  SUPPLEMENTARY
FINANCIAL STAEMENT INFORMATION (continued):

| | Subsequent
to December 31, 2002, the interested party demanded the repayment of the loan. The
principal shareholders of the Company agreed to grant the Company a new loan designated
for the repayment of the abovementioned loan.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Accounts
payable and accruals:
| | -- | ------------------------------

|                                   | December 31
|---------------------------------- | -----------
|
|
|
|
|Employees                          |            
|Institutions                       |            
|Provision for vacation pay         |            
|Accrued expenses                   |            
|Liability for employee rights upon |            
|retirement, net of amount funded,  |            
|see note 4c                        |            
|Other                              |            
|                                   |            
|                                   |            
|                                   |            

| | e. | Concentrations
of credit risks
| | -- | ------------------------------

| | The
Companys cash and cash equivalents at December 31, 2002 and 2001 were deposited
with Israeli banks. The Company is of the opinion that the credit risk in respect of
these balances is remote.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
fair value of the financial instruments included in working capital of the Company is
usually identical or close to their carrying value.
| | ---------------------------------------------------------------------------------------------------------------------------------------------

| | Data
regarding the of fair value of investments in companies is omitted because it is not
practicable to determine such fair value with sufficient reliability.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Statements
of operations
| | ------------------------

| | g. | General
and administrative expenses:
| | -- | ------------------------------------

|                                                       |  |  | Period from
March 29, 2000
(date of
incorporation, see
|------------------------------------------------------ |  |  | ------------------------------------------------------
|
|
|
|
|Payroll and related expenses                           |  |  |                                                       
|Office rent and maintenance                            |  |  |                                                       
|Other                                                  |  |  |                                                       
|                                                       |  |  |                                                       
|                                                       |  |  |                                                       
|Less - participation in expenses by interested parties |  |  |                                                       
|                                                       |  |  |                                                       
|                                                       |  |  |                                                       
|                                                       |  |  |                                                       
|                                                       |  |  |                                                       

19

---

---

# OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

# NOTE 10  NOMINAL
DATA:

| | a. | Balance
sheet data:
| | -- | -------------------

|                                               | Nominal NIS in thousands
|---------------------------------------------- | ------------------------
|
|
|
|
|A s s e t s                                    |                         
|Current assets:                                |                         
|Cash and cash equivalents                      |                         
|Accounts receivable                            |                         
|                                               |                         
|                                               |                         
|Investments in companies                       |                         
|Fixed assets, net of accumulated depreciation  |                         
|                                               |                         
|                                               |                         
|                                               |                         
|                                               |                         
|Liabilities and shareholders' equity           |                         
|Current liabilities:                           |                         
|Short-term bank credit                         |                         
|Short-term loan from a company which is an     |                         
|interested party                               |                         
|Accounts payable and accruals                  |                         
|                                               |                         
|                                               |                         
|Liability for employee rights upon retirement, |                         
|net of amount funded                           |                         
|                                               |                         
|T o t a l  liabilities                         |                         
|Shareholders' equity                           |                         
|                                               |                         
|                                               |                         
|                                               |                         
|                                               |                         

| | b. | Operating
results data:
| | -- | -----------------------

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

20

---

---

# OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 10- NOMINAL DATA(continued):

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

|                                             | Nominal NIS in thousands
|-------------------------------------------- | ------------------------
|
|
|
|
|Period from March 29, 2000 (date of          |                         
|incorporation, see note 1a(1)) to            |                         
|December 31, 2000:                           |                         
|Issuance of share capital                    |                         
|Receipts on account of shares to be allotted |                         
|Difference between cost of acquisition       |                         
|of investments in companies from             |                         
|a company under common control and           |                         
|the carrying value of those investments      |                         
|on the books of that company                 |                         
|Loss                                         |                         
|                                             |                         
|Balance at December 31, 2000                 |                         
|Changes during 2001 - loss                   |                         
|                                             |                         
|Balance at December 31, 2001                 |                         
|Changes during 2002 - loss                   |                         
|                                             |                         
|Balance at December 31, 2002                 |                         
|                                             |                         

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

21

---

---

# OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

# NOTE 11  SPECIAL
CONDENSED FINANCIAL STATEMENTS:

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

| | 1) | As
stated in note 1b, the primary financial statements of the Company are drawn           up
in Israeli currency adjusted for the changes in the Israeli CPI.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
incorporation in the financial statements of the Companys U.S. shareholder,
Ampal-American Israel Corporation (Ampal), the Company also prepared these
special condensed consolidated financial statements (the special statements),
see below.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | The
translation into dollars should be made in accordance with the principles           set
forth is Statement of Financial Accounting Standards (FAS) No.           52
of the Financial Accounting Standards Board of the United States           (FASB)
for economies that are not considered to be highly           inflationary.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | These
special statements have been prepared for the purpose of translation into
          dollars and inclusion in the Ampal consolidated financial statements in
          accordance with instructions of Ampal, as follows:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (a) | The
special statements are drawn up in Israeli currency (NIS) terms.
| | --- | --------------------------------------------------------------------

| | (b) | Adjustments
required to make the data conform with U.S. generally accepted           accounting
principles (GAAP) have been made.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------

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

22

---

---

# OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 11  SPECIAL CONDENSED
FINANCIAL STATEMENTS(continued):

| | b. | Following
are the special statements:
| | -- | -------------------------------------

| | 1) | Balance
sheets as of December 31, 2002 and 2001:
| | -- | ------------------------------------------------

|                                        |  |  | Translation into
U.S. dollars,
|--------------------------------------- |  |  | ------------------------------
|
|
|
|
|A s s e t s                             |  |  |                               
|Current assets:                         |  | 
|Cash and cash equivalents               |  |  |                               
|Accounts receivable                     |  |  |                               
|                                        |  |  |                               
|T o t a l  current assets               |  |  |                               
|                                        |  |  |                               
|Investments in companies                |  |  |                               
|Fixed assets, net of accumulated        |  | 
|Depreciation                            |  |  |                               
|                                        |  |  |                               
|                                        |  |  |                               
|                                        |  |  |                               
|Liabilities and shareholders' equity    |  | 
|Current liabilities:                    |  | 
|Short-term bank credit                  |  |  |                               
|Short-term loan from a company which is |  | 
|an interested party                     |  |  |                               
|Accounts payable and accruals           |  |  |                               
|                                        |  |  |                               
|T o t a l  current liabilities          |  |  |                               
|Liability for employee rights upon      |  | 
|retirement, net of amount funded        |  |  |                               
|                                        |  |  |                               
|T o t a l  liabilities                  |  |  |                               
|Shareholders' equity                    |  |  |                               
|                                        |  |  |                               
|                                        |  |  |                               
|                                        |  |  |                               
|                                        |  |  |                               

23

---

---

# OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 11  SPECIAL CONDENSED
FINANCIAL STATEMENTS(continued):

| | 2) | Statements
of operation the years ended December 31, 2002 and 2001 and for the           period from
March 29, 2000 (date of incorporation) to December 31, 2000:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

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

24

---

---

# OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 11  SPECIAL CONDENSED
FINANCIAL STATEMENTS(continued):

| | 3) | Statements
of changes in shareholders equity for the years ended December                31,
2002 and 2001 and for the period from March 29, 2000 (date of
               incorporation) to December 31, 2000:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                             | New Israeli shekels
|-------------------------------------------- | -------------------
|
|
|
|
|Period from March 29, 2000 (date of          |                    
|Incorporation, see note 1a(1)) to            |                    
|December 31, 2000:                           |                    
|Issuance of share capital                    |                    
|Receipts on account of shares to be allotted |                    
|Difference between cost of acquisition       |                    
|of investments in companies from             |                    
|a company under common control and           |                    
|the carrying value of those investments      |                    
|on the books of that company                 |                    
|Loss                                         |                    
|                                             |                    
|Balance at December 31, 2000                 |                    
|Changes during 2001 - loss                   |                    
|                                             |                    
|Balance at December 31, 2001                 |                    
|Changes during 2002 - loss                   |                    
|                                             |                    
|Balance at December 31, 2002                 |                    
|                                             |                    

*
Represents an amount less than NIS 1,000.

25

---

---

# OPHIRTECH LTD.

NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 11  SPECIAL CONDENSED
FINANCIAL STATEMENTS (continued):

|                                       | Translation into U.S. dollars, see a(4) above
|-------------------------------------- | ---------------------------------------------
|
|
|
|
|Period from March 29, 2000 (date of    |                                              
|Incorporation, see note 1a(1)) to      |                                              
|December 31, 2000:                     |                                              
|Issuance of share capital              |                                              
|Receipts on account of shares to be    |                                              
|Allotted                               |                                              
|                                       |                                              
|Difference between cost of acquisition |                                              
|of investments in companies from       |                                              
|a company under common control         |                                              
|and the carrying value of those        |                                              
|investments on the books of that       |                                              
|Company                                |                                              
|                                       |                                              
|Loss                                   |                                              
|Other comprehensive income -           |                                              
|translation differences                |                                              
|                                       |                                              
|T o t a l  comprehensive loss          |                                              
|                                       |                                              
|Balance at December 31, 2000           |                                              
|                                       |                                              
|Changes during 2001:                   |                                              
|Loss                                   |                                              
|Other comprehensive loss -             |                                              
|translation differences                |                                              
|                                       |                                              
|T o t a l  comprehensive loss          |                                              
|                                       |                                              
|Balance at December 31, 2001           |                                              
|Changes during 2002:                   |                                              
|Loss                                   |                                              
|Other comprehensive loss -             |                                              
|translation differences                |                                              
|                                       |                                              
|T o t a l  comprehensive loss          |                                              
|                                       |                                              
|Balance at December 31, 2002           |                                              
|                                       |                                              
|                                       |                                              

*
Represents an amount less than $ 1,000.

26

---

---

# TRINET VENTURE CAPITAL
LTD.

# FINANCIAL STATEMENTS

# AS OF DECEMBER 31, 2001



---

---

# TRINET VENTURE CAPITAL LTD.

# FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001

# CONTENTS

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



---

---

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

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

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

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

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

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

1

---

---

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

Brightman Almagor &
Co.Certified Public Accountants

Tel Aviv, March 11, 2002.

2

---

---

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

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

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

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

3

---

---

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

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

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

4

---

---

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

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

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

5

---

---

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

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

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

6

---

---

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

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

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

7

---

---

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

Note 1General

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

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

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

8

---

---

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

9

---

---

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

Note 2Summary of Significant Accounting Policies

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10

---

---

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

11

---

---

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

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

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

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

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

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

Note 3
Investments in Affiliates

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

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

| | (1) | In December
2001 the Company sold all of its investments in affiliates and           other companies
to its shareholders in exchange for NIS 26 million, which not           yet been paid and
presented in balance sheet as of December 31, 2001 within           Related parties.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | NetFormx
Ltd. (NetFormx)  (formerly Imagenet Ltd. NetFormx develops,
markets and supports computer-aided network engineering and software products for network
design simulation and optimization. During 1996, the Company invested in the shares of
NetFormx the amount of $1.5 million.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---

---

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

Note 3 Investments in Affiliates(contd.)

| | B. | Additional
details(contd.)
| | -- | --------------------------

| | (2) | NetFormx
Ltd. (NetFormx)  (formerly Imagenet Ltd.)(contd.)
| | --- | -------------------------------------------------------------

| | In
March 2000, Netformx issued additional shares to a group of investors, for net proceeds
of NIS 75.5 million. As a result, the Companys holding in Netformx was reduced to
16.8%. In accordance with Opinion No.68 of the Institute of Certified Public Accountants
in Israel regarding third party issuances, the gain of NIS 9,823 was recorded as deferred
income, of which NIS 7,934 was credited to income in 2000 against the Companys
share in the losses of Netformx and the remainder of NIS 1,889 was credited to income in
2001.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | See
Note 3B(1) above in respect of realization of investment in Netformx by the Company.
| | ----------------------------------------------------------------------------------------

| | (3) | Smart
Link Ltd. (Smart)
| | --- | -------------------------

| | Smart
is engaged in the development and marketing of efficient software communication. As of
December 31, 1996 the Company held 43.7% of Smart.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2000, Smart issued additional shares to a group of investors, for net proceeds of
NIS 57 million. As a result, the Companys holding in Smart was reduced to 28.73%.
The gain of NIS 15,227 was credited to income. During the period after March 2000 up to
date of realization of investment in Smart (see Note 3B(1) above), the Companys
holding in Smart was reduced to 28.41% due to exercise of options by third parties.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 4
Investments in Other Companies

|                                         | December 31,
|---------------------------------------- | ------------
|
|A.  Composition:                         |             
|Peptor Ltd.                              |             
|Simplayer.com Ltd. (formerly Logal Ltd.) |             
|                                         |             

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

| | See
Note 3B(1) above in respect of realization of investments by the Company.
| | -----------------------------------------------------------------------------

| | Peptor
Ltd. (Peptor)
| | ----------------------

| | Peptor
is engaged in the research and development of peptides for pharmeceutical medications.
The original investment as of the balance sheet date amounted to $705 thousand
representing 0.98% of Peptors shares.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Simplayer.com
Ltd. (formerly Logal Ltd.)( Simplayer)
| | ------------------------------------------------------

| | In
October 1999, the Company sold all of its investment in Simplayer in exchange for NIS
694. As a result of the sale the Company recorded a gain of approximately NIS 183.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2000, the Company exercised its option to buy back 84,894 shares of Simplayer for $
42 thousand.
| | ---------------------------------------------------------------------------------------------------------

13

---

---

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

# Note 5 Current
Liabilities

|                 | December 31,
|---------------- | ------------
|
|Composition:     |             
|Dividend to pay  |             
|Accrued expenses |             
|                 |             
|                 |             
|                 |             

# Note 6 Capital
Notes

| | The
capital notes, which were issued to a related party and a shareholder, are unlinked and
non-interest-bearing.
| | -----------------------------------------------------------------------------------------------------------------

# Note 7 Share
Capital

|                                | December 31,
|------------------------------- | ------------
|
|
|Number of shares:               |             
|Ordinary shares NIS 1 par value |             

# Note 8 General
and Administrative Expenses

|                      | Year ended December 31,
|--------------------- | -----------------------
|
|Composition:          |                        
|Professional services |                        
|Other                 |                        
|                      |                        
|                      |                        
|                      |                        

14

---

---

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

# Note 9 Income
Taxes

| | A. | The
Company is subject to the provisions of the Income Tax (Inflationary
               Adjustments) Law  1985.
| | -- | ----------------------------------------------------------------------------------------------------------------

| | B. | The
Company has received final tax assessments for the years up to and including
               tax year 1997.
| | -- | --------------------------------------------------------------------------------------------------------------

# Note 10 Condensed
Financial Information in Nominal NIS

| | A. | Condensed
balance sheets:
| | -- | -------------------------

|                                         | December 31,
|---------------------------------------- | ------------
|
|Assets                                   |             
|Current assets                           |             
|Investments                              |             
|Affiliates                               |             
|                                         |             
|Other companies                          |             
|                                         |             
|                                         |             
|                                         |             
|                                         |             
|Liabilities and Shareholders Deficiency |             
|Current liabilities                      |             
|Capital notes                            |             
|Shareholders' deficiency                 |             
|                                         |             
|                                         |             
|                                         |             

15

---

---

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

# Note 10 Condensed
Financial Information in Nominal NIS(contd.)

| | B. | Condensed
statements of operations:
| | -- | -----------------------------------

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

| | C. | Statement
of changes in shareholders deficiency:
| | -- | -------------------------------------------------

|                             | Share
capital | Capital
reserves | Accumulated
deficit | Total
|---------------------------- | ------------- | ---------------- | ------------------- | -----
|Balance at January 1, 1999   |               |                  |                     | 1    
|Net income for the year      |               |                  |                     | -    
|                             |               |                  |                     |      
|Balance at December 31, 1999 |               |                  |                     | 1    
|Translation adjustments      |               |                  |                     | -    
|Net income for the year      |               |                  |                     | -    
|                             |               |                  |                     |      
|Balance at December 31, 2000 |               |                  |                     | 1    
|Translation adjustments      |               |                  |                     | -    
|Net income for the year      |               |                  |                     | -    
|Dividend                     |               |                  |                     | -    
|                             |               |                  |                     |      
|Balance at December 31, 2001 |               |                  |                     | 1    
|                             |               |                  |                     |      

16

---

---

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

|Note 11 | Condensed
Financial Data in Dollars and in Accordance with Generally Accepted Accounting Principles
(GAAP) in the United States
|-------- | ---------------------------------------------------------------------------------------------------------------------------------

| | A. | Basis
of presentation
| | -- | ---------------------

| | (1) | The Companys
functional currency is the NIS. Pursuant to the request of a           shareholder, the
financial information of the Company in nominal historical NIS,           as presented in
Note 11, has been remeasured into U.S. dollars in accordance           with the
principles of Statement No. 52 of the Financial Accounting Standards           Board of
the United States, Foreign Currency Translation.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The Companys
objective is to achieve long-term capital appreciation from           its portfolio of
venture capital investments in new and developing companies and           other special
investment situations. In accordance with the U.S. GAAP, such           portfolio
investments should be reflected at fair value, defined as the quoted           market
price for securities for which market quotations are readily available,           or as
an estimate of fair value as determined in good faith by the Board of           Directors
and management.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with the above policy, the following condensed financial information reflects
investments in publicly traded securities at market value and investments in privately
held portfolio securities at cost until significant developments affecting the portfolio
company provide a basis for a change in valuation. In this regard, the fair value of
private securities is adjusted to reflect meaningful third-party transactions in the
private market or to reflect significant progress or deterioration in the development of
the portfolio of the Companys business, such that cost is no longer reflective of
fair value. Unrealized appreciation or depreciation in the value of investments is
reflected in earnings.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Deferred income
taxes in the condensed financial information below have been           recorded on the
unrealized appreciation of investments, net of deferred tax           benefits in respect
of tax loss carryforwards.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17

---

---

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

|Note 11 | Condensed
Financial Data in Dollars and in Accordance with Generally Accepted Accounting
Principles (GAAP) in the United States(contd.)
|-------- | -----------------------------------------------------------------------------------------------------------------------------------------

| | B. | Condensed
balance sheets (dollars in thousands):
| | -- | ------------------------------------------------

|                                                  | December 31,
|------------------------------------------------- | ------------
|
|Assets                                            |             
|Current assets                                    |             
|Investments                                       |             
|                                                  |             
|                                                  |             
|                                                  |             
|Liabilities and Shareholders Equity (Deficiency) |             
|Current liabilities                               |             
|Deferred income taxes                             |             
|Other current liabilities                         |             
|                                                  |             
|                                                  |             
|                                                  |             
|Capital notes                                     |             
|Shareholders' equity (deficiency)                 |             
|                                                  |             
|                                                  |             
|                                                  |             

| | C. | Condensed
statements of operations (dollars in thousands):
| | -- | ----------------------------------------------------------

|                                          | Year ended December 31,
|----------------------------------------- | -----------------------
|
|Revenues                                  |                        
|Gain from realization in other company    |                        
|Gain from increase in investments' value  |                        
|Financing, net                            |                        
|                                          |                        
|                                          |                        
|                                          |                        
|Expenses                                  |                        
|Depreciation of portfolio investments (1) |                        
|Loss from changes in ownership interests  |                        
|in affiliate                              |                        
|General and administrative                |                        
|                                          |                        
|                                          |                        
|                                          |                        
|Income (loss) before tax benefit          |                        
|(income taxes)                            |                        
|Tax benefit (income taxes)                |                        
|                                          |                        
|Net income (loss)                         |                        
|Other comprehensive income (loss)(2)      |                        
|                                          |                        
|Comprehensive income (loss)               |                        
|                                          |                        

18

---

---

# TRINET VENTURE CAPITAL
LTD.NOTES TO THE FINANCIAL STATEMENTSASOF DECEMBER 31, 2000

|Note 11  | Condensed
Financial Data in Dollars and in Accordance with Generally Accepted Accounting
Principles (GAAP) in the United States(contd.)
|--------- | -----------------------------------------------------------------------------------------------------------------------------------------

| | C. | Condensed
statements of operations (dollars in thousands) (contd.)
| | -- | ------------------------------------------------------------------

| | (1) | Due to
various developments relating to the operations of certain portfolio           companies,
the Company determined that the fair value of such companies was less           than the
value reflected in the Companys books.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | In accordance with Statement of Financial Accounting Standards No. 130
          (SFAS 130) foreign currency translation adjustments have been
          presented as a component of comprehensive income. The capital reserves include
          other comprehensive income reflecting this foreign currency translation of 2000,
          1999 and 1998, respectively. No other provision of SFAS 130 affects the
          financial statement presentation of the Company.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Statement
of changes in shareholders equity (deficiency) (dollars inthousands):
| | -- | --------------------------------------------------------------------------------

|                             | Share
capital | Retained earnings | Capital
reserves | Total
|---------------------------- | ------------- | ----------------- | ---------------- | -----
|Balance at January 1, 1999   |               |                   |                  | 1    
|Net income                   |               |                   |                  | -    
|Other comprehensive income - |               |                  
|Translation adjustments      |               |                   |                  | -    
|                             |               |                   |                  |      
|Balance at December 31, 1999 |               |                   |                  | 1    
|Net income                   |               |                   |                  | -    
|Other comprehensive loss -   |               |                  
|Translation adjustments      |               |                   |                  | -    
|                             |               |                   |                  |      
|Balance at December 31, 2000 |               |                   |                  | 1    
|Net loss                     |               |                   |                  | -    
|Other comprehensive income - |               |                  
|Translation adjustments      |               |                   |                  | -    
|Dividend                     |               |                   |                  | -    
|                             |               |                   |                  |      
|Balance at December 31, 2001 |               |                   |                  | 1    
|                             |               |                   |                  |      

19

---

---

INDEPENDENT AUDITORS SPECIAL REPORT

We have audited the balance sheets of Am-Hal Ltd. (the Company) and
the consolidated balance sheets of the Company and a consolidated partnership as of December 31, 2002 and 2001, 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, 2002, and have issued our
unqualified report thereon dated February 19, 2003. The aforementioned financial statements (not presented separately herein) were
prepared in new Israeli shekels (NIS) on the historical cost basis, adjusted for changes in the general purchasing power of the NIS
in accordance
with standards established by the Institute of Certified Public Accountants in Israel. As mentioned in our abovementioned
auditors report, we did not audit the 2000 financial statements of a partnership, whose revenues included in consolidation
constitute approximately 28% of total consolidated revenues for the year ended December 31, 2000. The financial statements of the
partnership for that year were audited by other auditors whose reports have been furnished to us and our abovementioned opinion,
insofar as it related to the amounts included in respect of the aforementioned partnership, was based solely on the reports of the
other auditors.

As described in Note 2B, the accompanying Company and consolidated financial data
in U.S. dollars as of the abovementioned dates and for the abovementioned years then ended were prepared on the basis of financial
data in nominal NIS (the basis on which the Company and consolidated adjusted NIS financial statements were also prepared),
translated into US dollars in accordance with the principles described in Note 2B.

In our opinion, the accompanying financial data in US dollars was translated in
accordance with the principles described in Note 2B.

This report is intended solely for the information and use of the Boards of
Directors and management of the Company and Ampal-American Israel Corp., and should not be used for any other purpose.

Brightman Almagor & Co.

Certified Public Accountants

Tel Aviv, February 19, 2003




INDEPENDENT AUDITORS REPORT

 TO THE SHAREHOLDERS OF

BAY HEART LTD. AND SUBSIDIARY

We have audited the accompanying balance sheets of Bay Heart Ltd. (the
Company) as of December 31, 2002 and 2001, and the consolidated balance sheets as of such dates, and the related statements of
operations, changes in shareholders equity and cash flows - of the Company and on a consolidated basis - for each of the three
years in the period ended December 31, 2002. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position - of the Company and on a consolidated basis - at December 31, 2002 and 2001, and the
results of operations, changes in shareholders equity and cash flows - of the Company and on a consolidated basis - for each of
the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in
Israel.

Accounting principles generally accepted in Israel differ in certain respects from
accounting principles generally accepted in the United States.  With respect to these financial statements, the difference in
the application of the latter is described in Note 20.

As described in Note 2A, the above mentioned financial statements have been
prepared in adjusted values based on the changes in the general purchasing power of the Israeli currency in accordance with
pronouncements of the Institute of Certified Public Accountants in Israel.

The condensed consolidated financial information in U.S. dollars presented in
Note 19 to the financial statements, prepared at the request of an investor, represents a translation of the Companys financial
statements in nominal values, as stated in Note 19A. In our opinion, such translation into U.S. dollars was appropriately performed
on the basis stated in Note 19A.

As described in Note 1C to the financial statements regarding the Companys
business condition, the Company has a working capital deficit of NIS 90 million as of December 31, 2002. The steps undertaken by
management for meeting the Companys commitments and guarantees are also described in that note.

Brightman Almagor & Co.

Certified Public Accountants

Member firm of Deloitte Touche Tohmatsu

Israel, February 27, 2003.




REPORT OF INDEPENDENT AUDITORS

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, 2001 and 2002, 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, 2002. These financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We did not audit the financial statements of certain subsidiaries, whose assets
included in the consolidation constitute approximately 20% and 10% of total consolidated assets as of December 31, 2001 and 2002,
respectively, and whose revenues included in the consolidation constitute approximately 30%, 29% and 9% of total consolidated
revenues for each of the three years ended December 31, 2000, 2001 and 2002, respectively. The financial statements of those
companies were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to amounts
included for those companies is based on the reports of the other auditors.

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

In our opinion, based on our 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, 2001 and 2002, and the consolidated results of their operations and cash flows
for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in
Israel, which differ in certain respects from those followed in the United States (see Note 21 to the consolidated financial
statements).

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

Tel-Aviv, Israel
KOST FORER & GABBAYMarch 4, 2003
A Member of Ernst & Young Global





INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS

OF CORAL WORLD INTERNATIONAL LTD.

We have audited the accompanying consolidated balance sheets of Coral
World InternationalLtd. (the Company) and its subsidiaries as of December 31, 2002 and 2001 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, 2002.  These financial statements are the responsibility of the board of directors and the
management of the Company.  Our responsibility is to express an opinion on these financial statements based on our audit.

We did not audit the financial statements of certain consolidated
subsidiaries whose assets included in the consolidation represent 61% and 74% of the total consolidated assets as of December 31,
2002 and 2001 respectively, and whose revenues included in the consolidation represent 61%, 61% and 54% of the total consolidated
revenues for the years ended December 31, 2002, 2001 and 2000, respectively.  The statements of these subsidiaries were audited
by other auditors whose reports have been furnished to us and our opinion, insofar as it relates to the amounts included for those
subsidiaries, is based on the reports of the other auditors.

Moreover, the data included in the financial statements relating to
the equity value of the investment and to the Companys equity in the operating results of an affiliated company, are based on
financial statements which were audited by other auditors.

We conducted our audit in accordance with generally accepted auditing
standards, including those prescribed under the Auditors Regulations (Auditors Mode of Performance), 1973 and, accordingly, we
have performed such auditing procedures as we considered necessary in the circumstances.  For purposes of these financial
statements, we conducted our audits in accordance with auditing standards generally accepted in the United States and Israel. 
These standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial
statements.  An audit also includes assessing the accounting principles used and significant estimates made by management as
well as evaluating the overall financial statement presentations.  We believe that our audit and the reports of other audits
provide a reasonable basis for our opinion.

In our opinion, based on our audit and on the reports of the other
auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Coral World
International Ltd. and its subsidiaries as of December 31, 2002 and 2001, and the results of operations, changes in
shareholders equity and cash flows for each of the three years in the period ended December 31, 2002, in accordance with
generally accepted accounting principles in Israel.  As applicable to the Companys financial statements, generally
accepted accounting principles, in the United States and Israel are substantially identical in all material respects.

Fahn, Kanne & Co.Certified Public Accountants (Isr.)


Tel-Aviv, Israel, March 19, 2003




To: PricewaterhouseCoopers - Tel Aviv

Date: March 5 2003

Report of Independent Public AccountantsCountry Club Kfar Saba Ltd.

We have audited the balance sheets of Country Club Kfar Saba Ltd. as of December
31, 2002, the related statements of income, changes in shareholders equity and cash flows for the year then ended. These
financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Israel
and in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement presentations. We believe that our audits provide a
reasonable basis for our opinion.

The above statements have been prepared on the basis of historical cost as
adjusted for the changes in the general purchasing power of the Israel currency in accordance with opinions issued by the Institute
of Certified Public Accountants in Israel.

Condensed statements in historical values which formed the basis of the adjusted
statements appear in Note 16 to the financial statements. These amounts have been translated into U.S. dollars using the method
described in Note 2F.

In our opinion, based on our audit, the above-mentioned financial
statements present fairly the financial position of the Company as of December 31, 2002, the results of its operations, the changes
in shareholders equity and cash flows for the year then ended, in conformity with accounting principles generally accepted in
Israel, consistently applied. As applicable to the Companys financial statements, accounting principles generally accepted in
the United States and in Israel are substantially identical in all material respects. Also, in our opinion, the financial statements
based on nominal data (Note 16) present fairly, in conformity with generally accepted accounting principles, the financial position
of the
Company as of December 31, 2002, and the results of its operations, the changes in shareholder equity, and its cash flows for
the year then ended, on the basis of the historical cost convention.

Luboshitz KasiererCertified Public Accountants (Isr.)




Report of Independent Public Accountants

To The Shareholders

of

COUNTRY CLUB KFAR-SABA LIMITED

We have audited the accompanying balance sheets of Country Club Kfar-Saba Ltd.
(the company) as of December 31,2000 and 1999, and the related statements of operations, changes in
shareholders equity and cash flows of the Company for each of the three years in the period ended December 31,2000. These
financial statements are the responsibility of the Companys Board of Directors and management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audit in accordance with generally accepted auditing standards,
including those prescribed under the Auditors Regulations (Auditors Mode of Performance) - 1973. For purposes of these
financial statements there is no material difference between generally accepted Israeli auditing standards and auditing standards
generally accepted in the U.S.  These standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles and significant
estimates made by the Board of Directors and management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2000 and 1999, and the results of operations, change in shareholders
equity and cash flows of the Company for each of the three years in the period ended December 31, 2000, in accordance with generally
accepted accounting principles. Also, in our opinion, the financial statements based on nominal data (Note 20) present fairly, in
conformity with generally accepted accounting principles, the financial position of the Company as at December 31, 2000 and 1999, and
the results of its operations, the changes in shareholders equity, and its cash flows for each of the three years in the period
ended December 31, 2000, on the basis of the historical cost convention.

As described in Note 2A the aforementioned financial statements have been prepared
in adjusted values on the basis of the changes in the general purchasing power of the Israeli currency in accordance with
pronouncements of the Institute of Certified Public Accountants in Israel. Condensed nominal Israeli currency data, on the basis of
which the adjusted financial statements were prepared, is presented in Note 20.




The condensed financial information in U.S. dollars presented in Note 20 to the
financial statement represents a translation of the Companys nominal
Israeli currency financial data in accordance with the basis stated in Note 2G. In our opinion, such translation into U.S. dollars
was properly made in accordance with the stated basis.

Accounting principles generally accepted in Israel differ in certain
respects from accounting principles generally accepted in the United States. The application of the latter would have affected the
determination of nominal/historical net income (loss) and shareholders equity to the extent summarized in Note 21 to the
financial statements.

Porat & Co.Certified Public Accountants (Isr.)Ramat Gan, March 12, 2001





Brightman Almagor

1 Azrieli Center

Tel Aviv 67021

P.O.B. 16593, Tel Aviv 61164

Israel

Tel: +972 (3) 608 5555

Fax: +972 (3) 609 4022

info@deloitte.co.il

www.deloitte.co.il

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO THE SHAREHOLDERS OF

EPSILON INVESTMENT HOUSE .LTD

We have audited the consolidated balance sheets of Epsilon Investment House
Ltd., (an Israeli corporation), (hereinafter  the Company) and its subsidiaries as at December 31, 2000 and
1999, and the related consolidated statements of income, comprehensive income and changes in shareholders equity for each of
the three years ended December 31, 2000, translated into U.S dollars. These financial statements are the responsibility of the
Company management. Our responsibility is to express an opinion on these financial statements, based on our audit.

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

A statement of cash flows for the period has not been included in the financial
statements.

In our opinion, the financial statement referred to above, present fairly, in all
material respects, the financial position of the Company and its subsidiaries, as at December 31, 2000 and 1999, the results of their
operations and the changes in their shareholders equity, for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.

Also, in our opinion, the translated amounts in the accompanying consolidated
financial statements in U.S Dollars have been computed on the basis set forth in Note 2 to the consolidated financial
statements.

Brightman, Almagor & Co.Certified Public Accountants

Tel Aviv, February 21, 2001




To:     PricewaterhouseCoopers - Tel Aviv

Date:  February 27, 2003

Report of Independent Public AccountantsHod Hasharon Sport Center Ltd.

We have audited the balance sheets of Hod Hasharon Sport Center Ltd. as of
December 31, 2002, the related statements of income and companys equity and cash flows for the year then ended. These financial
statements are the responsibility of the Companys management.

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

The above statements have been prepared on the basis of historical cost as
adjusted for the changes in the general purchasing power of the Israel currency in accordance with opinions issued by the Institute
of Certified Public Accountants in Israel.

Condensed statements in historical values which formed the basis of the adjusted
statements appear in Note 7 to the financial statements.  These amounts have been translated into U.S. dollars using the method
described in Note 2D.

In our opinion, based on our audit, the above-mentioned financial statements
present fairly the financial position of the company as of December 31, 2002, the results of its operations, the changes in
companys equity and cash flows the year then ended, in conformity with accounting principles generally accepted in Israel,
consistently applied. As applicable to the Companys financial statements, accounting principles generally accepted in the
United States and in Israel are substantially identical in all material respects. Also, in our opinion, the financial statements
based on nominal data (Note 7) present fairly, in conformity with generally accepted accounting principles, the financial position of
the company as of
December 31, 2002, and the results of its operations, the changes in companys equity, and its cash flows for the year then
ended, on the basis of the historical cost convention.

Luboshitz KasiererCertified Public Accountants





Report of Independent Public AccountantsTo The ShareholdersofHod Hasharon Sport Center Ltd.

We have audited the accompanying balance sheet of Hod Hasharon Sport Center Ltd.
as at December 31, 2000, and the related statements of income and changes in shareholders equity for each of the three years in
the period then ended, December 31, 2000 expressed in New Israel Shekels. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards,
including those prescribed under the Auditors Regulations (Auditors Mode of Performance) - 1973. For purposes of these
financial statements there is no material difference between generally accepted Israeli auditing standards and auditing standards
generally accepted in the U.S. These standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant
estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2000 and 1999, and the results of operations, change in shareholders
equity for each of the three years in the period ended December 31, 2000, in accordance with generally accepted accounting
principles.

- 1 -




Report of Independent Public AccountantsTo The ShareholdersofHod Hasharon Sport Center Ltd.

As described in Note 2A the aforementioned financial statements have been prepared
in adjusted values on the basis of the changes in the general purchasing power of the Israeli currency in accordance with
pronouncements of the Institute of Certified Public Accountants in Israel. Condensed nominal Israeli currency data, on the basis of
which the adjusted financial statements were prepared, is presented in Note 7.

The condensed financial information in U.S. dollars presented in Note 7 to the
financial statement represents a translation of the Companys nominal Israeli currency financial
data in accordance with the basis stated in Note 2D. In our opinion, such translation into U.S. dollars was properly made in
accordance with the stated basis.

Porat and Co.Certified Public Accountants (Isr.)Ramat Gan, February 22, 2001


To:     PricewaterhouseCoopers - Tel Aviv

Date:  February 27, 2003




Report of Independent Public AccountantsHod Hasharon Sport Center (1992) Limited Partnership

We have audited the balance sheets of Hod Hasharon Sport Center (1992) Limited
Partnership as of December 31, 2002, the related statements of income changes in partners equity and cash flows for the year
then ended. These financial statements are the responsibility of the Partnerships management.

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

The above statements have been prepared on the basis of historical cost as
adjusted for the changes in the general purchasing power of the Israel currency in accordance with opinions issued by the Institute
of Certified Public Accountants in Israel.

Condensed statements in historical values which formed the basis of the adjusted
statements appear in Note 16 to the financial statements.  These amounts have been translated into U.S. dollars using the method
described in Note 2E.

In our opinion, based on our audit, the above-mentioned financial statements
present fairly the financial position of the partnership as of December 31, 2002, the results of its operations, the changes in
partners equity and cash flows for the year then ended, in conformity with accounting principles generally accepted in Israel,
consistently applied.  As applicable to the partnerships financial statements, accounting principles generally accepted in
the United States and in Israel are substantially identical in all material respects. Also, in our opinion, the financial statements
based on nominal data (Note 16) present fairly, in conformity with generally accepted accounting principles, the financial position
of the
partnership as of December 31, 2002, and the results of its operations, the changes in partners equity, and its cash flows for
the year then ended, on the basis of the historical cost convention.

Luboshitz KasiererCertified Public Accountants





AUDITORS REPORTReport of Independent
Public Accountants

of

Hod Hasharon Sport Center (1992) Limited Partnership

We have audited the balance sheet of Hod Hasharon Sport Center (1992) Limited
Partnership as at December 31, 2000 and 1999, and the related statements of income, partners capital and cash flows for each of
the three years in the period ended December 31, 2000, expressed in New Israel Shekels. These financial statements are the
responsibility of the partnership management. Our responsibility is to express an opinion on these financial statements based on our
audit.

We conducted our audits in accordance with generally accepted auditing standards,
including those prescribed under the Auditors Regulations (Auditors Mode of Performance) - 1973. For purposes of these
financial statements there is no material difference between generally accepted Israeli auditing standards and auditing standards
generally accepted in the U.S. These standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant
estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements present fairly, in all material respects,
the financial position of the Partnership as of December 31, 2000 and 1999, and the results of operations, change in Partners Capital
and cash flows for each of the three years in the period ended December 31, 2000, in accordance with generally accepted accounting
principles.

- 1 -




Report of Independent Public Accountants

of

Hod Hasharon Sport Center (1992) Limited Partnership

As described in Note 2A the aforementioned financial statements have been prepared
in adjusted values on the basis of the changes in the general purchasing power of the Israeli currency in accordance with
pronouncements of the Institute of Certified Public Accountants in Israel. Condensed nominal Israeli currency data, on the basis of
which the adjusted financial statements were prepared, is presented in Note 20.

The condensed financial information in U.S. dollars presented in Note 20 to the
financial statement represents a translation of the Partnership nominal Israeli currency financial data in accordance with the basis
stated in Note 2D. In our opinion, such translation into U.S. dollars was properly made in accordance with the stated
basis.

Porat and Co.Certified Public Accountants (Isr.)Ramat Gan, February 22, 2001





REPORT OF INDEPENDENT AUDITORS

To the shareholders of

OPHIR HOLDINGS LTD.

We have audited the financial statements of Ophir Holdings Ltd. (the
Company) and the consolidated financial statements of the Company and its subsidiaries: balance sheets as of
December 31, 2001 and the related statements of income, changes in shareholders equity and cash flows for each of the two
years in the period ended December 31, 2001. These financial statements are the responsibility of the Companys Board of
Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.

We did not audit the financial statements of a subsidiary, whose revenues included
in consolidation constitute approximately 8% of total consolidated revenues for the year ended December 31, 2000.  We did not
audit the financial statements of certain associated companies, the Companys interest in which, as reflected in the balance
sheets as of December 31, 2001, is adjusted NIS 160,595,000, and the Companys share in excess of profits over losses of
which is a net amount of adjusted NIS 819,000 in 2001, and the Companys share in excess of losses over profits of which is
a net amount of adjusted NIS 297,000 in 2000. The financial statements of the above subsidiary and associated companies
were
audited by other independent auditors, whose reports have been furnished to us, and our opinion, insofar as it relates to amounts
included for those companies, is based on the reports of the other independent auditors.

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

In our opinion, based upon our audits and the reports of the other independent
auditors, the financial statements referred to above present fairly, in all material respects, the financial position - of the
Company and consolidated - as of December 31, 2001 and the results of operations, changes in shareholders equity and cash
flows - of the Company and consolidated - for each of the two years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in Israel. Furthermore, in our opinion, the financial statements referred to above are
prepared in accordance with the Israeli Securities (Preparation of Annual Financial Statements) Regulations, 1993.




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

Accounting principles generally accepted in Israel differ in certain respects from
accounting principles generally accepted in the United States. The application of the latter would have affected the determination of
nominal historical net income and shareholders equity to the extent summarized in note 17.

The special condensed consolidated financial statements which are presented in
note 17 have been translated into U.S. dollars for the convenience of one of the Companys shareholders, in accordance with
the principles set forth in Statement of Financial Accounting Standards No. 52 of the Financial Accounting Standards Board of
the United States. In our opinion, the translation has been properly made.



Tel-Aviv, Israel
Kesselman & KesselmanMarch 10,
2002
Certified Public Accountants (Isr.)





Brightman Almagor

1 Azrieli Center

Tel Aviv 67021

P.O.B. 16593, Tel Aviv 61164

Israel

Tel: +972 (3) 608 5555

Fax: +972 (3) 609 4022

info@deloitte.co.ilwww.deloitte.co.il

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO THE SHAREHOLDERS OF

RENAISSANCE INVESTMENT CO.LTD

We have audited the consolidated balance sheets of Renaissance Investments
Co.Ltd., (an Israeli corporation), (hereinafter  the Company) and its subsidiaries as at December 31, 2000 and
1999, and the related consolidated statements of income, comprehensive income and changes in shareholders equity for each of
the three years ended December 31, 2000, translated into U.S dollars. These financial statements are the responsibility of the
Company management. Our responsibility is to express an opinion on these financial statements, based on our audit.

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

A statement of cash flows for the period has not been included in the financial
statements.

In our opinion, the financial statement referred to above, present fairly, in all
material respects, the financial position of the Company and its subsidiaries, as at December 31, 2000 and 1999, the results of their
operations and the changes in their shareholders equity, for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.

Also, in our opinion, the translated amounts in the accompanying consolidated
financial statements in U.S Dollars have been computed on the basis set forth in Note 2 to the consolidated financial
statements.

Brightman, Almagor & Co.Certified Public Accountants

Tel Aviv, February 21, 2001




Kost Forer &          

 Gabbay

3 Aminadav St.

 Tel-Aviv 67067,

 Israel
Phone:

 Fax    :
972-3-6232525

  972 -3 -5622555


Messrs. Ampal Ltd.

Re:
Financial statements of Shmay-Bar Real Estate (1993) Ltd.

 (the Company) translated into U.S. dollars


As you know, the Company publishes
in Israel financial statements in NIS adjusted to the changes in the Consumer Price Index, in accordance with Statements of the
Institute of Certified Public Accountants in Israel. These primary annual financial statements of the Company for the years 2002 and
2001, which were audited by us, and on which we expressed our opinion on February 16, 2003, have been provided to you.

We have audited the accompanying
translated U.S. dollar balance sheets of the Company as of December 31, 2002 and 2001, and the related translated U.S. dollar
statements of income for each of the three years in the period ended December 31, 2002. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in
accordance with generally accepted auditing standards in Israel and the United States, including those prescribed by the Israeli
Auditors Regulations (Mode of Performance) (Israel), 1973. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, either originating within the
financial statements themselves, or due to any misleading statement included therein. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

The aforementioned translated U.S.
dollar financial statements have been prepared on the basis of nominal NIS historical cost. Disclosure of the effect of the changes
in the general purchasing power of the Israeli currency in the financial statements as stated in the Opinions of the Institute of
Certified Public Accountants in Israel, has not been included in the above mentioned statements.

Full financial statement disclosures
and statements of cash flows that are as required according to generally accepted accounting principles have not been presented and
as such, the translated U.S. dollar financial statements mentioned above are to be read in conjunction with the primary annual
audited financial statements of the Company, as of December 31, 2002 and their accompanying Notes.

In our opinion, except for the
effects of the matters discussed in the preceding paragraphs, the translated U.S. dollar financial statements referred to above
present fairly, in all material respects, the translated U.S. dollar financial position of the Company as of December 31, 2002 and
2001, and the related translated U.S. dollar results of its operations for each of the three years in the period ended December 31,
2002, in conformity with generally accepted accounting principles in Israel. As applicable to the Companys financial
statements, accounting principles generally excepted in the United Sates and in Israel are substantially
identical in all material respects.

Also, in our opinion, the
translation of the aforementioned nominal figures into U.S. dollars was made in accordance with the principles set forth in SFAS 52,
see Note 2.

The aforementioned financial
statements are designated solely for you as shareholders of the Company, are not to be published or delivered to others.

Tel-Aviv, Israel
KOST FORER & GABBAYFebruary 16, 2003
A Member of Ernst & Young International





Kost Forer &          

 Gabbay

3 Aminadav St.

 Tel-Aviv 67067,

 Israel
Phone:

 Fax    :
972-3-6232525

  972 -3 -5622555


Messrs. Ampal Ltd.

Re:
Financial statements of Shmay-Bar (I.A) 1993 Ltd.

 (the Company) translated into U.S. dollars


As you know, the Company publishes
in Israel financial statements in NIS adjusted to the changes in the Consumer Price Index, in accordance with Statements of the
Institute of Certified Public Accountants in Israel. These primary annual financial statements of the Company for the years 2002 and
2001, which were audited by us, and on which we expressed our opinion on February 16, 2003, have been provided to you.

We have audited the accompanying
translated U.S. dollar balance sheets of the Company as of December 31, 2002 and 2001, and the related translated U.S. dollar
statements of income for each of the three years in the period ended December 31, 2002. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in
accordance with generally accepted auditing standards in Israel and the United States, including those prescribed by the Israeli
Auditors Regulations (Mode of Performance) (Israel), 1973. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, either originating within the
financial statements themselves, or due to any misleading statement included therein. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

The aforementioned translated U.S.
dollar financial statements have been prepared on the basis of nominal NIS historical cost. Disclosure of the effect of the changes
in the general purchasing power of the Israeli currency in the financial statements as stated in the Opinions of the Institute of
Certified Public Accountants in Israel, has not been included in the above mentioned statements.

Full financial statement disclosures
and statements of cash flows that are as required according to generally accepted accounting principles have not been presented and
as such, the translated U.S. dollar financial statements mentioned above are to be read in conjunction with the primary annual
audited financial statements of the Company, as of December 31, 2002 and their accompanying Notes.

In our opinion, except for the
effects of the matters discussed in the preceding paragraphs, the translated U.S. dollar financial statements referred to above
present fairly, in all material respects, the translated U.S. dollar financial position of the Company as of December 31, 2002 and
2001, and the related translated U.S. dollar results of its operations for each of the three years in the period ended December 31,
2002, in conformity with generally accepted accounting principles in Israel. As applicable to the Companys financial
statements, accounting principles generally excepted in the United Sates and in Israel are substantially
identical in all material respects.

Also, in our opinion, the
translation of the aforementioned nominal figures into U.S. dollars was made in accordance with the principles set forth in SFAS 52,
see Note 2.

The aforementioned financial
statements are designated solely for you as shareholders of the Company, are not to be published or delivered to others.

Tel-Aviv, Israel
KOST FORER & GABBAYFebruary 16, 2003
A Member of Ernst & Young International





Kost Forer &          

 Gabbay

3 Aminadav St.

 Tel-Aviv 67067,

 Israel
Phone:

 Fax    :
972-3-6232525

  972 -3 -5622555


Messrs. Ampal Ltd.

Re:
Financial statements of Shmay-Bar (T.H) 1993 Ltd.

 (the Company) translated into U.S. dollars


As you know, the Company publishes
in Israel financial statements in NIS adjusted to the changes in the Consumer Price Index, in accordance with Statements of the
Institute of Certified Public Accountants in Israel. These primary annual financial statements of the Company for the years 2002 and
2001, which were audited by us, and on which we expressed our opinion on February 16, 2003, have been provided to you.

We have audited the accompanying
translated U.S. dollar balance sheets of the Company as of December 31, 2002 and 2001, and the related translated U.S. dollar
statements of income for each of the three years in the period ended December 31, 2002. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in
accordance with generally accepted auditing standards in Israel and the United States, including those prescribed by the Israeli
Auditors Regulations (Mode of Performance) (Israel), 1973. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, either originating within the
financial statements themselves, or due to any misleading statement included therein. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

The aforementioned translated U.S.
dollar financial statements have been prepared on the basis of nominal NIS historical cost. Disclosure of the effect of the changes
in the general purchasing power of the Israeli currency in the financial statements as stated in the Opinions of the Institute of
Certified Public Accountants in Israel, has not been included in the above mentioned statements.

Full financial statement disclosures
and statements of cash flows that are as required according to generally accepted accounting principles have not been presented and
as such, the translated U.S. dollar financial statements mentioned above are to be read in conjunction with the primary annual
audited financial statements of the Company, as of December 31, 2002 and their accompanying Notes.

In our opinion, except for the
effects of the matters discussed in the preceding paragraphs, the translated U.S. dollar financial statements referred to above
present fairly, in all material respects, the translated U.S. dollar financial position of the Company as of December 31, 2002 and
2001, and the related translated U.S. dollar results of its operations for each of the three years in the period ended December 31,
2002, in conformity with generally accepted accounting principles in Israel. As applicable to the Companys financial
statements, accounting principles generally excepted in the United Sates and in Israel are substantially
identical in all material respects.

Also, in our opinion, the
translation of the aforementioned nominal figures into U.S. dollars was made in accordance with the principles set forth in SFAS 52,
see Note 2.

The aforementioned financial
statements are designated solely for you as shareholders of the Company, are not to be published or delivered to others.

Tel-Aviv, Israel
KOST FORER & GABBAYFebruary 16, 2003
A Member of Ernst & Young International





TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OFTRINET INVESTMENTS IN HIGH-TECH LTD.

We have audited the accompanying balance sheets of Trinet Investments in High-Tech
Ltd. (the Company) as of December 31, 2002 and 2001, and the related statements of operations and changes in
shareholders deficiency for each of the three years in the period ended December 31, 2002. These financial statements are the
responsibility of the Companys Board of Directors and management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

During 2002 the company ceased its operations.

In our opinion, the aforementioned financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2002 and 2001, and the results of its operations and
changes in shareholders deficiency for each of the three years in the period ended December 31, 2002, in accordance with
generally accepted accounting principles in Israel.

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

The financial information presented in U.S. dollars and in accordance with
generally accepted accounting principles in the United States is based on nominal historical amounts in Israeli currency and is
presented in Note 8 to the financial statements.

Brightman Almagor & Co.

Certified Public Accountants

Tel Aviv, March 13, 2003




SIGNATURES

Pursuant to
the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 27 th day of March,
2003.

| | AMPAL-AMERICAN ISRAEL CORPORATION
| | ---------------------------------
|
| | By:                              
| |                                  
| |                                  

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 27, 2003.

|Signatures                |  | Title                                                        |  | Date          
|------------------------- |  | ------------------------------------------------------------ |  | --------------
|                          |  |                                                              |  |               
|/s/ YOSEF A.
MAIMAN       |  | Chairman of the Board of                                     |  | March 27, 2003
|Yosef A. Maiman           |  | Directors                                                    |  |               
|                          |  |                                                              |  |               
|/s/ JACK
BIGIO            |  | President & CEO - Director                                   |  | March 27, 2003
|Jack Bigio                |  |                                                              |  |               
|                          |  |                                                              |  |               
|/s/ LEO
MALAMUD           |  | Director                                                     |  | March 27, 2003
|Leo Malamud               |  |                                                              |  |               
|                          |  |                                                              |  |               
|/s/ DR. JOSEPH YERUSHALMI |  | Director                                                     |  | March 27, 2003
|Dr. Joseph Yerushalmi     |  |                                                              |  |               
|                          |  |                                                              |  |               
|/s/ YEHUDA
KARNI          |  | Director                                                     |  | March 27, 2003
|Yehuda Karni              |  |                                                              |  |               
|                          |  |                                                              |  |               
|/s/ EITAN
HABER           |  | Director                                                     |  | March 27, 2003
|Eitan Haber               |  |                                                              |  |               
|                          |  |                                                              |  |               
|/s/ MICHAEL
ARNON         |  | Director                                                     |  | March 27, 2003
|Michael Arnon             |  |                                                              |  |               
|                          |  |                                                              |  |               
|/s/ IRIT
ELUZ             |  | CFO, Vice President                                         |  | March 27, 2003
|Irit Eluz                 |  | Finance  and Treasurer                                       |  |               
|                          |  |                                                              |  |               
|/s/ ALLA
KANTER           |  | Vice President                                              |  | March 27, 2003
|Alla Kanter               |  | Accounting and Controller

 (Principal Accounting

 Officer) |  |               
|                          |  |                                                              |  |               
|/s/ GIORA BAR 
NIR       |  | Controller                                                   |  | March 27, 2003
|Giora Bar-Nir             |  |                                                              |  |               

100

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I, Jack Bigio, certify that:

1. I have reviewed this annual report on Form 10-K of Ampal-American Israel
Corporation;

2. Based on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included
in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a) designed such disclosure
controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this annual report is being
prepared;

b) evaluated the effectiveness
of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and

c) presented in this annual
report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent
evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the
equivalent functions):

a) all significant
deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal
controls; and

b) any fraud, whether or not
material, that involves management or other employees who have a significant role in the registrant's internal controls;
and

6. The registrant's other certifying officers and I have indicated in this annual report
whether there were significant changes in internal controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and
material weaknesses.

|Date: March 27, 2003 |                   | 
|-------------------- | ----------------- | 
|                     |                   | 
|                     |                   | 
|                     | Jack Bigio        | 
|                     | President and CEO | 

101

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I, Irit Eluz, certify that:

1. I have reviewed this annual report on Form 10-K of Ampal-American Israel
Corporation;

2. Based on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included
in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a) designed such disclosure
controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this annual report is being
prepared;

b) evaluated the effectiveness
of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and

c) presented in this annual
report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent
evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the
equivalent functions):

a) all significant
deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal
controls; and

b) any fraud, whether or not
material, that involves management or other employees who have a significant role in the registrant's internal controls;
and

6. The registrant's other certifying officers and I have indicated in this annual report
whether there were significant changes in internal controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and
material weaknesses.

|Date: March 27, 2003 |                                             | 
|-------------------- | ------------------------------------------- | 
|                     |                                             | 
|                     |                                             | 
|                     | Irit Eluz                                   | 
|                     | CFO, Vice President  Finance and Treasurer | 

102

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